Bass, Berry & Sims attorney Chris Lazarini discussed whether a federal court has subject matter jurisdiction over an expungement petition. While several courts have previously said no, this court directed the parties brief the issue before considering the substantive arguments in FINRA’s motion to dismiss. The court requests that the parties address the following seven questions in the briefs:
- Under which federal statutes, if any, may the court have jurisdiction?
- What specific liability, duty, rule, or regulation created by the Exchange Act, if any, does the petition seek to enforce that would create exclusive jurisdiction in the federal court under 15 U.S.C. §78aa?
- Does §78aa extend exclusive jurisdiction to suits to enforce liabilities or duties created by FINRA Rules?
- Does the complaint properly invoke federal question jurisdiction under 28 U.S.C. §1331?
- Alternatively, does the complaint entail federal issues necessarily raised, actually disputed, substantial, and capable of resolution in federal court so as to create jurisdiction under 28 U.S.C. §1331?
- Are there any other potential bases for federal jurisdiction?
- Assuming jurisdiction exists, what standards should the court apply in considering the petition?
Chris provided the analysis for Securities Online Litigation Alert (SOLA). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SOLA, please visit the SOLA website to sign up for the newsletter.
Howes vs. FINRA, No. 8:18-cv-03094 (D. Md., 6/11/19)
Does a federal court have subject matter jurisdiction over an expungement petition? Several courts have said no, but this Court directs the parties to brief the issue before considering the substantive arguments in FINRA’s motion to dismiss.
Pro se Plaintiff is a “nearly three decade” industry veteran. In February 2018, he filed two FINRA arbitrations seeking to expunge three customer complaints filed against him in the early 2000’s. The cases were consolidated, and a three-member arbitration panel denied his request. Plaintiff then sued FINRA here seeking declaratory relief and expungement. He alleged he could not prove the falsity of the customer complaints and was denied a fundamentally fair arbitration hearing because FINRA’s rules only required his former broker/dealers to retain records for 6 years. FINRA moved to dismiss, arguing the arbitration Award collaterally estopped Plaintiff from bringing his claims, FINRA enjoyed regulatory immunity from such claims, and that no private right of action existed for how it administers the regulatory scheme.
The Court denies FINRA’s motion without prejudice, because the Court questions, sua sponte, whether it has subject matter jurisdiction over the matter. The Court has found no cases holding that expungement petitions are matters over which federal courts have subject matter jurisdiction; it did find five decisions remanding expungement cases to state court for lack of subject matter jurisdiction. While the Court appears to agree with the analysis of those non-binding decisions, the Court is reluctant to dismiss the matter without allowing the parties to brief the issue. The Court lists the questions it expects the parties to address in their briefs: (1) under which federal statutes, if any, may the Court have jurisdiction; (2) what specific liability, duty, rule, or regulation created by the Exchange Act, if any, does the petition seek to enforce that would create exclusive jurisdiction in the federal court under 15 U.S.C. §78aa; (3) does §78aa extend exclusive jurisdiction to suits to enforce liabilities or duties created by FINRA Rules; (4) does the complaint properly invoke federal question jurisdiction under 28 U.S.C. §1331; (5) alternatively, does the complaint entail federal issues necessarily raised, actually disputed, substantial, and capable of resolution in federal court so as to create jurisdiction under 28 U.S.C. §1331; (6) are there any other potential bases for federal jurisdiction; and (7) assuming jurisdiction exists, what standards should the court apply in considering the petition.
In SLC Ref. No. 2017-17-04, we reported on Plaintiff’s failed effort to enjoin NY Life Securities from contacting clients after the firm terminated him for, according to the CRD disclosure, failing to timely disclose a federal tax lien on his U4. Plaintiff countered that the termination was solely to avoid payment of a lifetime pension and future renewals. Plaintiff sought the injunction after suing NY Life in arbitration alleging wrongful termination, defamation, and age discrimination. The parties notified FINRA of a “settlement in principle,” but then Plaintiff’s counsel apparently proposed an additional term for consideration which led to a dispute over the validity of the settlement agreement (which had been confirmed through email communications between the parties’ counsel) and, eventually, a reasoned opinion from the arbitrators finding a binding agreement had been reached and enforcing the settlement agreement without the additional term. See FINRA #16-01561.