DECISION AND ORDER PURSUANT TO CPLR §§ 1012, 1013
MARCY L. KAHN, J.S.C.
It is ordered that this motion is Decided in accordance with accompanying memorandum decision (written) explaining court's August 21, 2007, oral ruling.
By notice of petition and petition dated March 21, 2007, Petitioners/Defendants Summit Equities, Inc. ("Summit") and Peter O'Neill ("O'Neill") (collectively, "petitioners") commenced this proceeding pursuant to section 7510 of the Civil Practice Law and Rules ("CPLR") and Rule 2130 ("Rule 2130") of the National Association of Securities Dealers, Inc. ("NASD")
By notice of motion and affirmation filed March 26, 2007, the Attorney General of the State of New York (the "Attorney General") seeks leave of court to intervene in this proceeding as an intervenor-respondent for the purpose of opposing confirmation of so much of the arbitration award as recommends expungement of records from the CRD. Petitioners have opposed the Attorney General's motion, arguing that there are no grounds either for its intervention or for vacatur of the award. The Attorney General contends that his office has an interest in the CRD records, that the arbitrators exceeded their authority in granting expungement relief and that the arbitration process and findings were insufficient to support the expungement recommendation. Respondent Johnson has not appeared in this proceeding, and the NASD has not opposed the Attorney General's intervention application.
This court heard oral argument on the intervention issue and on the motion to confirm in this case and another case raising the same issue on August 21, 2007.
The CRD system is an electronic database used by NASD, the Securities and Exchange Commission ("SEC"), state securities regulators and others which contains information relating to registration and licensing decisions made by those bodies. (NASD Notice to Members 99-54 [July 1999], attached as Exh. F to the Affirm, of James J. Park, Esq., sworn May 2, 2007 ["Park Affirm."]). The information contained in the system includes criminal histories, disciplinary information, customer complaints, certain arbitration awards, and other information which is submitted by registered broker/dealers and regulatory authorities, and is accessible both to regulators for their official use and to the investing public. (
Effective in 2004, the SEC approved amendments to NASD Rule 2130, which provides for the expungement from the CRD of certain customer dispute information. Since that time, expungement is limited to cases in which NASD arbitrators make an affirmative finding that certain specified circumstances exist (NASD Rule 2130[b]), where they recommend expungement in their arbitral award, and where a court of competent jurisdiction confirms the award. (NASD Rule 2130[a]).
In this case, on June 3, 2004, respondent Johnson filed a statement of claim against petitioners Summit and O'Neill alleging claims of negligence, recklessness, deceptive practice and breach of the duties of good faith and supervision under state law. In October 2005, the petitioners and respondent Johnson agreed to a stipulated award in lieu of a hearing, which was approved by the members of the panel in May 2006. The award provided for the payment of an unspecified, confidential sum and for the withdrawal of all claims against the petitioners, and contained a recommendation that all reference to this matter be expunged from the petitioners' records in the CRD. (Stipulated Award, NASD Dispute Resolution Arbitration No. 04-04272 [the "award"], attached as Exh. 1 to the Verified Petition of Summit and O'Neill ["petition"]).
(Award, §§ 3 & 4).
On May 6, 2006, a telephonic hearing was held in which the counsel for respondent, counsel for petitioners and panel members participated. (Supplemental Affirmation of William A. Despo, Esq., sworn August 21, 2007, ["Despo Suppl. Affirm."], Exh. A, Telephonic Expungement Hearing for the Case of Elizabeth Johnson, et al. v. Summit Equities). Following this hearing, the panel noted that O'Neill's affidavit contained all available evidence and that counsel for Elizabeth Johnson did not oppose the expungement request. The panel revised the portion of the stipulated award granting expungement by basing it "solely upon 2130(b)(1)B" and quoting the relevant language in that subsection verbatim.
On March 26, 2007, petitioners commenced the instant proceeding seeking confirmation of the award by this court. Respondent Johnson has not appeared. The Attorney General's motion to intervene followed on May 2, 2007, and was deemed fully submitted for purposes of the instant motion upon oral argument on August 21, 2007.
The Attorney General argues that leave to intervene as of right pursuant to CPLR § 1012 should be granted because the data in the records of the CRD belong jointly to the applicant, NASD and state securities regulators, and because these records are necessary to performance of his statutory duties as New York State's regulator of securities brokers, dealers and their salespersons. He maintains that these duties would be compromised if information concerning registered brokers and dealers were expunged from the depository. He avers that NASD contemplates the intervention of state regulators in judicial confirmation proceedings when a registrant seeks a court order confirming an expungement award.
Petitioners respond that the Attorney General has presented no grounds for vacating the award that fall within the scope of CPLR Article 75, that the SEC has rejected the assertion that the records of the CRD are owned by the State of New York, and that the Attorney General has no right to intervene, since the parties to the proceeding, including NASD, have determined that expungement is appropriate.
The Attorney General replies that its interests are real, are recognized by NASD, and would be compromised if information in the CRD pertaining to dealers licensed in New York were expunged improperly. He maintains that his interest in preserving an accurate and reliable database for his regulatory and licensure purposes, and the investing public's right to complete and accurate information about brokers they may wish to engage, have not been adequately represented in these proceedings.
With respect to the argument for permissive intervention under CPLR § 1013, the Attorney General states that his claim raises common issues of law and fact with those that the court will be deciding in the underlying proceeding. Petitioners counter that the State's claim and the relief sought in this confirmation proceeding lack the commonality required for the granting of intervention under CPLR § 1013. They also argue that the court should deny discretionary intervention because the Attorney General cannot prevail on the merits, as Rule 2130 preempts any contrary state regulation, where, as here, the arbitrator makes an affirmative finding as provided by Rule 2130 and the NASD determines that expungement is appropriate.
Intervention as of Right
Section 1012 of the CPLR provides in pertinent part:
(CPLR § 1012[a]).
The CRD was established, and its records are maintained, for the benefit of all securities regulators, which include the NASD, a nationwide self-regulatory organization; the federal government, acting through the SEC; and the regulatory agencies of each individual state. (
Notwithstanding the vigorous protestations to the contrary by petitioners, the agreement establishing the CRD demonstrates that the NASD recognizes that a participating CRD State has a joint property interest in the information contained in the CRD. The CRD agreement between NASD and NASAA provides as follows:
(CRD Agreement, § 3.10[a]). The information in the CRD, therefore, is joint property of the State of New York and the NASD, while the CRD database itself remains the exclusive property of the NASD.
Contrary to petitioners' contention on this motion, the interest of the state regulators in the CRD data maintained by the NASD is not diminished by a comment in the SEC's statement approving Rule 2130. (SEC Order Granting Approval of Proposed Rule Change, Dec. 16, 2003, 68 Fed.Reg. 74667, 74672 [Dec. 24, 2003] ["SEC approval statement"]). In this comment, the SEC rejected the notion that because the CRD system contains data having public record status, its records comprise a privileged class of public record documents necessarily exempt from expungement. While the SEC allowed for expungement of data under certain circumstances, it still acknowledged the "state `public record' status" of this data. (
The remaining party, the NASD, which has a dual role as a regulator and as an association constituted of the dealers whom it regulates, has not opposed expungement in this case. In fact, it is in just this situation, where NASD declines to oppose expungement, that the SEC and NASD contemplated intervention by state regulators in court confirmation proceedings. In supporting adoption of the amendments now constituting NASD Rule 2130, the NASD noted that:
(SEC approval statement, 68 Fed.Reg. at 74671 [footnote omitted]). The NASD explains that state participation in the court confirmation proceeding:
(Park Affirm., Exh. L, #9, NASD 2130 Frequently Asked Questions, Question #9 http://www.nasd.org/RegulatorySystems/CRD/FilingGuidance/NASDW_005224, now found at http://www.finra.org/RegulatorySystems/CRD/FilingGuidance/p005224 [last accessed Nov. 1, 2007]). Thus, the drafters of Rule 2130 expressly acknowledged that states have a legitimate interest and should be allowed to intervene in cases of this kind to protect that interest.
Accordingly, since the New York Attorney General has an interest in this proceeding which may not be adequately be represented by the existing parties, the criteria for intervention under CPLR § 1012(a) are met in this case.
Intervention by Permission
Section 1013 of the CPLR provides:
The decision to permit intervention under this section rests in the court's sound exercise of discretion, and turns on whether the proceeding and the intervenor's claims have issues in common. Intervention should be liberally allowed, in order to give the intervening party an opportunity to protect its interest. (
(Alexander, Practice Commentaries, McKinney's Cons. Laws of NY, Book 7B , CPLR C1013, at 183).
Here, the Attorney General's claim would be adversely affected without intervention, as the data upon which his office relies would be eliminated from the national database used by his office to perform its official regulatory and licensing duties. Further, the Attorney General's claim has in common many questions of law in fact with the confirmation relief sought in this proceeding, such as whether the petitioners are entitled to expungement, the scope of this court's authority to review the arbitral recommendation of expungement, the standard to be employed in such review, and the propriety of expungement of data owned jointly by NASD and the CRD states.
Finally, involvement of the Attorney General in this proceeding will not unduly prejudice the parties. This is not a case where the presence of the intervenor will complicate a lengthy discovery or trial process, as neither discovery nor trial is contemplated in this special proceeding. No substantial rights of any party will be prejudiced: petitioners' award remains in place, and their position will be fully considered on the issue of confirmation, vacation or modification of that award. In sum, the presence of the Attorney General will simply insure that both sides of these novel and complex legal issues are presented in this proceeding. Therefore, the Attorney General should be allowed to intervene on the basis of permissive intervention, as well.
Accordingly, upon the Notice of Petition and Petition of Petitioners Summit and O'Neill filed on March 26, 2007; the Notice of Motion and Affirmation of James J. Park, Esq., filed May 2, 2007, the Memorandum of Law in Support of the Attorney General's Motion to Intervene, filed May 2, 2007; the Affirmation of William A. Despo, Esq. in Opposition, dated June 14, 2007; Petitioners' Memorandum in Opposition, dated June 14, 2007; the Reply Affirmation of R. Verle Johnson, Esq. in Support, dated July 12, 2007; the Reply Memorandum of Law in Support, dated July 12, 2007; the Supplemental Affirmation of William A. Despo, Esq., sworn August 21, 2007, and the oral argument heard on August 21, 2007; it is hereby
ORDERED, that the motion to intervene is granted and that the Attorney General of the State of New York be permitted to intervene in the above-entitled proceeding as an intervenor-respondent; and it is further
ORDERED, that the notice of petition and petition in the above-entitled proceeding be amended by adding the Attorney General of the State of New York as an intervenor-respondent; and it is further
ORDERED, that the attorney for the intervenor shall serve a copy of this order with notice of entry upon the Clerk of the Court and upon the Clerk of the Trial Support Office (Room 158), who are directed to amend their records to reflect such change in the caption herein.
The foregoing constitutes the decision and order of this court.