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Regulation and Compliance > Litigation

Wells Fargo ‘Manipulated’ FINRA Arbitration Process: Judge

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What You Need to Know

  • Wells Fargo and its counsel manipulated the arbitrator selection process, judge rules.
  • FINRA had secretly agreed to remove certain arbitrators from the computer-generated list, the judge wrote.
  • PIABA wants the SEC to investigate and Congress to hold hearings on FINRA's arb process.

A judge in Georgia has ruled that Wells Fargo and its counsel “manipulated” the Financial Industry Regulatory Authority’s arbitrator selection process and violated the FINRA Code of Arbitration Procedure, denying investors their contractual right to a neutral, computer-generated list of potential arbitrators.

Judge Belinda Edwards “excoriated the conduct of FINRA Dispute Resolution in managing the arbitration selection process and the arbitration panel for permitting a variety of misconduct by Wells Fargo Clearing Services and its counsel,” the Public Investors Advocate Bar Association said Wednesday in a statement.

Edwards’ order centered on a 2017 FINRA dispute filed by Wells Fargo Advisors’ client Brian Leggett over more than $1.1 million in losses that he said he incurred at the hands of a Wells Fargo broker. In 2019, an arbitration panel denied Leggett’s claim.

In 2021, Leggett asked the Georgia court to vacate the Wells Fargo award while Wells Fargo asked the court to confirm it.

On Jan. 25, Edwards vacated the FINRA arbitration decision, finding that Wells Fargo and its counsel manipulated the arbitration process. The manipulation was accomplished with the help of FINRA Dispute Resolution, according to Edwards.

Of immediate concern, according to PIABA, “is the apparent corruption of the arbitrator selection process.”

The group called for the Securities and Exchange Commission to investigate and for Congress to hold hearings on FINRA’s “operation of its arbitration forum.”

PIABA is an association of lawyers who represent investors in disputes with the securities industry.

Unwritten Agreement

According to the order, Wells Fargo and its attorney had an unwritten agreement with FINRA that FINRA would remove certain arbitrators from any list presented to counsel Terry Weiss.

Judge Edwards found, “[p]ermitting 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.”

A FINRA spokesperson said Wednesday that “there has never been any agreement between FINRA Dispute Resolution Services and attorney Terry Weiss regarding appointment of arbitrators. Any assertions to that effect are false.”

Added the spokesperson: “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.”

A spokesperson for Wells Fargo Advisors added in another statement that it intends to appeal the decision.

“We adamantly deny all of the allegations cited in this decision. 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, and both parties had the opportunity to make arguments regarding each of these issues to the arbitrators and to FINRA.”

The FINRA Neutral List Selection System computerized process was implemented in 1998; PIABA stated that the process exists in its “current form because of concerns [about] how FINRA previously managed its arbitrator appointment process dating back to the 1990s.”

Before October 1998, FINRA staff controlled the arbitrator appointment process, PIABA said.

“Based on this judge’s order, it looks like somebody has gotten [FINRA] staff back involved in appointing arbitrators where, starting in late 1998, FINRA had moved all of this to being an electronic system,” Michael Edmiston, the new PIABA president and partner with Jonathan W. Evans & Associates in Studio City, California, told ThinkAdvisor Wednesday in a phone interview.

Added Edmiston: “FINRA has worked very hard to turn itself into the last source of securities arbitration … Up until this order came out, my opinion was they were doing a very good job. To see this judge’s ruling is just shocking.”

Joseph Peiffer, managing partner of Peiffer Wolf Carr Kane Conway & Wise and former PIABA president, added in a separate response to the vacated arbitration ruling: “FINRA Dispute Director, Rick Berry, needs to come down to Capitol Hill, raise his right hand and explain to the American investing public just how deep the corruption goes at his industry-run forum. Congress and investors need to know: ‘How many other arbitration panels have been tainted?’”

(Photo: Bloomberg)


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