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FINRA Report Refutes Court Finding of Fundamental Unfairness in Leggett Arbitration (With Updated Conclusion)
June 30, 2022https://www.finra.org/sites/default/files/2022-06/report-independent-review-drs-arbitrator-selection-process.pdf In part the Report concludes that:
Lowenstein conducted its review from February to June 2022. 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 evidence further demonstrated that FINRA personnel generally adhered to the policies and procedures and that their actions during the Leggett Arbitration were intended to be fair and reasonable at each step. Based on historic and anticipated enhancements that were reviewed by Lowenstein, it is clear that FINRA is continually striving to make the arbitration selection processes more transparent for arbitration participants. Overall, notwithstanding the proposed potential enhancements, DRS is continuing to function as intended - as a neutral forum to assist investors, brokerage firms, and individual brokers in resolving securities and business disputes.
at Page 2 of the Report
In setting out its "Conclusions And Recommendations," the Report states in part that:
After careful consideration of the evidence obtained during the investigation, Lowenstein does not believe that there was any agreement between Weiss and FINRA regarding the panels for Weiss's cases. All current and former FINRA personnel who could conceivably have been a part of such an agreement were interviewed and denied the agreement's existence, noting that it would be contrary to DRS's culture of neutrality. Lowenstein found them all to be credible. Likewise, no documentary evidence - including any emails or other material - suggested in any way that such an agreement existed. Nonetheless, through this investigation, Lowenstein identified a series of potential improvements to the FINRA arbitrator selection process intended to increase transparency and ensure neutrality in the work undertaken by DRS.The evidence further demonstrated that FINRA personnel generally adhered to the policies and procedures and that their actions during the Leggett Arbitration were intended to be fair and reasonable at each step. Based on historic and anticipated enhancements that were reviewed by Lowenstein, it is clear that FINRA is continually striving to make the arbitration processes more transparent and uniform for arbitration participants. Overall, notwithstanding the proposed potential enhancements, DRS is continuing to function as intended - as a neutral forum to assist investors, brokerage firms, and individual brokers in resolving securities and business disputes.
at Page 35 of the Report
Bill Singer's Comment
Among those of us in the FINRA Dissident community and among advocates for Wall Street reform, the Report's findings seem pre-ordained and will likely be received as little more than whitewash.
Notably, the Report does not seem to fully address the most critical aspect of this issue, which is that Judge Belinda E. Edwards, Superior Court of Fulton County, Georgia found that the FINRA arbitration was fundamentally unfair. See, Brian Leggett and Bryson Holdings, LLC, Petitioners, v. Wells Fargo Clearing Services, LLC d/b/a Wells Fargo Advisors, LLC and Jay Windsor Pickett III, Respondents (Order Granting Motion to Vacate Arbitration Award and Denying Cross Motion to Confirm Arbitration Award, Superior Court of Fulton County, Georgia, 2019CV328949)
https://brokeandbroker.com/PDF/LeggettOrderFultonCo220125.pdf
If we are to believe FINRA's Report, Judge Edwards got it all wrong. There was no fundamental unfairness in the Leggett Arbitration. There was no agreement between Weiss and FINRA regarding the panels for Weiss's cases. Pointedly, I read nothing in the Report that directly refutes Judge Edwards' finding that:
at Page 25 of the Superior Court OrderThe Court's factual review of the record evidence leads to its finding that Wells Fargo and its counsel manipulated the FINRA arbitrator selection process in violation of the FINRA Code of Arbitration Procedure, denying the Investors' their contractual right to a neutral, computer-generated list of potential arbitrators. Wells Fargo and its counsel, Terry Weiss, admit that FINRA provides any client Terry Weiss represents with a subset of arbitrators in which certain arbitrators (at least three, but perhaps more) are removed from the list Wells Fargo agreed, by contract, to provide to the Investors in the event of a dispute. 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.
Interesting, ain't it, how a Court and a law firm both conduct reviews and come away with such diametrically opposed findings. Judge Edwards called "into question the entire fairness" of FINRA's arbitral forum but FINRA's chosen outside law firm, well, not so much -- as the law firm puts it, FINRA just needs to do some housekeeping in the form of improvements. Yeah, that's it -- this is all about improving. It's not about unfairness. As to the chasm between the Court and the law firm, consider this finding by Judge Edwards:
Ensure that the arbitration process is fundamentally fairJudicial review of arbitration awards, while limited in nature, ensure that the arbitration process is fundamentally fair to all parties involved. In this case (1) Wells Fargo and its counsel manipulated the arbitrator selection process; (2) the Arbitrators refused to postpone the hearing and provided no basis for their decision despite the Investors providing ample cause for postponement; (3) the Arbitrators denied the Investors their statutory right to present testimony from two relevant, noncumulative witnesses; (4) Wells Fargo witnesses and its counsel introduced perjured testimony, intentionally misrepresented the record, and refused to turn over a key document until after the close of evidence; and (5) the Arbitrators improperly and without legal justification imposed costs and fees on the Investors in violation of the contractual framework that bound the parties. The Court finds that each of these violations provides separate, independent grounds to vacate the Award in its entirety. Accordingly, the Panel's award is VACATED .
at Page 37 of the Superior Court Order
The Report says that the author "does not believe" the allegations are substantiated. Is not believing the same standard as concluding or as finding, or has the author carefully chosen his words?
Moreover, the Report somewhat painfully states that FINRA Staff "generally adhered" to DRS policies and procedures -- "generally?" Generally as in not always . . . as in some instances Staff went astray?
Conclusion
Ultimately, the Report is what it is, and, from my perspective, it's wholly unpersuasive. The larger question is how FINRA's lackluster Board of Governors will receive the Report, which, as I anticipate, will be with a large rubber stamp.
What if Judge Edwards is over-turned on appeal, I have been asked. Would that change my opinion? If Judge Edwards is over-turned on appeal, then I would accept a higher court's ruling; however, as matters presently stand, I am unpersuaded by the Report. As a veteran lawyer, I am aware of the likelihood that an appellate court may deem Judge Edwards as having improperly substituted her opinions for those of arbitrators, or a higher court may invoke the often-sacrosanct Federal Arbitration Act against a state court's intervention. As I said, I will respect judicial findings over that of FINRA's law firm and FINRA's Report. In the event of a reversal, however, we should remain mindful that an independent judge with no ties whatsoever to FINRA and no conflicts with the industry found FINRA's arbitration process "fundamentally unfair." That is a sobering and troubling conclusion.
As I have long and loudly proclaimed, Wall Street's system of self-regulation is a morally bankrupt construct. Further, it is reprehensible that on top of its tepid self-policing, that the industry forces mandatory arbitration upon public customers and hundreds of thousands of associated persons. How nice it is that we are asked to take comfort that such a system is policed by Staff who "generally adhere" to the organization's policies and procedures. Next time FINRA proposes to charge a broker-dealer or stockbroker for misconduct, that Respondent should argue that they "generally adhere" to the securities laws and FINRA's rules -- let's see how far that gets them with the regulator.
READ:
Court Finds FINRA Arbitration Process Not Fundamentally Fair (BrokeAndBroker.com Blog / February 4, 2022)https://www.brokeandbroker.com/6265/finra-wells-fargo-arbitration/Cynical FINRA Press Release Lacks Urgency In Response To Arbitration Fiasco (BrokeAndBroker.com Blog / February 22, 2022)https://www.brokeandbroker.com/6302/finra-leggett-audit/122 Days And Counting For FINRA's Independent Review Of Its Arbitration Selection Process (BrokeAndBroker.com Blog / June 20, 2022)
https://www.brokeandbroker.com/6505/finra-leggett-audit/