The pattern of brokers moving from one problem firm to another, according to a former broker, is sometimes called “cockroaching.”

The Wall Street Journal Story

On October 4, 2013, the Wall Street Journal wrote a story that more than 5,000 brokers who were still licensed to sell securities earlier this year after working for one or more firms that regulators expelled between 2005 and 2012, according to an analysis by The Wall Street Journal of a database of more than 550,000 stockbrokers.

The regulator overseeing securities brokers, in most cases, is Wall Street’s self-policing organization: the Financial Industry Regulatory Authority. FINRA has the authority to expel firms and to suspend brokers, making it illegal under federal law for them to sell securities.

FINRA won’t release its complete database of disciplinary records, although it lets anyone check a broker’s disciplinary record online. Brokers are also regulated by states; by filing public-records requests with securities regulators in all 50 states, the Journal compiled a database of about 88% of the nation’s registered brokers.

To identify firms FINRA has expelled, the Journal reviewed 105 monthly disciplinary reports the regulator published since 2005. Through the end of 2012, it said it had expelled 173 firms for problems ranging from a firm’s failure to pay regulatory fines to fraud involving individual brokers.

At least 5,054 brokers who worked at these defunct firms were still licensed to sell securities earlier this year, the Journal analysis shows. Of those, 610 had worked at more than one firm FINRA had expelled.

Public Investors Arbitration Bar Association Study

On October 16, 2013, the Public Investors Arbitration Bar Association released a study, focusing on how expungment is employed in cases where the investor was paid money to settle a claim. The Article studies FINRA arbitrations in such cases, and reveals that, post-settlement, customer complaints are being expunged at the rate of 93.7%, often in perfunctory ex-parte proceedings where the complainant has agreed not to oppose the application.

Following the release of this Study, FINRA was quick to point out that: PIABA’s study underlines and emphasizes serious concerns FINRA shares with respect to the expungement process. As a result of these concerns, FINRA recently provided expanded guidance to assist arbitrators in the proper performance of their responsibilities with respect to expungement, and is enhancing arbitrator training with added emphasis on the importance of the integrity of the information in the CRD system.

increase in Expungement Requests

According to FINRA, “The recent increase in expungement requests, as PIABA noted, is largely attributable to the 2009 change to the Forms U4 and U5 that increased the number of customer claims reported against brokers, and consequently in an increase in brokers pursuing expungement relief. While still significant, the number of arbitrator-recommended expungements executed by FINRA following a court order during the five-year period (838 orders) covered by the study is less than 5 percent of the total number of customer disputes filed (17,635).

FINRA, of cause, is misguided. Even where the broker is named as a party, or not, claims “involving their conduct” was settled for more than $15,000, has been reportable since probably 2002.

Now, almost routinely, after a case settles, the firm tries to get the broker’s records expunged. We are all in favor of zealous advocacy, and counsel should try to get whatever they can from the arbitration panel, but after a case has been settled, and the client customer no longer technically has a legal or financial interest in whether the broker should gets an expungement or is hit by a bus, it is difficult for claimant’s counsel to participate in a telephonic or evidentiary hearing seeking to wipe clean the broker’s record.

The only time claimant’s counsel will get involved is generally when the broker suggests that the complaint was frivolous or clearly erroneous and was without any basis in fact. The notion that counsel has filed a frivolous complaint, or a complaint that lacked any basis in law or fact raises certain ethical issues and ad hoc motions for expungement for this reason ought to be vigorously opposed.

However, it is not the job of a claimants’ lawyer to protect the general public interest by contesting expungement once a case is over. It is the job of FINRA to protect the public interest through the promulgation of expungement rules, and to train its arbitrators to protect the public interest by actually following these rules. Nonetheless, at least in my experience, Panels simply “rubber stamp” expungement requests, even where the broker lacks standing, or the rules do not permit expungement. In one case, a Panel permitted the president of a corrupt firm, whom had been charged by the SEC for running a boiler room peddling the same penny stocks that were the subject of the statement of claim, because despite having the ability to control and influence, indeed mastermind the corrupt organization, he was not the rogue broker’s immediate supervisor.

$50 Million of Arbitration Awards Unpaid

It gets worse. Each year more than $50 million of arbitration awards are unpaid, because the offending brokerage firm closes it doors, and like rats on a sinking ship, the rogue brokers migrate to a new boiler room.

Despite the state of affairs, at least the PIABA study, and the Wall Street Journal Articles have gained some traction. On October 25, 2013, Senator Edward J. Markey (D Mass), wrote a letter to FINRA Chair and CEO, Richard G. Ketchum asking FINRA to address these concerns.

Maybe FINRA, formerly known as the National Association of Securities Dealers, a self-regulatory organization consisting of member brokerage firms, might get the message, or maybe one day the SEC who has oversight authority over FINRA, may pass new rules and end the charade.

Guiliano Law Firm

If you have been the victim of securities fraud you should consult with an attorney. The practice of Nicholas J. Guiliano, Esq., and The Guiliano Law Firm, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.

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