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Georgia Appeals Court Reverses Decision Alleging 'Secret Agreement' in FINRA Arbitration

The court overturned a decision involving a FINRA arbitration ruling in favor of Wells Fargo, several months after the regulator commissioned a study to examine the case.

A Georgia Court of Appeals reversed a lower court’s decision that vacated a Financial Industry Regulatory Authority arbitration award in favor of Wells Fargo, with the court arguing that there was no evidence that the wirehouse had “manipulated” the arbitration pool in the original dispute.

The unanimous ruling, penned by Judge Amanda Mercier, overturned the decision by Fulton County Superior Court Judge Belinda Edwards, who was convinced by plaintiff’s arguments that Wells Fargo counsel Terry Weiss and FINRA verbally agreed to automatically remove certain arbitrators from consideration for cases in which Weiss was involved. 

The reversal also follows the release of a report in June commissioned by FINRA to analyze the case, in which investigators found “no evidence” of any secret agreement between regulators and Wells Fargo attorneys.

Brian Leggett and Bryson Holdings originally entered FINRA arbitration proceedings alleging their Wells Fargo broker lost more than $1 million by allowing funds to be overconcentrated in certain stocks. Potential arbitrators were randomly selected, but before the start of the proceedings, Weiss allegedly asked FINRA to remove potential arbitrator Fred Pinckney from consideration, claiming he “harbored personal bias” against him due to a conflict between Weiss and arbitrators on a separate case from 10 years ago (known as the “Postell” arbitration).

According to Edwards’ original decision and FINRA’s subsequent investigation, Weiss wrote FINRA that it had been “made clear to me verbally that none of the Postell arbitrators would have the opportunity to serve on any one of my cases given the horrific circumstances surrounding the underlying case, the SEC investigation, the publicity and the aftermath.”

Edwards subsequently overturned the $80,000 the arbitration panel had originally awarded in favor of Wells Fargo, writing that if a lawyer could “red line” a neutral list of arbitrators, it “calls into question the entire fairness of the forum.”

But the Court of Appeals disagreed, arguing that the decision by the director of FINRA’s Dispute Resolution Services to remove Pinckney from serving as an arbitrator did not amount to manipulation by Wells Fargo.

“Although the investors claim that a ‘secret agreement’ existed between FINRA and Weiss to automatically exclude the Postell arbitrators from any arbitrator list generated on a case involving Weiss, there is no evidence that such agreement was at play here, given Pinckney’s inclusion on the initial list,” the reversal read. “Even if such an agreement exists, the investors have not shown that impacted this arbitration.”

The appellate judges also ruled that the director didn’t abuse his discretion when inferring that Pinckney had a “clear and definite bias.” The court also argued the lower court incorrectly ruled that arbitrators on the Leggett panel were guilty of misconduct by failing to agree to a request by Leggett for a continuance during the proceedings, and that arbitrators had not maliciously erred by disallowing Leggett from calling his current stockbroker to comment on the conduct of the Wells Fargo broker.

Nicole Iannarone, an assistant professor of law at Drexel University’s Thomas R. Kline School of Law and the current chair of FINRA’s National Arbitration and Mediation Committee, said the Court of Appeals had reached the right result, but that the case raised concerns for regulators nonetheless. While she would have been “surprised” by the existence of a secret agreement, Iannarone believed FINRA needed to make sure parties wouldn’t engage in actions that would preclude arbitrators from ever serving on their cases.

“How do we balance legitimate conflicts that create bias with ensuring that no one takes extra steps to create bias or conflicts when they didn’t ordinarily exist?” she asked. “That’s a tough balancing line to strike and one I hope FINRA is able to take a look at.”

In response to the original ruling and scrutiny from Sen. Elizabeth Warren (D-Mass.) and Rep. Katie Porter (D-Calif.), FINRA hired the law firm Lowenstein Sandler to review regulators’ conduct in the case; the investigation was headed by Christopher Gerold, a partner at the firm and former chief of New Jersey’s Bureau of Securities.

While FINRA said it had no comment on the Georgia Appeals Court decision, as it was not a party in the original case, a FINRA spokesman said the regulator was “actively implementing” recommendations from Lowenstein Sandler’s report.

“We remain committed to continually improving the arbitration system to serve all parties who use FINRA’s dispute resolution services,” he said.

Wells Fargo was pleased with the court’s decision overturning what the firm deemed an “erroneous judgment,” and noted the original arbitration award against Leggett had been reinstated, according to spokeswoman Shea Leordeanu.

“We were always confident in the merits of our appeal and are pleased that the Georgia Court of Appeals completely validated our position,” she said.

The independent report had its critics, including Bill Singer, a securities attorney and author of the blog, who wrote its findings were “pre-ordained and will likely be received as little more than whitewash” for those urging reform to FINRA’s arbitration process. Singer didn’t mince words on the Georgia Appeals Court decision.

“It is an unfortunate excuse for public investors being deprived of the justice that would be rendered in a court but often goes missing in an industry-mandated arbitration forum,” he wrote.

Iannarone says the case’s legacy could be the attention it’s brought to FINRA’s arbitration process, and that when critics raised concerns, FINRA did move to take them seriously and is now taking steps on improving transparency.

“I think the biggest difficulty is how to ensure trust in a process that customers are forced into,” she said. “Anything we can do to improve transparency, provide information and respond to serious allegations helps rebuild that trust."

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