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Georgia Court of Appeals Reverses Leggett v. Wells Fargo
August 3, 2022
"FINRA Report Refutes Court Finding Of Fundamental Unfairness In Leggett Arbitration" (BrokeAndBroker.com Blog / June 30, 2022)
https://www.brokeandbroker.com/6519/finra-leggett-drs/
https://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/
UPDATE
August 2, 2022 / Court of Appeals of Georgia
As I had presciently opined back on June 30, 2022:
[A]s 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.
Superior Court Reversed
In Wells Fargo Clearing Services, LLC et al., v. Leggett et al. (Opinion, Court of Appeals of Georgia, A22A1149 / August 2, 2022)
https://brokeandbroker.com/PDF/LeggettGaCtApp220802.pdf, the appellate court reversed Judge Edwards. In parsing through the fact pattern, the higher court initially considered this first flashpoint:
In their petition to vacate the award, the investors argued that Wells Fargo improperly "manipulated" the FINRA arbitrator selection system by having Pinckney removed without using a strike. They further claimed that the incident "disclosed a secret agreement between FINRA and [Weiss] pertaining to the pool of arbitrators available to his clients in all of his cases." The superior court adopted these arguments, concluding that Wells Fargo manipulated the pool and that the arbitrators acted outside of their authority by proceeding without a fully neutral panel selected pursuant to FINRA's rules.
at Page 8 of the Court of Appeals Opinion
Pinckney Removal Not Manipulation by Wells Fargo but FINRA Director of Arbitration's "Discretion"
In response to the allegation of Wells Fargo's manipulation and the "secret agreement," the Court of Appeals found in part that:
We disagree. Nothing indicates that Wells Fargo "manipulated" the arbitrator pool. It simply asked that Pinckney be removed under FINRA Rule 12407. We fail to see how the Director's decision to grant that request - which was made after all parties had a chance to address the issue - constituted 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. Even if an agreement exists, the investors have not shown that it impacted this arbitration.The Code vests the Director with discretion to "make any decision that is consistent with the purposes of the Code to facilitate the appointment of arbitrators and the resolution of arbitrations," FINRA Rule 12408, and Rule 12407 (a) explicitly allows the Director to remove an arbitrator for cause. On appeal, the investors claim that the Director can only dismiss an arbitrator from an appointed panel, not from the arbitrator list used to select the panel. But nothing in the text of FINRA's rules supports that conclusion. Rule 12407 (a) authorizes removal of "an arbitrator" for conflict of interest or bias "[b]efore the first hearing session begins." FINRA Rule 12407 (a). The procedures for selecting a panel refer to individuals on the selection list as "arbitrators." FINRA Rule 12403. And the selection process reflects FINRA's desire to avoid conflicts of interest and bias among the listed arbitrators. See FINRA Rule 12403 (a) (3) ("The Neutral List Selection System will exclude arbitrators from 9 the lists based upon current conflicts of interest identified within the Neutral List Selection System.").The Director concluded that he had discretion to remove an arbitrator from the selection list pursuant to Rule 12407 (a). Given the text of the rule, we cannot find that he exceeded his authority in making that determination. See Inversiones y Procesadora TropicalINPROTSA, S.A. v. Del Monte Intl. Gmbh, 921 F3d 1291, 1304 (III) (B) (11th Cir. 2019) (arbitration "tribunal did not exceed its power by reasonably construing its own rules"); see also Grand Canyon Ed. v. Ward, 358 Ga. App. 412, 417 (855 SE2d 415) (2021) ("A regulation should be construed to give effect to the natural and plain meaning of its words. In addition, we look to the stated purpose of the regulation, as well as the broader regulatory . . . context of which it is a part.") (citation and punctuation omitted).Similarly, in light of the information provided regarding the past history between Pinckney and counsel for Wells Fargo, we cannot find that the Director abused his discretion in inferring that Pinckney had a clear and definite bias here. Neither the Director nor any arbitrator exceeded his or her authority by removing Pinckney from the selection list and proceeding with the arbitration. See FINRA Rule 12407 (a); Peco Foods Inc. v. Retail Wholesale & Dept. Store Union Mid-South 10 Council, 727 Fed. Appx. 604, 609 (II) (B) (11th Cir. 2018) (arbitrator did not exceed his authority by acting within broad discretion to resolve arbitration issue); Davis v. Producers Agricultural Ins. Co., 762 F3d 1276, 1286 (II) (C) (1) (11th Cir. 2014) (same)
at Pages 8 - 11 of the Court of Appeals Opinion
Arbitrator Canfield's Removal from Selection List by FINRA Director
After Arbitrator Pinckney was removed from the selection list, a new three-arbitrator Panel was picked that included Arbitrator Canfield -- except, Wells Fargo requested that the FINRA Director of Arbitration remove attorney Canfield or that Canfield recuse himself. Wells Fargo's basis for seeking Canfield's removal was that his law firm had filed Hubbard v. Wells Fargo Advisors. Prior to the selection of the second arbitration panel, however, Wells Fargo knew that Canfield's law firm represented plaintiffs against financial institutions. Further, although a partner of the firm, Canfield did not seem to be working on Hubbard. Over the investors' objection, the FINRA Director again exercised his discretion and removed Canfield, and, thereafter, appointed a replacement. Judge Edwards found that FINRA's Director of Arbitration had abused his discretion in removing Canfield. In contrast, the Court of Appeals stated:
[W]e cannot conclude, however, that the Director abused his discretion by reaching the opposite result and finding, based on the available information, a reasonable inference of bias or conflicted interest. . . .
at Pages 12 - 13 of the Court of Appeals Opinion
Three Further Errors: Prejudice, Misconduct, and Fees/Costs
The Court of Appeals found that Judge Edwards erred in vacating the FINRA Award on the ground that the investors were prejudiced by the Panel's refusal to continue the hearing. Similarly, the appellate court found Judge Edwards had erred in finding the arbitrators guilty of misconduct for refusing to allow the investors' rebuttal witness and in limiting the cross of a Wells Fargo expert. The higher court did not deem that the arbitrators evidenced bad faith such that a party was deprived of fundamentally fair proceeding. Also, the appellate court found that Judge Edwards had improperly vacated the Panel's order that Leggett pay $32,200 in hearing session fees and to reimburse Wells Fargo for $51,000 in costs.
Not Procured by Fraud
Perhaps no aspect of Leggett v. Wells Fargo generated more publicity than Judge Edwards' findings of fraud and perjury. As expected, the Court of Appeals cut through the headline-grabbing aspects of the case and rejected the lower court's findings:
4. Citing 9 USC § 10 (a) (1), the superior court also vacated the award after concluding that the award had been "procured by fraud." Specifically, the court found that Wells Fargo broker McKelvey, who was in the process of testifying when the hearing was continued in September 2018, offered conflicting "perjured" testimony when the hearing recommenced in July 2019; that counsel for Wells Fargo made factual misstatements during the hearing; and that Wells Fargo failed to turn over a specified document until after the close of evidence, despite being ordered to produce the document by the arbitrators.To show the fraud necessary to vacate an arbitration award: (1) "the movant must establish fraud by clear and convincing evidence; (2) the fraud must not have been discoverable upon the exercise of due diligence prior to or during the arbitration; and (3) the fraud must have materially related to an issue in the arbitration." Floridians for SolarChoice v. Paparella, 802 Fed. Appx. 519, 523 (11th Cir. 2020) (citation and punctuation omitted). The moving party must satisfy all three prongs before a trial court can vacate an arbitration award for fraud under 9 USC § 10 (a) (1). See id.As an initial matter, we have not been able to locate any record evidence of McKelvey's testimony from the September 2018 proceeding, which evidently was audio-recorded, but not officially transcribed. The audiotape is not in the appellate record. And although the investors provided a recap in their brief of what they contend the audiotape shows with respect to McKelvey's September 2018 testimony, "[s]tatements of fact in the briefs of the parties unsupported by evidence in the record cannot be considered on appeal." Beasley v. Wachovia Bank, 277 Ga. App. 698, 698 (627 SE2d 417) (2006).It is clear, however, that counsel for the investors was aware of the purported conflicts in McKelvey's testimony when he cross-examined McKelvey in June 2019. Counsel stated during a June 2019 arbitration session that he did not have a transcript of the September testimony.4 But he asserted that he had "notes" and recalled the prior testimony. Counsel cross-examined McKelvey about the alleged inconsistencies and challenged statements by Wells Fargo's counsel, who insisted that the testimony was consistent. Because McKelvey's allegedly inconsistent testimony was discoverable -and was, in fact, discovered-by the investors during the arbitration, it does not support a finding of fraud. See Freeman v. Citibank, N.A., 2015 U.S. Dist. LEXIS 197610, *35 (II) (B) (1) (N. D. Ga. 2015) (no vacatur for fraud where claimant was aware of alleged misconduct during arbitration, brought it to the arbitrators' attention and challenged it through objections).The investors also complain that while their counsel was cross-examining a Wells Fargo expert regarding a stock trade report, counsel for Wells Fargo made factual misstatements about the meaning of certain dates on the report. We have not been able to find a complete excerpt of this cross-examination in the record. The accuracy of opposing counsel's factual statements during the arbitration, opposing counsel noted: "I was speaking as to my knowledge as to how they do their [report]. If you've got a question about a specific situation . . . [you can ask] the guy who did [the report]," who was yet to testify. Opposing counsel's allegedly inaccurate statements, therefore, were either discovered or discoverable during the arbitration. See Freeman, supra.Similarly, the record shows that Wells Fargo produced the document it had been ordered to produce before the arbitration concluded, and counsel for Wells Fargo asked that it be made an exhibit to the arbitration. Like the other alleged instances of fraud, the investors knew or should have known about the late production before the hearing adjourned. Wells Fargo's conduct provides no grounds for a fraud based vacatur. See generally Floridians for Solar Choice, supra; Freeman, supra.= = = = =Footnote 4: Although the investors claim that the audiotape of the September 2018 proceedings were not available to the parties or the arbitrators at that point, they have provided no authority or record cite to support that assertion.
at Pages 19 - 2 of the Court of Appeals Opinion
Bill Singer's Comment / August 3, 2022
What the Court of Appeals presents to us is a shrug. 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.
As long as the arbitrators are discharging their roles in "good faith," well, gee, they're not judges in a formal court system but are arbitrators sitting on a FINRA panel, and, you know, the fact that FINRA arbitration is mandatory is just how it is. Nah, it's not a great system but it is what it is and good enough is good enough, right? As to what looks like fraud on public investors by the industry, well, gee, even if the investors didn't actually know what had really happened, the "should" have. Oh, and another thing, a lot of the finger pointing is misdirected at Wells Fargo because it's actually FINRA's Director of Arbitration who got involved and exercised what we view as appropriate discretion.
About the only positive takeaway from the Court of Appeals' reversal of the Superior Court is that it shines the light of hypocrisy on this disclaimer atop each FINRA Dispute Resolution Services Award:
FINRA has no part in deciding the award? Gimme a break.Awards are rendered by independent arbitrators who are chosen by the parties to issue final, binding decisions. FINRA makes available an arbitration forum -- pursuant to rules approved by the SEC -- but has no part in deciding the award.