An Advisor's Fight to Clear His Name Clashes With Finra's Resolve to Uphold its Rules
The battle between Finra and Merrill Lynch advisor Patrick Dwyer shows on one side how critical it is for advisors to wipe their records clean, and the lengths the self-regulator is prepared to go to uphold its arbitration rules on the other.
Dwyer has been fighting for years to wipe clean his Central Registration Depository (CRD) record -- the publicly available record where regulators and investors can check the employment and disclosure histories of more than 630,000 registered individuals. He has been registered with Merrill Lynch since 1993 and his lawyers have stated in court documents that he manages more than $2.5 billion in client assets.
His record is currently stained with seven customer complaints from 2001 to 2009 -- including six disputes involving alleged unsuitable investments (two of the customer claims were denied while four were closed with no resulting action) and one dispute involving the timing of an investment, which was settled by Merrill Lynch for $111,000.
In what has been a five-year -- and counting -- road to expungement for Dwyer, he first tried but failed to gain victory in court before turning to Finra’as arbitration panel, where he succeeded. But that victory has been short-lived because Finra is aiming to block in court the expungement of the customer complaints from Dwyer’s records by arguing "impermissible forum shopping" and "fraud," among other charges.
Thomas Potter, Nashville, Tenn.-based partner at law firm Burr & Forman, notes that Finra has been "taking a more restrictive approach toward expungements" over the years from the rule-making perspective and in its responses to particular matters, and it looks like this particular case is an extension of that position.
"It seems a pretty extreme instance of seeking a do-over in a different forum," he says.
There has been "tension for many years" between the regulator's desire to help protect investors via making information available in the CRD and the potential harm to broker-dealers if complaints are unfounded or unfair, Philip Cottone, a Malvern, Pa.-based lawyer, arbitrator and mediator, noted at an annual securities arbitration seminar in September at the Practicing Law Institute.
Finra and the SEC, as expressed in explanatory notes to relevant rules, view the expungement of broker-dealer records as an "extraordinary measure" and not one that should be expected to be routine.
Nonetheless, Christopher Coss, a partner at Coss & Momjian law firm, stressed at the same PLI seminar the importance of broker-dealers keeping their records clean because "complaints beget complaints."
He believes it’s "eminently unfair" that a "mere complaint immediately becomes reportable" in the CRD and that it typically takes around 14 to 16 months to get an expungement of the customer claims if the broker-dealer is successful. "You’re essentially guilty until proven innocent."
Dwyer’s road to expungement started on July 31, 2013, when he filed a request for the expungement of customer complaints from his records before the Los Angeles superior court, naming Finra as the defendant. His request was denied by Judge Michael Linfield on August 18, 2015.
On September 16, 2016, Dwyer tried again to get his customer complaints expunged, this time by filing a claim before Finra’s arbitration forum, naming Merrill Lynch as the respondent. Merrill Lynch didn’t contest Dwyer’s claim. On June 14, 2017, an arbitration panel decided in favor of the expungement of all seven customer complaints. Finra’s arbitration rules require that an arbitration panel award in favor of an expungement be confirmed by a court.
It was around this time that Finra -- which maintains that its arbitration forum runs independently from the self-regulator -- entered the picture to intervene in court. On October 12, 2017, Finra filed a motion to vacate the arbitration award before a Miami-Dade county circuit court.
Finra accuses Dwyer of forum shopping because he filed an expungement request in a California court -- under the pseudonym John Doe, citing the need to protect his reputation. Then, when his request was denied, he filed a claim before Finra’s arbitration forum without informing the panel he had previously sought an expungement of the customer complaints from his records in court.
On November 30, 2017, Dywer filed his response to Finra’s motion to vacate, while simultaneously filing a petition to confirm the arbitration award.
On January 30, 2018, Finra filed its opposition to Dwyer’s petition to confirm the arbitration award.
FA-IQ reached out to Finra, Merrill Lynch and Dwyer for this article. Finra and Merrill Lynch declined to comment. Dywer referred us to his lawyer, Jeffrey Sonn, who says "the law and the facts are on Mr. Dwyer’s side."
Sonn represents Dywer in the current Miami-Dade court case and previously in Finra arbitration, but he was not Dywer's original lawyer in the California case. In Dwyer’s November 2017 court filing, his lawyers’ arguments for the court to confirm the arbitration award included:
- Dwyer was entitled to use both paths -- the court and the arbitration panel -- to purse the expungement of the customer complaints from his records.
- Finra lacks legal standing in the Miami-Dade county circuit court because the self-regulator was not a party to the Dwyer vs. Merrill Lynch arbitration case.
- Finra has no authority to vacate the arbitration award.
- Finra’s claim of fraud is not supported by any clear and convincing evidence.
- Finra’s argument that Dwyer waived his right to arbitrate is groundless.
- Finra waived its right to object to the arbitration award when it let Dwyer file the arbitration claim, and then delivered the arbitration award to the parties using a Finra cover letter.
In Finra’s January 2018 filing, its lawyers countered with the following arguments, among others:
- Dwyer already chose the judicial path to pursue expungement and must abide by the California court’s decision. Only one path is available to broker-dealers seeking expungements: a court or an arbitration panel.
- Finra’s arbitration rules require Finra to be a respondent to an expungement arbitration award confirmation action and requires that it be served with all the documents. Finra is not a party in the award confirmation action in court because Dwyer chose not to name it as a party.
- Finra is the real party in interest in the expungement process due to its ownership and control over the CRD.
- When Dwyer requested a California court to expunge the customer complaints from his records, he waived his right to arbitrate.
- Dwyer committed fraud when he named Merrill Lynch as the respondent in the arbitration claim "to hide from Finra that he is taking a second bite at the apple" and when he didn’t inform the arbitration panel about the California court case and decision.
The case continues.
Editor's note: This article has been edited to specify that Jeffrey Sonn represents Patrick Dywer in a current case before the Miami-Dade court and in Finra arbitration previously, but that he was not Dywer's lawyer in an earlier case in California.