SEC Orders FINRA to Raise Its Arbitration Forum Gate For Expungements

In today's blog we consider the plight of two registered representatives seeking to obtain expungements of customer complaints by filing FINRA Arbitration Statements of Claim in 2017 and 2018. Both reps wound up appealing their respective FINRA Arbitration Award to state court, where each won a vacatur of the Award. Thereafter, each rep re-filed their expungement claims, but FINRA declared the matters ineligible for arbitration. That set in motion appeals to the SEC, and the federal regulator remanded the matters back to FINRA for arbitration. Indeed, justice delayed is justice denied -- but what are we to make of justice that is endlessly delayed?

2018: Coyuyoumjian FINRA Arbitration Statement of Claim

In 2018, Cynthia Couyoumjian filed a FINRA Arbitration Statement of Claim to expunge about eight of the above-referenced customer disputes from her Central Registration Depository record ("CRD"). 

SIDE BAR: The FINRA Arbitration case is likely: 
In the Matter of the Arbitration Between Cynthia Mary Couyoumjian, Claimant, v. First Allied Securities, Inc. and LPL Financial LLC, Respondents
(FINRA Arbitration Award 18-04362 / February 11, 2020) 
https://www.finra.org/sites/default/files/aao_documents/18-04362.pdf

Couyoumjian's BrokerCheck Record

According to online FINRA BrokerCheck disclosures as of May 29, 2023, Couyoumjian was first registered in 198; and she has

• three disclosures under the heading "Regulatory - Final" (from 2005 to 2007);
• 10 disclosures under the heading "Customer Dispute - Settled" (from 2004 to 2018);
• two disclosures under the heading "Customer Dispute --   Closed-No Action/Withdrawn/Dismissed/Denied"  (from 2002 and 1999); and
• two disclosures under the heading "Customer Dispute -- Pending." 

2020: FINRA Arbitrator Denies Expungements But Court Vacates

By 2020, we come across the following posture of Coyuoumjian's expungement efforts [Ed: footnotes omitted]:

[O]n February 10, 2020, a FINRA arbitrator considered but denied Couyoumjian’s claims for expungement. Couyoumjian subsequently filed a petition to vacate that award in a Colorado state court. She argued that the arbitrator had “manifested a disregard for the law and exceeded his powers,” in part on the ground that “the vast majority of the [presented] evidence” allegedly supported her expungement claim. The court granted Couyoumjian’s request to vacate the arbitration award without explanation on July 15, 2020.

On October 23, 2020, Couyoumjian filed another arbitration statement of claim again seeking to expunge from the CRD information about the same eight customer disputes. On October 29, 2020, FINRA issued a letter to Couyoumjian from a senior case specialist stating:

FINRA has determined that the claims you have alleged in your statement of claim are not eligible for arbitration. Therefore, pursuant to the Customer Code Rule 12203(a) or Industry Code Rule 13203(a), we decline to accept your claim.

On November 19, 2020, Couyoumjian filed an application for review of this denial letter with the Commission.

at Page 3 of In the Matter of the [sic] Cynthia Mary Couyoumjian For Review of Action Taken by FINRA (SEC Opinion, '34 Act Rel. No. 97179; Admin. Proc. File No. 3-20154 / March 21, 2023)
https://www.sec.gov/litigation/opinions/2023/34-97179.pdf

2020: A Matter of Ineligibility

In her November 2020 Application to the SEC, Couyoumjian argued that FINRA's declaration that her claims for expungement were ineligible for adjudication before its arbitration forum constituted the prohibition or limitation of an individual's access to services offered by the self-regulatory-organization in violation of Section 19(d) of the Securities Exchange Act. 

In contrast, FINRA argued that the SEC lacked authority to review its determination that Couyoumjian’s claims are ineligible for arbitration because, in fact, FINRA had provided Couyoumjian with access to its arbitration forum and issued a Final Award addressing her expungement requests. 

FINRA's Misguided Invocation of Court-Vacated Arbitration Award 

In considering FINRA's argument, the SEC found in part that [Ed: footnotes omitted]:

[T]he prior arbitration award was vacated and has no continuing legal effect. FINRA therefore cannot invoke it as evidence that Couyoumjian has already received access to its arbitration forum. By denying Couyoumjian the opportunity to obtain a new, valid arbitration award regarding her claims, FINRA is prohibiting or limiting her access to a key aspect of FINRA’s arbitration service. That action is reviewable under Section 19(d).

at Page 4 of the SEC Couyoumjian Opinion

The Denial Violated FINRA's Rules

Having found that FINRA denied Couyoumjian an opportunity to obtain a new arbitration award regarding her claims, the SEC next considered whether pursuant to Section 19(f) of the Exchange Act:

• if FINRA's denial was in accordance with FINRA's rules, and
• if those rules are/were applied in accordance with Section 19(f) of the Exchange Act. 

SIDE BAR: Section 19(f) of the Exchange Act:

(f) Dismissal of review proceeding

In any proceeding to review the denial of membership or participation in a self-regulatory organization to any applicant, the barring of any person from becoming associated with a member of a self-regulatory organization, or the prohibition or limitation by a self-regulatory organization of any person with respect to access to services offered by the self-regulatory organization or any member thereof, if the appropriate regulatory agency for such applicant or person, after notice and opportunity for hearing (which hearing may consist solely of consideration of the record before the self-regulatory organization and opportunity for the presentation of supporting reasons to dismiss the proceeding or set aside the action of the self-regulatory organization) finds that the specific grounds on which such denial, bar, or prohibition or limitation is based exist in fact, that such denial, bar, or prohibition or limitation is in accordance with the rules of the self-regulatory  organization, and that such rules are, and were applied in a manner, consistent with the purposes of this chapter, such appropriate regulatory agency, by order, shall dismiss the proceeding. If such appropriate regulatory agency does not make any such finding or if it finds that such denial, bar, or prohibition or limitation imposes any burden on competition not necessary or appropriate in furtherance of the purposes of this chapter, such appropriate regulatory agency, by order, shall set aside the action of the self-regulatory organization and require it to admit such applicant to membership or participation, permit such person to become associated with a member, or grant such person access to services offered by the self-regulatory organization or member thereof.

In pertinent part, the SEC found that [Ed: footnotes omitted]:

The Federal Arbitration Act expressly provides that a party may challenge an arbitration award by moving to vacate the award in court—which Couyoumjian successfully did here. And FINRA identifies no authority suggesting that a claim cannot be re-arbitrated in its arbitration forum once a court vacates a previous arbitration award denying that claim.

FINRA asserts that Couyoumjian should not be allowed “to access FINRA’s arbitration forum and relitigate expungement until she gets the outcome she wants.” And we have repeatedly sustained FINRA action preventing applicants from relitigating final arbitration awards. But here, there is no final award—the prior arbitration award was vacated. And FINRA has identified no basis for treating Couyoumjian’s vacated arbitration award as if it were final and binding. We therefore find that FINRA’s decision to deny Couyoumjian access to its arbitration forum to obtain a new, final arbitration award was not in accordance with its rules.

at Pages 6 - 7 of the SEC Couyoumjian Opinion

Accordingly, the SEC ordered that:

• the action taken by FINRA denying Couyoumjian’s request for access to its arbitration forum be set aside; and
• FINRA grant Cynthia Mary Couyoumjian access to its arbitration forum.

Bill Singer's Comment

Couyoumjian filed her FINRA Arbitration Statement of Claim in 2018 and it's now 2023, which means she's been on a wild goose chase for five years. After the SEC found that FINRA's denial of its arbitration forum to Couyoumjian was "not in accordance with its rules," the SEC remanded the matter back to the very FINRA arbitration forum where this all began. In pursuing her expungements, what exactly did Couyoumjian do wrong? A state court vacated FINRA's Arbitration Award. So, that means FINRA was in the wrong. Then FINRA refused to raise its arbitration forum gate on remand from the state court, which the SEC said was wrong. And yet, despite a history of wrongs, the SEC thinks it's right to refer this mess back to FINRA. Clearly, FINRA's expungement process is flawed -- and that's assuming we should even call that mess a "process." 

2017 Nicholson FINRA Arbitration Statement of Claim

In November 2017, Shaun Nicholson filed two FINRA Arbitration Statements of Claim to expunge four customer disputes from his Central Registration Depository record ("CRD"). 

SIDE BAR: The FINRA Arbitration cases are likely: 

In the Matter of the Arbitration Between Shaun Perry Nicholson, Claimant, v. UBS Financial Services, Inc., Respondents
(FINRA Arbitration Award 17-02982 / July 31, 2018) 
https://www.finra.org/sites/default/files/aao_documents/17-02982.pdf

-consolidated with-

In the Matter of the Arbitration Between Shaun Perry Nicholson, Claimant, v. Barclays Capital Inc. and UBS Financial Services Inc., Respondents
(FINRA Arbitration Award 17-03197/ August 1, 2018) 
https://www.finra.org/sites/default/files/aao_documents/17-03197.pdf

2018: FINRA Arbitrator Denies Expungement of Two Occurrences But Grants Expungement of Two

In 2018, the sole FINRA Arbitrator hearing Nicholson's consolidated cases denied expungement of two of the four occurrences at issue but recommended expungment of the remaining two occcurences.

2019: Motion to Vacfate FINRA Arbitration Award / Colorado District Court

In December 2019, Nicholson filed, a Motion to Vacate the FINRA Arbitration Award (In Part). Shaun Perry Nicholson, Petitioner, v. UBS Financial Services Inc., Respondent (Motion to Vacate; District Court, Broomfield County, Colorado;19-CV-30551 / December 18, 2019)
https://www.finra.org/sites/default/files/aao_documents/17-02982%283%29.pdf In pertinent part, the Motion to Vacate alleged that:

27. In the underlying proceeding, the Chairperson exceeded his powers and manifestly disregarded the law in denying Mr. Nicholson’s request for expungement as to the Rue and Milisists Occurrences. The Chairperson knew the law and explicitly disregarded it in rendering the award. It is a well-established principle of law that the publication of false information about a person is defamatory and the injured party is entitled to relief. Where no other relief at law is appropriate, equitable relief—here, injunctive—is appropriate to prevent continued harm to the injured party when it does not prejudice another party. These principles are fundamental to the practice of law and are required knowledge of any licensed attorney. As the arbitrator’s disclosure report attests, the Chairperson is a licensed attorney and experienced with injunctive relief litigation. See Exhibit 5. It is, therefore, irrefutable that the Chairperson knew and understood the law as it relates to the publication of false information. Finally, a review of the record clearly indicates that Mr. Milisists and Ms. Rue possessed sufficient knowledge about financial investments, acknowledged the risks associated with investing, and alleged misconduct against Mr. Nicholson only after sustaining financial loss even though investigations were conducted and determined that Mr. Nicholson did nothing wrong and the allegations were without merit.

On February 24, 2020, the court granted Nicholson's Motion to Vacate.

2021: Nicholson Files Two Expungement Claims with FINRA Arbitration

On August 13, 2021, Nicholson filed two FINRA Arbitration Statements of Claim seeking expungement of the two occurrences for which the Colorado state court had granted a vacatur in February 2020. On August 17, 2021, FINRA transmitted a letter to Nicholson deeming the occurrences "ineligible for expungment" pursuant to FINRA Rules 12203 or 13203 because they had already been denied an expungement by a FINRA Arbitrator and, as such, "the subject matter of this dispute is inappropriate.

September 2021: Nicholson Appeals to SEC

On September 3, 2021, Nicholson filed an application for review of FINRA's denial letter with the SEC. In the Matter of the Shaun Perry Nicholson For Review of Action Taken by FINRA (SEC Opinion, '34 Act Rel. No. 97604; Admin. Proc. File No. 3-20529 / May 26, 2023)
https://www.sec.gov/litigation/opinions/2023/34-97604.pdf . In summarizing the posture of Nicholson's appeal, the SEC asserted [Ed: footnotes omitted]:

FINRA rules expressly authorize associated persons to request expungement of customer dispute information from the CRD by seeking a final arbitration award from a FINRA arbitrator or arbitration panel. Section 19(d) of the Securities Exchange Act of 1934 authorizes the Commission to review actions taken by a self-regulatory organization (“SRO”), such as FINRA, where those actions prohibit or limit an individual’s access to services offered by the SRO. We consider under Section 19(d) claims that FINRA has prohibited or limited access to its arbitration forum for associated persons seeking expungement of customer dispute information. And under Exchange Act Section 19(f), we review a FINRA action prohibiting or limiting a person’s access to its services to determine if (1) the specific grounds on which FINRA based the action exist in fact; (2) the action was in accordance with FINRA’s rules; and (3) FINRA’s rules are, and were applied in a manner, consistent with the Exchange Act’s purposes. 

at Pages 4 - 5 of the SEC Nicholson Opinion

Revisiting Couyoumjian

Not surprisingly, in deciding Nicholson, the SEC summoned up its March 2023 Opinion in Couyoumjian [Ed: footnotes omitted]:

Based on our recent opinion in Cynthia Mary Couyoumjian, we find that we have authority to consider Nicholson’s application for review, set aside FINRA’s action, and direct FINRA to grant Nicholson access to its arbitration forum. In Couyoumjian, FINRA denied the applicant’s use of its arbitration forum to seek expungement where the applicant had previously sought expungement in that forum, received an award on her expungement claims, and then obtained an order from state court vacating the award.  We found that we had authority to review FINRA’s action because FINRA had prohibited or limited the applicant’s access to its arbitration forum by preventing her from seeking a new, valid award as to her expungement claims. And we found that FINRA had not acted in accordance with its rules when it denied use of its arbitration forum by treating a vacated FINRA arbitration award as still final and binding.

This case is not materially distinguishable from Couyoumjian. Although, unlike in Couyoumjian, the state court vacated only part  of the arbitration award, the court vacated the part that had denied two of Nicholson’s claims for expungement, which means there is no longer a final award as to those claims. FINRA has thus prohibited or limited Nicholson’s access to its arbitration forum by preventing him from seeking a new, valid award as to those two expungement claims. To the extent that FINRA suggests that the state court acted improperly by vacating only a portion of the prior arbitration award, we lack authority to review or set aside the state court’s order. And we find, as we did in Couyoumjian, that FINRA’s denial of the use of its arbitration forum was not in accordance with its rules, as FINRA provides no basis for treating the vacated portion of Nicholson’s arbitration award as if it were final and binding.

at Pages 5 - 6 of the SEC Nicholson Opinion

Accordingly, the SEC ordered that:

• the action taken by FINRA denying Nicholson’s request for access to its arbitration forum be set aside; and
• FINRA grant Nicholson access to its arbitration forum.

A BrokerCheck Record

According to online FINRA BrokerCheck disclosures as of May 31, 2023, Shaun Perry Nicholson was first registered in 1981; and he has

• two disclosures under the heading "Customer Dispute - Settled"involving settlements in 1993 for
  • $19,000 to which Nicholson contributed $8,000; and
  • $10,000 to which "NICHOLSON & (OTHER FIRM EMPLOYEE] TO PAY 4000 [sic]".

Bill Singer's Comment

NIcholson filed his FINRA Arbitration Statement of Claim in 2017 (a year earlier than Couyoumjian) and it's now 2023, which means he's been on a wild goose chase for six years. After the SEC found that FINRA's denial of its arbitration forum to Nicholson was "not in accordance with its rules," the SEC remanded the matter back to the very FINRA arbitration forum where this all began. In pursuing his expungements, what exactly did Nicholson do wrong? A state court vacated FINRA's Arbitration Award. So, that means FINRA was in the wrong. Then FINRA refused to raise its arbitration forum gate on remand from the state court, which the SEC said was wrong. And yet, despite a history of wrongs, the SEC thinks it's right to refer this mess back to FINRA. Clearly, FINRA's expungement process is flawed -- and that's assuming we should even call that mess a "process." 

The SEC published the Nicholson Opinion on May 26, 2023. Despite his appeal having been filed on September 3, 2021, Nicholson's case sat at the SEC for some 20 months. Adding insult to injury, despite pronouncing Nicholson as "not materially distinguishable from Couyoumjian," the federal regulator issued the Nicholson Opinion over two months after issuing Couyoumjian on March 21, 2023.

Let's not lose sight of the fact that in 2023, the only tangible relief provided to Nicholson by the SEC is that he gets to go back to square one at FINRA and seek a recommendation of expungement from an arbitrator. After he had filed his initial Statements of Claim in 2017, Nicholson's first FINRA hearings took about nine months to materialize in 2018, and the result was to send him to a state court on appeal (where he prevailed in 2020). In 2021, Nicholson's second attempt at a court-remanded FINRA hearing was dead on arrival. And here we are, in 2023, and Nicholson is waiting for FINRA to raise its arbitration gate and provide him with a hearing -- which, for all we know, may end with yet another cycle of the insanity set out above. Indeed, justice delayed is justice denied -- but what are we to make of justice that is endlessly delayed?

Compliments to attorneys Michael Bessette, William Bean, and Frederick Steimling of HLBS Law for their zealous advocacy of Respondents Couyoumjian and Nicholson. https://www.hlbslaw.com/

• FINRA
• Arbitration
• Ineligible
• SEC
• Couyoumjian
• Nicholson
• Expungement
• Motion to Vacate
• Section 19(f)
• Section 19(d)
• BrokeAndBroker
• Bill Singer