Alabama regulator intervenes in broker delisting case

In a rare move with huge potential impact on FINRA arbitration, a state regulator is seeking to reverse the removal of a client’s complaint from a UBS broker’s record.

Harvey R. Linder’s decision last year allowing five client complaints to be expunged from financial adviser Kent Kirby’s file was the result of the FINRA arbitrator’s misconduct in exceeding or imperfectly exercising his powers and “fraud, bribery, or abusive means,” according to a Feb. 22 motion by the Alabama Securities Commission to vacate the award in Florida state court. Financial planning is the first outlet to review documents filed in a previously unreported public case. It comes like the second major case in state court this year with big ramifications for FINRA arbitration and amid a debate over delisting process reforms.

Kenneth Lehmann, a client of Kirby’s previous firm, received a $125,000 settlement in 2012 based on allegations that the broker made inappropriate secured debt recommendations, the regulator’s filing shows. Lehmann objected to having his BrokerCheck complaint expunged, the filing says. Linder removed Lehmann from the hearing, misrepresented FINRA rules and displayed “obvious bias or corruption,” according to the regulator’s filing.

Linder was at fault by “obtaining the reward by fraud, bribery or abusive means by providing perjured testimony to obtain disbarment,” the document states. “He told Lehmann during the hearing that FINRA rules prevent Lehmann from presenting the underlying facts. Kirby also helped achieve the result by providing false testimony. He misrepresented the extent of his misconduct and the number of investment products involved. He blamed Lehmann for selling in a panic, when documents definitively show that Kirby sent the panicked message. He misrepresented the diversity of the portfolio and the level of sophistication of Lehmann.

The award Last September, Joe Borg, co-chair of the enforcement section of the North American State Securities Administrators Association and a director of the Alabama Securities Commission for the past 28 years, found Lehmann’s claims to be false.

“The more we looked at it, the more we decided it couldn’t last,” Borg said. “It shows that there are problems in the system with regard to radiation.”

Party responses
UBS representatives declined to comment on the matter. Contrary to its formal support for broker delisting requests requesting – and receives very often – approving the deletion of customer complaints related to Puerto Rico, the brokerage’s response statement to Kirby’s case said it “does not oppose” his claim.

FINRA representatives also declined to comment. FINRA published a working paper last month on current issues with erasure cases and proposed changes to them under heavy criticism of the system by NASAA and the Public Investors Advocate Bar Association Foundation.

“FINRA has reviewed the arbitration award and motion to confirm that it was filed in this case,” according to FINRA’s own filing with the Palm Beach County Court as a technical defendant in Kirby’s motion. “FINRA takes no position on whether the award should be confirmed. FINRA notes, however, that the other party to the underlying arbitration proceeding, UBS Financial Services, is not named in this proceeding. FINRA is unable to express, protect or defend any interest that UBS may have in the outcome of these proceedings.

Kirby did not respond to a phone call or email from his Nashville, Tennessee-based firm, Family Office Partners. Lawyers representing him also did not respond to requests for comment. In a comment on BrokerCheck about Lehmann’s complaint, Kirby denied the allegations.

“I reject and very strongly deny all accusations that clients have received improper investment advice from me or any member of my team or that any of our investment advice and recommendations have been misrepresented by us during the period from February 2004 to December 2008 that they allege,” the comment read.

Linder, the sole arbitrator in Kirby’s arbitration case seeking to strike all five client complaints, did not respond to inquiries to his Atlanta office with law firm Culhane Meadows.

“Each client signed a subscription agreement, which contained language confirming that the client did not rely on the CDO issuers, their officers or advisers, the brokerage firm or any of their representatives, but rather consulted their own legal, tax, financial and accounting advisors and had made their own individual judgments as to whether or not to invest in the CDOs In addition, each client has reviewed, completed and signed all necessary authorization forms related to his investment,” the price says. “The arbitrator finds that Clients B, C, D, and [Lehmann’s] the claims are false with respect to the plaintiff.

That decision probably came as no surprise to any of the parties in the next case, given that FINRA’s own data shows that 84% of expungement requests that have resulted in a decision over the past six years have granted approval. customer complaints. be removed from a broker’s file. Additionally, Linder has served as an arbitrator in 36 disbarment cases since 2015, according to the Alabama filing.

“Despite the extremely high standard for expungement — that the underlying complaint is ‘false, factually impossible, and clearly wrong’ — he granted expungement in all but one case,” the document says. “He has become a go-to arbiter for brokers and brokerage firms seeking to clear broker wrongdoing from the public record. The arbitrator’s bias is also evident by the fact that he prevented Lehmann from presenting or cross-examining Kirby, while allowing Kirby’s attorney to cross-examine Lehmann, and then allowing Kirby to present a irrefutable testimony in support of the striking off. »

Borg, whose agency has chosen some of the PIABA Foundation’s most knowledgeable and outspoken critics of the current expungement system as attorneys in Florida state court, said he had no problem remove a genuine misrepresentation from a broker’s file or related to a product. failure. He rejects the idea that Kirby’s former brokerage, Merrill Lynch, paid $125,000 to settle a “factually impossible” lawsuit, Borg said.

“I will choose my battles,” he said. “You have a few specialty law firms right now that specialize in write-offs. Anyone who wants it erased recently seems to have it erased.

A larger context
Borg’s agency has never sought to overturn an arbitration decision, although he has opposed disbarment in a handful of cases over the years and said he believes there have been some efforts to overrule the decisions of other state regulators. Such action by a state regulator is “not a typical fluke,” according to attorney Jenice Malecki of Malecki Law.

“I believe that the arbitration process on the one hand and the complaint and expungement process on the other need to be improved so that they are fair for everyone. It’s not black and white as many want the public to believe when it comes to disbarment, especially when anyone can file an unverified complaint, substantiated or not, without proof,” she said in an email.

“In this case, I would say that arbitrator Linder committed a real miscarriage of justice for both the broker and the client, really,” Malecki continued. “Mr. Kirby’s complaints appear to have mostly never been acted upon or resolved due to nuisance. He deserved a good day in arbitration proceedings to be heard. Likewise, the client should also have the right to be heard The process exists, and both the broker and the client should have the opportunity to be heard and to pursue what the rules allow.

The rarity of such a decision from a state agency seeking to overturn the award “is what makes this case so interesting,” Robert Herskovits of the Herskovits law firm said in an email. The case raises the question of whether there will be more efforts to intervene by state regulators to “frustrate duly rendered arbitration awards,” Herskovits said.

“Any allegation by the state should be emphatically rejected by a court,” he said. “A court will only interfere with an arbitration award where there is clear misconduct by the arbitrator. On the contrary, it sounds a lot like sour grapes by the state. If Alabama is involved in the arbitration process, the The state should raise this issue with FINRA, not seek to interfere with a validly rendered arbitration award.

The case of Alabama and one in Georgia which is currently on appeal by Wells Fargo after a state judge accused the company of fraud in another proceeding shed light on how parties select arbitrators in the FINRA forum, according to attorney Steven Gomberg of Lynch Thompson. Wells Fargo actually appealed a state judge’s decision to overturn a sentence granting the strike of another customer’s complaint the day after Alabama intervened in the Kirby case. Gomberg’s client, former UBS compliance chief Mark Munizzi, was awarded $14 million in compensatory damages, attorneys’ fees and costs last month in a massive victory over the company in his defamation case.

Having Kirby listed as general manager means he’s “a big retail producer,” Gomberg said. Even though brokers “sometimes have to deal with customer complaints that they really don’t deserve to have their records tarnished for,” write-offs have “been a concern in recent years,” he said. Gomberg noted that Kirby’s lawyers come from the law firm Bressler, Amery & Ross, which often represents UBS and other brokerages.

“There’s a significant number of arbitral awards reported every week that are expungements, and that’s being abused,” Gomberg said. “The brokers want this erased from their records. This is a big concern for brokers and if they can get them, they want to get them. UBS was behind him. »

The judge in the Kirby case, Circuit Judge Donald Hafele, ruled on March 30 that Alabama had standing to pursue its motion to dismiss the case as an intervener, according to court records. The case can undo the entire award or just the part involving Lehmann, according to Borg. The filing represents a simple effort involved in any type of proceeding, where “someone finds a hole and you have to fix it,” Borg said.

“We seek to work cooperatively with all parties involved,” he said. “We want to correct what appears to be a flaw in the process, particularly the direct disbarments, due to the lack of fairness in the selection of arbitrators.”