AdvisorHub (February 2, 2022) - (Updated with statement from Finra spokeswoman.)
In a rare decision overturning an arbitration award, a Georgia state court judge vacated a 2019 decision in which Wells Fargo successfully beat back an investor’s $1.7 million damage claims over investment losses, according to an order in Fulton County Superior Court.
Making the order more unusual, Judge Belinda E. Edwards based her ruling in part on grounds that the Financial Industry Regulatory Authority administrators had allowed Wells Fargo and an outside lawyer to “manipulate” the arbitrator selection process. 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.
“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 in her January 25 ruling.
Edwards also found Wells had committed fraud in obtaining the award, including perjury by one of its witnesses, which qualified the decision for vacatur under the limited grounds provided in the Federal Arbitration Act.
The decision drew quick response from plaintiff lawyers who said the ruling shows cracks in the notion that Finra, as the self-regulatory organization, serves as an unbiased administrator of arbitrated disputes—a significant concern as most investors are required by contract to arbitrate their disputes.
“This situation calls into question the fundamental fairness of the dispute resolution process at FINRA,” said James Chapman of Cleveland’s Chapman Albin, who represents investors.
The Public Investors Advocate Bar Association called for “an immediate investigation” by the Securities and Exchange Commission and hearings in Congress “as to FINRA’S operation of its arbitration forum,” according to its release posted Wednesday.
“The secret agreement undermines the very neutrality of the computerized system,” it added, referencing the “surprising revelation of a corrupted arbitrator appointment system.”
A spokeswoman for Finra denied that there was ever any agreement between its representatives and Wells’ outside lawyer Terry Weiss, a partner at Maynard Cooper & Gale in Atlanta.
“We have reviewed all cases involving Terry Weiss as counsel and none of the three arbitrators in question was excluded or removed from ranking lists prior to sending the lists to the parties,” the spokeswoman said. “As the neutral administrator, we continually strive to make the FINRA forum the fairest, most efficient program available and stand behind the integrity of our neutral list selection process.”
PIABA noted that the ruling comes shortly after the General Accounting Office in December 2021 raised broad questions in a report about the SEC’s supervision of Finra.
Wells plans to appeal the ruling, according to spokesperson Jackie Knolhoff.
“FINRA has well-established rules for admitting arbitrators to its roster and the process is fair to all parties. Wells Fargo Advisors followed this process,” Knolhoff said in a statement.
Under Finra rules, each side is provided a randomly selected “neutral” list of qualified industry and public arbitrators from which they can rank and strike names until a final three are chosen.
According to Edwards’ ruling, Wells’ lawyer, Terry Weiss, a shareholder at Maynard Cooper & Gale in Atlanta, instead sent a letter to Finra administrators “insisting that one of the proposed arbitrators on the list” be removed on the grounds that he “harbored personal bias” against Weiss.
After the plaintiff investors objected, Wells’ lawyer sent another letter in which he disclosed “for the first time” an agreement between Finra and Weiss about “the pool of arbitrators available to his clients in all of his cases,” Edwards writes.
In the second letter, which was excerpted in the ruling, Weiss referred to a 2013 case in which he defended Merrill Lynch and had lost a bid to vacate that award over alleged arbitrator misconduct. He had then reached an agreement with Finra to have the three arbitrators in that case removed from any future lists of prospective panelists in his cases, Weiss, who did not return a request for comment, said in the letter.
“It was made clear to me verbally that none of the [those] arbitrators would have the opportunity to serve on any one of my cases given the horrific circumstances surrounding the underlying case,” Weiss wrote to Finra’s dispute resolution director.
Weiss also successfully lobbied the dispute resolution director to remove another arbitrator after the case had begun, according to Edwards’ order. Weiss said that the arbitrator, who was also a lawyer, should be removed because other attorneys at his firm had filed a case against Wells Fargo, according to the order.
Edwards once again found the removal improper.
“The record shows that the arbitrator fully disclosed his firm’s activities prior to arbitrator selection,” Edwards wrote in the ruling. “The newly filed case did not create any newly disclosed interest or bias against Wells Fargo.”
In addition to the arbitrator selection concerns, Edwards also found that the panel “refused to postpone the hearing and provided no basis for their decision despite the investors providing ample cause for postponement,” and denied plaintiffs “their statutory right to present testimony from two witnesses.”
Edwards also found evidence that one of Wells’ key witnesses had altered key testimony about industry rules against texting with clients over the course of the hearings.
She also said the arbitrators “improperly and without legal justification imposed” $83,000 in costs and fees for the Finra hearing on investors and overturned that aspect of the award as well.
The investor in the case, Brian Leggett, had sued Wells and a broker at the firm in 2016 over alleged losses tied in part to Amazon call options, according to a copy of the underlying award.
Craig Kuglar of Kuglar Law in Atlanta, who represents Leggett, said he is hoping that Wells Fargo will settle rather than having to re-litigate the dispute.
“My clients are pleased with the judge’s order,” Kuglar said. “Given what happened here, we are hoping that Wells Fargo sees the wisdom in fully compensating my clients–both as to the fee and costs of the arbitration as well as their underlying investment losses–without having to resort to a third arbitration hearing in this case.”