FinancialPlanning (June 29, 2022) - There was no “secret agreement” between Wells Fargo’s attorney and FINRA that improperly removed a potential arbitrator from a client complaint case at his request. The regulator simply agreed with and complied with that request, in a manner that an outside law firm deems proper.

That was the confusing takeaway from an independent review commissioned by FINRA. At issue: whether its Dispute Resolution Services unit followed FINRA’s arbitrator selection guidelines in a case that a state judge in Atlanta vacated in the clients’ favor based on a finding that Wells Fargo and its attorney had “manipulated” the process. FINRA disclosed the results of law firm Lowenstein Sandler’s investigation on June 29 after appointing partner Christopher Gerold, the former president of the North American Securities Administrators Association, to lead the review earlier this year. Wells Fargo Clearing Services is currently appealing the January court decision, which questioned “the entire fairness” of FINRA arbitration.

Far from examining any implications for investor protection or capital markets stemming from Fulton County Superior Court Judge Belinda Edwards’ ruling, the law firm’s study asserts that “the primary question in this investigation was whether [the attorney] had an agreement with FINRA to automatically remove certain arbitrators from arbitrator selection lists in his matters.” 

On that point, the law firm states that it found no evidence that there was any such agreement and that “FINRA personnel generally adhered to the policies and procedures” and took actions they “intended to be fair and reasonable at each step” of arbitrator selection in the case. The regulator has pledged to make certain changes to the process recommended in the report.

“FINRA welcomes the opportunity to make the results of the independent review public, as we recognize the critical importance of maintaining the trust of all parties in the arbitration forum,” CEO Robert Cook said in a statement. “FINRA management agrees with the recommendations and commits to promptly deliver a plan for implementation to the board. This report will also inform our ongoing evaluation of how best to continue modernizing the [Dispute Resolution Service] arbitration system to serve all stakeholders in an evolving, complex investing environment.”

Missing answers
Within the report, however, the investigation revealed many complexities about the claim filed five years ago by ex-Wells Fargo clients Brian Leggett and Bryson Holdings. The current case has links to an earlier, separate one from 2011 involving attorney Terry R. Weiss and a subsequent Bloomberg News column in which arbitrator Fred Pinckney went public with concerns about that 2011 case. Between 2010 and April 2022, Pinckney hasn’t presided over any other cases, according to statistics included in the law firm’s report. After Pinckney appeared in a pool of 35 potential arbitrators for the Leggett claim, the attorney defending Wells Fargo, Weiss, asked FINRA in July 2017 to take him out of the running, the report states.

“It was made clear to me verbally that none of the [earlier case] arbitrators would have the opportunity to serve on any one of my cases given the horrific circumstances surrounding the underlying case, the SEC investigation, and the publicity and the aftermath,” Weiss wrote to the director of FINRA’s dispute unit, according to the report. Other lawyers from Wells Fargo later told the law firm that the megabank had not seen Weiss’ letters at the time and “had no communications” with him about the three arbitrators from the 2011 case.

Regardless, the case administrator relayed Weiss’ concerns about “an appearance of potential bias” due to Pinckney’s involvement with the earlier case to a regional director and associate regional director of the dispute unit. The regional director spoke with the unit’s overall director about the request to take Pinckney out of the running before the case, the report states.

The director and regional director “agreed to remove Pinckney because of the events of the [earlier arbitration],” the report states. “Both agreed the decision was proper under the customer code when asked by [the law firm]. The [dispute unit] director specifically recalled agreeing with the staff recommendation to remove because Pinckney had taken the extraordinary step of going to the press to complain about Weiss. Both denied any other reason for removal.”

Despite the fact that the law firm conducted 29 interviews and read through 150,000 documents, emails and telephone records, its report contains no quotes from client attorneys in the current or prior case, academic researchers who have studied arbitrator selection nor any other stakeholders besides Wells Fargo, FINRA and Weiss. It puts forth no arguments about the merits of taking Pinckney from the pool in the case and gives no explanation as to why he hasn’t served on any other arbitration panels. It doesn’t include the amount that FINRA paid the law firm to conduct the independent investigation, either.

“This whole thing is a sham, and it's been a sham for decades,” said William D. Cohan, the investment banker turned writer who penned the 2012 column describing FINRA arbitration as “one of the largest ongoing abdications of legal rights in the U.S.” His opinion remains the same a decade after writing the column, he said in an interview, noting that the law firm didn’t reach out to him, either, even though it cited his piece as the reason for Pinckney’s removal.

“Here you have what is supposed to be an impartial arbitration system from an organization that is completely in the pocket of Wall Street deciding if Wall Street misbehaved,” Cohan said. “If you are an arbitrator in this system and you start rewarding people who lost money in a dispute with Wall Street and you award them compensation for their suffering and you do that on a consistent basis, guess what: You're not going to be an arbitrator for very long.”

The Public Investors Advocate Bar Association, an organization of attorneys who represent clients in arbitration and other legal cases against financial firms, expressed respect for “the thorough and rigorous work” of the independent review, according to an emailed statement from President Michael Edmiston.

“While the review determined that FINRA personnel generally adhered to FINRA’s policies in the [current] arbitration, PIABA remains concerned about the lack of transparency in the process and the appearance of impropriety in that case,” Edmiston said. “The appointment of arbitrators is the single most important part of the arbitration process, and investors who are forced into arbitration must have confidence in the integrity of the selection process. Accordingly, PIABA welcomes the report’s detailed recommendations and looks forward to working with FINRA in improving its arbitrator appointment process to prevent abuses, provide consistent results and give greater transparency.”

Representatives for FINRA and the law firm didn’t respond to requests for comment on the report. Weiss said in an email that he was on vacation and hadn’t read the report. Pinckney and the attorney representing the ex-Wells Fargo clients in the current arbitration case didn’t respond to requests for comment. Wells Fargo welcomed the report’s conclusions.

“We are pleased with the findings of the independent report, and we believe the report speaks for itself,” spokeswoman Jackie Knolhoff said in an emailed statement.

Stepping back in time
Understanding the 37-page report requires a flashback to the case from more than a decade ago, when Weiss and Pinckney had their first run-in during a client case against Merrill Lynch. The panel in that case held Merrill Lynch liable for $520,000 in damages to be paid to clients Joan and Robert Postell — a decision later upheld in federal court. Weiss, who was representing Merrill Lynch in that case, had “demanded that the entire panel recuse themselves” after alleging that arbitrators “demonstrated bias” in their line of questioning of him, according to the law firm’s report. Pinckney told Cohan that Weiss had “exploded at the panel” when it had become apparent that the firm would lose the case. FINRA’s dispute unit allowed the case to move forward, nonetheless, and it went in favor of the Postells.

Separate from the case, though, FINRA’s dispute unit launched its own investigation of Pinckney and two other arbitrators on the panel after Weiss wrote a letter arguing that the case had become a “tag team inquisition of Merrill Lynch,” the law firm’s report states. A deputy regional director concluded that she had “never experienced such egregious behavior by an arbitration panel” in 20 years with the unit, according to the report. Senior executives eliminated Pinckney and the two other arbitrators, Ilene Gormly and Daniel Kolber, from service in 2011. After Cohan’s article the following year, though, the unit backtracked and reinstated them.

A letter to the three arbitrators stated that senior FINRA executives had “reached a different conclusion regarding alleged inappropriate conduct” at the hearing, according to the law firm’s report.

Fast forward a decade later to Edwards’ shocking ruling that Wells Fargo and its attorney, Weiss, had “committed fraud on the arbitration panel.” The decision vacated an August 2019 award ordering the clients to pay Wells Fargo $83,600 in costs and fees. 

“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,” Edwards wrote. “The record here shows that Wells Fargo and its counsel, Terry Weiss, insisted that three potential arbitrators be removed from the neutral list itself, prior to arbitrator selection, without notification to any parties, in every case in which Terry Weiss appeared for any client. The 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.”

Thus, the law firm’s review contradicts Edwards’ findings.

“Lowenstein conducted its review from February to June 2022,” the report states. “After careful consideration of the evidence obtained during that review, [the law firm] does not believe that there was any agreement between Weiss and FINRA regarding the panels for Weiss’s cases.”

Edwards pointed to many different areas of concern, though. The removal of Pinckney from the pool — as well as another arbitrator that FINRA’s dispute unit took off the eventual panel over a conflict of interest — represented only one of five different reasons cited by Edwards for vacating the decision. She also accused the other arbitrators of improperly assessing costs against the clients, denying them from introducing two relevant witnesses and refusing to postpone the hearing without adequate basis. 

In addition, Edwards found that “Wells Fargo witnesses and its counsel introduced perjured testimony, intentionally misrepresented the record and refused to turn over a key document until after the close of evidence,” the decision states. “The court finds that each of these violations provides separate, independent grounds to vacate the award in its entirety.”

Next steps
The parties in the appeal have filed their briefs in the case, according to court records, which don’t have a timetable for hearings or a decision. So it’s not immediately clear what will happen in the case itself. As for FINRA, the law firm’s report made a half dozen recommendations for “potential improvements to the FINRA arbitrator selection process intended to increase transparency and ensure neutrality in the work undertaken” by the dispute unit. The law firm called for updates to the unit’s manual, ongoing mandatory training, codification of manual reviews of arbitrator lists, greater consistency across all of FINRA’s guidelines, written explanations of elimination decisions and updates to the random selection technology.

“Based on historic and anticipated enhancements that were reviewed by [the law firm], it is clear that FINRA is continually striving to make the arbitration processes more transparent and uniform for arbitration participants,” the report states. “Overall, notwithstanding the proposed potential enhancements, [the dispute unit] is continuing to function as intended — as a neutral forum to assist investors, brokerage firms, and individual brokers in resolving securities and business disputes.”

To Cohan, the idea that the system is working as designed is exactly the problem. Financial advisors, employees and clients relegate themselves to the arbitration process through little-noticed provisions of their contract or customer agreement, Cohan said.

“The whole system is utterly corrupt. As bad as that is, what's worse is that nobody really cares because it operates in the shadows,” he said. “You don't even realize that you've signed away your civil rights to a jury trial in a situation where you have a monetary dispute with Wall Street.”