Expungement of FINRA - Broker Check Report

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A recent California appellate court decision has greatly expanded the ability of licensed securities brokers to expunge complaints and adverse actions from their Broker Check report, which is maintained by the Financial Industry Regulatory Authority (FINRA). This memo provides background about FINRA, the court's decision and expungement of information made public by FINRA. Higbee & Associates has helped hundreds of licensed professionals (doctors, lawyers, nurses, real estate agents, etc) expunge their record. We are now helping securities brokers. If you have negative information that you wish to have expunged from your Broker Check report, please call us. Cases are priced on a flat-fee and typically cost $5,000.

FINRA and the CRD

The Financial Industry Regulatory Authority (FINRA) is the largest independent regulator for all securities firms doing business in the United States. It is not a government agency but is authorized and defined under the Securities and Exchange Act.[1] FINRA oversees nearly 4,380 brokerage firms, 163,150 branch offices, and 633,000 registered securities representatives.[2] About 45 percent of the nation's 630,000 securities brokers are licensed in California.[3] FINRA maintains a record keeping database known as the Central Registration Depository (CRD) System. The CRD contains information reported in connection with the registration or licensing of brokers and dealers and their associated persons, including disciplinary actions, regulatory, judicial and arbitration proceedings[4] It is available to the public as an immediately searchable database.[5]

The Problem

Since the creation of the CRD, and prior to the [very] recent California Court of Appeals ruling in Lickiss v. FINRA, A134179 (Cal.App.1st, 2012), it had been very difficult for brokers to obtain expungements of CRD records covering past customer disputes regardless of a respective complaints particularized facts or age. To obtain any order of expungement, FINRA Rule 2080(b)(1) required affirmative judicial or arbitral findings of one of the following:

  1. The claim, allegation or information is factually impossible or clearly erroneous;
  2. the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or
  3. the claim, allegation or information is false.[6]

FINRA interpreted this rule to be the substantive test under which a request for an expungement order should be adjudicated via FINRA arbitration or by any court of competent jurisdiction.[7] This made expungement for anything other than pure falsity, mistaken identity, or clerical error almost impossible.

A Solution

The California First District Court of Appeals decision in Lickiss v. FINRA, determined a court sitting in equity is not bound by the narrow requirements of FINRA Rule 2080(b)(1) in determining whether a CRD expungement is appropriate.

A. Facts

Edwin Lickiss CRD report contains 17 past consumer complaints, as well as a regulatory action, filed between 1991 and 1996. The facts state that Mr. Lickiss began selling stock in a company known as CET to clients in 1987 and continued selling through the early part of 1991, during which time CET exhibited strong financial performance, under the prudent management of Jeff Berger, Sr.

However, Mr. Lickiss stopped selling CET stock because he became concerned about its rising level of debt, which coincided with Berger, Sr.'s death, at which time the son, Berger, Jr., took over. Berger Jr.'s company, B & B Property Investment, extracted $7.2 million in prepaid commissions from CET around 1990. This drained liquidity from CET and weakened its financial position as California entered a recession and experienced a declining commercial real estate market.

CET's share price plummeted, its stock became illiquid and the company declared bankruptcy in 1993. Meanwhile, lawsuits against B & B were settled for approximately $1 million, and Berger, Jr. was ousted from the company.

Many of Mr. Lickiss's clients who invested in CET filed claims against him, their essence being that the investments were unsuitable for the clients and [Lickiss] failed to disclose the risks of the stock to them.

According to Lickiss, in at least 12 of the 17 arbitration claims, clients were represented by Richard Sacks, a non-attorney who ran an investor recovery service in the Bay Area in the mid1990's.   Prior to this career, Sacks was the subject of over $479,000 in securities regulatory fines and was eventually barred from the industry.   Sacks' operating method was to affirmatively contact investors and incite them to sue Lickiss [and presumably others].

Mr. Lickiss record is completely clear from 1997 to the present.

B. Procedural History

Mr. Lickiss petitioned for expungement of his CRD records, asserting that the superior court of California had jurisdiction pursuant to (1) FINRA Rule 2080(a);  [and] (2) the Court's equitable and inherent powers to effectuate expungements.
After FINRA removed the action to federal court, Mr. Lickiss moved to remand the matter back to state superior court. The federal court granted the motion and remanded the case ruling that it did not have subject matter jurisdiction over the case because there is no statute, rule or regulation imposing a duty on FINRA to expunge. Lickiss v. FINRA, A134179 (Cal.App.1st, 2012) citing In the Matter of Lickiss (N.D. Cal. June 22, 2011) WL 2471022 at 1, 3. In its unpublished order and decision, the court noted that [i]mportantly, Rule 2080 does not provide any substantive standard for determining whether expungement is appropriate or required. Id. at 2. And again:  There is nothing in the Act, rules, or regulations that provide substantive criteria as to when expungement is appropriate  [] While FINRA rule 2080 addresses expungement, it only sets forth procedures, not a substantive duty.  Id. at 4.

Thereafter, FINRA demurred to the petition, arguing that the standards set forth in FINRA Rule 2080(b)(1) should guide the court in adjudicating the demurrer. Mr. Lickiss opposed the demurrer arguing that the 2080(b)(1) requirements did not constitute a substantive test; rather a procedural one available to avoid joining FINRA in any judicial expungement attempts. After wavering on a tentative ruling the superior court ruled in favor of FINRA by sustaining the demurrer. Mr. Lickiss brought an appeal.

C. Analysis

In overturning the demurrer and remanding the case the court of appeals held that because Mr. Lickiss petition specifically requested that the court invoke its inherent equitable powers, that the general burdens and benefits of granting his petition must be weighed. Most notably, the court found that our Supreme Court reminds us that courts cannot properly exercise equitable powers without considering the equities on both sides of a dispute. Lickiss v. FINRA, A134179 (Cal.App.1st, 2012) citing Cortez v. Purolator Air Filtration Products Co. (2000) 23 Cal.4th 163, 180. This basic principle of equity jurisprudence means that in any given context in which the court is prevailed upon to exercise its equitable powers, it should weigh the competing equities bearing on the issue at hand and then grant or deny relief based on the overall balance of these equities. Id.

The court ruled that the superior court sitting in equity erred if it believed that equity permitted it to rely exclusively on rule 2080(b)(1) to resolve the demurrer. Lickiss v. FINRA, supra. Further, the court ruled that FINRA rule 2080(b)(1) is a procedural rule that does not provide any substantive criteria as to when expungement would be appropriate. Id. The SEC itself argued against applying the rule 2080 standards directly to NASD [now FINRA] members, acknowledging that federal and state courts are better suited to make the right decision. Id. citing 68 Fed.Reg., 7466701, 74671. 68 (Dec. 24, 2003).

Finally, the court found that FINRA Rule 2080(a) essentially recognizes the right of members and associated persons to seek expungement of information from the CRD system by obtaining an order from a court of competent jurisdiction capable of ordering such expungement. Lickiss v. FINRA, supra.

Mr. Lickiss had correctly petitioned state superior court to rule under its inherent equitable powers asking it to weigh the equities favoring expungement against the detriment to the public should expungement be granted.

What the Case Means

What Questions Remain?

Practical Applications

  1. Preliminary Case Research.Unlike other criminal expungements, all of background and violation information is immediately searchable on the internet.[8] We will be able to review a client's record instantaneously.
  2. Common Sense.Without any guidance as to what types of cases and fact patterns will lead to successful expungement orders from California superior courts it is necessary to use common sense in analyzing and preparing potential cases. Mr. Lickiss, for example, has a clean record for the past 15 years; a majority of the complaints came as the result of the gathering and representation of clients by a broker who had lost his license; and the complaints arose generally from a single type of stock sold; Mr. Lickiss appears to have stopped selling that stock when he noticed a problem with it; and Mr. Lickiss appeared to have no advanced knowledge or influence in the bankruptcy of the company for which he sold the stocks.
    These show that he is not prone to recidivism, he may not even have complaints against him if it were not for the efforts of a single credibility-lacking individual, he did not continue to sell stock once he was aware of a problem, and he did not intentionally harm his clients.
  3. Form of the Complaint. The court of appeals specifically stated that they "would have preferred a standard complaint with numbered paragraphs and a prayer for relief" although "Lickiss's petition, declarations and points and authority adequately plead a cause of action for expungement." At this time, we do not have a copy of the pleadings. However, any future use of those pleadings should be with special consideration of the court's preference for the familiar numbered paragraphs and prayer for relief of a standard complaint.
  4. Content of the Complaint. While it is important to cite FINRA Rule 2080 as a basis for the petition, it is very important that the complaint also contain a prayer for relief invoking the court's "general and inherent equitable powers." Certainly, facts and relevant law should also be included in order to adequately plead a cause of action for expungement.

Final Note

Under FINRA Rule 2080(a) members or associated persons seeking to expunge information from the CRD system arising from disputes with customers must obtain an order from a court of competent jurisdiction directing such expungement or confirming an arbitration award containing expungement relief. This means that even those members who have received an arbitration award from FINRA granting them expungement of their CRD, they still need to seek an expungement from a court of competent jurisdiction. This could be a potentially very easy type of case to pursue and win considering the regulatory agency has already granted the relief. Apparently, there are a large number of people who go through the FINRA arbitration but never actually get the record removed from the CRD system for failure to get a court order.[9]

Please contact RecordGone.com if you are looking to have your criminal record expunged or if you have experienced employment discrimination that violates the laws discussed in this article. You can see if you are eligible for expungement by going to https://www.recordgone.com/eligibility/