In a rare move carrying a huge potential impact on FINRA arbitration, a state regulator is seeking to overturn the expungement of a client’s complaint from a UBS broker’s record.
Harvey R. Linder’s decision last year giving approval for the erasure of five client complaints from financial advisor Kent Kirby’s record was the result of the FINRA arbitrator’s misconduct, exceeding or imperfectly carrying out his powers and “fraud, corruption or undue 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 the filings in the public, yet previously unreported, case. It comes as
Kenneth Lehmann, a client of Kirby’s prior firm, received a settlement of $125,000 in 2012 based on allegations that the broker made unsuitable recommendations of collateralized debt obligations, the regulator’s filing states. Lehmann objected to the expungement of his complaint from BrokerCheck, the filing states. Linder removed Lehmann from the hearing, misrepresented FINRA rules and displayed “evident partiality or corruption,” the regulator’s filing argues.
Linder committed misconduct by “procuring the award by fraud, corruption or undue means by providing perjured testimony to obtain expungement,” the document states. “He told Lehmann at the hearing that FINRA rules prevent Lehmann from presenting the underlying facts. Kirby, too, helped procure the result through providing false testimony. He misrepresented the scope 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 Lehmann’s portfolio and level of sophistication.”
The
“The more we looked into it, the more we decided this can't stand,” Borg said. “This shows that there are problems in the system when it comes to expungements.”
Responses from the parties
Representatives for UBS declined to comment on the case. Unlike its formal support for the expungement requests of brokers asking for —
Representatives for FINRA declined to comment as well. FINRA released
“FINRA has reviewed the arbitration award and the petition to confirm that was filed in this case,” according to FINRA’s own filing in Palm Beach County Court as the technical defendant in Kirby’s petition. “FINRA does not take a position on whether the award should be confirmed. FINRA does note, however, that the other party to the underlying arbitration proceeding, UBS Financial Services, is not named in this proceeding. FINRA is not in a position to express, protect or advocate for any interest UBS may have in the outcome of this proceeding.”
Kirby didn’t respond to a phone call or email to his Nashville, Tennessee-based practice, Family Office Partners. The attorneys representing him didn’t respond to requests for comment either. In a comment on
“I most strongly reject and deny any and all accusations that the clients received unsuitable investment advice from me or any member of my team or that any of our investment advice and recommendations were misrepresented by us during the period of February 2004 to December 2008 which they allege,” the comment states.
Linder, the sole arbitrator in Kirby’s arbitration case seeking expungement of the five client complaints, didn’t respond to inquiries to his Atlanta office with the law firm Culhane Meadows.
“Each customer signed a subscription agreement, which contained language that confirmed that the customer was not relying on the CDO issuers, their managers or advisors, the brokerage firm or any of their representatives, but rather had 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. Further, each customer reviewed, completed and signed all necessary authorization forms related to their investment,” the award states. “The arbitrator finds that Customers B, C, D, and [Lehmann’s] claims are false with respect to claimant.”
That award likely came as no surprise to any parties in the subsequent case, given that FINRA’s own data shows that 84% of expungement claims that reached an award in the past six years granted approval for client complaints
“Despite the extremely heightened standard for expungement — that the underlying complaint be ‘false, factually impossible and clearly erroneous’ — he granted expungement in all but one case,” the document states. “He has become a go-to arbitrator for brokers and brokerage firms seeking to expunge broker wrongdoing from the public record. The arbitrator’s partiality 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 allowed Kirby to present unrebutted testimony in support of expungement.”
Borg, whose agency chose some of the PIABA Foundation’s most knowledgeable and vocal critics of the current expungement system as its lawyers in the Florida state court, said he takes no issue with removing a truly false claim from a broker’s record or one related to a product failure. He rejects the idea that Kirby’s former brokerage, Merrill Lynch, would have paid $125,000 to settle a “factually impossible” complaint, though, Borg said.
“I’m going to pick my battles,” he said. “You've got a few boutique law firms right now that specialize in expungements. Anyone who wants it expunged lately seems to be getting it expunged.”
A larger context
Borg’s agency has never previously sought to vacate an arbitration decision, though he has objected to expungements in a handful of cases over the years and said he thinks there have been a few efforts to overturn awards by other state regulators. Such an action by a state regulator is “not a typical happenstance,” according to attorney Jenice Malecki of Malecki Law.
“I do believe that both the arbitration process on one side and the complaint and expungement process on the other need work so that it is fair for all. It is not black and white as many want the public to believe when it comes to expungement, particularly when anyone can file an unverified complaint, justified or unjustified, without evidence,” she said in an email.
“In this case, I would say, the arbitrator Linder has executed a real miscarriage of justice for both the broker and the customer, really,” Malecki continued. “Mr. Kirby’s complaints look as though most were either never followed up on or settled for nuisance value. He deserved a fair day in an arbitration proceeding to be heard. Likewise, the customer should have the right to be heard as well. The process exists, and both the broker and customer should have their opportunity to be heard and pursue what the rules allow.”
The rarity of such a move by a state agency seeking to vacate the award “is what makes this filing so interesting,” Robert Herskovits of the Herskovits
“Any such allegations by the state should be flatly rejected by a court,” he said. “A court will only disturb an arbitration award in the event of plain arbitrator misconduct. On the contrary, this sounds a lot like sour grapes by the state. If Alabama is concerned by the arbitration process, the state should take up that issue with FINRA, not seek to disturb a validly issued arbitration award.”
Alabama’s case and one in Georgia that’s
The fact that Kirby is listed as a managing director means that he’s “a big retail producer,” Gomberg said. Even though brokers sometimes “have to deal with customer claims for which they really aren't deserving of having their records blemished,” expungements have “been a concern in the last few years,” he said. Gomberg noted that Kirby’s attorneys come from the law firm Bressler, Amery & Ross, which often represents UBS and other brokerages.
“There's a significant number of reported arbitration awards every week that are expungements, and it's abused,” Gomberg said. “Brokers want it off their records. It’s a big concern of brokers and, if they can get them off, they want to get them off. UBS was full stop behind him.”
The judge in Kirby’s case, Circuit Judge Donald Hafele, ruled on March 30 that Alabama has standing to pursue its motion to vacate the case as an intervening party, court records show. The case may vacate the entire award or just the portion involving Lehmann, according to Borg. The filing represents a simple effort involved with any kind of procedure, in which “somebody finds a hole and you’ve got to fix it,” Borg said.
“We are looking to work cooperatively with all parties involved,” he said. “We want to fix what appears to be a defect in the process, especially the straight-through expungements, because of the lack of fairness in picking arbitrators.”
