On January 25, 2022, Fulton Superior Court Judge Belinda Edwards issued an order vacating a FINRA arbitration award and finding, among other things that “Wells Fargo and its counsel manipulated the arbitrator selection process.” Yesterday, the Public Investors Advocate Bar Association (PIABA) issued a statement calling for a Congressional investigation into whether FINRA’s arbitration forum tilts the scales in favor of industry firms by manipulating the arbitrator selection process. The Wall Street Journal has already started covering the fracas. What happened here?
This story starts in the standard fashion. Wells Fargo managed the claimants accounts and allegedly over-concentrated their accounts into single stocks and industries. When the claimants suffered some losses and complained, Wells Fargo assigned a different broker to their account. The claimants became increasingly dissatisfied with Wells Fargo’s management of their accounts and eventually brought an arbitration claim in the FINRA forum because their Wells Fargo account opening agreement contains a pre-dispute arbitration agreement. All perfectly normal.
Things soon became more interesting. Wells Fargo hired Terry Weiss as outside counsel to defend it. The arbitration proceeded in the normal course. FINRA circulates lists of potential arbitrators for the parties to rank and potentially strike before FINRA assigns the arbitrators for the case. When the matter reached the arbitrator selection process, Mr. Weiss went into action. He didn’t like one of the arbitrators that had been included on the list and sent a letter to FINRA demanding changes, stating “It was made clear to me verbally that none of the Postell arbitrators would have the opportunity to serve on any one of my cases . . .” Judge Edwards found that Weiss’s letter “disclosed an agreement between FINRA and counsel for Wells Fargo pertaining to the pool of arbitrators available to his clients in all of his cases.” Although the investors opposed Mr. Weiss’s request to remove the arbitrator from the list, the arbitrator was struck without explanation and the parties were provided with “a new, edited, computer generated list.” A panel of three arbitrators was selected after the parties ranked and struck arbitrators from that list. Mr. Weiss did not like the panel’s composition still and demanded that one of the arbitrators be removed. FINRA again “ceded to Wells Fargo’s demands and struck the arbitrator from the case.” A new arbitrator was appointed.
The arbitration proceeded and ultimately went in Wells Fargo’s favor. Some interesting things happened along the way. When a broker began answering questions during testimony, he admitted that he had violated “Written Supervisory Procedures,” “SEC record keeping rules,” that it was a “bad thing,” and that he he “did it anyway.” Right at about that point, the testimony was interrupted by a sudden “medical emergency” afflicting “counsel for Wells Fargo.” The hearing was postponed for about nine months. When the hearing picked up again, the testimony was different. Wells Fargo’s counsel also told the arbitration panel that he did not recall the admissions that preceded the medical emergency. FINRA arbitrations are not ordinarily contemporaneously transcribed. FINRA keeps an audio recording which parties may request after the hearing. This can make it difficult to establish exactly what someone said earlier in the hearing. Judge Edwards found that “Wells Fargo and its counsel committed fraud on the arbitration panel by procuring perjured testimony, intentionally misrepresenting the record, and refusing to turn over a key document. . .”
Judge Edwards also found that the arbitrator selection process had been manipulated. The court’s finding are troubling because they raise questions about the fairness of the arbitration forum:
The Court’s factual review of the record evidence leads to its finding that Wells Fargo and its counsel manipulated the FINRA arbitrator selection process in violation of the FINRA Code of Arbitration Procedure, denying the Investors’ their contractual right to a neutral, computer-generated list of potential arbitrators. Wells Fargo and its counsel, Terry Weiss, admit that FINRA provides any client Terry Weiss represents with a subset of arbitrators in which certain arbitrators (at least three, but perhaps more) are removed from the list Wells Fargo agreed, by contract, to provide to the Investors in the event of a dispute. Permitting one lawyer to secretly red line the neutral list makes the list anything but neutral, and calls into question the entire fairness of the arbitral forum.
The court also explained that “only reason this secret agreement came to light was because FINRA accidentally included one of the three Postell arbitrators, Fred Pinckney, on the neutral computer-generated List.”
Did an agreement to circulate modified lists for Terry Weiss and his clients exist, and if so, who at FINRA made it? Do other lawyers have similar privileges? Terry Weiss said in writing that he had a verbal promise that certain arbitrators would never be allowed to serve on his cases. If that were the case, Wells Fargo could bias the arbitrator pool in its favor by hiring Terry Weiss. If this is true, this isn’t fair to investors or to the defense lawyers out there who compete with Weiss for business. They can’t offer their clients the ability to exclude certain arbitrators merely by appearing in a case. It’s worth noting again that the Court found that “Wells Fargo witnesses and its counsel introduced perjured testimony [and] intentionally misrepresented the record. . .” It’s possible Weiss’s representations about preferential lists were not entirely accurate.
There is much we do not know. We do not know the reason why FINRA struck the first arbitrator. We don’t know exactly why FINRA struck the second arbitrator. Nicole Iannarone has called for greater transparency around these issues. It may be that FINRA has some informal, unpublished criteria it uses when evaluating these kinds of requests. If that is the case, it’s a problem for fairness and transparency in the forum, but it isn’t a secret agreement to tilt the arbitration pool in the favor of well-connected lawyers representing FINRA members. FINRA itself didn’t enter an appearance in the Georgia proceedings so the Court didn’t have FINRA before it.
The language in the opinion goes directly to fears about industry-controlled arbitration forums. If the industry is able to manipulate the arbitrator pool, it can shift the outcomes in cases. Most of the time, investors won’t have the kinds of facts available that led to this motion to vacate. The SEC oversees FINRA and I expect that it will ask questions and investigate this issue. Hopefully the investigation will be transparent and generate confidence in the forum. Transparency will require a deliberate decision by FINRA and the SEC though because FINRA isn’t subject to FOIA and the SEC’s oversight of FINRA is also not subject to FOIA.