The Expert's Examiner

On the eve of its annual meeting October 22 - 25, the Public Investors Advocate Bar Association released a study commissioned by the PIABA Foundation, maintaining that the expungement process is flawed and recommending an immediate moratorium.  The 29-page Report, 2019 Study on FINRA Expungements: A Seriously Flawed Process that Should be Stopped Immediately to Protect the Integrity of the Public Record, was announced in an October 15 Press Release. It is based on data provided by the Securities Arbitration Commentator “with respect to all [1,078] arbitration awards issued in Expungement-Only cases filed from January 1, 2015 through December 31, 2018 and resolved with an award on or before July 31, 2019.”

Key Findings

As described in the Release, the key findings are as follows (ed: excerpts taken essentially verbatim):

• Brokers and brokerage firms have been gaming FINRA’s arbitration system by falsely including a bogus $1.00 demand in damages to reduce the number of arbitrators reviewing expungement requests and to make it cheaper for brokers to get customer complaints expunged. From 2015-2018, the number of cases in which nominal damages were requested in the broker’s statement of claim increased from six to 456 cases.
• A handful of law firms represent brokers and brokerage firms as repeat players and appear to be coordinating to secure favorable expungement results.
• FINRA is essentially subsidizing the most abusive expungement cases with the sham $1.00 damage claims. FINRA lost at least $8,050.00 per case in revenue in the “$1.00 cases,” which amounts to more than $6 million in lost revenue.
• Stockbrokers and their firms have an interest in erasing customer complaints from the brokers’ records and, as a result, are not truly in opposition to each other.
• Customers are supposed to receive notice and be able to appear and object at an expungement proceeding, although it is not clear that always happens. FINRA does not have a process to ensure that the notice provided to customers adequately explains their right to appear and oppose it.
• When a brokerage firm or a customer opposes a request for expungement, arbitrators are significantly more likely to deny the request.
• FINRA does not have procedural safeguards in place to ensure that expungement requests aren’t being granted based upon one-sided and possibly false evidence presented to arbitrators. There is no basis for concluding that 1,000+ customer complaints were false or so flawed as to require being expunged.

… and Recommendations

As for what should be done to address the problem, the Report proposes the following (ed: again, essentially verbatim):

• FINRA should halt all pending expungement proceedings immediately and any efforts to confirm expungement awards issued from January 1, 2015 to the present.
• FINRA should commission an independent outside investigation of whether expungements have been granted based upon false and/or fraudulent information.
• FINRA’s BrokerCheck and the state-FINRA Central Registration Depository (CRD) should carry a prominent warning that they are unreliable inasmuch as they do not include all customer complaints because expungement may have resulted in the removal of pertinent information.
• The SEC or FINRA should intervene and establish an Investor Protection Advocate who would participate in all expungement cases to advocate against brokers’ expungement requests to ensure the integrity of the process.

Seem Familiar?

If any readers are experiencing a sense of déjà vu, it’s not your imagination. We covered in SAA 2019-33 (Aug. 28) the "$1 in damages" expungement strategy, noting in #2019-33 that the "Special Proceedings Rule,” which permits a telephonic hearing as an option for those initiating claims of $50,000 or less, extends to industry cases as well: “In fact, we found four Awards of this nature that had proceeded under FINRA Rule 13800(c)(3)(B) and, upon closer inspection, we found that all four were sole expungement cases!” SAC earlier reported in SAA 2018-46 (Dec. 5) on “the now widely known device of asking $1 in damages, along with one's request for expungement relief, as a way to lower filing fees and ensure a one-person panel” and noted that industry parties often “ask for $1 in damages and achieve two big savings for the client. First, the forum fees are much less than the fees when one does not specify damages and, second, the number of arbitrators (one vs. three) is also altered by specifying a nominal sum. We've mentioned this before, but we still see a lot of unspecified damage requests (ed: For those who want to see a sample, check out these Awards (18-03297 & 18-03422).)” Recall also that in 1999, NASAA notified NASD that it felt expungement orders were amending state records and NASD initiated a temporary moratorium on arbitrator-ordered expungements (see Notice to Members 99-09). That's when court confirmation of arbitrator-ordered expungement relief became a prerequisite for CRD action.

(ed: *The Foundation is: “a 501(c)(3), provides unbiased investment education in an effort to prevent individuals from becoming victims of investment abuse or fraud. The Foundation was formed by a group of attorneys who specialize in representing investors in investment disputes with their securities professionals.” It has set up a dedicated Webpage for all-things on the Report, such as exhibits, at https://piabafoundation.org/expungement-study/. **A one-hour streaming audio recording of a related October 15 news event is available online at https://hastingsgroupmedia.com/PIABA/ExpungementStudyNewsEvent.mp3. ***So far, there has been no official reaction from FINRA.)