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FINRA Orders Review of Wells Fargo Arb Ruling That Was Struck Down in Court

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What You Need to Know

  • Christopher Gerold, a Lowenstein partner and former chief of the New Jersey Bureau of Securities, will lead the investigation.
  • An Atlanta Superior Court judge ruled that Wells Fargo had manipulated the FINRA arbitration process.
  • FINRA takes this matter very seriously, said CEO Robert Cook.

The Financial Industry Regulatory Authority is ordering an independent review of an arbitration decision in favor of Wells Fargo that was thrown out in court when a judge found that the wirehouse had manipulated the arbitrator selection process, the regulator said Friday.

FINRA says it has hired the Lowenstein Sandler law firm to review how FINRA Dispute Resolution Services complied with its rules, policies and procedures for arbitrator selection in the proceeding, in which a panel denied an investor’s claim against Wells Fargo.

On Feb. 2, Atlanta Superior Court Judge Belinda Edwards ruled that Wells Fargo and its counsel “manipulated” FINRA’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.

“We take this matter very seriously,” Robert Cook, FINRA president and CEO, said Friday in a statement.

“FINRA recognizes the importance of maintaining trust in the system and is committed to ensuring the DRS arbitration forum is operated in a fair and neutral manner,” Cook continued. “In keeping with that commitment, FINRA’s Audit Committee has engaged an independent, outside party to review how the arbitrator selection process was carried out in this case, and to determine whether any improvements to the process may be warranted. FINRA will make the results of this review public.”

Christopher Gerold, a partner in Lowenstein’s Securities Litigation and Corporate Investigations & Integrity Practice groups, will lead the independent review and report the firm’s findings directly to the Audit Committee of FINRA’s Board of Governors.

Prior to joining Lowenstein in January, Gerold was chief of the New Jersey Bureau of Securities from 2017 to 2021 and was president of the North American Securities Administrators Association.

The Case

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 June 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.

The Public Investors Advocate Bar Association raised an alarm about “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.

FINRA’s DRS administers the arbitration forum to assist in the resolution of disputes involving investors, securities firms and their registered employees.

“Although securities firms and investment advisers often include mandatory arbitration clauses in their customer account agreements, FINRA rules do not require this practice,” FINRA said. “The arbitration forum operates in accordance with rules that have been approved by the SEC, after a finding that the rules are in the public interest. The SEC regularly examines DRS’ operations.”

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