Bankruptcy: An Opportunity To Settle FINRA Member - Employee Disputes

Last year, a U.S. bankruptcy court held that a bankruptcy trustee could settle a Financial ‎Industry Regulatory Authority ("FINRA") suit against a broker-dealer by its former employee ‎seeking damages and expungement of alleged false and defamatory FINRA Form U-5 ‎termination disclosure language, over the objection of the former employee-debtor.2 Once a ‎bankruptcy case is filed by a former employee, the claims become property of the bankruptcy ‎estate. In chapter 7 liquidation and in some chapter 11 reorganization cases, a trustee is ‎appointed, providing the broker-dealer with an opportunity to settle the claims with the trustee ‎and obtain a full release, usually for payment of a relatively small amount.‎

FACTUAL BACKGROUND

Clark was terminated by his broker-dealer ("BD") after it received and investigated ‎customer allegations that he placed unauthorized trades in their accounts.3‎ ‎ The BD reported that ‎reason for termination in a Form U-5 Termination Notice filed with the Central Registration ‎Depository, as required by law. 15 U.S.C. § 78s(d)(1) (mandatory filing requirement); Article V, ‎Section 3 of FINRA's By-Laws; FINRA Regulatory Notice 10-39. The information was ‎included on the registered representative's public BrokerCheck Report, and he contended it was ‎essentially a death knell for his career.4‎ ‎ Clark commenced a FINRA arbitration proceeding ‎against the BD, alleging wrongful termination and defamation and requesting a substantial award ‎of alleged actual damages, punitive damages, and expungement of his Form U-5 (the "FINRA ‎Action"). Two years after his termination, and while the FINRA Action was pending, Clark filed ‎for bankruptcy.

Clark did not initially list his FINRA Action as an asset in his bankruptcy case, or notify ‎the bankruptcy trustee, the BD or FINRA of the bankruptcy. He received a discharge and his ‎bankruptcy case was closed. The BD learned of the bankruptcy and informed the debtor's ‎counsel of its intent to dismiss the FINRA Action because of the bankruptcy non-disclosure. ‎The debtor then moved to reopen his bankruptcy, and the bankruptcy trustee hired his ‎contingency fee counsel to pursue the FINRA Action for the bankruptcy estate. The BD and the ‎trustee agreed to settle for a fraction of the claimed amount, enough to pay the fees of the trustee ‎and his counsel and enable a distribution to the creditors. The debtor objected, arguing that (1) ‎his "claim" for expungement was personal and not...