COMPLY-Big win offers Wall St. brokers path to clean up records

April 11 Fri Apr 11, 2014 10:20am EDT

April 11 (Reuters) - There is hope for Wall Street brokers whose professional histories are marred by complaints from customers about securities that went sour after their brokerage firms promoted them as safe.

Brokers who sold securities that ultimately failed, but which their firms had pushed as cash-like investments, are finding some success in cleaning up their records and their reputations.

One former broker for a unit of UBS AG, Edward Graham Dulin Jr., recently scored big: An arbitration panel ordered UBS Financial Services Inc to pay Dulin $5.4 million for business he lost because of details that appeared on Dulin's public record about arbitration complaints against UBS from 39 of his customers. In addition, the panel recommended erasing all of those complaints from his record.

Dulin, who now works for Bank of America's Merrill Lynch unit, sold his clients so-called principal protected notes issued by Lehman Brothers Holdings Inc before the credit crash in 2008. Those notes plummeted in value after Lehman filed for bankruptcy in September 2008.

Dulin persuaded arbitrators from the Financial Industry Regulatory Authority (FINRA) that UBS misled its advisers about Lehman's financial health, prompting him to recommend the notes to clients.

The case is already sparking interest among brokers who are weighing whether they should pursue similar claims, lawyers say. Public records for hundreds of current and former UBS brokers reflect details about customers' arbitration claims involving Lehman notes. UBS has faced at least 336 arbitration claims from 459 customers, according to court records.

Rules from FINRA, Wall Street's industry-funded watchdog, require that details about those arbitration claims appear in the public disclosure records of brokers who facilitated the deals, even if they are not named in the cases.

The regulator also runs the forum in which brokers must resolve most employment disputes against their firms and request recommendations to clean up their public records.

Dulin's award followed a similar decision last September. An arbitration panel ordered Los Angeles brokerage Wedbush Securities Inc to pay a former broker, Michael Farah, $4.3 million after he alleged that the firm failed to properly disclose the risks of mortgage-backed securities he sold to his clients. {ID:nL2N0HM13D]

Brokers with bad records may be taking encouragement from this, but the rulings are unusual and future arbitration panels do not have to reach the same results. That is because arbitration rulings do not create precedent as court decisions do. What's more, not all brokers may have strong cases.

PUSHING THE LIMIT

Brokers whose records are riddled with other problems are not likely to find legal help, no matter how many securities from failed product classes they sold to clients, lawyers say. Lawyers typically want to pick cases they think they can win.

Furthermore, "The broker has to be a strong person who can handle litigation for an extended period," said Rosemary Shockman, a lawyer in Phoenix who was one of two attorneys who represented Dulin. That case dragged on for more than two years and required 21 days of hearings.

Expect firms to push back hard. UBS filed a counterclaim against Dulin, requesting that he pay the firm $3.9 million for settlements UBS paid to his clients. It was ultimately denied.

Furthermore, the failure of a product class may not matter if clients weren't a good match for securities the brokers believed they were selling, say industry lawyers. In other words, getting bad product information from the firm doesn't absolve individual brokers from having to meet the requirement that they only recommend investments that are suitable for clients, said Francis Curran, a securities lawyer in New York.

SMALLER STRIDES

Not all brokers can score millions of dollars in product cases, but there are other successes: Some brokers who sold failed products are persuading arbitrators to recommend clearing disclosures from their records.

For example, a FINRA arbitration panel on April 4 recommended erasing (or "expunging," in FINRA parlance) several arbitration cases involving Lehman notes from the records of two former UBS brokers who now work for Morgan Stanley. The brokers, unlike Dulin, did not seek damages from the firm.

UBS helped the brokers by filing papers in the proceeding saying that "expungement is warranted," according to the ruling.

UBS supports brokers' requests for expungement when evidence shows that the allegations against them were "false or clearly erroneous" under FINRA rules, a UBS spokesman said. That was the case involving the two brokers, the spokesman said.

A Morgan Stanley spokeswoman declined to comment.

As in other record-scrubbing cases, industry rules require the two brokers to get a court order confirming the expungement recommendation.

Their cases don't involve money, but the outcome of having a clean record has value, brokers say. That is especially true for brokers who are also registered with the U.S. Securities and Exchange Commission as investment adviser representatives. Industry rules require firms to automatically send copies of their professional histories to clients every time new complaints and other disclosures appear.

The damage is difficult to shake, said one former UBS broker who recently filed an arbitration claim to clear his record of black marks about Lehman notes. "Would you work with someone who dumped this thing on your lap that says you're the worst person in the world?" (Reporting by Suzanne Barlyn; Editing by Linda Stern and Jonathan Oatis)

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