Finra Fights to Overturn Merrill Broker’s Expungement Victory
The Financial Industry Regulatory Authority is accusing a Merrill Lynch broker who won expungement of seven customer complaints last summer of “forum shopping” and of “fraudulent manipulation” of the arbitration process.
In a relatively rare filing, the industry-funded self-regulatory organization asked a Florida court to vacate an arbitration panel’s unanimous decision in July in favor of Patrick J. Dwyer, a Miami, Fla.-based broker whose 11-person private banking and investment group team regularly ranks as a “top” national advisory team in wealth management publications.
Dwyer has filed a petition with the same circuit court of the 11th Judicial Circuit in Miami to confirm the arbitration award made by the Finra-sponsored panel, as required under Finra arbitration procedures.
Finra accused the broker and Merrill of failing to tell the arbitration panel that a California court in 2015 had denied his two-year judicial battle (filed under the pseudonym John Doe) to expunge the same complaints, and of naming different parties (Finra in court and Merrill in arbitration) as respondents in an effort to “get a decision more to his liking….”
Finra rules require brokers seeking expungements to choose either arbitration or a judicial forum, its filing said, adding that Dwyer “nonsensically” denies that interpretation.
“The court should not allow respondent to have the proverbial second bite at the apple given the preclusive effect of the [California] state court action and FINRA’s rule that a broker may sue or arbitrate the issue of expungement—but cannot do both,” Finra told Miami-Dade Circuit Judge Miguel De La O in its filing, citing legal doctrines that prohibit relitigation of decided issues.
Dwyer declined to comment. His lawyer, Jeffrey Sonn of Aventura, Florida, has argued that Finra’s rules at the time of his expungement filings did not restrict an arbitration filing following a courtroom denial, according to Finra. Sonn did not return a request for comment.
Finra last year reworded its guidance to arbitrators to explicitly state that its rules do not permit an issue to be decided in arbitration following a court decision, a change that people familiar with the process say was made in response to Dwyer’s case. Finra’s filing said that the guidance update does not represent a change of policy, and that Dwyer was deliberately flouting rules and judicial procedures.
“Respondent now attempts to tax the resources of yet another judicial forum, this Court, in his pursuit of relief to which he is not entitled,” Finra wrote in its vacate filing.
A Finra spokeswoman said the regulator cannot discuss matters in litigation.
The Finra arbitration panel ruled in July that Dwyer demonstrated a “strong grip on the underlying facts” and presented ample evidence to show that most of the customer complaints—four of which were closed with no action and two of which were denied—were “false” and “erroneous.”
Finra and several state regulators argue that expungement should be an “extraordinary remedy,” since complaints in the Central Registration Depository database maintained by Finra and co-owned by state regulators are critical tools for regulators, employers and the public in evaluating brokers.
“The deletion of information from the CRD affects…the agency’s ability to carry out its regulatory functions,” Stephen Masterson, chief council of Florida’s Office of Financial Regulation wrote in a court filing supporting Finra’s request to overturn Dwyer’s arbitration award.
“I would have done the same thing if it was being done in my state,” said Joseph Borg, Alabama’s securities director and president of the North American Securities Administrators Association when told of Florida’s filing.
Expungement hearings held after settlement of underlying customer complaints, as in the Dwyer case, “often consist of a one-sided presentation of the facts, as investors and their counsel—the only other party in the case—have little incentive to participate after the investor’s concerns have been resolved,” Borg wrote in a comment letter from NASAA on arbitration code amendments that Finra has proposed to the expungement process.
The February 5 comment letter also urges Finra to consider addressing the fact that “more and more brokers are bypassing the [arbitration] process entirely” by going directly to court for expungements. “This is a significant concern for NASAA and its members,” Borg wrote.
Several brokers and lawyers who bring expungement requests on their behalf, all of whom spoke on condition of anonymity, said that the current expungement process works well in allowing them to eliminate specious complaints that tar publicly available regulatory records.
Finra’s January 30 request to vacate the arbitration award was reported earlier by “Daily Business Review,” a Florida legal news publication.