Alabama Securities Commissioner Joseph Borg has brought a lawsuit against Financial Industry Regulatory Authority (“FINRA”) arbitrator Harvey Linder, alleging that Mr. Linder engaged in “fraud, corruption, and undue means” in expunging (i.e., wiping clean) five customer complaints brought against financial advisor Kent Kirby, formerly of Merrill Lynch.

Harvey Linder Accused of Fraud

According to the allegations, Harvey Linder also engaged in misconduct by failing to permit one of the customers from presenting documents or testimony to rebut false testimony by Mr. Kirby, essentially kicking the customer out of the hearing.

The case dovetails with a decision from the Fulton County Georgia Superior Court earlier this year, in which the judge overturned an arbitration award based on the court’s finding that Wells Fargo and its counsel had manipulated the FINRA arbitrator selection process.

Harvey Linder is one of the most frequently selected arbitrators in the country. FINRA’s rules and arbitrator training include a presumption against expungement – describing expungement as an “extraordinary remedy” which should be granted “only when the expunged information has no meaningful regulatory or investor protection value.” Despite this admonition, the Motion against Mr. Linder argues that he grants expungement requests almost 100% of the time.

Explosion of FINRA Expungement Petitions

A review by the Public Investors Arbitration Bar Association (“PIABA”) found that brokers’ use of the expungement process to clear their records has increased by over 1000% since 2019. PIABA further found that expungement motions – despite FINRA’s “extraordinary remedy” warning – are granted over 90% of the time.

According to the Alabama Securities Commission’s complaint, Harvey Linder was chosen in 25 out of his 36 expungement cases by two law firms—Bressler Amery and Advisor Law, which specialize in expungements. In one instance, Arbitrator Linder erased 29 complaints against one broker in a single expungement case.

Harvey Linder isn’t the only alleged “hired gun” expungement arbitrator – as the complaint notes that the top three FINRA arbitrators selected by law firms seeking to erase customer complaints “recommend expungement in almost every case.”

“Straight-In” Expungement Hidden From Customers Whose Complaints are the Subject of the Expungement Request

Shockingly, FINRA permits advisors to move for expungement using a “straight in” expungement motion process, in which the advisor can seek arbitration by naming his or her employer firm as the sole respondent in the expungement petition – thereby avoiding giving notice to the customer(s) whose complaint(s) is/are the subject matter of the expungement request.

This “straight-in” expungement process helps in part to explain the explosion of expungement petitions filed in the past three years. With the “straight-in” expungement, the customer will almost certainly not participate in the expungement by providing any testimony or evidence against the petition.  The broker-dealers named as respondents in the “straight-in” expungement have little incentive to fight the petition. On the contrary, expungement will likely remove from the record arbitrations in which the broker dealer and/or its employees are named.

PIABA found that customers whose complaints are the subject of expungement requests participate and object to the brokers’ expungement motion just 13% of the time. Further, PIABA found that in 1,078 arbitrations filed by brokers against their brokerage firms as “straight-in” expungement cases between January 2015 and July 2019, brokerage firms objected just 23 times.

“Straight-In” Expungement Removes Meaningful Opposition and Investor Protection

With no meaningful opposition, it is too easy for arbitrators to simply rubber stamp the expungement requests. This removes a layer of protection for investors, who have no record of their advisor’s customer complaints and it leaves regulatory agencies without customer complaints to review with advisors seek to register.