Court Opinion

ID: 4217493
Source: CourtListenerOpinion
Date Created: 2017-11-02 22:03:05.9787+00
Date Added: 2024-06-11T09:27:53.501291
License: Public Domain

Filed 10/20/17; Certified for Publication 11/2/17 (order attached)

                   COURT OF APPEAL, FOURTH APPELLATE DISTRICT

                                                DIVISION ONE

                                         STATE OF CALIFORNIA

TROY FLOWERS,                                                    D071392

         Plaintiff and Appellant,

         v.                                                      (Super. Ct. No. 37-2015-00029957-
                                                                 CU-MC-CTL)
FINANCIAL INDUSTRY REGULATORY
AUTHORITY, INC.,

         Defendant and Respondent.

         APPEAL from a judgment of the Superior Court of San Diego County, Ronald L.

Styn, Judge. Affirmed.

         McColloch Law Firm, Maria E. Saling and Michael T. McColloch for Plaintiff

and Appellant.

         Gibson, Dunn & Crutcher and Ethan D. Dettmer for Defendant and Respondent.

         In the period between 2000 and 2001, plaintiff and appellant Troy Flowers's

application for a securities sales license was rejected by Ohio state officials because they

found that he was "not of 'good business repute.' " In addition, Flowers was subjected to

discipline by securities regulators with respect to his violation of securities laws and
regulations and his failure to cooperate in a securities investigation. A publicly

accessible record of this disciplinary history is maintained by defendant and respondent,

the Financial Industry Regulatory Authority, Inc. (FINRA).

       Flowers filed a complaint against FINRA in which he sought an order requiring

that FINRA expunge his disciplinary history from its records. The trial court sustained

without leave to amend FINRA's demurrer to Flowers's complaint. Because federal

securities laws and regulations provide Flowers with a process by which he may

challenge FINRA's publication of his disciplinary history, and Flowers has not pursued

that process, he may not now, by way of a civil action, seek that relief from the trial

court. Accordingly, we affirm the trial court's order sustaining the demurrer and its

judgment in favor of FINRA.

                   FACTUAL AND PROCEDURAL BACKGROUND

       Although FINRA is a private, not-for-profit Delaware corporation, it is also a self-

regulatory organization (SRO) authorized under title 15 United States Code section 78o-3

et seq. (The Maloney Act, amending the Securities Exchange Act of 1934 (the Exchange

Act)); as such, it is registered with the federal Securities and Exchange Commission

(SEC) as a national securities association. Prior to 2007, FINRA was known as the

National Association of Securities Dealers (the NASD); in 2007, the NASD consolidated

its regulatory functions with the regulatory functions NYSE Regulation, Inc. provided for

the New York Stock Exchange and changed its name to FINRA. (See In re Series 7

Broker Qualification Exam Scoring Litigation (D.D.C. 2007) 510 F. Supp. 2d 35, 36, fn.1,

aff'd (D.C. Cir. 2008) 548 F.3d 110.)

                                              2
       In its role as an SRO, FINRA is subject to extensive oversight by the SEC.

(See 15 U.S.C. § 78s; First Jersey Securities, Inc. v. Bergen (3d Cir. 1979) 605 F.2d 690,

693, cert. denied, 444 U.S. 1074.) FINRA disciplines its members when it has

determined they have violated securities laws and regulations or FINRA's own rules. (15

U.S.C. § 78s.) The Exchange Act itself requires that, as an SRO, FINRA maintain

information in a central registration depository (CRD) database about its member firms as

well as their current and former registered representatives, including their broker

representatives. (See 15 U.S.C. § 78o-3(i)(1)(A); Santos-Buch v. Fin. Indus. Regulatory

Auth. (S.D.N.Y. 2014) 32 F. Supp. 3d 475, 479.) Of concern here, the Exchange Act

further requires that FINRA publish information about its members' "disciplinary actions,

regulatory . . . proceedings, and other information required by . . . exchange or

association rule, and the source and status of such information." (15 U.S.C. § 78o-

3(i)(5).) FINRA does this through BrokerCheck (https://brokercheck.finra.org), which

allows members of the public to search for and review the professional history of

individual brokers.

       BrokerCheck was established when in 2009, with the SEC's approval, FINRA

adopted Rule 8312 of its rules. In approving FINRA Rule 8312, the SEC stated:

"BrokerCheck allows the public to obtain certain limited information regarding formerly

associated persons, regardless of the time elapsed since they were associated with a

member, if they were the subject of any final regulatory action." (75 Fed.Reg. 41254

(July 15, 2010) (italics added).) The SEC noted that former brokers, "although no longer

in the securities industry in a registered capacity, may work in other investment-related

                                             3
industries, such as financial planning, or may seek to attain other positions of trust with

potential investors." (Id. at p. 41257.) Thus, on one hand, the SEC found that

"[d]isclosure of such person's record while he was in the securities industry via

BrokerCheck should help members of the public decide whether to rely on his advice or

expertise or do business with him"; on the other hand, it also found that the absence of

this information "could lead a person making an inquiry about a formerly associated

person to conclude that the formerly associated person had a clean record." (Ibid.) The

SEC noted that, "if registered persons are aware . . . information will be available for a

longer period of time, it should provide an additional incentive to act consistent with

industry best practices." (Ibid.) In describing and approving FINRA'S creation and

operation of BrokerCheck, the SEC stated: "FINRA has a statutory obligation to make

information available to the public and, . . . the [SEC] believes that FINRA should

continuously strive to improve BrokerCheck because it is a valuable tool for the public in

deciding whether to work with an industry member." (Securities and Exchange Com.,

Release No. 34-61002, (Nov. 13, 2009), 74 Fed.Reg. 61193, 61196 (Nov. 23, 2009).)

       Flowers was a registered representative of two NASD member firms from 1995

until 2000, Pacific Cortez Securities Incorporated (also known as La Jolla Capital), and

Equitrade Securities Corporation. As such, his regulatory history as a participant in the

securities industry is available to the public on BrokerCheck. There is no dispute

Flowers's BrokerCheck history states that: in August 2000, the Ohio Division of

Securities rejected his application for a securities salesperson license because it found

that he was "not of 'good business repute' "; that in 2000, he was fined $10,000 by the

                                              4
NASD for engaging with La Jolla Capital in penny stock sales, which did not comply

with the Exchange Act and SEC Penny Stock Rules; and that in 2001, the NASD barred

Flowers from participating in the securities industry because he failed to timely cooperate

with an NASD investigation as required by his firm's membership in the NASD.

       By way of the complaint he filed in the trial court against FINRA, Flowers sought

an order requiring that FINRA expunge these matters from its database. Flowers alleged

that the information about him as disclosed on BrokerCheck was false, inaccurate and

misleading. In particular, he alleged that he had never in fact applied for an Ohio sales

license, that in 2000, he had accepted the $10,000 fine only because he was leaving the

securities business and did not wish to contest the matter, and that he initially had

declined to cooperate with NASD's investigation on the advice of counsel and had later

agreed to cooperate. Flowers further alleged that although he no longer wishes to act as a

securities broker, his BrokerCheck record prevents him from opening a personal

securities account and, because it is publicly available, the record inhibits his ability to

obtain employment. Given these circumstances, Flowers's complaint alleges that as a

matter of equity the three items should be expunged from FINRA's records.

       Initially, FINRA removed Flowers's complaint to the United States District Court.

However, the district court remanded the case to the trial court, where FINRA filed a

demurrer. In support of its demurrer, FINRA asked the trial court to take judicial notice

of records with respect to Flowers's Ohio application for a sales license and its own

                                               5
records of the regulatory actions it took against Flowers.1 FINRA argued Flowers's

complaint was barred by the requirement that he exhaust available administrative and

judicial remedies and that in any event his claims were preempted by federal securities

laws and regulations. The trial court agreed and sustained FINRA's demurrer without

leave to amend and entered a judgment in favor of FINRA. Flowers filed a timely notice

of appeal.

                                              I

       The principles governing our review of orders sustaining a demurrer without leave

to amend are well-established. " ' "We treat the demurrer as admitting all material facts

properly pleaded, but not contentions, deductions or conclusions of fact or law.

[Citation.] We also consider matters which may be judicially noticed." [Citation.]

Further, we give the complaint a reasonable interpretation, reading it as a whole and its

parts in their context. [Citation.] When a demurrer is sustained, we determine whether the

complaint states facts sufficient to constitute a cause of action. [Citation.] And when it is

sustained without leave to amend, we decide whether there is a reasonable possibility that

the defect can be cured by amendment: if it can be, the trial court has abused its

discretion and we reverse; if not, there has been no abuse of discretion and we affirm.

[Citations.] The burden of proving such reasonable possibility is squarely on the

plaintiff.' " (Champion v. County of San Diego (1996) 47 Cal. App. 4th 972, 976, quoting

Blank v. Kirwan (1985) 39 Cal. 3d 311, 318.)

1     Those documents conflict with Flowers's allegations with respect to the accuracy
of FINRA's BrokerCheck disclosures.

                                              6
                                             II

       We agree with the trial court that Flowers's complaint is barred by the doctrine of

exhaustion of remedies. As we explain, our concern here is not so much with the fact

that it appears from the record that Flowers could have challenged Ohio's rejection of his

sales license, as well as NASD's earlier disciplinary actions administratively and obtained

judicial review of any adverse administrative determination2; rather we are more

concerned here with Flowers's ability to seek relief from publication of those matters first

from FINRA itself, then the SEC and finally a United States Circuit Court of Appeals.

With respect to disciplinary actions against participants in the securities industry, we

believe the doctrine of exhaustion of remedies requires that such a determination be made

in the first instance in the forums to which Congress has assigned the task of resolving

those issues. Moreover, by requiring that the subject of a BrokerCheck report which

includes disciplinary action seek expungement by way of exhausting the remedial scheme

available under the Exchange Act, we not only assure that the expertise and interests of

the institutions to which Congress has delegated the task of policing the securities

industry is brought to bear, we also diminish the risk of intruding into areas where state

law has been preempted by federal securities statutes and regulations.

       "[W]here an administrative remedy is provided by statute, relief must be sought

from the administrative body and this remedy exhausted before the courts will act."

2      The record includes documents which demonstrate that Flowers received notice of
his right to challenge both the rejection of his application for an Ohio sales license and
the discipline imposed by NASD.

                                              7
(Abelleira v. Dist. Ct. of App. (1941) 17 Cal. 2d 280, 292.) Exhaustion of available

administrative remedies "is a jurisdictional prerequisite, not a matter of judicial

discretion." (Yamaha Motor Corp. v. Super. Ct. (1986) 185 Cal. App. 3d 1232, 1240,

citing Wilkinson v. Norcal Mut. Ins. Co. (1979) 98 Cal. App. 3d 307, 313.) "[E]ven

though the administrative remedy is couched in permissive language[,] an aggrieved

party is not required to file a grievance or protest if he does not wish to do so, but if he

does wish to seek relief, he must first pursue an available administrative remedy before

he may resort to the judicial process." (Yamaha Motor Corp. v. Super. Ct., at p. 1240,

citing Morton v. Super. Ct. (1970) 9 Cal. App. 3d 977, 982.)

       "There are several reasons for the exhaustion of remedies doctrine. 'The basic

purpose for the exhaustion doctrine is to lighten the burden of overworked courts in cases

where administrative remedies are available and are as likely as the judicial remedy to

provide the wanted relief.' [Citation.] Even where the administrative remedy may not

resolve all issues or provide the precise relief requested by a plaintiff, the exhaustion

doctrine is still viewed with favor 'because it facilitates the development of a complete

record that draws on administrative expertise and promotes judicial efficiency.'

[Citation.] It can serve as a preliminary administrative sifting process [citation],

unearthing the relevant evidence and providing a record which the court may review.

[Citation.]" (Yamaha Motor Corp. v. Super. Ct., supra, 185 Cal.App.3d at p. 1240.)

       The doctrine of exhaustion of remedies is not solely a creature of our state law, but

has been repeatedly recognized by federal courts in their disposition of closely related

securities cases involving discipline imposed by SROs. (See, e.g., Barbara v. NYSE

                                               8
(1996) 99 F.3d 49, 56–57 (Barbara).) "The exhaustion requirement has also been

applied to review of disciplinary actions by self-regulatory organizations such as national

securities exchanges. [Citations.] . . . [G]iven the 'comprehensive review procedure'

established by the Exchange Act [citation] Congress intended that the doctrine of

exhaustion of administrative remedies, in appropriate circumstances, apply to challenges

to the disciplinary proceedings of the national securities exchanges." (Id. at p. 57.)

       Here, FINRA has emphasized that its publication of Flowers's regulatory history

was an important part of its enforcement responsibility. As the court in Barbara noted,

Congress has provided for administrative review by the SEC of FINRA's enforcement of

its rules and resort to the circuit court of appeals. (Barbara, supra, 99 F.3d at pp. 56–57.)

Thus, if Flowers was unable to obtain relief from the publication of his history from

FINRA itself, he could have asked for relief from the SEC and in turn a federal circuit

court. (Ibid.)

       In requiring that Flowers exhaust his federal administrative and judicial remedies,

we fully recognize the trial court has equitable power to order expungement of public

records in appropriate circumstances. (Lickiss v. Financial Industry Regulatory Authority

(2012) 208 Cal. App. 4th 1125, 1133–1134 (Lickiss).) The court in Lickiss expressly

recognized that power. (Ibid.) "[I]n any given context in which the court is prevailed

upon to exercise its equitable powers, it should weigh the competing equities bearing on

the issue at hand and then grant or deny relief based on the overall balance of these

equities . . . [thus,] expungement is proper where the benefits to the petitioner outweigh

the disadvantages to the public and the burden on the court." (Ibid.; italics added.)

                                              9
However, because a trial court, in exercising its equitable power to order expungement,

must weigh the benefits to an individual against the public's interest in full disclosure,

disposition of Flowers's claims by the agencies tasked with protecting the public interest

will not only avoid the need for the trial court's intervention but will plainly facilitate the

" 'development of a complete record that draws on administrative expertise.' " (Yamaha

Motor Corp. v. Super. Ct., supra, 185 Cal.App.3d at p. 1240.)

       As we noted, a closely related concern is preemption. We accept the holdings of

federal cases which have found that FINRA's publication of disciplinary histories is not

protected by the "complete preemption," which would prevent application of any state,

statute, or rule of law. (See Godfrey v. Fin. Indus. Regulatory Auth. (C.D.Cal., Aug. 9,

2016, No. CV 16-2776 PSG) 2016 WL 4224956; Doe v. Fin. Indus. Regulatory Auth.,

(C.D.Cal., Nov. 19, 2013, No. CV 13-06436 DDP) 2013 WL 6092790.) Finding an

absence of complete preemption, those cases permit state as well as federal jurisdiction

over FINRA publication and expungement issues. However, here we are concerned with

the narrower doctrine of "conflict preemption," which arises by implication when

"Congress's intent to preempt state law is implied to the extent that federal law actually

conflicts with any state law. [Citation.] Conflict preemption analysis examines the federal

statute as a whole to determine whether a party's compliance with both federal and state

requirements is impossible or whether, in light of the federal statute's purpose and

intended effects, state law poses an obstacle to the accomplishment of Congress's

objectives." (Whistler Invs. v. Depository Trust & Clearing Corp. (2008) 539 F.3d 1159,

1164.) Conflict preemption applies even where, as here, a case is heard in a state

                                              10
tribunal. (See, e.g., AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333, 352,

[preventing state court from applying rule which is obstacle to purposes and objectives of

Federal Arbitration Act].) In light of the SEC's determination the public has an interest in

having access to the disciplinary records of individuals providing financial and

investment advice, there is an obvious risk of conflict between the SEC's conclusion a

particular individual's records should remain public and a state court's decision that the

individual's interests outweigh the public benefit of disclosure. Such a result would

plainly put FINRA in a situation where it was subject to the conflicting duties and in turn

require application of conflict preemption.

       Contrary to Flowers's argument, the holding in Lickiss has no bearing on the

exhaustion of remedies determination we make here. In Lickiss, the court held the

provisions of FINRA's distinct rule 2080 only govern the circumstances under which

FINRA will waive its right to participate in third party judicial or arbitral proceedings

involving customer disputes and in which expungement has been sought by a FINRA

member; contrary to FINRA's contention in Lickiss, the waiver of notice and service

standards set forth in rule 2080 do not govern the substantive principles of equity, which

a court must apply in determining whether such expungement is appropriate. (Lickiss,

supra, 208 Cal.App.4th at pp. 1135–1136.)

                                              11
       We note that in adopting the predecessor to rule 2080 discussed in Lickiss, the

NASD was responding to concerns that members, by way of settlements with customers

in third party litigation would be able to "buy clean records" by obtaining an

expungement order from a court or arbitrator hearing a customer complaint. (68

Fed.Reg. 74667-01.) Rule 2080 and its predecessor sought to prevent such evasion of its

recording keeping and publication responsibilities by requiring notice to the NASD and

now FINRA and providing them an opportunity to object to any expungement sought in

such third-party proceedings. In the context of third party customer disputes which are

the subject of rule 2080, the SEC has expressly found state and federal courts are fully

capable of determining whether expungement is appropriate. (68 Fed.Reg. 74667-01;

Lickiss, supra, 208 Cal.App.4th at p. 1135.) As FINRA emphasizes, Flowers is seeking

expungement of disciplinary actions FINRA itself has taken against him and quasi-

disciplinary action taken by the State of Ohio; by its terms rule 2080 does not speak to

expungement of such disciplinary actions. Thus, the SEC's expressed willingness to

permit the state and federal courts where customer complaints are pending determine

whether expungement is appropriate in those cases in no way suggests the SEC believes

its own disciplinary actions should be treated similarly by courts or any other forum

which did not impose the discipline in the first instance.

       In sum, we affirm the trial court's judgment because although the trial court has

equitable power to order expungement of public records, in this case Flowers has an

adequate and more carefully tailored remedy under the process set forth in the Exchange

Act.

                                             12
                                  DISPOSITION

     The judgment is affirmed. FINRA to recover its costs of appeal.

                                                                       BENKE, J.

WE CONCUR:

McCONNELL, P. J.

NARES, J.

                                        13
Filed 11/2/17
                            CERTIFIED FOR PUBLICATION

                COURT OF APPEAL, FOURTH APPELLATE DISTRICT

                                      DIVISION ONE

                                   STATE OF CALIFORNIA

TROY FLOWERS,                                        D071392

        Plaintiff and Appellant,
                                                   (Super. Ct. No. 37-2015-00029957-
        v.                                         CU-MC-CTL)

FINANCIAL INDUSTRY REGULATORY                      ORDER CERTIFYING OPINION
AUTHORITY, INC.,                                   FOR PUBLICATION

        Defendant and Respondent.

THE COURT:

        The opinion in this case filed October 20, 2017, was not certified for publication.

It appearing the opinion meets the standards specified in California Rules of Court, rule

8.1105(c), the respondent's request pursuant to California Rules of Court, rule 8.1120(a)

for publication is GRANTED.

        IT IS HEREBY CERTIFIED that the opinion meets the standards for publication

specified in California Rules of Court, rule 8.1105(c); and

        ORDERED that the words "Not to Be Published in the Official Reports" appearing

on page one of said opinion be deleted and the opinion herein to be published in the

Official Reports.

                                                                       McCONNELL, P. J.
Copies to: All parties

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