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February 2, 2022


JUDGE REBUKES FINRA ARBITRATION IN VACATING WELLS FARGO AWARD

by Miriam Rozen
|
News
|
FINRA, Merrill Lynch, Wells Fargo
|
Arbitration, PIABA
|
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(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.”

 

MORGAN STANLEY ASKS COURT TO TOSS CLIENT ASSOCIATE’S $63K ARBITRATION AWARD IN
DEFAMATION CASE

The wirehouse’s lawyers argue that the award, including an order for expungement
of the CA’s discharge, is “totally irrational.”

Nov 22, 2021

In "News"

TOP-RANKED UBS BROKER CLEARS HIS RECORD WITH AN ASSIST FROM HIS FORMER FIRM

A Finra arbitration panel recommended the removal of the complaint from the New
Jersey broker’s record after Morgan Stanley lawyers backed his case for
expungement.

Jul 29, 2021

In "News"

JUDGE DENIES EX-CREDIT SUISSE BROKER’S BID TO OVERTURN $300K AWARD

The broker, who had represented himself in the underlying arbitration, said the
panel unfairly ordered hearings to proceed even though he was suffering long
haul effects of the Covid-19 virus.

Oct 4, 2021

In "News"

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