Two key congressional representatives want answers from FINRA CEO Robert Cook on the regulator’s response to a Georgia court ruling that overturns the arbitration award originally awarded to Wells Fargo.
Sen. Elizabeth Warren (D-Mass.) and Rep. Katie Porter (D-Calif.) sent a letter to Cook asking whether the internal FINRA investigation would be expanded to include other cases in the selection process for case arbitrators.
Fulton County Superior Court Judge Belinda Edwards shocked many in the industry earlier this year when she reversed the award in Brian Leggett and Bryson Holdings v. Wells Fargo Based on allegations that there was a ‘secret agreement’ between FINRA and Wells Fargo to exclude multiple arbitrators from being selected in the case. But the roots of the case go back even further, to a separate arbitration dispute from 10 years ago.
Wells Fargo appealed the decision, saying WealthManagement.com That it “disagree with the decision.” FINRA hired the law firm Lowenstein Sander to conduct an “independent review” of the case. But some securities attorneys and regulator watchdogs, including Sander Ressler, managing director of Essential Edge Compliance Outsourcing Services, say the review should look beyond this single instance.
“We can’t afford to think it hasn’t happened before,” Ressler told WealthManagement.com, “This issue strikes at the heart of the integrity of the process, so you have to look under every single stone to make sure the process is fair. And I’m terrified that’s not going to happen.”
Indeed, in their most recent letter to Robert Cook on March 7, Warren and Porter wrote that while they welcomed the new investigation, they wanted answers to a number of questions, including whether there were other cases in the investigation. Will have a look at.
According to Edwards’ ruling, Wells Fargo attorney Terry Weiss believed that FINRA would automatically remove certain arbitrators from consideration for any case in which they had to present arguments. Weiss’ conflict with these arbitrators stemmed from a 10-year-old case in which he represented Merrill Lynch.
In 2009, Robert C. Postel and his wife, Joan, claimed that Merrill did not monitor their accounts properly, According to a 2012 article in Bloomberg, Two years later, his case came before a three-person arbitration panel, which included Eileen Gormley, as well as attorneys Daniel Kolber and Fred Pinckney. As Bloomberg reports, during a three-day mediation session, panelists learned that Postel had committed suicide earlier that year.
In a recent interview WealthManagement.com, Kolber said that he became overly enthusiastic near the end of the proceedings. He called on the arbitrators to dissociate themselves, accusing them of unfairly biased against Merrill, with Kolber calling Weiss “Rambo Litigator” During the panel (Weiss sent a request for comment to Wells Fargo).
recently WealthManagement.com In the interview, Pinckney recalled that the arbitrators briefly adjourned and called FINRA. Afterwards, they resumed and asked Weiss to calm down.
“It went on for a day or two and then the case was over, and we delivered the verdict and Merrill lost the case based on the evidence presented,” Pinckney said. “The reason I thought Mr. Weiss thought he was losing was because the case was weak.”
Joan Postel and her husband’s estate Won over $500,000 in damagesBut Weiss and Merrill Lynch filed offer to vacate awardDuring the proceedings, the arbitrators argued that it “violated its obligations to remain neutral”. In the motion, Merrill and Weiss stated that the arbitrator became an “advocate” for Postel, quarreled with witnesses for Merrill Lynch and that the side investigation into Merrill’s conduct was ongoing, among other issues.
Additionally, in a letter to FINRA, Weiss complained about the arbitrators and called for an investigation. To the surprise of Pinckney and Kolber, within several months all three arbitrators in the Postell case received notices that they had been dropped from consideration for FINRA arbitration.
The arbitrators publicly spoke out against FINRA’s decision to remove them from overseeing future arbitrations; Gormley reportedly contacted the SEC, while Pinckney spoke with Weiss and FINRA about William Cohn’s situation, who wrote a scathing opinion for Bloomberg on the case.
A federal judge ultimately rejected Merrill’s motion to vacate the Postel award, writing that Weiss and Merrill did not prove the arbitrators had “run amok or otherwise engaged in behavior that was clearly their authority.” were over.”
The SEC also launched an investigation into the removal of all three, and soon thereafter all three were reinstated as alternatives to FINRA arbitration. With this clear face, Pinckney assumed that things were back to normal.
“(FINRA) apologized and reflected on its decision and wrote a general letter,” he said. “We were back in the potential pool of being selected as an arbiter. I didn’t give it any more thought.”
Pinckney wouldn’t think otherwise until nearly 10 years after the conflict between Brian Leggett and Wells Fargo came to light. Leggett and Bryson Holdings reportedly lost more than $1 million in a merger arbitration investment strategy recommended by their Wells Fargo broker, and they filed a complaint with FINRA to arbitrate the dispute.
In each case, FINRA removes individual arbitrators on the basis of any prejudice, whether the arbitrator had brokerage accounts with certain firms, if he had sued the claimant or defendant in his work as an attorney, or if they have a personal relationship with anyone involved.
then, using “Neutral Inventory Selection System,” FINRA generates a random list of available arbitrators in the specific area in which the case is to be heard.
At this point, the process unfolds like jury selection; Claimants and Defendants remove potential arbitrators from consideration, and rank the remainder; Ideally, there is a panel at the end that both sides of the dispute can accept.
When Weiss saw Pinckney’s name on the list of potential arbitrators for the Leggett case, in accordance with Edwards’s later ruling, he reportedly asked FINRA to remove him from the neutral list, arguing that he had been involved in the Postel case. There was prejudice against Weiss on the basis.
Weiss then followed up with FINRA, claiming in a letter that he had an oral agreement with the self-regulatory organization “that none of the Postel arbitrators shall have an opportunity to serve” which included him in any case. Because the Postel case involved “the most unusual set of circumstances”. ,
Based on that letter, Leggett found the prospect of an unwritten settlement between FINRA and Weiss “extremely troubling”, but FINRA removed Pinckney from its list of potential arbitrators.
Ultimately, the arbitrators ruled in Wells Fargo’s favor and awarded Wirehouse $80,000. But Leggett filed a motion to vacate the decision—and Edwards partially reversed the award based on the existence of a so-called secret agreement.
Edwards wrote in his ruling, “allowing an attorney to secretly redeploy the neutral list makes the list anything other than neutral, and calls into question the overall impartiality of the arbitral forum.”
Neither Pinckney nor Colber knew this was happening, and only news accounts learned of their alleged excommunication; According to Pinckney, he was not aware that he had been included in the Leggett case list.
Drexel University’s Thomas R. The relationship between the Weiss and Postel arbitrators could potentially escalate to the level of conflict of interest, according to Nicole Inarone, assistant professor of law and current chair at the Kline School of Law. National Arbitration and Arbitration Committee of FINRA,
It would be a serious concern if Weiss was accurate about an oral agreement between FINRA and Weiss to exclude certain arbitrators, but Inaron questioned whether that kind of agreement existed or if Weiss was escalating the matter. Was.
“It’s a point to draw a line,” Inaron said. “How do we ensure fairness for legitimate challenges, while discouraging people from gamesmanship to create the pool they want?”
Christopher Gerold, a partner at the Lowenstein Sanders Securities Litigation and Corporate Investigation and Integrity Practice Groups, will lead the independent investigation (previously, Gerold was chief of the New Jersey Securities Bureau and president of the North American Securities Administrators Association). He will report to the audit committee of FINRA’s board of governors over the next few months and the findings will be made public, according to FINRA.
But the wording of the announcement worried some securities lawyers like Wrestler. While FINRA made the right move in selecting a reputable outside firm to run the investigation, Ressler believed the regulator’s statement implied that the investigation could be limited to this matter.
“If someone’s done something once, they’ve probably done it twice. The chances that you’ve caught the only incident where it’s ever happened are very small,” he said. “I’m not saying you have to go back to more than 1,000 cases, but you should be looking at more than one case.”
Bill Singer, a securities attorney and author of BrokeandBroker.com NewsletterAgreed.
“You have questions about fraud, questions about FINRA’s regulatory authority as a self-regulator, you have questions on the regulatory authority of the arbitration platform, and I’m sure Sen. (Elizabeth) Warren sharpens his knives. Will be doing it,” he said.
FINRA referred queries regarding the matter Cook’s previous letter to Warren and Porter, However, a FINRA spokesperson had previously stated that there has never been an agreement between FINRA and Weiss. Additionally, FINRA reviewed all cases involving Weiss as counsel and, according to that spokesperson, none of the three postal arbitrators were removed before sending a random list to the parties to the arbitration.
Inaron believed that FINRA’s approach to the investigation was correct, and acknowledged that if an agreement was indeed reached between FINRA and Weiss, she expected a greater review.
“I think the biggest issue for FINRA is to make sure there is confidence in the legitimacy of this system,” she said.