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Howes v. Financial Industry Regulatory Authority, Inc.

United States District Court, D. Maryland, Southern Division

June 11, 2019

THOMAS HOWES, Plaintiff,
v.
FINANCIAL INDUSTRY REGULATORY AUTHORITY, INC., Defendant.

          MEMORANDUM OPINION AND ORDER

          Paul W. Grimm United States District Judge.

         Plaintiff Thomas Howes has filed this federal lawsuit seeking an order expunging customer complaints from a securities industry regulator's database. The regulator, the Financial Industry Regulatory Authority, Inc. ("FINRA"), has moved to dismiss the suit under Rule 12(b)(6) of the Federal Rules of Civil Procedure. Although FINRA has not sought a dismissal for lack of subject-matter jurisdiction under Rule 12(b)(1), my own review of the relevant case law has uncovered several federal district court decisions remanding similar expungement petitions to state court on jurisdictional grounds. See Godfrey v. Fin. Indus. Regulatory Auth., Inc., No. 16-2776 PSG (PJWx), 2016 WL 4224956, at *5 (CD. Cal. Aug. 9, 2016); Flowers v. Fin. Indus. Regulatory Auth., Inc., No. 15cv2390 DMS (JMA), 2015 WL 9487450, at *3 (S.D. Cal. Dec. 24, 2015); Doe v. Fin. Indus. Regulatory Auth., Inc., No. 13-6436 DDP (ASx), 2013 WL 6092790, at *4 (CD. Cal. Nov. 19, 2013); Spalding v. Fin. Indus. Regulatory Auth., Inc., No. 1:12-CV-1181-RWS, 2013 WL 1129396, at *6 (N.D.Ga. Mar. 19, 2013); In re Lickiss, No. C-11-1986 EMC, 2011 WL 2471022, at *4 (N.D. Cal. June 22, 2011). In view of these precedents, I am denying FINRA's motion without prejudice and ordering the parties to brief the issue of whether this Court has subject-matter jurisdiction over Mr. Howes's Complaint.

         BACKGROUND

         The Securities Exchange Act of 1934 (the "Exchange Act") "vests registered national securities associations with a prominent role in the administration and enforcement of federal securities law." Turbeville v. Fin. Indus. Regulatory Auth., 874 F.3d 1268, 1270 (11th Cir. 2017). FINRA, a private, not-for-profit Delaware corporation, is one of those registered associations, commonly known as "self-regulatory organizations," or SROs. See Id. In this capacity, FINRA enjoys "regulatory oversight of all securities firms that do business with the public" and is responsible for providing "professional training, testing[, ] and licensing of registered persons" and for arbitrating and mediating disputes. Sacks v. SEC, 648 F.3d 945, 948 (9th Cir. 2011) (quoting 72 Fed. Reg. 42, 169, 42, 170 (Aug. 1, 2007)).

         Among the various requirements the Exchange Act imposes on SROs such as FINRA is an obligation to "establish and maintain a system for collecting and retaining registration information." 15 U.S.C. § 78o-3(i)(1)(A). The statute defines "registration information" as "information reported in connection with the registration or licensing of brokers and dealers and their associated persons, including disciplinary actions, regulatory, judicial, and arbitration proceedings, and other information required by law, or exchange or association rule, and the source and status of such information." Id. § 78o-3(i)(5). FINRA maintains much of this information in an electronic database called the Central Registration Depository ("CRD"). See Spalding v. Fin. Indus. Regulatory Auth., Inc., No. 1:12-CV-1181-RWS, 2013 WL 1129396, at *1 (N.D.Ga. Mar. 19, 2013). It also makes information about current and former members publicly available via an online application known as "BrokerCheck." See id.; 75 Fed. Reg. 41, 254, 41, 254 (July 15, 2010).

         Mr. Howes has worked in the investment field for nearly three decades. See CRD Entry 10-11, ECF No. 6-1. In February 2018, he filed two arbitration claims in FINRA's Office of Dispute Resolution, each seeking to expunge certain records from the CRD. See July 2018 Arbitration Award 1-2, ECF No. 1-4. The cases were soon consolidated. See Id. at 2-3.

         Mr. Howes's first petition, dated February 1, 2018, named Morgan Stanley as the respondent. See Morgan Stanley Pet. 1, ECF No. 1-5. The petition sought the expungement of a complaint a customer filed against him on July 24, 2001, while Mr. Howes was a senior financial advisor for Smith Barney. See Id. at 2. In it, Mr. Howes recounted that the customer filed the complaint after the "Smith Barney wire room accidentally did a syndicate trade in" the customer's account in spite of the customer's explicit instruction that he wanted "Mr. Howes to sit tight with his investments [and] not to purchase anymore [sic] securities, or increase his margin." Id. at 4. The petition alleged that Mr. Howes "had nothing to do with the trade" and that Smith Barney corrected the error. Id. The complaint, however, could still be found in the CRD. See id.

         Mr. Howes filed his second petition on February 2, 2018, this time naming Citigroup Global Markets as respondent. See Citigroup Pet., ECF No. 1-6; Arbitration Award 2. There, Mr. Howes sought to expunge a pair of complaints another customer had filed against him, also in the early 2000s. See Citigroup Pet. 1-3. The petition noted that Mr. Howes had paid the customer' $100, 000 in connection with the first complaint and was "told by CitiGroup that this matter was put to bed." Id. at 3. It argued the second claim, filed on May 19, 2003, "was factually impossible and clearly erroneous." Id.

         In July 2018, a three-member FINRA arbitration panel denied all of Mr. Howes's claims in their entirety. See Arbitration Award 3. This federal lawsuit soon followed. Mr. Howes, who is representing himself, named FINRA as the lone defendant and styled the Complaint as a "Petition for Declaratory Relief and Expungement." Compl. 9, ECF No. 1. The Complaint accuses FINRA of reporting "erroneous information" about him on BrokerCheck and the CRD. Id. at 13. It acknowledges that he previously sought to expunge the allegedly false complaints through FINRA's arbitration procedures but alleges those procedures "are flawed in that they only require member firms to retain documents and information for 6 years." Id. at 10; see 17 C.F.R. § 240.17a-4 (2014). It says he "could have easily proven the customer complaints [were] false" if FINRA had required the companies he named as respondents to preserve documents relating to the complaints against him, [1] at least one of which was 17 years old at the time he filed his Complaint in this Court. Id. The Complaint closes by stating, "Plaintiff respectfully request[s] this court to grant relief through expungement." Id. at 13.

         FINRA moved on November 30, 2018, to dismiss the Complaint. FINRA Mem., ECF No. 6. Its motion raises three arguments: first, that Mr. Howes is collaterally estopped from litigating this suit against FINRA following the denial of his arbitration claims; second, that FINRA enjoys absolute immunity in its roles as a regulator and as an arbitration forum; and, third, that Mr. Howes "has no private right of action against FINRA for its regulatory acts and omissions, including how it administers the regulatory scheme for securities reporting, disclosure and expungement, or for how it administers arbitration proceedings." Id. at 2-3. Alternatively, the motion urges the Court to "exercise its discretion to deny declaratory relief pursuant to the Declaratory Judgment Act, 28 U.S.C. §2201." Id. at 3.

         DISCUSSION

         FINRA's motion has been fully briefed and is ripe for a decision. See ECF Nos. 6-1, 10, 13. Before addressing the organization's arguments, though, this Court has an obligation to assure itself of its jurisdiction, no matter whether either of the parties has challenged it. See United States v. Wilson, 699 F.3d 789, 793 (4th Cir. 2012); Brown v. Hungtington Ingalls, Inc., No. 4;13CV26, 2013 WL 5591932, at *3 (E.D. Va. July 25, 2013) ("[W]hen a district court is aware of the absence of subject matter jurisdiction, it must 'raise such lack of subject-matter jurisdiction on its own motion,' without regard to the positions of the parties." (quoting Ins. Corp. of Ireland v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 702 (1982)). "If the court determines at any time that it lacks subject-matter jurisdiction, the court must dismiss the action." Fed.R.Civ.P. 12(h)(3).

         "Jurisdiction of the lower federal courts is ... limited to those subjects encompassed within a statutory grant of jurisdiction." Ins. Corp. of Ireland, 456 U.S. at 701. Mr. Howes's Complaint asserts that this Court has federal-question jurisdiction over this action under 28 U.S.C. § 1331. See Compl. 4. It cites, in particular, the Securities Exchange Act of 1934, 15 U.S.C. § 78a, as a federal law at issue in this case.[2] Id.

         Although FINRA has not challenged this Court's jurisdiction, subject matter jurisdiction "cannot be conceded by any party; nor can it be granted by this Court in its discretion." McGahey v. Giant Food, Inc., 300 F.Supp. 475, 477 (D. Md. 1969). It is a threshold matter that, if at all in doubt, must be addressed before this Court may reach the merits of FINRA's arguments in support of a dismissal under Rule 12(b)(6). Such a doubt is present here, as my review of federal district court cases involving similar petitions to expunge FINRA records has uncovered five decisions remanding the petitions to state court for lack of federal subject-matter jurisdiction.[3] See Godfrey v. Fin. Indus. Regulatory Auth., Inc., No. 16-2776 PSG (PJWx), 2016 WL 4224956, at *5 (CD. Cal. Aug. 9, 2016); Flowers v. Fin. Indus. Regulatory Auth., Inc., No. 15cv2390 DMS (JMA), 2015 WL 9487450, at *3 (S.D. Cal. Dec. 24, 2015); Doe v. Fin. Indus. Regulatory Auth., Inc., No. 13-6436 DDP (ASx), 2013 WL 6092790, at *4 (CD. Cal. Nov. 19, 2013); Spalding v. Fin. Indus. Regulatory Auth., Inc., No. 1:12-CV-1181-RWS, 2013 WL 1129396, at *6 (N.D.Ga. Mar. 19, 2013); In re Lickiss, No. C-l 1-1986 EMC, 2011 WL 2471022, at *4 (N.D. Cal. June 22, 2011). I have, by contrast, found no cases expressly holding that petitions to expunge FINRA records are matters over which the federal courts have subject-matter jurisdiction.[4]

         Courts that have assessed this issue typically have focused, as I will here, on FINRA Rule 2080, which sets out a procedure for expunging records from the CRD.[5] The rule provides in part: "Members or associated persons seeking to expunge information from the CRD system arising from disputes with customers must obtain an order from a court of competent jurisdiction directing such expungement or confirming an arbitration award containing expungement relief." FINRA R. 2080(a). The rule, as several courts have noted, "does not provide any substantive standard for determining whether expungement is appropriate or required." In re Lickiss, 2011 WL 2471022, at *2; see also Doe, 2013 WL 6092790, at *2. It does specify that, generally, a party petitioning for expungement or for confirmation of an arbitration award containing expungement relief "must name FINRA as an additional party and serve FINRA with all appropriate documents." FINRA R. 2080(b). FINRA, however, may waive this requirement under certain conditions - for ...


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