AdvisorHub (June 10, 2022) - A three-judge panel of the Court of Appeals of the State of Georgia showed skepticism about a trial court’s controversial ruling in January that vacated a 2019 arbitration award allowing Wells Fargo to successfully beat back $1.7 million in damage claims over investment losses.
Widespread interest in the litigation centers on the complaining investors’ allegations that the Financial Industry Regulatory Authority allowed Wells to “manipulate” the arbitration-selection process, as Judge Belinda E. Edwards of the Fulton County Superior Court wrote in her January 25-issued opinion jettisoning the underlying award.
The case has drawn attention from regulators, lawmakers and the plaintiff’s bar–the Public Investors Advocate Bar Association–which after Edwards’ ruling called for “an immediate investigation” by the Securities and Exchange Commission and hearings in Congress “as to Finra’s operation of its arbitration forum.”
At a hearing Thursday, held after Wells appealed Edwards’ ruling, the appeals panel reviewing it seemed unprepared to delve into Finra policies as well as broader questions about the fairness of Finra arbitrations between investors and brokerages.
“Whether Finra is a good idea, whether arbitration is a good idea—all that’s above our pay grade,” Stephen Louis A. Dillard, the presiding judge, said during the hearing.
A Finra dispute resolution director improperly granted Wells Fargo’s request to strike two arbitrators, including one from a computer-generated “neutral” list, as part of an unwritten side agreement between the regulator and Wells’ lawyer, according to arguments made by lawyers for the investors who filed the complaint, which were repeated by Edwards in her ruling.
“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.
Wells’ lawyer, Harold Melton, a partner of Troutman Pepper in Atlanta and former chief justice of the Supreme Court of Georgia, at the Thursday hearing told the panel that the Finra arbitration had been fair. The investors had the opportunity to object to the arbitrator-selection prior to the issuance of the award, but didn’t do so until they lost, Melton argued.
“If you look at the record, devoid of all the arguments from either side, you will be very confident and comfortable with what you see that happened,” Melton said.
The appeals court judges expressed sentiments as if they agreed with him.
“It appears that for everything that arbitrators did, they were following an actual rule,” Judge Amanda H. Mercier, also on the panel, said at one point.
The lawyer for the investors, Jeff Horst of Krevolin & Horst in Atlanta, argued that Wells had violated the contractual terms that called for it to abide by the Finra arbitration rules.
Citing a May 23 U.S. Supreme Court ruling in Morgan v. Sundance, he noted the nation’s highest court found that courts have authority to find that one side had breached its arbitration contract and overturn an award.
“A court must hold a party to its arbitration contract, just as the court would to any other kind,” Horst told the panel, repeating the Morgan opinion’s language.
Dillard, however, appeared skeptical and asked if the justices set a precedent that would allow a lower court to vacate an arbitration award “simply because the rules aren’t perfectly followed? Or that the process wasn’t perfect?”
“No,” Horst conceded but added the ruling in Morgan was about “the parties being deprived of the benefit of their bargain,” and that his clients’ “bargain” was “supposed to be Finra and Wells Fargo following the rules.”
Finra and Wells didn’t follow the rules as they pertained to the selection process, he said.
In late February, Finra disclosed that it had hired an outside law firm, Lowenstein Sandler, to conduct a review of the arbitration selection in the Wells case, although the industry’s self-regulatory organization had previously denied any flaw in the process. But Finra has not issued any results from that review, according to a spokesperson.