Securities Arbitration Lawyers BlogWells Fargo Allegedly Manipulated FINRA Arbitration System
In this blog, we frequently discuss investors who, through no fault of their own, have lost money to unscrupulous brokers and investment advisors who mislead or defraud their clients. When an investor can’t work things out with their registered representative, the next step is frequently arbitration with the Financial Industry Regulatory Authority, or FINRA. As a not-for-profit, non-governmental organization, FINRA is responsible for the licensing and regulation of broker-dealers.
FINRA is the largest self-regulatory organization (SRO) in the securities industry within the U.S. The agency also has one of the largest forums for dispute resolution in the country. With 3,000 employees through 16 offices throughout the US, FINRA governs 3,700 brokerages and 630,000 registered representatives. FINRA is separate from the Securities and Exchange Commission, or SEC.
Securities Arbitration
Arbitration through FINRA requires the selection of neutral arbitrators through FINRA’s Dispute Resolution Services. One to three neutral third parties are brought in to hear both sides of the case and make a decision that is binding for both parties. The process is designed so that both parties’ concerns are heard, and that the decision is fair.
The arbitrators are chosen via FINRA’s Neutral List Selection System Process. This is a computer-generated list that is intended to randomly select neutral panelists to oversee the process. The parties then rank the potential arbitrators and can strike the ones they don’t want. Prior to 1998, FINRA staff handled the selection of panelists.
The arbitrators read the petitions, listen to both parties’ arguments, study and review all evidence, and decide based on everything submitted. Unlike a court proceeding, arbitration is generally confidential, and all submitted documents are not publicly available unless an award is involved.
The parties are required to abide by the award unless they successfully challenge it in court. Arbitrators can award Claimants (investors) money that the Respondent (broker and broker-dealer) must pay. The arbitration panel’s decision, or award, is final and binding. Awards are rarely overturned.
Top Securities Attorney’s Question Wells Fargo’s Action
Unfortunately, a neutral third party may not have made some decisions in FINRA arbitrations.
Recently, two former clients of Wells Fargo, Brian Leggett and Bryson Holdings LLC, filed an arbitration claim against Wells Fargo and advisor Jay Wilson Pickett III after a merger arbitrage strategy caused them to sustain losses of $1,178,446 between 2015 and 2016.
The clients allege that FINRA’s arbitration process became “rigged” with a secret agreement between FINRA’s Dispute Resolution Services and a specific Wells Fargo attorney when they began appointing arbitrators for their case. Both claimants filed an arbitration claim against the advisor and the firm that alleged breach of fiduciary duty and failure to supervise, among other things.
Both claimants lost their original claim in November 2021 after going through FINRA arbitration. But during the arbitration proceedings, the claimants saw evidence of selective editing in the pool of potential arbitrators.
The Court Decision Overturns The FINRA Arbitration Award
On January 25, 2022, Judge Belinda E. Edwards of the Fulton County Superior Court In Atlanta vacated the FINRA arbitration award after it was found to be fraudulent by both the broker-dealer and legal counsel.
The court heard that Wells Fargo’s outside counsel, Terry Weiss, secretly arranged with FINRA to keep specific people off the list of arbitrators for everyone he represented in arbitration without the other side knowing. This information was in documents he turned over to the arbitration panel and the claimants’ attorney. Weiss was allowed to strike specific individuals he knew would favor the investor and not his client. This arrangement with FINRA allowed Weiss to win his client’s cases and for the investors to lose theirs, leading to an unfair advantage.
The court found that “factual evidence presented by the investors leads to its factual finding 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 evidence until after” the closing arguments in arbitration cases.
Additionally, the three-person FINRA arbitration panel allowed Wells Fargo to block or remove two separate arbitrators in an improper manner that was approved by FINRA’s Director Of Dispute Resolution. There was no response to the investors’ counsel questions and objections over these removals.
Judge Edwards wrote that “Wells Fargo and its counsel manipulated the arbitrator selection process” and criticized FINRA Dispute Resolution for allowing misconduct by Wells Fargo and its counsel.
“(P)ermitting 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,” Judge Edwards wrote.
“Of immediate concern to PIABA is the apparent corruption of the arbitrator selection process. The Court found Wells Fargo and its counsel manipulated the arbitration process to deny Claimants their right to a neutral arbitration panel,” Public Investors Advocate Bar Association (PIABA) president Michael S. Edmiston said in a statement.
The FINRA Arbitration Award
The court also noted that the arbitration charged to the plaintiffs was $32,000 along with attorney’s fees of $51,000. The Wells Fargo attorney allowed an Atlanta-based regional brokerage manager to name those costs. The FINRA arbitration panel used these numbers to award Wells Fargo these fees. “Not only were these numbers not proven, they were never entered into evidence,” the court found. “Even if the arbitrators had the authority to assess fees and/or costs against Leggett, here there was no valid evidence to support this number.”
Arbitrators “improperly and without legal justification imposed costs and fees on the investors in violation of the contractual framework that bound the parties. The court finds that each of these violations provides separate, independent grounds to vacate the award in its entirety. Accordingly, the panel’s award is vacated.”
According to news reports, Wells Fargo, and FINRA deny the allegations, with Wells Fargo planning an appeal.
Silver Law Group Represents Investors In FINRA Arbitration
Silver Law Group is a nationally recognized law firm with experience representing investors in FINRA arbitration and investment fraud cases. Scott Silver, Silver Law Group’s managing partner, is the chairman of the Securities and Financial Fraud Group of the American Association of Justice. Scott routinely lobbies for investors and is a frequent proponent of improving the FINRA arbitration process to make it fairer for investors and restore investor confidence.
Our attorneys are admitted to practice in New York and Florida and represent investors nationwide. Most cases are handled on a contingency fee basis, so nothing is owed unless we recover your money for you. Contact Silver Law Group for a no-cost, confidential consultation at (800) 975-4345 or by email at ssilver@silverlaw.com.