Saying stockbrokers should be barred from hiding their mistakes, Attorney General Douglas F. Gansler lauded a federal appeals court for allowing state regulators to intervene in malpractice settlements in an attempt to make sure the action stays on the broker’s national record. But the outcome was decried by an attorney for the former broker who lost the appeal.
The decision could harm brokerage clients by discouraging brokers from settling malpractice claims, said Richard Magid, a partner in the Baltimore office of Whiteford Taylor & Preston LLP. Brokers might have little incentive to settle now that the U.S. Court of Appeals for the D.C. Circuit has ruled that a settlement agreement, conditioned in large part on an expungement request, can be challenged by state regulators, Magid said on Monday.
Expungement Requests Require FINRA Approval
Expungement requests require approval from the Financial Industry Regulatory Authority (FINRA, formerly known as the National Association of Securities Dealers), and a federal court. The D.C. Circuit’s decision “adds yet another layer of regulation” and could discourage brokers from settling claims, Magid said.
Protected interest In its decision, the D.C. Circuit said Maryland Securities Commissioner Melanie S. Lubin should have been allowed to intervene when a federal court was asked to approve an arbitration award involving former stockbroker Joseph R. Karsner IV. Karsner’s client, Pamela Lothian, claimed he led her into unsuitable investments and mismanaged her account, causing her to lose more than $104,000. Through arbitration, she settled for about $47,000.
Lubin sought to challenge a provision that would have expunged the allegation from Karsner’s public record in the Central Registration Depository, a stockbrokers’ database accessible in all states. The expungement request was one of 11 involving Karsner, formerly of Legacy Financial Services Inc. in Gambrills, according to last week’s opinion.
Federal Judge Lubin Denied Lubin’s Motion
A federal judge in Washington denied Lubin’s motion to intervene, approved the arbitration award, and adopted the arbitration panel’s recommendation that the proceeding be expunged.
State Reverses Federal Ruling
Reversing, the appellate panel said a state securities commission has “a legally protected interest” in intervening in order to protect the integrity of its regulatory licensing authority. It also questioned whether a federal court has the authority to order expungement, but declined to decide that issue until the lower court has considered it.
Information vs. expectations Gansler called the D.C. Circuit’s opinion a victory for Marylanders who seek the advice of stockbrokers. “This decision ensures that the state will have the opportunity to protect our citizens from brokers’ attempts to purge their records of negative information and deny investors and regulators the ability to make informed decisions concerning those brokers,” Gansler said in a prepared statement.
“The court agreed with us that the state has an absolute right to protect its interests and those of its citizens from a broker’s attempt to expunge records of proved or alleged misconduct.” But Magid, who represents Karsner, said the decision brings uncertainty to the settled expectations of stockbrokers and their customers with whom they reach agreements. These settlements often provide money to the customers in return for their support of the brokers’ request for an expungement of the record, thereby enabling the malpractice allegation to be resolved quickly and on terms agreeable to both parties, Magid said.
Expungement is often “an appropriate remedy in the appropriate cases,” he said. “Who knows how it [the decision] will affect the ability of parties to get expungements,” Magid added.
Magid said he and Karsner are “definitely considering” an appeal either to the full appeals court or directly to the Supreme Court. Karsner has left the brokerage industry but continues to sell insurance, Magid said. Karsner’s Maryland brokerage license has lapsed, the attorney added.
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