FINRA Arbitration

Broker Denied FINRA Expungement after Settlement – Tightening Rules and the Need for Legal Representation

May 15, 2017 | Herskovits, PLLC

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Michael James Malone, a FINRA arbitrator in Detroit, recently denied an expungement request from broker Kathie Lee Foreman. Foreman was seeking expungement of a customer complaint in connection with “unsuitable” investments allegedly leading to the, also alleged, loss of $20,000.

Foreman, formerly of Sigma Financial Corp.; had also been accused by Troy William Johnson of failing to cash him out in spite of several requests to do so. According to the arbitrator, Foreman characterized Johnson as “an unsophisticated, nervous investor,” who had the bad fortune of investing during “the worst quarter since 2011.”

The case of Johnson v. Foreman was settled in December. Barely a day after Johnson withdrew his complaint (in exchange for an undisclosed sum) Foreman decided to file a request for expungement. Johnson did not oppose the request. At this time, neither the claimant nor the respondent opted for legal representation. They made the often ill-advised decision of “appearing pro se.”

4th Circuit Further Defines A “Customer” Under FINRA Arbitration Rules

April 1, 2013 | Herskovits, PLLC

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Following its broad ruling in UBS Financial Services v. Carilion Clinic, 706 F.3d 319 (4th Cir. 2013), the 4th Circuit has issued two recent decisions that somewhat lessen the impact of the UBS holding. In UBS, the court held that a customer of a FINRA firm is anyone “not a broker or dealer, who purchases commodities or services from a FINRA member in the course of the member’s business activities,” including “investment banking and the securities business.” But in two recent rulings, the Court refused to further extend that definition, enjoining two FINRA arbitrations in which claims were based on (1) losses resulting from bonds issued by a FINRA member where the claimants purchased those bonds in a secondary market transaction from an unaffiliated third party and (2) losses resulting from purchases of fraudulent securities that were recommended by an attorney informally associated with an advisor at a FINRA-member firm.

Morgan Keegan & Co. v. Silverman, 706 F.3d 562 (4th Cir. 2013)

The Defendants in Morgan Keegan suffered losses in bond funds that were distributed and underwritten by Morgan Keegan (“MK”). The losses were allegedly in part the result of MK’s failure to disclose certain information regarding the valuation of – and risk associated with – the bonds. In enjoining the arbitration, the 4th Circuit noted that no contractual relationship existed between the Defendants and MK – the Defendants had not purchased the funds through an IPO but in a secondary market transaction from Legg Mason, a FINRA member unaffiliated with MK.

Courts Lining Up in Favor of Broad Definition of Customer Under FINRA Rules

January 29, 2013 | Herskovits, PLLC

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Last week, the U.S. Court of Appeals for the 4th Circuit issued a favorable ruling on the arbitrability of suits against FINRA members. Traditionally, under FINRA Rule 12200 any “customer” may request arbitration of a dispute with a FINRA member. UBS and Citi argued that Carilion was an issuer of securities, not a customer, and thus did not have the right to arbitrate their claims against the banks, both of which are FINRA members. The 4th Circuit joins the U.S. Court of Appeals for the 2nd Circuit and several district courts that have recently defined “customer” broadly in the FINRA context. The case is UBS Financial Services v. Carilion Clinic, (3:12-cv-00424-JAG).

Background

Carilion is a non-profit hospital administration group based in West Virginia that issued $308 million of municipal bonds through UBS/Citi to finance a series of renovations and improvements. $234 million of that debt was issued in the form of auction rate securities (“ARS”).

FINRA Arbitrators Start Getting Tough With Discovery Abuses

October 12, 2012 | Herskovits, PLLC

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Two recent FINRA arbitration awards highlight increased focus by FINRA arbitrators concerning discovery abuses by litigants. FINRA’s rules require cooperation of the parties in discovery (Rule 12505) and specifically empower the arbitrators to issue sanctions for lack of cooperation, failing to comply with the discovery rules, or frivolously objecting to the production of documents or information (Rule 12511). Rule 12511 also permits the panel to dismiss a claim, defense or proceeding if prior warnings or sanctions have proven ineffectual.

Miriam Dean v. Wells Fargo Advisors, LLC (FINRA Arbitration No. 11-03911)

Although the power to dismiss a claim is in the rule book, until recently, you would be hard pressed to find an award which exercised that power. That changed with Miriam Dean v. Wells Fargo Advisors, LLC (FINRA Arbitration No. 11-03911), wherein the customer asserted claims in connection with an investment in a reverse convertible note. Apparently, the customer ignored the first discovery order. Somewhat miffed by the customer’s non-compliance, the arbitrator issued a second order giving the claimant the following 3 options: