This week, a California court did something that regulators have often failed to do: Keep a problem broker's record honest.
A California appeals court in Los Angeles said Tuesday that the New York-based brokerage firm Royal Alliance would not be able to expunge a customer grievance from the record of a former stockbroker with an alarming number of complaints.
The case, which revealed stunning behavior by arbitrators at the Financial Industry Regulatory Authority, or Finra, has been a black mark on the secretive, closed-door sessions in which customer complaints and broker requests for expungement are ruled on. TheStreet wrote about the case in a story in June.
"Simply put, the hearing was not fair," the three-judge panel wrote in a 20-page ruling on August 30. Although the arbitrators allowed former stockbroker Kathleen J. Tarr to testify that she had "completely fulfilled" aggrieved client Sandra Liebhaber's objectives, they unfairly denied Liebhaber the opportunity to explain why she thought the complaint should remain on the broker's record, the panel wrote.
During the hearing in dispute, Tarr said that she was "the daughter and granddaughter of ministers" and that she found Liebhaber's allegations to be "offensive and without any basis in fact." But when Liebhaber's lawyer, Robert Banks, tried to speak, the lead arbitrator at one point said "I'm sorry I'll have to cut you off." Banks later said "may I please make my record?" and "I feel like I have not been given a full and fair opportunity" to respond to Tarr's testimony. He was again cut off.
This week, the court ruled that treatment was unfair.
"The arbitrators gave Royal Alliance an unfettered opportunity to bolster the written record but denied Liehaber even a limited chance to do the same," the Los Angeles judges wrote. "Liebhaber's rights as a party to the arbitration proceedings were substantially prejudiced."
Liebhaber, who lives in Scappoose, Oreg., said that Tarr had put her into illiquid, high-risk investments that were "inappropriate and unsuitable" for her retirement account. Although the panel never had a hearing on the merits of the case, it said in its September 10, 2014 ruling that the investments were suitable.
Liebhaber had filed to have her case heard by the Finra arbitrators, but the two sides settled before any hearings had begun. After that, Royal Alliance asked the arbitrators who had been assigned to the case to consider its arguments for expungement of the complaint from Tarr's record.
Finra offers a database of stockbroker records known as BrokerCheck, where the public is able to access at least some of the information about customer complaints and broker terminations. When arbitration panels grant brokers' requests to expunge a complaint, it leaves the public with the impression that a record is cleaner than it really is.
Tarr has 44 customer complaints and a termination on her record.
Although Tarr is no longer in the securities industry, Royal Alliance was fighting to get the mark off her record because it faced other upcoming Finra arbitrations brought by her clients. The firm said in a November 12 legal brief that if it were to win the expungement in the Liebhaber case, it would be able "to use that judgment and the Expungement Award to its benefit in the ongoing arbitrations and in any later filed arbitration."
Incredibly, after refusing to allow Liebhaber to speak at an August 12, 2014 telephonic hearing, the arbitrators said in their decision that she had been given a "full argument" opposing the request.
The arbitrators granted the expungement. But when Royal Alliance proceeded to superior court for a confirmation of the award, Liebhaber opposed it and the award was overturned. Royal Alliance appealed and the ruling this week affirmed the superior court's decision.
It is unusual for customers to fight a broker's expungement request after a settlement has taken place. But Liebhaber said she felt strongly enough about Tarr's behavior that she wanted other investors to know about all the complaints against her.
Royal Alliance did not immediately respond to a request for comment.