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Case number 23-1139.

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Marking Casco et al.

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Petitioners versus Securities and Exchange Commission.

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Mr. Basette for the petitioners.

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Mr. Alvarez for the respondents.

[00:00:13] Speaker 02:
Morning, counsel.

[00:00:14] Speaker 02:
Mr. Basette, please proceed when you're ready.

[00:00:23] Speaker 03:
Morning, your honors.

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Michael Basette on behalf of the petitioners in this case.

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There are three major issues here today.

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First, the pending motion to dismiss for petitioner Mr. Gaskell.

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The pending motion to supplement the record with the additional denial of forum letter submitted by FINRA on remand.

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And then of course the merits as to each of the petitioners here.

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So I'd like to first start with the jurisdictional aspect on the motion to dismiss.

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Of course, the Exchange Act provides jurisdiction when there is a final order from the SEC.

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Under the Bennett test, the elements of a final order require that there must be a consummation of the agency's decision-making process and one by which rights or obligations have been determined or legal consequences will flow.

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This test, the courts have held that it should be construed in a flexible, pragmatic manner.

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And here, generally, remand orders are not final orders unless that lack of finality is eventually resolved.

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So in this matter, Mr. Gaskell, his portion of the appeal to the SEC was remanded for a determination by FINRA as to who issued the remand, or excuse me, who issued the denial of forum matter.

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Um, Finra rule 13203 requires that the director of Finra is the person to deny forum.

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Um, and there was no evidence in the record as to whether it was the director or someone else.

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Um, so the SEC remanded for the sole purpose of that determination.

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Can I ask you about, um, the equitable claims and whether they've been forfeited?

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Sure, yes.

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So when I read rule 2080B, it's not clear to me that there are only three grounds for expungement.

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But it does seem to be the case that the SEC and FINRA have said in various places for a long time that there are only three grounds for expungement.

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So given that context,

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You know, what a party that is saying there are additional grounds for expungement have to make that quite clear, both before FINRA and then before the SEC.

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And how have the petitioners here done that?

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Sure, so it's our position that it is not necessarily need to be outlined as to what ground you're seeking expungement of or under.

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Expungement, it's been widely held that expungement is in fact an equitable remedy.

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FINRA rule 2080 does not, if you look at the language itself, does not outline

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or state anywhere that you must submit these three, which is A, B, and C, false, clearly erroneous, factually impossible, or the person.

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I don't necessarily disagree with that, but that does seem to be the agency's interpretation of how that rule works.

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as if there are three exclusive grants for expassionate.

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I agree that may not be the most natural reading of that rule, but it seems to be the reading that the agency has provided.

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Well, I think it's telling that first, again, it's not specifically outlined in that rule and that arbitration forums are specifically for equitable remedies.

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There are no pleading requirements other than to state sufficient facts

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in a statement of claim submitted before Finra.

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So there are not elements that must be met in a pleading like in the state court proceeding.

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So I think it would be unfair for the petitioners to be held to a higher standard, specifically seeking expungement under an equitable remedy when an equitable remedy is necessarily the part and parcel of the claim that they're seeking.

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Additionally, it's our position that, although not explicitly stated in the statement of claim to FINRA that they were seeking equitable expungement.

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Again, that is what they were seeking, but they did mention

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specific allegations that the public disclosure of the patently false allegations here and does not offer any public protection and has no regulatory value, that if not expunged, customer dispute disclosures will mislead any person viewing the claimant's central registration depository record and will not provide valuable information for decision making, and also ask in the relief section for any other further relief that the arbitrator deems just and equitable

[00:05:29] Speaker 02:
But if you put aside the kind of boilerplate language in the last part of it, it seemed like the rest of the items that you read, they were just adjuncts to the argument that there's false statements.

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Well, it really seemed like those were just bound up in the claim that under the explicit items that are set out in World 2080 about falsity.

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Right.

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And again, I

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It's our position that you don't necessarily need to put in the statement claim that I am seeking expungement based on equitable principles that the nature of an expungement claim itself is seeking expungement based on principles because there's necessarily a weighing of the equities.

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when an arbitrator or judge or anyone determines whether expungement is warranted in a particular circumstance.

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And here, the petitioners did state under the ABC, the false, clearly erroneous standards, but they're also stating here in that language I just described that

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It's a totality of the circumstances argument here that they're saying, regardless of whether it's false, this will mislead people in viewing their public disclosure on the broker check record.

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And because of that, they're asking for expungement.

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In considering whether this is a new rule that FINRA made that would have to have approval by the SEC, I'm wondering if you can help me understand

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what precisely petitioners think is the new policy or interpretation.

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Is it about the authority of the FINRA director to withhold arbitration in this particular context?

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Or is the new policy or interpretation something about whether collateral attacks are allowed in a FINRA arbitration?

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What precisely is the new policy?

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or interpretation.

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So if I understand the question correctly, is it the fact that the director of FINRA is essentially issuing a blanket rule, bypassing the rulemaking procedure at the question?

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Well, that's one of your one of your arguments, but I'm wondering what precisely is the new policy or interpretation that you think would require SEC approval?

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Here with the director of Finner is essentially instituting a blanket policy that says anyone seeking expungement of a disclosure that previously resulted in a prior adverse award is ineligible from seeking expungement in this forum.

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that is not listed anywhere in the rules.

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And this is a blanket rule that is not contemplated by the plain rules of 10 or 20 80 itself and under principles of equity in the exchange act.

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Seems very specific though.

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And it is, and I think part of that argument is that the SEC

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that the director was making a case-by-case determination for each of these occurrences.

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However, I cited to an occurrence where a prior petitioner was able to seek expungement based on a prior adverse award.

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So this isn't a case-by-case, or excuse me, it's not, I apologize.

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I missed my point there, but essentially what the SEC is arguing is that the director made a case by case determination, but there's no facts in the record to support any analysis or case by case determination here.

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It's just the fact that they were... The more specific idea was that these were impermeable collateral attacks.

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So is it your position that the

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the FINRA arbitral rules or the FINRA rules generally do not say anything about collateral attacks?

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Because they do suggest, I mean, there are rules that suggest these arbitrations are final.

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So maybe it's fairly implied from that that you can't make a collateral attack.

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Are you suggesting that that is a new interpretation?

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You know, the bar on collateral attacks of FINRA arbitrations?

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or arbitral awards?

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Well, I do think that the SEC placed upon the director of FINRA's determination this collateral attack piece.

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Nowhere in the denial of forum letters issued by FINRA does it say that this was a collateral attack on these awards.

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They just state

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you're ineligible because of this prior award.

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But as outlined in our brief, it's our position that this is not a collateral attack on the award.

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The relief requested by each of these petitioners is removal of the information from the public database that describes this award broker check and or the CRD that populates the information there.

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It's not seeking to vacate the award.

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It's not seeking to

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reclaim any of the damages that were awarded in the underlying arbitration.

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It's not seeking to affect that original arbitration award in any capacity other than to remove the public disclosure of it in this database.

[00:11:20] Speaker 01:
I've got a question.

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I want to ask you about the lead plaintiff, Mark Gaskell.

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And I think I heard you say that it was remanded simply for the director to make the decision.

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But if you look at footnote 32 of the commission order, it says, because we are remanding to FINRA, the proceedings of Gaskell, so forth, we reserve the question of whether the same analysis, that is the non FINRA arbitration, that this arbitration service of Portland performed

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Gaskell, whether the same analysis would apply.

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And then it says, on remand, the director should consider that question in the first instance.

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Now that April 25th letter doesn't explicitly say, oh, by the way, the fact that Gaskell came from Portland doesn't change the analysis.

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If we decide that we

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we don't have jurisdiction over Mr. Pascal.

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What's your position on whether we should remand to let FINRA answer the question that the Commission told it to answer in the first place?

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So if jurisdiction is not found, then we would request that it be remanded

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And I think that would be the appropriate solution here rather than dismissal of the petition entirely.

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But to remand to address that specific issue, I don't think that, I mean, the SEC makes pretty clear in its decision what the effect of its order is really stating.

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I'm not sure what the difference between a final arbitration award in one forum versus a final arbitration in another forum would have any impact on the analysis here.

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But the SEC does make that statement as a footnote in their order.

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It must feel there is some room there to have a different analysis.

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I think or they wouldn't have said we're not going to reach that issue because it didn't come from FINRA.

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Right and the on remand center did issue a new order denial of form order and again they did not specify any further distinction between Mister gas kills arbitration award issued in our Portland forum versus finner a the again stated that this is a collateral attack.

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on a prior adverse award.

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And therefore he is ineligible from seeking expungement in that forum.

[00:14:10] Speaker 04:
Thank you.

[00:14:13] Speaker 02:
Thank you, counsel.

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We'll give you all the time for rebuttal.

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Thank you.

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Mr. Alvarez.

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Morning, Your Honors, and may it please the court, Paul Alvarez for the Securities and Exchange Commission.

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Your Honors, as the commission's brief makes clear, this court lacks jurisdiction to consider the petition for review by Mr. Yaskol because there was no final order disposing of his application.

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The commission did not conduct a 19F analysis that it did in disposing of the remaining petitioners who were properly before this court.

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And as counsel acknowledged, the commission remanded Mr. Gaskell's application to FINRA.

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Because there is no final order as to Mr. Gaskell's application, because this court sits in review only of final orders of the commission, this court lacks jurisdiction to consider his petition for review.

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And therefore, it must be dismissed.

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And on that point, you asked about remand, Your Honor.

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I don't think that this court has anything to remand because the petition is not properly for this court.

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So I believe dismissal would be the appropriate remedy here and not remand.

[00:15:30] Speaker 01:
Well, we're reviewing.

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You may be right.

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We're reviewing the commission order.

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And that order, as I read it anyway, said to FINRA, not only does the director have to make this decision,

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But there may be a different analysis because it comes from a non FINRA arbitration.

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That's right.

[00:15:49] Speaker 04:
Yes, that's right.

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And so I think what the issue here is, Mr. Gaskell's case is presently, effectively still before FINRA because he hasn't presented, he hasn't submitted an application to the commission for review of FINRA's order.

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Now, of the director's decision to deny access.

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I don't want to speak for what they can argue, but they certainly could argue, well, FINRA's director didn't make that determination.

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We would like for FINRA to make that determination, or they could request that FINRA, that the director make that determination in the first instance.

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Is he not out of time?

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I don't think he's out of time for seeking commission review of FINRA's.

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Of the April 25th?

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Of the April 25th.

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He may be.

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I don't know that necessarily.

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I think he might still be.

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The point is he hasn't brought this to the commission's attention.

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So there's really no analysis that the commission has done on that issue.

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And because of that, there's nothing for this court to consider, because his case effectively is still in front of FINRA, because he hasn't brought it to the commission's attention in the first instance.

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I recognize it's a weird situation, but that is kind of where we're at.

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I mean, I guess he could have sought review in that proceeding as a protective matter, even if he thought that there was

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If he thought there was jurisdiction here, he could cover himself by seeking review through the other channel.

[00:17:18] Speaker 04:
Absolutely.

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I think that's what he should have done, right?

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I mean, he should have sought the commission's review of the April 25th order immediately.

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And because he still had the 60 days from the early April commission order.

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So that would give him to about June.

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And I don't know, I couldn't tell you whether the commission would have resolved the issue in

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that time frame, but at least he could have made the attempt to do so and attempt to kind of then join the petitioners here with the final commission order and perhaps bring the commission's order resolving his April 25th letter in as a related case or combine the two, but he never did that.

[00:17:57] Speaker 01:
So we are... I don't want to get into the wild blue yonder, but you are an expert.

[00:18:03] Speaker 01:
Can you think of why the fact that the arbitration took place

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in a non FINRA site make any difference?

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These arbitration services, Portland and these others, do they have something different from FINRA?

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Or do you know?

[00:18:21] Speaker 04:
I don't know, Your Honor.

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I think it was merely, and again, I don't want to speculate here as to what the commission was thinking.

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But if I were to guess, it looks like in certain instances, you have arbitrators that are actually FINRA arbitration.

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And Mr. Gaskell's was years ago.

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I don't know whether it was before the NASD or before FINRA.

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I don't know exactly.

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I hesitate to say, I'm sorry, I wish I had a better understanding of what the commission is.

[00:18:49] Speaker 01:
Portland.

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Yes.

[00:18:51] Speaker 04:
Yeah.

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Right.

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The state versus say, you know, this is an arbitrator that is under the auspices of FINRA.

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So, but so we believe that the petition should be dismissed and turning to the commission order as to the remaining petitioners who are properly before this court.

[00:19:12] Speaker 04:
The commission acted reasonably in concluding that the Director of Dispute Resolution Services at FINRA acted consistent with FINRA's rules and with the Exchange Act in denying the, yes.

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I was gonna ask you here, are the decisions here that were made by the FINRA Director, are they a kind of new interpretation or policy that would require SEC approval?

[00:19:40] Speaker 04:
No, no, not at all.

[00:19:42] Speaker 00:
You know, both with respect to the type of authority that the director can exercise as well as to whether you can bring collateral attacks.

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in the federal arbitral court.

[00:19:53] Speaker 04:
Sure.

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So I think these are not, this is not a new rule.

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I know they've, my friend on the other side has claimed that it is.

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But the rules that, you know, as you alluded to in your questions earlier on, the rules well established that there are no collateral attacks.

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And I point this court to

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rule 12904B and 13904B, which states that all awards are final and shall not be subject to further review or appeal.

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And that establishes that collateral attacks on awards are not permissible.

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And I don't even take my friend to be arguing that collateral attacks could occur, that petitioners could challenge the merits of the underlying original adverse arbitration awards against them.

[00:20:38] Speaker 00:
So finality, I mean, in the federal court context, the finality requirement implies some kind of limit on collateral attack.

[00:20:46] Speaker 00:
Yes.

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But there are exceptions to that.

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And so there's nothing specified in the FINRA rules about collateral attacks or perhaps situations in which something that looks like a collateral attack might be brought.

[00:21:00] Speaker 04:
No, there's nothing specifically saying you're not allowed to collaterally attack, but I think fairly

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interpreted each of the rules do prevent such attacks.

[00:21:13] Speaker 04:
I think you again look to 13904B, 8312C of FINRA's rules states that where there is customer dispute information that gives rise to a final award, that information shall be made permanently available on broker check and in the CRD.

[00:21:28] Speaker 00:
And do you think that's reasonably and fairly implied by existing rules?

[00:21:33] Speaker 04:
Yes, absolutely.

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I think also with respect to the director's authority, that's also a long-standing rule that permits the director to engage in a gatekeeping function to ensure that FINRA is utilizing its limited resources in a way that would make the arbitration forum most efficacious and most efficient.

[00:21:59] Speaker 04:
and preventing collateral attacks on awards that are meant to be final is a reasonable exercise of that authority.

[00:22:11] Speaker 04:
I think the other thing that you need to keep in mind, Your Honor, is that in addition to FINRA rules, which place an emphasis on finality, the Federal Arbitration Act

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places an emphasis on the finality of arbitration awards.

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And I point this court to nine USC sections 10 and 11, which provide the grounds for when an arbitration award can be vacated or modified.

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And the vacator section is section 10 and in the vacator where they allow the award where the award was procured by corruption, fraud or undue means or where the arbitrators were corrupt, evidently partial, committed prejudicial misconduct or exceeded their powers.

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And modifications arbitration awards in section 11 may be made only where there has been

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Scrivener's error or where there is some other error that has not affected the underlying merits that does not go to the underlying merits of the award.

[00:23:08] Speaker 04:
So that those two provisions express Congress's you know policy and interest in ensuring finality.

[00:23:16] Speaker 00:
Are you suggesting that that goes to the reasonableness of what the SEC did because it's consistent with Arbitration Act?

[00:23:22] Speaker 04:
I'm saying that that shows that the SEC acted reasonably in interpreting the rules as they existed and in interpreting the framework that Congress set up for the review of arbitration awards.

[00:23:33] Speaker 04:
And that that emphasis on finality makes clear that collateral attacks, even though there's not an express rule that says, well, you can't have collateral attacks, fairly interpreted the rules that FINRA has established and the rules that Congress has set up regarding the review of arbitration awards.

[00:23:52] Speaker 04:
clearly shows that collateral attacks are not permissible.

[00:23:55] Speaker 04:
And again, I don't take the petitioners to be arguing that they could collaterally attack, but their argument instead is that they're not collaterally attacking the awards because they're instead only seeking to expunge the allegations that gave rise to those awards.

[00:24:12] Speaker 04:
But there's a number of problems with that argument.

[00:24:15] Speaker 04:
And I can see I have 15 seconds left if I may continue on this point, if that's OK.

[00:24:22] Speaker 04:
The problems with their arguments are threefold.

[00:24:25] Speaker 04:
The first is that argument ignores the fundamental fact that the original arbitration panels in this case

[00:24:34] Speaker 04:
found each of the petitioners liable.

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And that finding of liable liability is critical here because the grounds for seeking expungement go to, as Judge Sonervasen stated, they go to the issue of whether the allegations and rule 2880 will rule 2080 states allegations, claims,

[00:24:56] Speaker 04:
or information was clearly erroneous, factually impossible, or false, or that the associated person wasn't involved in the misconduct that was alleged.

[00:25:09] Speaker 04:
But by finding the petitioners liable, the arbitration panel in the original awards necessarily

[00:25:16] Speaker 04:
made the determinations that the allegations were not clearly erroneous, were not false, were not factually impossible, and that the associated persons, the petitioners, were involved, because they would have to make those determinations, if not explicitly, certainly implicitly, in reaching a finding of liability.

[00:25:37] Speaker 04:
The second problem for the petitioners in their arguments, that they're only seeking to expunge the allegations against them,

[00:25:47] Speaker 04:
that they are actually collaterally attacking the underlying awards, not just by seeking the expungement of the information, but by challenging the awards themselves.

[00:25:57] Speaker 04:
I'd like to point this report to footnote nine of the commission's brief, which begins on page 32 of the brief.

[00:26:04] Speaker 04:
And in that footnote, the commission details the nature of the expungement request that the petitioners actually made to FINRA.

[00:26:11] Speaker 04:
And in those requests, the petitioners argue that they were entitled to expungement.

[00:26:17] Speaker 04:
Because contrary to what the original arbitration panels found, they did not act negligently.

[00:26:22] Speaker 04:
They did not make misrepresentations.

[00:26:24] Speaker 04:
They did not provide false or misleading information.

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They did not act fraudulently.

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They did not engage in churning.

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They had no fraudulent intent.

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They did not make unsuitable recommendations.

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And they did not violate the federal securities laws.

[00:26:37] Speaker 04:
Each of those challenges goes directly

[00:26:41] Speaker 04:
to the underlying legal determinations and findings of liability made by the original arbitration panels.

[00:26:47] Speaker 04:
And thus, those arguments constitute impermissible collateral attacks.

[00:26:51] Speaker 04:
What's your third one?

[00:26:53] Speaker 04:
The third one is simply just as a practical matter.

[00:26:56] Speaker 04:
What the petitioners are arguing for is an unfettered access, even decades after the fact, to the arbitration forum that they could argue on any argument.

[00:27:09] Speaker 04:
Outside of 20 80 B one, which we think is very clear that those are the only three categories for expungement that they can make any argument at any time, even if there was a finding of liability.

[00:27:19] Speaker 04:
So as a practical matter, those

[00:27:22] Speaker 04:
That standard that they're proposing is directly contrary to FINRA's interest in maintaining the finality of arbitration awards and ensuring that FINRA's resources are well spent and used on arbitrations that are properly before the arbitration form.

[00:27:39] Speaker 04:
Unless this court has any further questions.

[00:27:41] Speaker 01:
I do have one more question.

[00:27:43] Speaker 01:
And it's a footnote again.

[00:27:44] Speaker 01:
Yes.

[00:27:45] Speaker 01:
Tell me what role the court that has to confirm expungement relief

[00:27:52] Speaker 01:
has.

[00:27:52] Speaker 01:
Is it just a stamp of approval?

[00:27:54] Speaker 01:
Can it second guess the award of expungement?

[00:28:00] Speaker 04:
Well, so I think the court has to, you know, sit in review as courts would.

[00:28:04] Speaker 01:
I don't think it's a rubber stamp necessarily, but the way that it... It says the award must be confirmed.

[00:28:09] Speaker 04:
Yes, that's right.

[00:28:10] Speaker 04:
So this is...

[00:28:13] Speaker 04:
I'll try and be very brief, because prior to this requirement being implemented into the rules, arbitrators had themselves been able to just expunge records without resort to a court.

[00:28:26] Speaker 04:
And NASD and now FINRA created this requirement to provide an extra check and to allow themselves to oppose.

[00:28:34] Speaker 04:
And the categories in B1,

[00:28:37] Speaker 04:
FINRA said, as the commission order approving NASD rule 2130, which became 2080, NASD and FINRA said that they would not oppose expungement requests where the three categories in B1 were met, but that they would continue to oppose expungement requests to the extent the arbitration panel made findings outside of those three.

[00:29:02] Speaker 04:
And so that's where that comes into play.

[00:29:07] Speaker 04:
any further questions?

[00:29:08] Speaker 04:
Thank you very much, Your Honors.

[00:29:10] Speaker 02:
Thank you, Council.

[00:29:12] Speaker 02:
Mr. Massette, we'll give you two minutes for rebuttal.

[00:29:20] Speaker 03:
I'd like to use this opportunity to address a few of these points that were made.

[00:29:25] Speaker 03:
One is that the confirmation portion

[00:29:31] Speaker 03:
that FINRA would not oppose when expungement is recommended under the A, B, and C standards, that would necessarily mean that expungement is allowed if there are other reasons for expungement, like equitable expungement here.

[00:29:47] Speaker 03:
That is a scenario where you would be required to name FINRA and FINRA could oppose at the court confirmation phase.

[00:29:56] Speaker 03:
As to the finding of liability by the previous arbitrators,

[00:30:01] Speaker 03:
Attached are the awards that were made in each of these cases.

[00:30:06] Speaker 03:
The awards simply state finding of liability jointly and severably for an amount in damages, all of which were significantly less in value than was requested.

[00:30:18] Speaker 03:
There is no specific findings as to, for example, Mr. Gaskell is liable for negligence.

[00:30:25] Speaker 03:
Mr. Gaskell is liable for unsuitability.

[00:30:29] Speaker 03:
None of those findings are present in any of these awards.

[00:30:33] Speaker 03:
So to say that it's necessarily a collateral attack because these petitioners are now seeking to expunge based on any one of these arguments is

[00:30:47] Speaker 03:
just not within the evidence.

[00:30:50] Speaker 03:
If you look at Mr. Wetzel's award, for example, the customers were asking for over $170,000 in damages.

[00:30:58] Speaker 03:
Mr. Wetzel, along with the broker dealer firm, was found liable for $1.

[00:31:03] Speaker 03:
Not a single fact said why he was liable, whether it was the broker dealer or whether it was him specifically.

[00:31:11] Speaker 03:
And additionally, you're allowed to

[00:31:17] Speaker 03:
that they're not allowed to.

[00:31:18] Speaker 03:
Allege alternate theories of relief in a statement of claim just because.

[00:31:21] Speaker 03:
Mr or any of these petitioners are seeking expungement under something that the director may consider to be collateral attack doesn't mean that they're not allowed to seek expungement under alternate theories of relief, such as equitable expungement or any of these

[00:31:47] Speaker 03:
Thank you.