A California Court of Appeal has opened the door for brokers to obtain expungement of Central Registration Depository (“CRD”) reports where they can show that equitable considerations support such relief. Lickiss v. Financial Industry Regulatory Authority, Case No. A134179 (Cal. Ct. App., 1st Dist. Aug. 23, 2012).

The case originated with a petition by Edwin “Mike” Lickiss, a broker who had several customer complaints. Lickiss made a compelling case. He contended that the 17 customer complaints should be expunged because they occurred “anciently, i.e., more than 20 years ago,” and the material sought to be expunged was caused by a single failed investment. According to Lickiss, all but one complaint related to the sale of a single company’s securities from 1987 to 1991. The company went from a secure investment to a severely deteriorated condition because of a change in management. The only other complaint against Lickiss related to a transaction by his partner, and even in that instance, Lickiss agreed to reimburse the client for his losses, but failed to notify FINRA first—a violation of FINRA rules—and the client later complained. Lickiss’s record in subsequent years was unblemished.

Lickiss commenced an action by filing a petition in the California Superior Court, County of Los Angeles for expungement pursuant to FINRA Rule 2080. In his petition, Lickiss claimed that these complaints caused professional and financial hardships, particularly given the ability of clients to use the Internet to obtain a “BrokerCheck” history. Lickiss specifically invoked the equitable powers of the Court.

FINRA opposed Lickiss’s request and filed a demurrer1 to the Complaint, arguing that FINRA Rule 2080(b)(1) controlled the court’s determination and that Lickiss had failed to satisfy any of the Rule’s three enumerated grounds for expungement.2 Those grounds provide that members may seek expungement in a court of competent jurisdiction by making a petition that names FINRA as an additional party. FINRA Rule 2080 further sets forth the circumstances in which the petitioner/broker must provide notice to FINRA.

The trial court agreed and sustained the demurrer. Lickiss appealed and a unanimous California Court of Appeal, relying on Minnesota case law allowing for expungement in proper cases on equitable grounds3, reversed. The Court of Appeal’s decision and analysis bodes well for similarly-situated brokers in California and elsewhere.

The Court of Appeal reasoned that Rule 2080(b)(1) is a procedural rule that does “not provide any substantive criteria as to when expungement would be appropriate.” The Court of Appeal held that because Lickiss had invoked the equitable powers of the court, the trial court erred when it applied the procedural criteria in 2080(b)(1)—which are used merely to determine when FINRA is entitled to notice of the action—to evaluate whether Lickiss had stated a valid claim for relief.

The Court chastised the trial court for declining to exercise its equitable powers, noting that applying the “rigid legal rule to assess the legal sufficiency of Lickiss’s petition—a choice that closed off all avenues to the court’s conscience in formulating a decree and disregarded basic principles of equity—was nothing short of an end run around equity.” Having found that Lickiss had stated a valid claim for relief, the Court of Appeal remanded the case back to the trial court.

Courts in California and other jurisdictions (including Minnesota) may follow this lead and more freely invoke their equitable powers to consider expungement requests by members and other affiliated persons. Any request for expungement that does not strictly adhere to the procedural requirements listed in 2080(b) will likely be opposed by FINRA, so it is imperative that the request specifically invoke the equitable powers of the court and state as compelling of facts as possible to ensure a favorable result.

The process may become all the more important—and popular—as the number of requests for expungement rise. And requests for expungement are on the rise. The September 11, 2012 edition of the New York Times, in an article entitled “Wall Street Brokers Asking to Expunge Disclosures at Record Pace,” reported, “[s]ecurities brokers are on pace to make the most requests to clean up their public disclosure records ever lodged in one year, a lawyer for a national organization of state securities regulators said Tuesday. Brokers have made 354 requests so far in 2012 to expunge information . . ..” Many of those seeking expungement may now choose to pursue this direct process through the courts.

1  In California, a “demurrer” tests the sufficiency of the pleadings, similar to a motion to dismiss under Federal Rule of Procedure 12(b)(6).

Under Rule 2080(a), members or associated persons seeking to expunge information from the CRD system must obtain an order from a court of competent jurisdiction directing expungement. Under Rule 2080(b), a member or associated person petitioning a court for expungement relief must name FINRA as an additional party and serve FINRA with all appropriate documents unless FINRA waives this requirement. FINRA may waive this requirement if it determines the expungement relief is based affirmative judicial or arbitral findings that (A) the claim, allegation or information is factually impossible or clearly erroneous, (B) the registered person was not involved in the alleged investment-related sales practice violations, forgery, theft, misappropriation or conversion of funds, or (C) the claim, allegation or information is false. Alternatively, FINRA may only waive this requirement “under extraordinary circumstances” if it determines that (A) expungement relief and accompanying findings on which it is based are meritorious, (B) the expungement would have no material adverse effect on investor protection, the integrity of the CRD system or regulatory requirements.  

3  State v. Schultz (Minn.App.2004) 676 N.W.2d 337, 340–341 [inherent power to expunge criminal records]; State v. Ambaye (Minn.2000) 616 N.W.2d 256, 261 [expungement is proper where the benefits to the petitioner outweigh the disadvantages to the public and the burden on the court.]