By Suzanne Barlyn
Aug 30 Broker Edwin "Mike" Lickiss wants to erase past public disclosure reports that he says reveal old and irrelevant details that unfairly hurt his livelihood.
He may now get his wish, even though regulators typically do not allow brokers to clean up, or "expunge," their records unless the information is somehow wrong or false. A California appeals court decision last week in a lawsuit by Lickiss could, in many cases, make the process easier.
The ruling will let a judge invoke unusually broad authority in deciding whether to erase details about more than a dozen arbitration complaints from Lickiss' record, all based on what a court decides is simply the fair thing to do.
The judge would not have to follow rigorous standards the Financial Industry Regulatory Authority has in place for when brokers ask arbitrators to sign off on expunging their records. Those requirements can help protect investors by making sure they are informed about a broker's past.
But lawyers who represent brokers are now closely watching the Lickiss case because a victory would be a good reason for some brokers to pursue expungements in court. Gaps in FINRA's expungement procedures, until recently, made it difficult for some brokers to even request removing certain complaints in arbitration.
While the case could have the greatest impact on many of California's 285,000 licensed brokers, it could potentially have wider influence on courts in other states, lawyers say. About 45 percent of the nation's 630,000 securities brokers are licensed in California.
"This is quite a case," said Patrick Burns, a lawyer in Beverly Hills, California, who represents brokers. For years brokers have complained that disclosures are nearly impossible to get removed through FINRA's expungement arbitration process, he said.
Still, Lickiss has a long road ahead. The appeals court decision only allows his case to go forward after 18 months of effort by the regulator to get a court to throw it out. Now Lickiss must begin the process of convincing a judge to order a clean-up of his record.
Lawyers for aggrieved investors are concerned, however, about the consequences. Conduct, and not the age of a complaint, is what matters, they say. Judges may not accurately interpret events that played out long ago and harmed investors.
"It becomes a dangerous precedent for investors who rely on disclosure records to ascertain who to do business with," said Steven Caruso, a New York-based securities arbitration lawyer, who is not involved in the case.
But a court's review would protect investors while allowing "deserving brokers" to have "inappropriate blemishes removed from their public records," said Jeffrey Salisbury, a lawyer in Eugene, Oregon, representing Lickiss.
A FINRA spokeswoman declined to comment. Lickiss did not return calls.
Mike Lickiss' problems started in 1986, when he worked for a predecessor of the brokerage unit of LPL Financial Holdings Inc and started selling stock in Commonwealth Equity Trust, a real estate investment trust, or REIT.
REITs invest in commercial real estate, such as hotels and strip malls, offering a way to profit from rises in property values.
The REIT was initially well-managed but took on too much debt in 1991, just as California commercial real estate slumped. It filed for bankruptcy after its manager took $7.2 million in cash.
Seventeen customers filed arbitration cases against Lickiss, mainly for REIT investments they made between 1987 and 1991. They alleged he did not disclose the risks. Details of those complaints, most of which were settled, still appear in the public record for Lickiss, a broker at California-based Investment Architects Inc. A spokesman for the firm did return a call requesting comment.
Lickiss, a broker since 1977, argued he was not to blame for the problems, according to court papers. He said his record was clean until the REIT failed and "beyond reproach" since, except for a "small" incident involving a $10,000 note he bought as an investment for a customer without his firm's approval. Regulators fined him $8,500.
But the report reflects some other questionable disclosures. Among them: he was "permitted to resign" in 1995 - typically an alternative to being fired - for privately settling a complaint without his firm's knowledge.
Brokers who may stand the best shot at convincing a judge to order expungement are those whose records were tainted by claims stemming from entire classes of failed securities, said James Sallah, a lawyer in Boca Raton, Florida, who represents brokers.
That could include scores of brokers whose records show arbitration complaints filed against their firms by customers who bought auction rate securities that became illiquid in 2008, leaving them stranded. The securities were sold for more than a decade by advisers with few problems prior to the 2008 financial crisis.
Many brokers with otherwise clean records now have details about arbitration complaints involving the securities on their public records. FINRA rules require the disclosure if a broker sold securities at issue, even if they are not named in the case. But erasing those complaints can be tough for many brokers who, among other things, may have trouble meeting FINRA's expungement criteria.
In California, they could now ask a judge to rule that the disclosure is just not fair.
"Now you have some precedent, at least in California, for opening the floodgates," Sallah said.