A California appeals court ruling that makes it easier for brokers to expunge customer complaints and disciplinary actions from their records could have far-reaching implications for brokers everywhere.
In an Aug. 23 decision, the California Court of Appeal for the First Appellate District in San Francisco ruled that brokers may expunge their records under a principle of basic fairness, or equity. The ruling poses a direct challenge to rules imposed by the Financial Industry Regulatory Authority Inc. that require certain thresholds to be met before complaints are expunged.
“This case could do damage to the [disclosure] system,” said Ryan Bakhtiari, a partner at a Beverly Hills, Calif., and president of the Public Investors Arbitration Bar Association, which represents plaintiff’s attorneys.
Jeffrey Riffer, an attorney at Elkins Kalt Weintraub Reuben Gartside LLP in Los Angeles, expects to see a “big uptick” in expungement cases as a result of the ruling, especially in California.
“This opens up a whole new avenue,” he said.
H. Thomas Fehn, a partner at Fields Fehn & Sherwin in Los Angeles, said that the ruling “might spark more successful expungement requests, because brokers aren’t locked into [following Finra rules] anymore.”
The broker who brought the case, Edwin “Mike” Lickiss, asked a state court in April 2011 to expunge 17 customer complaints and a regulatory action. Mr. Lickiss argued that 13 of the 17 complaints involved the same real estate investment trust and that because his record since 1997 was unblemished, the incidents should be removed. He also told the court that with investors increasingly using Finra’s BrokerCheck reporting system, his record has caused professional harm.
Finra objected to Mr. Lickiss’ efforts to clean up his work record, and late last year a state court denied his request for expungement. The appeals court didn’t buy Finra’s argument that removal of complaints is strictly determined by the self-regulator’s rules.
“The choice of a very narrow, rigid legal rule to assess the legal sufficiency of [Mr. Lickiss’ expungement] petition — a choice that closed off all avenues to the court’s conscience in formulating a decree and disregarded basic principles of equity — was nothing short of an end run around equity,” the three-judge appellate panel ruled.
The appeals court sent Mr. Lickiss’ case back to the trial court for another hearing.
Finra spokeswoman Michelle Ong declined to comment.
In a court filing last year, however, Finra accused Mr. Lickiss of seeking “to sanitize his record and prevent regulators, brokerage firms and investors from learning of this history for what amounts to ‘time served.’ “
In other words, Finra said, “Mr. Lickiss believes that equity requires that securities industry participants be ignorant of the fact that Mr. Lickiss has defended approximately $1.4 million in investor claims against him.”
The 17 complaints were settled or arbitrated for total payments to customers of $831,000. In one of those cases, Mr. Lickiss personally paid $5,000 of the settlement, according to his BrokerCheck report.
Mr. Lickiss did not return phone calls. His attorney, Jeffrey Salisbury of The Law Offices of Jeffrey S. Salisbury in Eugene, Ore., was out of the country and not available for comment.
Legal experts say the fight between Finra and Mr. Lickiss is far from over.
“This decision is not pointing to a final outcome of the trial court one way or the other,” said Joel Beck, founder of The Beck Law Firm LLC in Atlanta. “Should Finra lose at the trial court, I would certainly expect an appeal.”
Hardy Callcott, a partner at Bingham McCutchen LLP in San Francisco, agreed. “If it stands, I would expect Finra to try to appeal … or get [the decision] ‘depublished,’ which means it wouldn’t be citable as precedent.”
The equitable coin has two sides. Finra will be able to make its equitable arguments against expungement when the case is reheard at the trial court, according to Sylvia Scott, a partner at Freeman Freeman & Smiley LLP in Los Angeles.
Observers say the expungement question has grown in importance as more disciplinary information is disclosed.
Customer allegations, as well as regulatory actions and arbitrations, are revealed to the public online via the BrokerCheck system.
In August 2010, Finra began disclosing all historic complaints, regardless of age. In the past, unproven allegations were not disclosed after two years.
In addition, under a mandate in the Dodd-Frank reform law, Finra is considering disclosing exam scores, broker termination information and more historical data on the BrokerCheck system.