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State Court Cannot Vacate a FINRA Arbitration Award FINRA to Expunge Negative Information from a Broker’s Complaint History

State Court Cannot Vacate a FINRA Arbitration Award FINRA to Expunge Negative Information from a Broker’s Complaint History

Thomas F. Nee, Jr. v. Financial Industry Regulatory Authority, Inc., 29 Mass.L.Rptr. 437 (2012).

In a recent case before Massachusetts state court, Thomas F. Nee, Jr., (“Nee”) filed a complaint against the Financial Industry Regulatory Authority (“FINRA”) seeking an order that all references to a claim lodged against him by customers of the brokerage firm where he worked and the FINRA arbitration award in favor of these customers be expunged from the FINRA Central Registration Depository (“CRD”) database. FINRA filed a motion to dismiss Nee’s complaint on failure to state a claim upon which the court can grant relief. The court allowed FINRA’s motion.

The underlying dispute in this case arose in 2003 when customers of the brokerage firm that employed Nee asserted claims against him, two other employees and the brokerage firm. The customers alleged that their investments had been mismanaged and sought compensatory damages. Nee and the other respondents contested the customers’ claims, requested that these claims be dismissed, and also requested that the claims be expunged from their regulatory records. The National Association of Securities Dealers (“NASD”), the predecessor of FINRA, convened an evidentiary hearing before a panel of three arbitrators. In January 2005, the panel issued its decision, holding that Nee, one of his colleagues and the brokerage firm were jointly and severally liable to the claimants for compensatory damages in the amount of $187,628. With respect to Nee’s other colleague, the arbitration panel recommended expungement of all references to the claim and the arbitration from his CRD, but noted that he must obtain confirmation of the expungement from a court of competent jurisdiction. Nee took no action to challenge the arbitration award until he filed the instant complaint in July 2011.

In his complaint, Nee asked the court to order FINRA to expunge any reference to the customers’ claim and the arbitration award from his CRD. He complained that the arbitration award did not explain the reasons for the panel’s decision and that the arbitration panel erred in finding him liable to the claimants because, among other things, he had no direct dealings with them.

FINRA Rule 2080 addresses expungement of negative information from the CRD, which is the FINRA database used by brokerage firms, investors, and regulators to assess the complaint history concerning a broker or investment advisor. According to this rule, “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.” The court disagreed that FINRA Rule 2080 gave it jurisdiction over FINRA and the authority to vacate the 2005 arbitration award. Construing the rule as such would conflict with the statutory requirement that arbitration awards be confirmed unless a prompt motion to vacate is filed with the court. Previous Massachusetts state court decisions granting expungement orders to brokers were based on actions filed under the section of Massachusetts general laws, G.L. c. 251, § 11 to confirm an arbitration award recommending expungement. The Massachusetts statute is analogous to the Federal Arbitration Act (“FAA”) provision, 9 U.S.C. § 9; therefore, precedents in federal district court and other states have reached the same conclusion.

FINRA Rule 2080 does not provide claimants with a substantive right to override the finality of arbitration decisions. Matters fully litigated in arbitration are subject to the same res judicata effect as if they had been litigated in a court of competent jurisdiction or before an administrative agency. When arbitration affords opportunity for presentation of evidence and argument substantially similar in form and scope to judicial proceedings, the arbitration award should have the same effect as a court judgment. Bailey v. Metropolitan Property & Liab. Ins. Co., 24 Mass.App.Ct. at 36–37, quoting from Restatement (Second) of Judgments § 84 comment c. Nee asked the arbitration panel to find that he was not liable to the claimants and to order expungement, but the panel ruled against him on both requests. His current complaint asks the court to reconsider the expungement issue that was expressly resolved by the panel. Because that matter was “deemed arbitrable and [was] in fact arbitrated,” it cannot be collaterally attacked in a new complaint. TLC Construction Corp. v. A. Anthony Tappe & Associates, Inc., 48 Mass.App.Ct. 1, 4 (1999).

Massachusetts state law establishes a short 30-day window for filing a petition to vacate an arbitration award in order to accord such awards finality in a timely fashion, G.L. c. 251, § 12(b). Nee filed his complaint over six years after the arbitration award that denied his request for expungement. Therefore, the complaint was not properly before the court.

The court allowed FINRA’s motion to dismiss Nee’s complaint seeking an expungement order on the basis that the court has no authority to overrule the arbitration panel award denying expungement and that a motion to vacate the award was not filed in a timely fashion.

Should you have any questions relating to FINRA or arbitration issues, please do not hesitate to contact Attorney Joseph C. Maya in the firm’s Westport office in Fairfield County, Connecticut at 203-221-3100 or at JMaya@Mayalaw.com.

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