Today, the Public Investors Arbitration Bar Association (PIABA) published another hit piece on the expungement process. For those of you interested, you can find it HERE. Again and again, PIABA issues press releases and reports contending that the expungement process is broken because expungement is granted at an “alarmingly high rate.” Let’s start with the basic issue PIABA has with the expungement process. Although they claim to be interested in investor protection, I don’t think that’s the main motivator. What they really want is to be able to keep all of the frivolous arbitrations they file on the permanent record of the Financial Advisor (“FA”) so, when they sue those FAs again, they can argue that the FA is a repeat offender.
We defend arbitration after arbitration in which counsel representing a Claimant files a cookie cutter Statement of Claim alleging identical facts and causes of action no matter the actual circumstances in that investor’s account or portfolio. Just the caption and the identity of the Claimant in the opening paragraph is changed. These documents are nearly a word for word replications of other Statements of Claim filed on behalf of other Claimants. Oftentimes, they even forget to change the pronouns in the filed document from “he” to “she” when the gender of the Claimant changes. They contain references to investments never purchased by the Claimant. It is even common to see the wrong broker-dealer referenced in the body of the Statement of Claim. Seriously. This is happens all the time.
The firm, now in receipt of a written complaint, has a duty to disclose this complaint on the permanent record of the FA no matter how ridiculous the complaint may seem. For example, say the investor signed and initialed 20 separate disclosures indicating that the investor understood that the investment he was about to purchase was not guaranteed from loss. If a Claimant’s counsel files a Statement of Claim making the conclusory allegation that the FA misrepresented that the investment was guaranteed, the firm must disclose this complaint on the FA’s U4. There is no discretion here. The mere allegation creates the duty to disclose. I’ve defended FA’s against Claimant’s allegation that they lost hundreds of thousands of dollars associated with an investment when, in fact, the investment recommended was very profitable. Like every other customer complaint, this issue ended up on the FA’s U4. Where’s the investor protection related to maintaining that complaint on the FA’s permanent CRD record? Got me!
There is nothing wrong with the expungement process. In my experience, arbitrators take a very critical look at expungement requests asking pointed questions trying to determine – even in the face of a cookie-cutter Statement of Claim – whether the Statement of Claim alleges a plausible cause of action. Arbitrators take their duty to evaluate expungement requests seriously and, in my view, have not failed the expungement process in any way.
Making sure the public is protected should be the goal of everyone associated with this industry but these self-serving reports are not advancing investor protection. If PIABA really wanted to advocate for investor rights, they would show up to expungement hearings and defend their frivolous complaints. Instead, they skip those proceedings and then complain about the result. But correlation does not equal causation. The expungement rate is not a product of a broken expungement process. It’s a product of broken Statements of Claim.
 Under FINRA Bylaws (Article 5, Sec. 2), a firm must report customer disputes to FINRA’s Central Registration Depository (“CRD”).