The Wall Street Journal (February 3, 2022) - A Georgia judge said the bank and its lawyer secretly manipulated a list of potential arbitrators
A Georgia judge questioned the fairness of the financial industry’s dispute-resolution process in a ruling stemming from a Wells Fargo WFC -0.92% & Co. customer’s claim that the bank botched his investments.
Wells Fargo and its lawyer improperly manipulated a list of arbitrators who could decide on the customer’s claim—with the permission of the regulatory body that oversees the process, Superior Court Judge Belinda Edwards wrote in a Jan. 25 ruling.
Brian Leggett and Bryson Holdings LLC brought the case against Wells Fargo after losing some $1.2 million on a merger arbitrage investment strategy executed by a broker there in 2015 and 2016. The arbitrators ultimately decided in Wells Fargo’s favor. Judge Edwards’s ruling vacated the arbitration award.
The case is another mess for Wells Fargo, which is still digging out from its long-running fake-accounts scandal. It also sheds an unflattering light on the arbitration process set up to handle many of the disputes between investors and financial institutions. The process is overseen by the Financial Industry Regulatory Authority, Wall Street’s self-regulatory arm, and typically plays out behind closed doors.
Finra for years has used a computer system to randomly generate a neutral list of potential arbitrators from which the parties agree on three to decide the case. But in this case, multiple names were removed from the list at the request of Wells Fargo’s lawyer and with the permission of Finra, according to the judge’s decision.
“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,” Judge Edwards wrote.
A Finra spokeswoman said that none of the arbitrators in question were excluded or removed from the lists before they were sent to the parties, nor did Finra have any sort of agreement with Wells Fargo’s attorney regarding the appointment of arbitrators. “Any assertions to that effect are false,” she said.
Finra “has well-established rules for admitting arbitrators to its roster and the process is fair to all parties,” a Wells Fargo spokeswoman said. “Wells Fargo Advisors followed this process, and both parties had the opportunity to make arguments regarding each of these issues to the arbitrators and to Finra.”
Still, the verdict is sure to fuel concerns among critics that private arbitration leaves room for bias. Sen. Elizabeth Warren (D., Mass.) has previously criticized Finra arbitration.
Michael Edmiston, an attorney and president of the Public Investors Advocate Bar Association, said, “It highlights a suspicion that many of us perceive that sometimes the arbitrator names that appear on a list are not as random as we’d like them to be.”
His group has called for the Securities and Exchange Commission to investigate Finra’s operations and Congress to hold hearings.
Jill Gross, a professor at the Elisabeth Haub School of Law at Pace University who has studied arbitration, said that Finra has generally bent over backward to address complaints about unfairness in the process. The Wells Fargo case “struck me as really out of the norm and greatly varying with my experience of the forum,” she said.
The judge said the rationale for vacating the decision also was based on the conduct of the bank and its lawyer after the arbitration began.
At one point, the arbitration stopped due to a medical emergency. When it resumed, the broker who had been testifying provided different answers than before the break, and the bank’s attorney misrepresented the prior testimony, according to the judge’s decision. “Wells Fargo and its counsel committed fraud,” she said.
The Wells Fargo spokeswoman said that the bank plans to appeal the decision. “We adamantly deny all of the allegations cited in this decision,” she said.
The attorney that represented Wells Fargo in the case, Terry Weiss, didn’t respond to an email requesting comment.