LPL Financial and at least one other firm paid nearly $500,000 in settlements of client complaints that will soon get wiped from public records under two FINRA arbitration decisions.
In separate rulings by Houston- and Tampa, Florida-based FINRA panels earlier this month, arbitrators approved expungement of one case previously
The paradoxical rulings came as the Securities and Exchange Commission considers
The relatively rare cases in which brokerages pay sizable settlements yet
"We're very curious to see how these new rules play out in results," Berkson said. "If you see the same percentage being granted, it means the rules were not as effective."
FINRA
However, those two categories represented less than a quarter of the total number reaching a decision in that span. The vast majority came as "straight-in requests" on expungement alone in filings by the brokers or the brokerages themselves rather than in the course of a customer complaint. In those cases, arbitrators voted "yes" on expungement 84% of the time.
LPL, the three brokers involved in the two cases and the attorneys who represented the clients didn't respond to requests for comment on the case. Sun Life Institutional Distributors, an annuity brokerage named as a respondent in one of the cases, said no one was available to discuss the matter.
Ameriprise, which was named in the other case and filed an expungement request on behalf of two ex-LPL advisors currently with the firm, declined to comment.
The Tampa panel decided that case on Feb. 14. Clients Sara and David Barnett had requested damages of $950,000 while accusing Ameriprise and LPL of negligence, unsuitable investments and breaches of contract and fiduciary duty over recommendations to purchase "illiquid alternative" products tied to energy, healthcare and real estate.
Last February, the Barnetts received a settlement of $95,000 from LPL — a tenth of their claimed damages — without any contributions from their brokers,
Without any participation from LPL or the Barnetts, the arbitrators heard testimony and read through 1,855 pages of exhibits on Ameriprise's expungement request, according to a brief explanation arbitrators included in their ruling. The Hartland team spoke with the clients on a monthly basis, and the Barnetts had signed documents acknowledging the percentage of alternative investments in their portfolios when adding more holdings on one fund.
"When the Hartlands switched brokerage firms from LPL Financial to Ameriprise Financial Services, the customers also switched," the arbitrators wrote. "Evidence was presented at the expungement hearing that showed the customers had owned particular alternate securities in which they increased their position for up to seven years before filing the claim."
The Houston case reached its conclusion two days after the other ruling. The estate of LPL client Gloria Elizondo Altamirano claimed damages of $1 million to $2 million based on allegations of breach of fiduciary duty against the firm, Sun Life's annuity brokerage and advisor Jose Julian Cruz.
Because they didn't investigate or question an authorization form giving her daughter "unfettered access to and control of her assets" in two Sun Life annuities when the client's mental and physical health were declining, the customer's offspring "was enabled to steal from her mother and ultimately her mother's estate," according to the award document.
The customer dismissed their claims against Sun Life in June 2022. Six months later, LPL settled the case for 20% of the estate's maximum requested damages without any payments by the broker, according to Cruz's
Cruz believes he "committed no wrongdoing" in his handling of the account, he wrote in a formal comment about the case on BrokerCheck. "I believe I and LPL would have prevailed in the arbitration on the merits. We settled solely in consideration of the ongoing cost of litigation and interruption to my business. I stand by the services I have provided to all past and present customers."
In this case, the broker filed the request for expungement and the customer participated in the hearing in opposition to removing the complaint from Cruz's record. The arbitrators ruled that the estate's "claim, allegation or information is false," though. The panel found no evidence that Elizondo Altamirano's signature on the authorization had been forged, and Cruz testified that her daughter had been a joint holder of the annuities from the beginning in order to access withdrawals for her mother's expenses.
To remove the complaints from their records permanently, the brokers must get the arbitration decisions confirmed in court. Acknowledging that "there are times when expungement is completely appropriate," PIABA's Berkson argues that the process has a "rubber-stamp problem" in which nearly every request is granted by arbitrators.
Provisions in FINRA's pending rule, which is in its final stage of approval or disapproval by the SEC, would remove some of the advantages for brokerages by notifying state regulators and giving them the ability to participate in hearings, according to Berkson. The proposal would also make the selection of arbitrators random rather than leaving it up to the parties.
Currently, many expungements move forward without any input from the clients, so brokerages often are "going to have a one-way street, and you're going to win," Berkson said. Anytime he's involved in such cases or reading through them, Berkson checks how many times potential arbitrators have refused to grant expungement, he said.
"If it's zero, that tells me that, yes, they came up with an opinion, but they're always going to find in favor of expungement," Berkson said. "It's difficult to believe that every expungement request is a valid one. Not every expungement request wins, although almost all of them do."
FINRA is navigating its second attempt to win the green light from the SEC for reforms to expungement after withdrawing the initial version of the rule in May 2021 amid
The SEC faces an April 12 deadline to approve or reject the new rule.
