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Two prominent congressional representatives want answers from FINRA CEO Robert Cook on the regulator’s response to a Georgia court decision overturning an arbitration award originally granted to Wells Fargo.
Sen. Elizabeth Warren (D-Mass.) and Rep. Katie Porter (D-Calif.) sent a letter to Cook asking whether an internal FINRA investigation into the selection process for arbitrators in the case will be expanded to include other cases.
Fulton County Superior Court Judge Belinda Edwards stunned many in the industry earlier this year when she overturned the award in Bryan Leggett and Bryson Holdings v. Wells Fargo based on allegations that FINRA and Wells Fargo had a ‘secret agreement’ to exclude several arbitrators from being selected in the case. But the case’s roots go back further, to a separate arbitration dispute from 10 years earlier.
Wells Fargo appealed the decision, telling WealthManagement.com that it “disagreed with the decision.” FINRA hired the law firm Lowenstein Sander to run an “independent review” of the case. But some securities attorneys and regulator watchdogs, including Sander Ressler, the managing director of Essential Edge Compliance Outsourcing Services, say that review must look beyond this single instance.
“We can’t afford to think that 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 ensure that the process is fair. And I’m nervous 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 several questions, including whether the investigation will include a look into other cases.
According to Edwards’ decision, Wells Fargo counsel Terry Weiss believed FINRA would automatically remove certain arbitrators from consideration for any cases in which he was to present arguments. Weiss’ conflict with these arbitrators stems from a 10-year old case in which he represented Merrill Lynch.
In 2009, Robert C. Postell and his wife Joan claimed Merrill did not properly monitor their accounts, according to a 2012 article from Bloomberg. Two years later, their case came before a three-person arbitration panel including Ilene Gormly, as well as attorneys Daniel Kolber and Fred Pinckney. During the three-day arbitration session, the panelists learned that Postell had committed suicide earlier that year, according to the Bloomberg reporting.
In a recent interview with WealthManagement.com, Kolber said Weiss became overtly zealous near the end of the proceedings. He called for the arbitrators to recuse themselves, accusing them of being unfairly biased against Merrill, with Kolber describing Weiss as a ‘Rambo’ litigator’ during the panel (Weiss referred requests for comment to Wells Fargo).
In a recent WealthManagement.com interview, Pinckney recalled that the arbitrators briefly adjourned and called FINRA. Afterwards, they resumed and asked Weiss to calm down.
“This went on for a day or two more and then the case was over, and we ruled and Merrill lost the case based on the evidence presented,” Pinckney said. “The reason I presumed Mr. Weiss thought he was losing was that the case was weak.”
Joan Postell and her husband’s estate won more than $500,000 in damages, but Weiss and Merrill Lynch filed a motion to vacate the award, arguing the arbitrators “violated their obligations to remain neutral” during the proceedings. In the motion, Merrill and Weiss said the arbitrators became an “advocate” for the Postells, quarreling with Merrill Lynch witnesses and running side investigations into Merrill’s conduct on other issues.
Additionally, in a letter to FINRA, Weiss complained about the arbitrators and asked for an investigation. To the surprise of Pinckney and Kolber, within several months all three arbitrators in the Postell case received notices that they were removed from consideration for FINRA arbitration.
The arbitrators spoke out publicly against FINRA’s decision to remove them from overseeing future arbitrations; Gormly allegedly reached out to the SEC, while Pinckney spoke about Weiss and the situation with FINRA to William Cohan, who wrote a scathing opinion for Bloomberg about the case.
A federal judge eventually denied Merrill’s motion to vacate the Postell award, writing that Weiss and Merrill did not prove the arbitrators “had run amok or otherwise engaged in behavior that clearly exceeded their authority.”
The SEC also opened an investigation into the trio’s removal, and soon after all three were reinstated as choices for FINRA arbitration. With this apparent about-face, Pinckney presumed things were back to normal.
“(FINRA) apologized and rethought their decision and wrote a general letter,” he said. “We were back in the potential pool for being selected as an arbitrator. I didn’t give it any more thought.”
Pinckney wouldn’t think otherwise until nearly 10 years later, after the conflict between Brian Leggett and Wells Fargo came to light. Leggett and Bryson Holdings allegedly lost more than $1 million in a merger arbitrage investment strategy recommended by their Wells Fargo broker, and they filed a complaint with FINRA to arbitrate the dispute.
In every case, FINRA weeds out individual arbitrators based on any bias they may have, whether an arbitrator has brokerage accounts with certain firms, if they had sued either the claimant or respondent in their work as lawyers, or if they have a personal relationship with anyone involved.
Then, using the “Neutral List Selection System,” FINRA creates a randomized list of available arbitrators in the specific region in which the case is to be heard.
At this point, the process unfolds like jury selection; claimants and respondents strike potential arbitrators from consideration, and rank the remainder; ideally, by the end there is a panel both sides of the dispute can accept.
When Weiss saw Pinckney’s name on the list of potential arbitrators for the Leggett case, he allegedly asked FINRA to remove him from the neutral list, arguing he held a bias against Weiss based on the Postell case, according to Edwards’ later decision.
Weiss then followed up with FINRA, claiming in a letter he had a verbal agreement with the self-regulatory organization “that none of the Postell arbitrators would have the opportunity to serve” on any cases involving him, because the Postell case involved a “most unusual set of circumstances.”
On the basis of that letter, Leggett found the possibility of an unwritten agreement between FINRA and Weiss to be “extremely troubling,” but FINRA removed Pinckney from the list of potential arbitrators.
Eventually, arbitrators decided in favor of Wells Fargo and awarded the wirehouse $80,000. But Leggett filed a motion to vacate the decision—and Edwards overturned the award based partly on the existence of the so-called secret agreement.
“Permitting one lawyer to secretly redline the neutral list makes the list anything but neutral, and calls into question the entire fairness of the arbitral forum,” Edwards wrote in her decision.
Neither Pinckney or Kolber were aware this was happening, and only found out about their alleged exclusion from news accounts; according to Pinckney, he was not aware that he’d been included on a list for the Leggett case.
The relationship between Weiss and the Postell arbitrators could potentially rise to the level of a conflict of interest, according to Nicole Iannarone, an assistant professor of law at Drexel University’s Thomas R. Kline School of Law, and the current chair of FINRA’s National Arbitration and Mediation Committee.
It would be a graver concern if Weiss was accurate about a verbal agreement between FINRA and Weiss to exclude certain arbitrators, but Iannarone questioned whether that kind of agreement existed, or if Weiss was overstating the case.
“It’s a line drawing issue,” Iannarone said. “How do we ensure fairness for legitimate challenges while disincentivizing individuals from gamesmanship to create the pool they want?”
Christopher Gerold, a partner at Lowenstein Sander’s Securities Litigation and Corporate Investigations & Integrity Practice Groups, will lead the independent investigation (previously, Gerold was Chief of New Jersey’s Securities Bureau and president of the North American Securities Administrators Association). He’ll report to the Audit Committee of FINRA’s Board of Governors in the next few months and the findings will be made public, according to FINRA.
But the announcement’s wording worried some securities attorneys like Ressler. While FINRA made the right move in selecting a reputable outside firm to run the investigation, Ressler believed that the regulator’s statement implied the investigation could be limited to this case.
“If someone’s done something once, they’ve probably done it twice. The odds that you’ve caught the only incident where this ever occurred is very small,” he said. “I’m not saying you have to go back over 1,000 cases, but you should look at more than one.”
Bill Singer, a securities attorney and the author of the BrokeandBroker.com newsletter, agreed.
“You have questions of fraud, questions about the regulatory authority of FINRA as a self-regulator, you have questions on the regulatory authority of the arbitration forum, and I’m sure Sen. (Elizabeth) Warren will be sharpening her knives,” he said.
FINRA referred questions about the case to Cook’s previous letter to Warren and Porter, though a FINRA spokesperson previously said there’d never been an agreement between FINRA and Weiss. Additionally, FINRA reviewed all cases involving Weiss as counsel and none of the three Postell arbitrators had been removed before sending a randomized list to parties in arbitration, according to that spokesperson.
Iannarone believed FINRA’s approach to the investigation was the right one, and acknowledged that if there really was an agreement between FINRA and Weiss, she’d expect a larger review.
“I think the biggest issue for FINRA is ensuring there is trust in the legitimacy of this system,” she said.
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