AdvisorHub (June 29, 2022) - The outside law firm that the Financial Industry Regulatory Authority’s audit committee hired to review its arbitration process has rejected allegations about an improper side deal that allowed a lawyer representing Wells Fargo to rig its arbitrator selection process, the regulator said Wednesday. 

In a 37-page report released Wednesday, lawyers at Lowenstein Sandler LLP found “no evidence” of wrongdoing and said that the Finra officials administering the forum had generally acted in-line with policies and procedures and were “intended to be fair and reasonable at each step.”

The report comes after a Georgia state judge in January vacated an arbitration award in favor of Wells Fargo and found that an outside lawyer representing Wells Fargo, Terry Weiss, had an agreement with Finra to automatically remove arbitrators who ruled against him in prior cases from the list of potential panelists in any future cases. Finra ordered the review in February after the case drew criticism from lawmakers and investor advocates who said the case called into question the fairness of the arbitration forum. 

“After careful consideration of the evidence obtained during that review, Lowenstein does not believe that there was any agreement between Weiss and Finra regarding the panels for Weiss’s cases,” the firm said in its report. 

But Lowenstein did provide recommendations for the industry’s self-regulatory organization to provide “greater clarity” to its arbitration process, including “written explanations” about its administrators’ decisions to remove possible arbitrators, upon either sides’ request, updated training and a review of its arbitrator selection algorithm. 

“Finra management agrees with the recommendations and commits to promptly deliver a plan for implementation to the Board,” the regulator’s Chief Executive Robert Cook said in a statement. 

The review was led by Christopher Gerold, a Lowenstein partner and former chief of the New Jersey Bureau of Securities who had served as President of the North American Securities Administrators Association. It was based on 29 interviews, 150,000 documents and recordings of relevant arbitration proceedings.  

Lawyers for the plaintiff in the case against Wells could not immediately be reached for comment on Lowenstein’s report. Spokespeople for Senator Elizabeth Warren (D-Mass.) and Rep. Katie Porter (D-Calif.) who in February sent a letter to Cook questioning the fairness of the arbitration process, also could not immediately be reached for comment. 

The Public Investors Advocate Bar Association–which after the Georgia trial court ruling to vacate had called for “an immediate investigation” by the Securities and Exchange Commission and hearings in Congress “as to Finra’s operation of its arbitration forum”—issued a tweet after the report’s release today welcoming its recommendations and, in the future, working with Finra to improve the arbitrator appointment process. “While the review determined that FINRA personnel generally adhered to FINRA’s policies,” in the arbitration underlying controversy, the plaintiff lawyers organization said, “PIABA remains concerned about the lack of transparency in the process and the appearance of impropriety in that case.”

In the underlying January 25 opinion jettisoning the Wells award, Judge Belinda E. Edwards of the Fulton County Superior Court wrote that Finra had allowed the wirehouse to “manipulate” the arbitration-selection process. She had based her finding on a letter that Weiss had sent to Finra’s dispute resolution director during the arbitration. 

“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, a shareholder at Maynard Cooper & Gale in Atlanta, wrote in the letter that Edwards excerpted in her ruling. 

Lowenstein’s report said that “no documentary evidence–including any emails or other material–suggested in any way that such an agreement existed.” It cited an interview with Weiss who characterized his call to an unidentified Finra staff member as giving them a “heads up” that he would object to specific arbitrators and “would utilize the tools available to him to ensure they did not make it to one of his panels.”

The Maynard Cooper lawyer told investigators he couldn’t remember the name of the Finra “director level” person with whom he spoke.

Earlier this month, a three-judge panel of the Court of Appeals of the State of Georgia showed skepticism about Edwards’ ruling at a hearing on Wells Fargo’s appeal of the trial court ruling. 

“It appears that for everything that arbitrators did, they were following an actual rule,” appellate judge Amanda H. Mercier said. 

The appellate judges have not yet issued an official ruling on whether to reinstate the award, in which Wells had prevailed on a $1.7 million damage claim. 

Finra’s arbitration forum, which mediates disputes between firms, employees and investors, operates in accordance with rules approved by the Securities and Exchange Commission and is regularly examined by the SEC, Finra noted.