What You Need to Know
- A review found no evidence of an improper agreement to remove certain arbitrators from arbitration cases.
- Lowenstein said it does not believe that there was any agreement between Wells Fargo counsel and FINRA regarding the arb panels.
An independent review of an arbitration decision in favor of Wells Fargo that was thrown out in court when a judge ruled that the wirehouse had manipulated the Financial Industry Regulatory Authority’s arbitrator selection process “found no evidence of an improper agreement to remove certain arbitrators from arbitration cases,” according to the Lowenstein Sandler law firm, FINRA reported Wednesday.
However, the review — ordered by FINRA and conducted by Lowenstein Sandler — recommended that FINRA provide greater transparency to the arbitrator selection process.
Christopher Gerold, a Lowenstein partner and former chief of the New Jersey Bureau of Securities, led the investigation.
FINRA said Wednesday that it “would promptly implement” the report’s recommendations.
“FINRA welcomes the opportunity to make the results of the independent review public, as we recognize the critical importance of maintaining the trust of all parties in the arbitration forum,” said FINRA President and CEO Robert Cook, in a statement.
“FINRA management agrees with the recommendations and commits to promptly deliver a plan for implementation to the Board,” Cook said. “This report will also inform our ongoing evaluation of how best to continue modernizing the [FINRA Dispute Resolution Services] DRS arbitration system to serve all stakeholders in an evolving, complex investing environment.”
The report concluded, “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,” Cook added. “Overall, notwithstanding the proposed 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.”
The report recommended that FINRA further enhance DRS by:
- Implementing ongoing, mandatory training for staff;
- Requiring written explanations, upon a party’s request, of approval or denial of a causal challenge to the selection of an arbitrator or an arbitrator removal by the DRS director for cause;
- Conducting an updated external procedural review of the arbitrator selection algorithm to determine if it is still the most effective means for creating random, computer-generated arbitrator lists; and
- Updating the DRS Manual and rules to clarify staff roles and procedures, and to ensure consistency and transparency.
Judge Belinda Edwards, of the Fifth Superior Court District of Georgia, ruled on Jan. 25 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.
Edwards’ Jan. 25 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.
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 Services, according to Edwards.