The following article, by Susan Antilla appeared in the NY Times on September 25, 2014 give a glimpse into the FINRA broker expungement process and it's alleged faults.
As a former stockbroker whose regulatory file included 41 customer complaints and a job termination, Kathleen J. Tarr was concerned that her reputation had been hurt by accusations that she had disputed. So, like an increasing number of brokers, she sought to have some negative information expunged from her record.
After a contentious phone hearing overseen by three arbitrators for the Financial Industry Regulatory Authority last month, Ms. Tarr received the go-ahead on Sept. 10 to have one of the complaints taken away.
Expungement hearings are not open to the public. Robert S. Banks Jr., the lawyer who represented the investor in the case, provided a copy of the recorded hearing to The New York Times, and it offers a rare window into the process of expungement requests.
Finra, which has been under increasing pressure from investor advocates to rein in arbitrators who they contend were rubber-stamping expungement requests, has been reminding arbitrators in emails and on its website that such requests should be granted only in "extraordinary" circumstances.
During a 50-minute session on Aug. 12, Ms. Tarr, who had worked for Royal Alliance Associates of Lafayette, Calif., told the panel that she found the client's allegations that she had sold unsuitable investments to be "offensive and without any basis in fact" and noted that she was the daughter and granddaughter of ministers. Her lawyer, Kasumi L. Takahashi, testified that exploitative plaintiffs' lawyers were on a campaign to drum up complaints against Ms. Tarr.
But Sandra Liebhaber, the investor who sued Ms. Tarr and later settled, was also on the conference call and was not allowed to speak. And the investor's lawyer, who did address the panel, was not allowed to question Ms. Tarr.
"I've never heard of a more egregious case," said Jason Doss, president of the Public Investors Arbitration Bar Association, a group of lawyers who represent investors in cases against brokers.
Ms. Liebhaber said she was unhappy that she could not testify but considered the broker's record so poor that "it would be an open-and-shut case," with the expungement being denied. "How could they look at her record and not think there was a problem?" Ms. Liebhaber asked.
Ms. Liebhaber was a 46-year-old customer service representative at AT&T in 2007 when she was offered an early retirement package. Ms. Tarr advised her to put her money into variable annuities and nontraded real estate investment trusts. Ms. Liebhaber became one of several dozen former AT&T employees who filed claims against Royal Alliance related to Ms. Tarr's advice.
Investors are required to agree to use private Finra arbitration when they open a brokerage account, so Ms. Liebhaber's complaint went to a three-member panel that both sides selected from a list of arbitrators. Before the hearing began, she agreed to settle.
During the discovery phase of the case, Mr. Banks had asked for copies of 38 customer complaints brought by Ms. Tarr's clients whom he believed had allegations similar to those of Ms. Liebhaber. Although Finra's rules say firms should supply those documents, Richard J. Stall Jr., the panel's chairman, denied the request, Mr. Banks said. In an email, Mr. Stall declined to comment.
In securities arbitration, whatever panel hears a case also considers any expungement request, and the investor who brought the complaint is notified and has the opportunity to be involved with the hearing. Many investors do not care at that point, but Ms. Liebhaber said she was so upset that many of her former colleagues had also lost money that she decided to take a stand.
In an interview, Ms. Tarr said that none of the 41 complaints in her file on Finra's online database, BrokerCheck, had merit and that the notation in her regulatory records that she had been terminated by Royal Alliance "was an error." Larry Mark, a spokesman forAmerican International Group, which owns Royal Alliance, wrote in an email that "the BrokerCheck data regarding Kathy Tarr's termination of affiliation with Royal Alliance is accurate."
Of Ms. Tarr's 41 customer complaints, five have been settled, 11 have been withdrawn, dismissed or denied, and 25 are pending, according to Finra.
Ms. Tarr, who is the chief executive of an aviation computer systems company in Oxnard, Calif., said it was "possible" she might go back into the brokerage business. "I do not feel that I did anything wrong, ever," she said.
At the hearing, Mr. Banks repeatedly pleaded with Mr. Stall to allow him to take testimony from both his client and Ms. Tarr, to no avail.
"I listened carefully to Mr. Banks, and I think he, based on the documents that I've seen, has covered all the important points," Mr. Stall said. He also expressed concern that accommodating Mr. Banks's request could significantly add to the length of the hearing.
"We're going to deny the request to take testimony from the claimant and to allow questioning by counsel of the respondent," Mr. Stall said during the hearing. Later in the session, Mr. Stall told Mr. Banks, "I'm sorry, I'll have to cut you off." And after Mr. Banks appealed - "Can I be heard on that, please, Mr. Chair?" - Mr. Stall responded, "I don't want to get into anything further from your side."
The Securities and Exchange Commission encourages investors to use BrokerCheck to vet brokers before opening an account. But because of expungement, some brokers have had as many as 18 complaints removed from their records, leaving investors with an incomplete picture.
Although Finra has tightened the rules on expungement, the Tarr case shows that, even when a customer feels strongly enough to contest a deletion, arbitrators can still find in favor of brokers. Mr. Doss said his group, known as Piaba, would like to see a regulator like Finra appoint hearing officers to oversee the process.
Because of the private nature of arbitration, transcripts of the pleadings and other documents are not publicly available. That means that the public loses its only access to information about a customer complaint once it has been expunged.
After the panel heard from Ms. Tarr and Ms. Takahashi, Mr. Banks took his turn. He discussed the importance of keeping accurate broker records, telling the arbitrators that BrokerCheck is "an important part of the public's trust in the brokerage industry."
When Mr. Banks said that he wanted to question Ms. Tarr and Ms. Liebhaber, though, Ms. Tarr's lawyer objected, saying that an expungement hearing was "not a hearing on the merits of the case." Mr. Stall agreed that no further testimony was necessary.
One arbitrator, Carole Helfert Aragon, initially sided with Mr. Banks. "It's a settled case, so we don't have the benefit of having known everything that's gone on," she said, noting that Finra's guidelines instructed arbitrators to look at everything necessary to make a fair and well-reasoned decision. By the end of the hearing, though, Ms. Aragon had fallen in line with Mr. Stall's position that Mr. Banks need not question the broker or his client.
In the final minutes of the hearing, Mr. Banks implored Mr. Stall, "May I please make my record?" and "I feel like I have not been given a full and fair opportunity to respond to the claims that have been made." Mr. Stall responded, "I'm sorry you feel that way."
Although Mr. Banks was cut short in presenting his arguments, the arbitrators' written decision on Sept. 10 said that the claimant had given "a full argument" opposing expungement.
On Aug. 12, Mr. Banks wrote a letter to Linda D. Fienberg, president of Finra Dispute Resolution, asking that Finra immediately communicate to arbitrators that clients must be allowed to tell their side. Two days later, Finra arbitrators received an email emphasizing that customers should be allowed to testify at hearings and that customers or their lawyers were permitted to cross-examine brokers.
Mr. Banks also asked Ms. Fienberg to oppose the expungement if Ms. Tarr proceeded to the final step: asking a court to confirm the decision. Nancy Condon, a Finra spokeswoman, wrote in an email that the agency was reviewing the case and would "fully consider the issues raised by the customer and customer's counsel."
Ms. Liebhaber said the experience taught her that investors could not trust what they saw when they checked a broker's background. "If the broker has one or two complaints, they probably had 40," she said. "That's the impression I get after this."