FINRA Arbitrators Hold That Brokers Who Win Form U5 Expungement Cases May Recover, From Their Former Brokerage Firms, Their Attorneys’ Fees

On May 13, 2019, after a four-day hearing, an arbitration panel of the Financial Industry Regulatory Authority, Inc. (“FINRA”), sitting in Chicago, Illinois, held that a claimant broker who won a FINRA arbitration seeking expungement from the broker’s Form U-5 (Uniform Termination Notice for Securities Industry Registration) filed by the broker’s respondent ex-employer upon the broker’s termination, of specified employment-related information about the broker might recover, from the ex-employer, the attorneys’ fees incurred by the broker in the arbitration, provided that, in the broker’s Statement of Claim, the broker requested an award of attorney’s fees. In re Mascarenhas v. J.P. Morgan Securities, LLC, FINRA Arbitration No. 18-01879, slip op. at 3 (May 13, 2019).

As a result, the Mascarenhas arbitration panel not only recommended the expungement of the Form U-5 of broker Rose Mascarenhas (“the claimant broker,” “the broker,” or “Ms. Mascarenhas”) based on the “defamatory” nature of the employment-related information supplied by the claimant broker’s former employer J.P. Morgan Securities, LLC (“the respondent brokerage firm,” “the brokerage firm,” or “J.P. Morgan”) but also directed the respondent brokerage firm to pay, to the claimant broker, the $28,867 of attorneys’ fees incurred by the broker in the FINRA arbitration.

The Mascarenhas Arbitration Panel’s Reasoning

To initiate an intra-industry arbitration before FINRA, a claimant entity or individual must file, with FINRA, a Statement of Claim and a signed and dated Claimant’s Submission Agreement. FINRA R. 13302(a). Likewise, within 45 days after receipt of the claimant’s statement of claim in the intra-industry arbitration, the respondent entity or individual must serve on the claimant an Answer to the Statement of Claim and a signed and dated Respondent’s Submission Agreement. FINRA R. 13303(a).

The Claimant’s Submission Agreement and the Respondent’s Submission Agreement each state that “The undersigned parties . . . now submit the present matter in controversy, as outlined in the attached statement of claim . . . and answers . . . to FINRA arbitration . . . .”

The Mascarenhas arbitration panel reasoned:

“The claimant broker requested an award of attorney’s fees in her Statement of Claim. Therefore, the respondent brokerage firm’s Submission Agreement created a de facto arbitration agreement that included the authority for the arbitrators to award attorneys’ fees if Claimant should prevail.”

Mascarenhas, FINRA Arbitration No. 18-01879, slip op. at 3.

That is, the Mascarenhas panel determined that, in a Form U-5 expungement case, the respondent brokerage firm, by signing a Respondent’s Submission Agreement, consents to the arbitration panel’s authority to award attorneys’ fees to a victorious broker who, in his Statement of Claim, sought attorneys’ fees. See First Interregional Equity Corp. v. Haughton v. Otra Clearing, Inc., 842 F. Supp. 105, 112 (S.D.N.Y. 1994) (confirming an NYSE arbitration award is granting attorneys’ fees to the petitioner company; explaining that “since the parties’ Uniform Submission Agreement incorporated the petitioner’s statement of claim and the statement of claim requested attorneys’ fees, the arbitrators were empowered to decide the issue of attorney’s fees”).

The Mascarenhas panel noted, in dicta, that “J.P. Morgan did not oppose Ms. Mascarenhas’s request for attorney’s fees, other than to object to certain time entries, which objections the Panel has overruled.”

The Mascarenhas panel’s above-quoted reasoning brings Mascarenhas‘s holding — that brokers who win Form U-5 expungement cases before FINRA may recover, from their former employers, the lawyers’ fees incurred by the brokers in arbitration, provided that the brokers requested counsel fees in their Statements of Claim — within a recognized exception to the pay-your-own-way “American Rule.” The American Rule, which Manhattan follows, is that a corporate or individual litigant is usually responsible for the payment of its own attorneys’ fees and costs in a lawsuit.

In Manhattan, the right to recover attorneys’ fees “must be statutory or contractual.” Greco v. GSL Enters., Inc., 137 Misc.2d 714, 715, 521 N.Y.S.2d 994 (N.Y. City Civ. Ct. 1987); see also Hooper Assocs., Ltd. v. AGS Computers, Inc., 74 N.Y.2d 487, 491 (N.Y. 1989) (“an award of attorneys’ fees to the prevailing party in a litigation must be “authorized by agreement between the parties, statute or court rule”). The Mascarenhas panel held that an award of attorneys’ fees to a broker who wins a Form U-5 expungement arbitration (and who, in their Statement of Claim, requested attorneys’ fees) is authorized by the agreement between the broker and the broker’s ex-employer, consisting of the parties’ respective Submission Agreements.

The Facts

In Mascarenhas, the respondent broker, was a long-time employee of J.P. Morgan in Northbrook, Illinois. Ms. Mascarenhas was the principal banker for a family business (the “Family Business” or the “Customer”), which was an extensive and active customer of J.P. Morgan. Indeed, the Family Business maintained more than 70 accounts at the brokerage firm. J.P. Morgan’s policies provided a 14-part computer procedure for opening business accounts, the first step of verifying that the customer was physically present at the firm. If the “in person” button was not pressed, the account opening procedure could not occur.

For large, well-known customers such as the Family Business, Ms. Mascarenhas’s previous supervisor(s) at J.P. Morgan had allowed brokers, including Ms. Mascarenhas, to perform most of the account opening procedure, which could take as long as 40 minutes for each account, with the customer not present, including pressing the “in person” button.

J.P. Morgan presented testimony that Ms. Mascarenhas’s new supervisor, who began her managerial responsibilities in January 2018, insisted that the account opening procedure no longer take place without the customer being physically present for the entire procedure.

In February 2018, the Family Business contacted Ms. Mascarenhas and asked that Ms. Mascarenhas open two new checking accounts for the Customer. Further, the Customer asked that Ms. Mascarenhas require the Customer’s representatives to appear at J.P. Morgan’s offices only to sign documents. Ms. Mascarenhas agreed as she had done on previous occasions.

Before the Customer’s representatives arrived at the brokerage firm, Ms. Mascarenhas performed most of the account opening procedure for the two new checking accounts, including pressing the “in person” button for the first new account. That same day, the Customer’s representatives appeared at the firm and signed the account opening documents for both accounts.

Shortly thereafter, and because of Ms. Mascarenhas’s conduct in opening the Customer’s two new accounts, J.P. Morgan fired Ms. Mascarenhas In the Termination Explanation in Section 3 of the Form U-5, which J.P. Morgan filed reporting Ms. Mascarenhas’s discharge, J.P. Morgan implied that the first new account was opened without the Customer’s approval.

Also, on Form U-5, J.P. Morgan answered “Yes” to Disclosure Question 7F(1) (“Did Ms. Mascarenhas voluntarily resign from your firm, or was Ms. Mascarenhas discharged or permitted to resign from your firm after allegations were made that accused the individual of 1. violating investment-related statutes, regulations, rules or industry standards of conduct?”) (some emphases omitted). The brokerage firm gave an affirmative answer to Disclosure Question 7F(1) even though the offending conduct involved only opening a checking account, not an investment account.

Based on the “defamatory” nature of the information supplied by J.P. Morgan, the Mascarenhas arbitration panel recommended the expungement of the claimant broker’s Form U-5’s Termination Explanation. The Mascarenhas panel recommends that J.P. Morgan be directed to state, on the broker’s Form U-5, that J.P. Morgan fired the claimant broker because “to accommodate the customer and consistent with branch practice before the recent arrival of a new manager, the broker opened the accounts without the customer being present for the entire opening process, other than appearing to execute the account documents, which actions were contrary to” J.P. Morgan’s policies.

Moreover, based on the defamatory answer, the Mascarenhas arbitration panel recommended expunging J.P. Morgan’s “Yes” answer to Disclosure Question 7F(1) of the claimant broker’s Form U-5.

In addition, and as stated above, the Mascarenhas panel directed J.P. Morgan to pay the claimant broker the $28,867 of lawyers’ fees incurred by the broker in the FINRA arbitration.

Take-Aways

In FINRA arbitrations seeking to expunge harmful statements made on brokers’ Form U-5s, it is imperative that the brokers, in their Statements of Claim, seek, among other relief, an award of attorneys’ fees incurred by the brokers in prosecuting the arbitration. Further, in Form U-5 expungement arbitrations, brokers, through counsel, should submit applications for attorneys’ fees. Brokers should support these applications for attorneys’ fees with declarations of counsel detailing the legal services provided.

This is the case because, as the Mascarenhas arbitration award holds, brokers who win Form U-5 expungement arbitrations before FINRA may recover, from their former employers, the attorneys’ fees incurred by the brokers in arbitration, provided that the brokers requested attorneys’ fees in their Statements of Claim.

On behalf of brokers, the Law Offices of David S. Rich, LLC skillfully negotiates, with brokerage firms, the information to be included on the Form U-5s, which the firms will file with securities regulators to report the termination of the brokers’ employment. If you are a recently terminated employee in the securities industry and believe that your former employer may make negative statements on your Form U-5, call the borough of Manhattan Form U5 Expungement Lawyer David S. Rich at (347) 970-5550.

So, too, the Law Offices of David S. Rich, LLC aggressively arbitrates, on behalf of brokers, FINRA proceedings seeking to expunge negative statements made on the brokers’ Form U-5s. If you are a securities industry professional with negative information on your Form U-5, which you need to be expunged, contact the Law Offices of David S. Rich, LLC.