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Godfrey v. Financial Industry Regulatory Authority, Inc.

United States District Court, C.D. California

August 9, 2016

Philip Godfrey
Financial Industry Regulatory Authority, Inc.



         Before the Court is Plaintiff Philip Godfrey’s (“Godfrey”) motion to remand. Dkt. #23. The Court finds the matter appropriate for decision without oral argument. See Fed. R. Civ. P. 78(b); L.R. 7-15. After considering the moving, opposing, and reply papers, the Court GRANTS the motion and REMANDS the case to state court.

         I. Background

         From March 22, 1983 to January 12, 1988, Godfrey was a registered broker with member firms of the National Association of Securities Dealers (“NASD”), the predecessor of Defendant Financial Industry Regulatory Authority, Inc. (“FINRA”). Compl. ¶¶ 9-10. In 1988, Godfrey purchased securities for members of his family. Id. ¶ 12. Later that year, Godfrey’s then-wife claimed that Godfrey had improperly converted the funds for his own use and benefit. Id. ¶ 13. NASD filed a complaint against Godfrey on the basis of the allegations made by Godfrey’s then-spouse. Id. ¶ 16. Although Godfrey alleges that he did nothing wrong, he entered into a settlement with NASD. Id. ¶¶ 14-18. Godfrey’s complaint and settlement information is currently included in FINRA’s Central Registration Depository (“CRD”), and is available to the public through FINRA’s “BrokerCheck” feature. Id. ¶¶ 10-11, 16-18. Godfrey alleges that his record is otherwise clean. Id. ¶ 18.

         On March 25, 2016, Godfrey filed an action for expungement and declaratory relief in the Superior Court for the County of Los Angeles. Dkt. #1-1. FINRA timely removed to this Court. Dkt. #1. On May 23, 2016, Godfrey filed the present motion to remand. Dkt. #23.

         II. Legal Standard

         Generally, subject matter jurisdiction is based on the presence of a federal question, see 28 U.S.C. § 1331, or on complete diversity of citizenship between the parties, see 28 U.S.C. § 1332. Section 1331 states that “[t]he district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States.” If at any time before the entry of final judgment it appears that the Court lacks subject matter jurisdiction over a case removed from state court, it must remand the action to state court. See 28 U.S.C. § 1447(c); Int’l Primate Prot. League v. Adm’rs of Tulane Educ. Fund, 500 U.S. 72, 87 (1991). There is a “strong presumption” against removal jurisdiction, and the party seeking removal always has the burden of establishing that removal is proper. Hunter v. Philip Morris USA, 582 F.3d 1039, 1042 (9th Cir. 2009). If there is any ambiguity as to the propriety of removal, federal jurisdiction must be rejected. See id.

         III. Discussion

         FINRA removed “on the grounds that this Court has original jurisdiction over this action pursuant to 28 U.S.C. § 1331 and that the state court action is preempted by federal law.” Notice of Removal 1, 4-5. “The presence or absence of federal-question jurisdiction is governed by the ‘well-pleaded complaint rule, ’ which provides that federal jurisdiction exists only when a federal question is presented on the face of the plaintiff’s properly pleaded complaint.” Retail Prop. Trust v. United Bhd. of Carpenters & Joiners of Am., 768 F.3d 938, 947 (9th Cir. 2014) (quoting Caterpillar Inc. v. Williams, 482 U.S. 386, 392 (1987)). California has a cause of action for expungement of public records. Lickiss v. Fin. Indus. Regulatory Auth., 208 Cal.App.4th 1125, 1135 (2012). Godfrey’s two causes of action are for expungement under California law and declaratory relief under California law. Compl. ¶¶ 20-28. Thus, federal jurisdiction is not presented on the face of Godfrey’s complaint.

         This does not, however, end the inquiry. “The artful pleading doctrine is a corollary to the well-pleaded complaint rule, and provides that although the plaintiff is master of his own pleadings, he may not avoid federal jurisdiction by omitting from the complaint allegations of federal law that are essential to the establishment of his claim.” Lippitt v. Raymond James Fin. Servs., Inc., 340 F.3d 1033, 1041 (9th Cir. 2003) (alteration and internal quotation marks omitted) (quoting Hansen v. Blue Cross of Cal., 891 F.2d 1384, 1389 (9th Cir. 1989)), as amended (Sept. 22, 2003). Courts have used the artful pleading doctrine in (1) complete preemption cases, and (2) substantial federal questions cases. See Id . (citing Metro. Life Ins. Co. v. Taylor, 481 U.S. 58, 64-65 (1987), and Franchise Tax Bd. of State of Cal. v. Constr. Laborers Vacation Trust for S. Cal., 463 U.S. 1, 27-28 (1983)). FINRA argues that federal jurisdiction is proper under both complete-preempetion and substantial-federal-question theories. Opp. 7-15.

         A. Statutory Background, FINRA Rules, and Prior Case Law

         FINRA “is the primary regulatory body for the broker-dealer industry.” Sparta Surgical Corp. v. Nat’l Ass’n of Sec. Dealers, Inc., 159 F.3d 1209, 1210 (9th Cir. 1998), abrogated on other grounds by Merrill Lynch, Pierce, Fenner & Smith Inc. v. Manning, 136 S.Ct. 1562 (2016). Under the Securities Exchange Act of 1934, FINRA is required to promulgate rules to protect investors and the public interest, and enforce these rules through disciplinary proceedings and sanctions. See Krull v. S.E.C., 248 F.3d 907, 910 (9th Cir. 2001). The Exchange Act establishes a review process for disciplinary proceedings that encompasses both administrative and judicial review. See Id . at 909-12; Swirsky v. Nat’l Ass’n of Sec. Dealers, 124 F.3d 59, 61-62 (1st Cir. 1997). Administrative appeals proceed directly to the applicable circuit. See Swirsky, 124 F.3d at 62 (“The third tier of the process provides for review of final SEC orders by the United States Courts of Appeals.”).

         FINRA’s duties also “include the duty to ‘establish and maintain a system for collecting and retaining registration information’ about registered broker-dealers.” Doe v. Fin. Indus. Regulatory Auth., Inc., No. CV 13-06436 DDP ASX, 2013 WL 6092790, at *1 (C.D. Cal. Nov. 19, 2013) (quoting 15 U.S.C. § 78o-3(i)(1)(A)). “‘[R]egistration information’ means the information reported in connection with the registration or licensing of brokers and dealers and their associated persons, including disciplinary actions, regulatory, judicial, and arbitration proceedings . . . .” Id. § 78o-3(i)(3)(5). FINRA fulfills this duty via the CRD database and BrokerCheck. See Doe, 2013 WL 6092790, at *1; Compl. ¶¶ 10-11; Opp. 6. Under FINRA Rule 8312, FINRA shall release information for a “person who was formerly associated with a BrokerCheck Firm, but who has not been associated with a BrokerCheck Firm within the preceding ten years, and was ever the subject of a final regulatory action . . . .” FINRA Rule 8312(c)(1)(A).[1]

         At least four courts have addressed remand in similar FINRA-expungement actions, and all have found that remand was proper. In In re Lickiss, the plaintiff sought expungement of “references to certain customer claims and settlements” under California law. No. C-11-1986 EMC, 2011 WL 2471022, at *1 (N.D. Cal. June 22, 2011). FINRA moved to remand, arguing that federal courts had exclusive jurisdiction under 15 U.S.C. § 78aa. Id. at *2. Section 78aa states that the “district courts . . . shall have exclusive jurisdiction of . . . all suits in equity and actions at law brought to enforce any liability or duty created by this chapter or the rules and regulations thereunder.” 15 U.S.C. § 78aa(a). The Lickiss court explained that although FINRA has a duty to collect and retain registration information, it has no corresponding duty to expunge. Id. at *3. The Court also noted that FINRA Rule 2080, which states in relevant part that “[m]embers or associated persons seeking to expunge information from the CRD system arising from disputes with customers must obtain an order from a court of competent jurisdiction directing such expungement or confirming an arbitration award containing expungement relief, ” “sets forth procedures, not a substantive duty, ” and seems to contemplate an action in state court due to the use of the phrase “court of competent jurisdiction.” Id. at *4. The Court thus found that there was no exclusive jurisdiction for expungement actions under state law, and remanded the case for lack of subject matter jurisdiction. Id.

         The plaintiff in Spalding v. Financial Industry Regulatory Authority, Inc. sought expungement of customer-dispute information under Georgia law. No. 1:12-CV-1181-RWS, 2013 WL 1129396, at *1-2 (N.D.Ga. Mar. 19, 2013). FINRA offered two theories of federal jurisdiction this time-that federal courts had exclusive jurisdiction under § 78aa because expungement implicated a duty, and that the suit would require the state court to interpret federal law (which was identified as Rule 2080). Id. at *2-3. Citing Lickiss, the Spalding court found that there was no exclusive jurisdiction because there was no duty to expunge under the Exchange Act or Rule 2080. Id. at *3-5. The court also rejected FINRA’s argument that substantial federal issues were implicated because expungement would require “a reading and interpretation of Rule 2080” and involved a “comprehensive federal regulatory scheme in which FINRA plays an integral role in enforcing the 1934 Act and regulating participants in the securities industry.” Id. at *5. The court explained that nothing in the expungement action would require interpretation of Rule 2080, and that the existence of a compressive federal regulatory scheme was insufficient on its own to establish federal jurisdiction. Id. at *5-6. The Court thus remanded the case for lack of subject matter jurisdiction. Id. at *6.

         Doe, like Lickiss, addressed the expungement of customer-dispute information under California law. 2013 WL 6092790, at *1. FINRA again argued that federal courts have exclusive jurisdiction over expungement of customer-dispute information, and that the case involved substantial issues of federal law. Id. at *2-3. Citing Lickiss, the Doe court held that there was no duty to expunge that would trigger exclusive jurisdiction. Id. Citing Spalding, the court also held that there was no substantial issue of federal law implicated because the plaintiff “d[id] not claim that FINRA failed to fulfill any particular duty or that FINRA’s rules are facially invalid, ” and “no determination [would need to] be made by the [state court] as to whether ...

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