COMPLY-Merrill broker files John Doe case to clear record quietly
Sept 19 (Reuters) - A broker at Bank of America's Merrill Lynch unit wants a court to erase details from his public record that he says serve no purpose other than to embarrass him. He just doesn't want the court to know who he is.
He is suing the Financial Industry Regulatory Authority (FINRA), Wall Street's industry funded watchdog, in a California state court under the pseudonym "John Doe" in the hopes that it will clear his record without drawing attention to him.
The case is raising several questions. Among them: Should securities brokers be allowed to shield their identities in court cases relating to cleaning up or "expunging" industry records that are already public?
A victory could drive more brokers to pursue expungements in California, where a state appeals court last year already set another precedent that could make it easier for brokers to cleanse their records. [ID: nL2E8JUHKZ] Letting brokers remain anonymous in court would bolster that advantage, lawyers say.
Almost 279,000 of the nation's 634,000 securities brokers are licensed in California, according to its securities regulator. They can sue there, even if they live elsewhere.
Some lawyers are skeptical that the broker's rare John Doe strategy will work. John Doe cases typically involve sex abuse or other private matters, and most brokers go directly to FINRA to cleanse their records.
"It's not for when you're in the securities business and you've disclosed you worked at Merrill Lynch and dealing with a (disclosure) document that's in the public domain," said Brandon Reif, a Los Angeles-based securities lawyer who is not involved in the case.
The broker's record is already public, concedes Jeffrey Riffer, the Los Angeles-based lawyer who represents Doe. But by seeking expungement as "John Doe" the broker hopes to not draw attention to himself and the flaws on his license.
"It's public only when someone with unlimited resources can find it. But in the world of finite resources that wouldn't be the case," said Riffer.
A ruling is a long way off. FINRA filed an action this month in the U.S. District Court for the Central District of California to move the case, pending since July, to federal court. The regulator says its rules, which cover expungements, are part of the federal securities regulation system so a federal judge, and not a California court, should hear the case.
Most brokers use FINRA's arbitration forum to request expungement. Arbitrators must apply rigorous and specific standards before recommending the measure. In California, however, a court can decide simply what it thinks is fair.
FINRA has not yet addressed the merits of the broker's arguments or his John Doe status. A FINRA spokeswoman and Merrill spokesman declined to comment.
QUESTIONS OF POLICY
Public brokerage records are a matter of great concern to brokers. Customer complaints and disciplinary actions, along with details such as employment history, are made publicly available for free through FINRA's BrokerCheck database. Black marks or embarrassing entries can put off potential clients.
In recent years, FINRA has broadened the details that appear on BrokerCheck. One change, for example, led to the disclosure of all customer complaints, including those that never became the subject of an arbitration or settlement.
But many brokers say that some customer complaints are frivolous and can hurt their reputations without providing useful details to investors.
"These disclosures have no valid public policy purpose to offset the harm and embarrassment they cause," Doe alleges.
His case involves a total of seven disclosures between 2001 and 2009. They include customer complaints that the customers ultimately did not pursue, Doe alleges. No payments were made to the customers and wrongdoing was not found, Doe said. Merrill even informed the customers that it found their claims to be without merit, he alleges.
Those factors highlight the nuances of making expungement decisions, said Arthur Laby, a securities law professor at Rutgers School of Law in Camden, New Jersey.
"One might look more favorably on a request to expunge a record of customer complaints, particularly where there was no follow-up and no finding of wrongdoing, than on a request to expunge a finding of fraud or other wrong by a court or regulator," Laby said.
Lawyers who represent investors, however, believe brokers' records should remain intact. It is unclear why the customers did not proceed with their complaints against Doe, said Scott Ilgenfritz, president of the Public Investors Arbitration Bar Association (PIABA), a group of lawyers that represent investors in securities arbitration cases.
"I can't jump to the conclusion that there is no public information benefit to them being on his record," Ilgenfritz said.
PRIVACY IN PUBLIC
Most brokers seeking expungement use FINRA's arbitration forum. Once arbitrators there agree to erase items from a broker's record, the broker must ask a court to confirm the ruling.
But of the 520 expungement requests filed in 2012, 48 were from brokers who bypassed FINRA's process and went straight to court, according to the North American Securities Administrators Association, a group composed mostly of state securities regulators. Such lawsuits are public and typically identify the broker as the plaintiff - a scenario that would "defeat the purpose of obtaining an expungement," Doe wrote.
The broker cites a 2008 California appeals court ruling that protecting plaintiffs' identities with pseudonyms, such as John Doe, is sometimes appropriate. The case centered on employment rights of people convicted of minor marijuana offenses.
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