In February, two former Wells Fargo customers won a court decision against Wells Fargo that ruled the bank had been involved in subtle manipulation of FINRA’s arbitration process. The customer showed in court that a Wells Fargo attorney had a “secret agreement” with FINRA to keep plaintiff-friendly arbitrators out of his cases to increase his chances of winning. His increased wins saw customers lose their cases due to an unfair advantage. Wells Fargo is now appealing the decision.
Now increased scrutiny on FINRA and its alleged neutrality has also called into question their entire dispute resolution process.
Scott Silver, founder of Silver Law, stated that the ruling “has opened a Pandora’s box of negative consequences” for both Wells Fargo and FINRA. Mr. Silver co-chairs the securities and investment fraud group at the American Association for Justice, a nonprofit trade group and lobby. He added, “we’ve been discussing how shocking this is. FINRA has yet to offer any rational explanation of what happened.”
Mr. Silver added that the ruling “is more serious for FINRA than for Wells Fargo.”
A FINRA spokesman declined to comment outside of its statement on February 18th. The agency has obtained the services of an outside law firm to examine how arbitrators are chosen. Similarly, Wells Fargo has said little outside of disagreeing with the Georgia court’s decision.
The US Securities & Exchange Commission oversees FINRA, which is itself a non-governmental agency operating under the SEC’s auspices. The decision also brings questions about the SEC’s mandate to protect investors.
Mr. Silver also asked, “Where is the SEC oversight of FINRA? The issue here is a lack of confidence in the system.”
FINRA is supposed to provide a “neutral ground” for investors to handle disputes with brokers and their firms. Arbitrators are chosen through FINRA’s computer system that generates a random list of names that are submitted to both sides for agreement. In the Wells Fargo case, the bank’s attorney was able to strike those he didn’t want from the arbitration because they were critical of Wells Fargo.
Previously decided cases may not be revisited since investors generally agree not to sue after they receive an award from a FINRA arbitration. Therefore, Mr. Silver said, “there is not an easy path open to reopen all of these old cases.”
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