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FINRA Arbitrator Saves Innocent Stockbroker Caught In the Middle By Settled Customer Complaint
December 2, 2019
A customer complains. The stockbroker prepares to defend his besmirched reputation. The brokerage firm does a cost-benefits analysis and pursuant to its "business judgment," writes a check and settles the complaint. The stockbroker never admitted guilt and never contributed to the settlement -- and, in the end, was denied a day in court. Years later, in response to the stockbroker's request for expungement of the customer complaint, a FINRA public arbitrator sees the issue before him as involving an innocent stockbroker left suspended in mid-air with no remedy to refute settled customer allegations against him.
Case In Point
In a FINRA Arbitration Statement of Claim filed in February 2019, associated person Claimant Burns sought the expungement of allegedly inaccurate disclosures on his Central Registration Depository record ("CRD") pertaining to a settled customer complaint to which Burns did not contribute, which asserted that he had engaged in unsuitable margin trading. Respondent Wells Fargo took no position on and did not contest the requested expungement; however, the firm participated at the hearing. Although notified of the hearing, the customers did not contest the requested relief and did not participate in the hearing. In the Matter of the Arbitration Between Robert Michael Burns, Jr., Claimant, v. Wells Fargo Clearing Services, LLC, Respondent (FINRA Arbitration Decision 19-00493) https://www.finra.org/sites/default/files/aao_documents/19-00493.pdf
SIDE BAR: A review of online FINRA BrokerCheck records as of December 2, 2019, discloses under the heading "Customer Dispute -- Settled," two items, one of which involved a customer complaint filed in 2003 against Wachovia Securities (now Wells Fargo) seeking about $202,189.50 in damages based upon allegations of unsuitable margin trading. On April 29, 2005, the matter settled for $122,500 without any contribution from Burns. This appears to be the underlying matter for which Claimant Burns seeks expungement.
In recommending expungement, the sole FINRA Public Arbitrator, James W. Geiger, made a FINRA Rule 2080 finding that the customers' claim, allegation, or information is factually impossible or clearly erroneous. Compliments to FINRA Public Arbitrator Geiger for an articulate, persuasive, and thoughtfully drafted rationale, which I share with you in full:
The arbitration system allows a securities customer to make serious claims against the stock broker and/or the broker's employer ("company"), claims that go to the broker's fitness to engage in the securities business and to earn a livelihood. The nature of the process allows the customer's legal representative to plead legal words of art that may never be ruled on by a neutral panel. The dispute may then be resolved between the original customer and the company based on business expediency and financial logic, wherein and whereby the company pays the customer a sum of money that satisfies the purposes of both the customer and the company.The company settles the case on its own dime in order to avoid the various risks that are inherent in an arbitration and in order to avoid extensive attorney fees, the costs of preparation, including the wide-ranging discovery process, and the distraction of its employees who are involved in general preparation of the matter for final hearing. In other words, the system provides a remedy for the wrongs that may have been experienced by the customer as well as a way for the company to treat the claim as a business expense.However, the facts of the case as well as the honor and reputation of the broker are left up in the air. The only loser is the innocent professional who is caught in the middle with no remedy to resolve the allegations leveled against him or her. It has been said that "character is who you are, but reputation is who other people think you are."Of course, the CRD process serves an important purpose. It allows a professional's reputation to be writ large for the world to see, so it helps regulators do their job; it also helps protect customers, future employers, and the general public from questionable practices in the market place. But it also leaves the blameless professional with no remedy to clear his name, except to file a claim and finally have an evidentiary hearing before a neutral panel, as in the subject case.In this expungement case, the issue was to determine whether or not the securities at issue in the original customers' case were "suitable" for these particular customers' portfolio. In other words, did Claimant violate the "suitability rule?" Claimant's evidence reveals a social situation in which Claimant was part of a small group of friends that included a husband and wife team (a doctor and dentist). The evidence shows that the group socialized and played golf together, that the husband and wife were just coming into their own, and that they were being influenced by the path being followed by some of their peers. They were especially impressed with the "up market" gains of some of their friends, and they had a fear of "missing out" and of wanting to "get in the game."Claimant cautioned the husband/wife team regarding the risks involved in their investment approach. For example, both husband and wife signed up for option trading, and they discussed margin accounts as well as obtaining a home equity loan in order to invest more money in the securities market. The broker cautioned against such an approach. The objectives and risk tolerance set forth in the testimony and in the exhibits confirms that the customers were aggressive investors, that they were knowledgeable and affluent professionals with an annual income around $200,000.00 and net worth of approximately $500,000.00. They had two or three investment accounts, were able to save $4,000.00 per month, and approximately fifty percent of their investment decisions were based on their own choices. In other words, their position allowed them to assume risks that might not have been suitable for them late in their careers.Unfortunately, the market turned against them, especially their tech stocks, and they were caught in the transition to a down market. The arbitration process allowed these original customers to cut their losses and recoup some of their money, and it permitted the firm to make a business decision to settle the case -- all without reference to the broker's need to protect his reputation and clear his name. So the nature of the process left the broker pretty much in a situation of "guilty until proven innocent."Respondent appeared at the expungement hearing on November 5, 2019, through its attorney, Demian J. Betz, Esq. Mr. Betz cross-examined Claimant at length. And his closing argument reaffirmed the nature of and reason for FINRA's restrictive expungement rule. He also cautioned the Arbitrator against a casual or careless interpretation of the rule, but took no position regarding the requested expungement relief or the substantive allegations set forth in the request for expungement.The testimony and exhibits in the expungement hearing on November 5, 2019, revealed that Claimant did not agree with Respondent's decision to settle the original claim and did not contribute to the settlement payment. The evidence at the hearing established to the Arbitrator's satisfaction that the husband/wife team made a conscious decision to follow the aggressive strategy being followed by their friends, that they disregarded Claimant's caution, and that Claimant did not violate the suitability rule. Therefore, Claimant is entitled to the expungement of his CRD under FINRA Rule 2080(b)(1)(A) based upon the fact that the claim, allegation, or information in the original case was factually impossible or clearly erroneous. The Arbitrator also finds that his ruling to expunge Claimant's CRD record is consistent with his BrokerCheck record, based upon his 30 years in the securities industry.
Bill Singer's Comment:
In "The Human Factor On Wall Street" (BrokeAndBroker.com Blog / June 14, 2018)
http://www.brokeandbroker.com/4022/wall-street-human-factor, I noted in part that:
Before I became a lawyer, I was the third generation of my family in the wine business. Sometime in the early '70s, I came across a wonderful quote by the late oenophile Andre Simon that I believe was from his book "The Noble Grapes and Great Wines of France":
There is a great deal in common between us and our wines. Wines enjoy, just as we do, the gift of life, a loan rather than a gift since it is ours and theirs for a short time only; and all wines are, as we are, liable to sickness and doomed to death. Most wines are quite ordinary wines, as most of us are quite ordinary people. There are, unfortunately bad wines, as there are bad people, but not nearly so many as the publicity given to crimes leads one to believe.
I am a former industry regulator, a lawyer who has represented defrauded public customers and industry whistleblowers, and an advocate for Wall Street reform. Moreover, I have worked in-house on the Street and have represented many industry firms and individuals -- admittedly, some of whom engaged in misconduct for which they were sanctioned and/or punished. I seek no acclaim for representing the good guys; nor do I offer apologies for doing my job as a defense lawyer. It comes with the profession. For those who are wronged, I do my best to battle for their just recompense. For those who do wrong, I fight to see that their punishment fits the crime but does not exceed it.Whether I was mopping floors and carrying cases of booze in a liquor store, or pursuing my profession as a second-career lawyer, I rarely came across an individual who got up each and every morning with the desire to do wrong and cause harm. Not saying they don't exist. They do. I've defended them. I've sued them. Having been on Wall Street since 1982, it has been my experience that the overwhelming majority of the men and women in our industry are honest, decent, dedicated, and professional. That goes for regulators, back-office and compliance staff, lawyers, stockbrokers, traders, and everyone else that makes the Street work. Some of those folks are exceptional, like a rare, great vintage wine. Some are crooks and scoundrels like Maderized wine. Somewhere in the middle are those of us who do our jobs and earn a living -- the table wines of our daily life. . . .
From my various seats around the table, I have seen unprincipled and untruthful public customer, unscrupulous industry con artists, bullies serving as regulators, and lawyers who lie and dishonor their profession. More frequently, I have seen victimized public customers suffering financial devastation, victimized industry professionals whose reputations are unjustly destroyed, regulators pursuing their job with passion and ethics, and lawyers who practice their profession with great skill and efficacy. Against my nearly four-decade background in the financial services community, I read FINRA Arbitrator Geiger's rationale and compelling narrative. I smiled. This arbitrator gets it!
In recommending expungement, FINRA Arbitrator Geiger knows that public customers are able to make mere allegations against a broker-dealer or its stockbroker employee. The way the adversarial system is supposed to work is you get the first shot, I hit back, and then we climb into the ring and duke it out until one of us wins. Where things become a tad messy is when there are three combatants such as a customer, brokerage firm, and stockbroker. What happens when the customer and brokerage firm enter the ring, hug it out, and then exit? The stockbroker never gets to land a blow. And this is where Arbitrator Geiger makes his point:
[T]he dispute may then be resolved between the original customer and the company based on business expediency and financial logic, wherein and whereby the company pays the customer a sum of money that satisfies the purposes of both the customer and the company.The company settles the case on its own dime in order to avoid the various risks that are inherent in an arbitration and in order to avoid extensive attorney fees, the costs of preparation, including the wide-ranging discovery process, and the distraction of its employees who are involved in general preparation of the matter for final hearing. In other words, the system provides a remedy for the wrongs that may have been experienced by the customer as well as a way for the company to treat the claim as a business expense.However, the facts of the case as well as the honor and reputation of the broker are left up in the air. The only loser is the innocent professional who is caught in the middle with no remedy to resolve the allegations leveled against him or her. . .
In Burns, Arbitrator Geiger was, in fact, persuaded that the customers' "claim, allegation, or information was factually impossible or clearly erroneous." In recommending expungement, Geiger found, in part, that:
The testimony and exhibits in the expungement hearing on November 5, 2019, revealed that Claimant did not agree with Respondent's decision to settle the original claim and did not contribute to the settlement payment. The evidence at the hearing established to the Arbitrator's satisfaction that the husband/wife team made a conscious decision to follow the aggressive strategy being followed by their friends, that they disregarded Claimant's caution, and that Claimant did not violate the suitability rule. . .