A Finra arbitrator has been accused of numerous violations, including fraud, in a landmark lawsuit brought by Alabama aimed at highlighting cracks in Finra’s expungement arbitration system, which brokers use to erase all trace of customer complaints from their record.
In its 750-page motion, the Alabama Securities Commission has accused Finra arbitrator Harvey R. Linder of “fraud, corruption and undue means” in his decision last September to erase five customer complaints from former Merrill Lynch advisor Kent Kirby’s record. Kirby is now an advisor with UBS.
Linder is also accused of misconduct for refusing to allow one of Kirby’s former customers from “presenting documents or testimony to rebut false testimony by Kirby.” The former client, Kenneth Lehmann, won a settlement of $125,000 from Merrill Lynch in 2012 over allegations that Kirby made unsuitable recommendations and trades in collateralized debt obligations.
“This case came to our attention and when we looked at it. We saw that the arbitrator basically kicked the investor out of the hearing,” Alabama Securities Commissioner Joseph Borg told Financial Advisor magazine.
"We’re documenting the problems so when Finra and the SEC are looking for expungement solutions, they can see the issues more clearly,” added Borg, who appointed two leading Public Investor Advocacy Bar Association (PIABA) attorneys as Alabama deputy attorney generals in the case.
Both Finra and arbitrator Linder declined to comment on Alabama’s motion.
This is the second serious legal rebuff of Finra arbitrators to explode into public view this year. On January 25, Judge Belinda Edwards of Superior Court of Fulton County in Georgia found that Wells Fargo and its counsel manipulated the Finra arbitrator selection process. Wells Fargo is appealing that decision and Finra has refuted the accusations.
Borg wants Finra or the SEC to remove expungements from the Finra arbitration system and take it over themselves. He has been on several Finra committees to reform the system over the past decade.
“None of Finra’s proposed fixes, which were shelved by the SEC due to PIABA lobbying last September and resurfaced in a Finra white paper last month, will fix the broken expungment system,” said Jason Doss, one of Alabama’s specially appointed deputy attorney generals.
Finra argued in a white paper that creating a specialized roster of arbitrators will add credibility to arbitrators’ decision of whether customer complaints should be removed from a rep’s records in the Central Registration Depository or CRD. But Doss, who founded PIABA’s foundation, which studies expungements, said brokers and their firms have a long track record of repeatedly hand picking Finra arbitrators who grant expungements.