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«NOTE WHAT YOU DO NOT KNOW CAN HURT YOU: HOW THE FINRA EXPUNGEMENT PROCESS IS ENDANGERING FUTURE INVESTORS THROUGH A LACK OF INFORMATION I. ...»

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134. Ilgenfritz, supra note 3, at 349 (internal quotations omitted); see Notice to Members 04Impermissible Confidentiality Provisions and Complaint Withdrawal Provisions in Settlement Agreements (June 2004), at 558, available at http://www.finra.org/web/groups/industry/ @ip/@reg/@notice/documents/notices/p003012.pdf (reminding members that conditioning settlements on withdrawal of complaints is impermissible).

135. See Notice of Filing of Proposed Rule Change Relating to Amendments to the Codes of Arbitration Procedure to Establish New Procedures for Arbitrators to Follow When Considering Requests for Expungement Relief, 73 Fed. Reg. 18308, 18309 (Apr. 3, 2008) (admitting that arbitrators would sometimes order expungement on the merits of the case, but would more often grant expungement in order to facilitate settlement of the dispute).

136. See infra notes 137-40 and accompanying text; Part III.A.1–3.

137. Dan Jamieson, Record-Cleaning Rules for Registered Reps to Get Finra Tweak, INVESTMENT NEWS (Aug. 6, 2013, 3:40 PM), http://www.investmentnews.com/article/ 20130806?FREE/130809952# [hereinafter Jamieson, Record-Cleaning]. Even when the arbitration panel hears evidence it is almost always one-sided, as the customer rarely participates, which provides the same unclear picture of how an arbitrator is to make a definitive decision. See Lipner, supra note 12, at 88.

2014] FINRA EXPUNGEMENT PROCESS 1245 potential ramifications on the customer’s counsel.138 Moreover, the money offered through settlement leads to the assumption that a clean record is being bought, as paying a large sum of money certainly suggests some form of culpability.139 Put in the most succinct way possible, “[e]xpungement is just too easy after settlement.”140 The review of expungement statistics regarding disputes that resulted in a settlement agreement is a useful way to demonstrate the issues just discussed, which Subpart A.1, will examine.141 Further, as a result of the demonstrated issues involving settlement in expungement claims, ethical issues are likely to arise too, which will be considered in Subpart A.2.142 Finally, the discussed settlement issues have not gone unnoticed by members of public office, thus Subpart A.3 will detail members of public office who have taken a stance against the abuse of settlement in expungement proceedings.143

1. Statistical Analysis of Settlements Agreeing to Expungement Awards Dating back as early as 2006, a study performed by PIABA analyzing 200 settlement award cases found that out of the 185 where brokers requested expungement, 182 were successful.144 In the two years prior to the institution of Rule 12805, expungement was granted roughly 89% of the time in cases resolved by settlement that subsequently sought an expungement award.145 After the institution of the new rule, in a span of approximately seven months—from May 2009 to December 2009— out of a total of 199 settlements that agreed to an expungement, only 6 of those expungement requests were denied.146 The study continued, finding that from May 2009 through the end of December 2011, a total of 483 settlements agreeing to expungement were entered, with only 15

138. See Caruso, supra note 24, at 4.

139. See Ilgenfritz, supra note 3, at 362 (“Member firms do not pay substantial sums to claimants when investors’ claims are clearly erroneous....”); Dan Jamieson, New Finra Rules Could Help Brokers Clear Records in Certain Cases: Regulator Working on Dual Tracks But Specifics and Timing Remain Uncertain, INVESTMENT NEWS (Aug. 8, 2013, 4:57 PM), http://www.investmentnews.com/article/20130808/FREE/130809919 [hereinafter Jamieson, New Finra Rules]; Lee, supra note 9, at 4.

140. Barlyn, supra note 10 (quoting Seth Lipner).

141. See infra Part III.A.1.

142. See infra Part III.A.2.

143. See infra Part III.A.3.

144. Donovan, supra note 19, at 3. The study found that in 130 of those 200 cases, arbitrators granted expungement before any hearing on the merits of a case went forward. Id.

145. Ilgenfritz, supra note 3, at 360 (dating back to January 1, 2007 through May 2009).

146. Id. at 357.

1246 HOFSTRA LAW REVIEW [Vol. 42:1227 of those expungement requests being denied.147 That is nearly a 97% success rate for broker dealers seeking to find a way to expunge their records through settlement negotiations.148 Separately, more recent studies have shown similar results to the previously mentioned research.149 Lipner, an attorney who represents investors against brokers, analyzed 150 expungement requests from the fourth quarters of 2011 and 2012 that resulted from settlements, and discovered that arbitrators had granted expungement in all but five of the cases.150 The most recent analysis of all 2013 settlement cases indicates that out of 353 total expungement requests brought for post-settlement confirmation, only thirty were denied.151 That equates to a 91.5% success rate for broker dealers who sought expungement through settlement this past calendar year.152 These settlement agreements leading to expungement not only endanger investors, but also present further legal issues for customer attorneys who are agreeing to such settlements.153

2. Problems Faced by Customer Attorneys After Agreeing to a Settlement When a customer agrees to a settlement offer in exchange for their agreement to expunge the dispute from the broker’s record, it may not affect the customer, but it presents practical, legal, and collateral consequences for the customer’s attorney.154 The burden and ramifications are placed squarely on the attorney who accepts such an offer on behalf of the client.155 An attorney who agrees to expunge a





147. Id. at 359.

148. See id.

149. See supra notes 144-48 and accompanying text.

150. Antilla, supra note 4. In his most recent analysis of the first six months of 2013, Professor Lipner looked at 205 and found that only 13 resulted in a denial, and in only 3 of the cases did the investor object to expungement. Lipner, supra note 12, at 92. In each of the 3 cases where the investor objected, the request for expungement was denied. Id. For a more detailed analysis of Professor Lipner’s most recent research, see id. at 91-95.

151. FINRA Dispute Resolution Arbitration Award Review 2013, supra note 23. The research also indicates the Rule 2080(b)(1) predicate that was cited by the arbitrators when granting expungement and found that predicate (c), “the claim, allegation, or information is false” was the primary factor cited, roughly 79% of the time. Id.; FINRA MANUAL R. 2080(b)(1)(C) (2011).

Factor (a), “the claim, allegation, or information is factually impossible or clearly erroneous” was cited the second most, approximately 67% of the time. FINRA Dispute Resolution Arbitration Award Review 2013, supra note 23; FINRA MANUAL R. 2080(b)(1)(A) (2011).

152. FINRA Dispute Resolution Arbitration Award Review 2013, supra note 23.

153. See infra Part III.A.2.

154. Caruso, supra note 24, at 4-5; Lazaro, supra note 17, at 94-95 (presenting two possible ethical concerns: (1) an attorney’s obligation of candor; and (2) whether the attorney knowingly filed a frivolous and meritless claim).

155. Caruso, supra note 24, at 4 (describing settlement abuse as the “flavor of the month”).

2014] FINRA EXPUNGEMENT PROCESS 1247 claim and admit on the record that the claim filed was “false,” puts himself in danger of both earning a reputation as an attorney who files false claims, and receiving severe sanctions from his respective bar association for filing a false claim.156 A customer’s attorney who files an honest, non-frivolous claim can not accept a deal agreeing to expungement, as it would require the attorney to agree the claim was false.157

3. Challenges From Public Office In 2006 and 2007, a Maryland broker named Joseph Karsner received eighteen separate arbitrator expungements that had been preceded by settlement, which prompted the Maryland Securities Commissioner to interject.158 One of the claims even involved an arbitrator dissenting because the panel’s conclusion had been based on no actual evidence.159 Accusing Karsner of “dishonest and unethical” practices,160 the Maryland Securities Commissioner successfully interjected into the court confirmation claim,161 but eventually settled with Karsner.162 As a crystal clear indication of what likely occurs in many settlement negotiations that involve expungement, Karsner wrote to FINRA that an offer to settle with a customer for $15,000 would be “automatically reduced to $9,999 if [the customer denied] the expungement request.”163 Similar to the situation that took place in Maryland, New York’s former Attorney General, Andrew Cuomo, also attempted to interject into a number of expungement claims in 2007.164 Cuomo intervened in seven separate cases, arguing, among other things, that expungements

156. Id.; see also Lazaro, supra note 17, at 95-96 (asserting that while no attorney wants to file a meritless claim, possible sanctions are unlikely). Along with the name of the lawyer being associated with filing a false claim, the investor’s name will also be associated with filing a false claim, because when expungement is granted, the FINRA award database will list the award with the investor’s name in a caption and will likely contain a “finding” that the complaint was false or erroneous. Lipner, supra note 12, at 102.

157. Mason, supra note 24, at 96.

158. Lipner, supra note 12, at 76 (objecting to one of the cases where expungement was sought).

159. Antilla, supra note 4 (“It is the responsibility of the panel to see through a ruse such as this.” (quoting Sidney Werner, arbitrator)).

160. Id.

161. Karsner v. Lothian, 532 F.3d 876, 887 (D.C. Cir. 2008) (reversing the lower court). For a further analysis of the Karsner decision, including whether courts have the power to confirm arbitration expungement awards, see Lipner, supra note 12, at 76-78.

162. Antilla, supra note 4 (agreeing not to seek a broker’s license until 2016); Lipner, supra note 12, at 78 (consenting to engaging in dishonest and unethical practices).

163. Antilla, supra note 4.

164. See Donovan, supra note 19, at 1 (believing complaints were expunged too easily).

1248 HOFSTRA LAW REVIEW [Vol. 42:1227 were being bought and violated public policy.165 The request to intervene was based on Cuomo’s role as a securities regulator and interest in preserving state records.166 However, the N.Y. Courts pointed to the lack of judicial requirements to confirm an expungement award.167 Thus, despite successfully intervening in all but one case, Cuomo was unsuccessful in his attempts to overturn the expungements and implement his policy.168 B. FINRA’s Deficient Expungement Guidelines While a majority of expungement issues stem from the previously discussed settlement agreement problem,169 the general expungement guidelines regulating the granting of all expungement awards are “seriously flawed,” too.170 A primary concern surrounding the guidelines, including both Rule 2080 and Rule 12805, is that arbitrators do not appear to be applying either guideline when making expungement determinations.171 Moreover, “arbitrators do not appear to appreciate the importance of the accuracy of disclosure information in the CRD system to investor protection.”172 A likely source of these issues173 is the current unclear arbitrator guidelines.174 As one court described it, nothing in Rule 2080 “tells the

165. Lipner, supra note 12, at 79. The seven cases in which Cuomo intervened were: In re Johnson v. Summit Equities, Inc., 864 N.Y.S.2d 873, 881 (Sup. Ct. 2008); In re Kay v. Abrams, 853 N.Y.S.2d 862, 863 (Sup. Ct. 2008); In re BNY Inv. Ctr. Inc. v. Bacchus, No. 0109678/2007, 2008 WL 2490062 (N.Y. Sup. Ct. June 13, 2008); In re Walker v. Connelly, No. 52161, slip op. at 2 (N.Y. Sup. Ct. 2008); Zaferiou v. Holgado, No. 102996/07, 2008 WL 6677787, at *1 (N.Y. Sup. Ct.

Apr. 14, 2008); Sage, Rutty & Co. v. Salzberg, No. 2007-01942, 2007 WL 2174117, at *2 (N.Y.

Sup. Ct. June 1, 2007); In re UBS Fin. Servs., Inc. v. Gibson, No. 103188/07, slip op. at 1 (N.Y.

Sup. Ct. Nov. 15, 2007).

166. Lipner, supra note 12, at 79.

167. See Elisofon, supra note 20, at 3 (observing that Rule 2080 lacked direction for judges);

Lipner, supra note 12, at 80 (viewing their role as extremely limited in the confirmation process).

168. See Donovan, supra note 19, at 1-2 (describing Cuomo’s intervention in all cases);

Lipner, supra note 12, at 79-86 (describing the prior case decisions that ultimately doomed Cuomo’s cause).

169. See supra Part III.A.

170. See PIABA Study, supra note 12, at 2 (quoting Scott Ilgenfritz).

171. See Ilgenfritz, supra note 3, at 360-61 (failing to apply guidelines and rubber-stamping awards); Jamieson, Record-Cleaning, supra note 137 (arguing arbitrator determinations are unclear because of how quick they make them); Lipner, supra note 12, at 96 (imposing Rule 2080 changed nothing, as the rule was “vague and over-lapping”).

172. Ilgenfritz, supra note 3, at 362; see also Order Approving a Proposed Rule Change Amending the Codes of Arbitration Procedure to Establish Procedures for Arbitrators to Follow When Considering Requests for Expungement Relief, 73 Fed. Reg. 66086, 66087 (Nov. 6, 2008) (granting expungement without reviewing settlement agreement).

173. See supra notes 170-72 and accompanying text.



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