Investment Executive (May 2, 2002 8:10 am) — “In August 2000, Virginia Hay filed an arbitration complaint against Salomon Smith Barney and its broker Lawrence Gordon. Her since-deceased father lost hundreds of thousands of dollars after making unsuitably risky investments — primarily in junk-bond mutual funds — recommended by the broker, Ms. Hay, a resident of Lexington, Ky., alleged in the complaint,” writes Susanne Craig in today’s Wall Street Journal.

“Salomon paid a $175,000 financial settlement and Ms. Hay withdrew her complaint, according to documents filed with the National Association of Securities Dealers. But as part of the settlement, she also agreed to a request from Salomon, a division of Citigroup Inc.: The incident would be expunged from Mr. Gordon’s disciplinary record on public file with the NASD.”

” ‘Expungement is an industry favored activity to keep secret the activities of the brokerage industry,’ says Charlie Mihalek, Ms. Hay’s attorney and a former Kentucky securities director.”

“Now, in response to concern that brokers and their firms are often able to buy a clean record by coaxing an expungement out of aggrieved customers, the NASD has proposed severely limiting the ability to keep such settlements secret. The NASD estimates that 4.4% of the 5,582 cases that resulted in awards or settlements in 2001 involved an expungement. But plaintiff lawyers say the number may run as high as 8.5%, according to a study by Charles Austin Jr., a member of the Public Investors Arbitration Bar Association, an industry association whose members represent investors in disputes.”

“While customers who agree to an expungement often get a quicker resolution to their own cases, critics contend that leaves other investors in the dark and puts the system at risk. Indeed, regulators believe some brokers stacked up multiple complaint settlements without any showing up in the NASD’s Central Registration Depository, or CRD, an important industry data bank that provides investors and state regulators with information on brokers.”

“Currently, the record of most misdeeds can be erased if recommended by the arbitration panel and approved by a court. But under the NASD proposal, only certain cases could be erased: those that contain a clear inaccuracy — such as a broker being named in error when it was really someone else with a similar name; complaints that are found to be without legal merit; and complaints that can contain defamatory information. Further, the NASD would have to be notified of any effort to seek a court order for expungement so that it could object if it wants. Under these proposed rules, Mr. Gordon’s record wouldn’t have been erased.”