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Regulation and Compliance > Federal Regulation > FINRA

In Wells Fargo Case, FINRA Didn't Manipulate Arb Process: Independent Review

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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.

Case Background

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.

FINRA announced on Feb. 18 that it was seeking an independent review of the ruling. Wells Fargo said on Feb. 25 that it is appealing Edwards’ ruling.

As the Lowenstein report, released Wednesday, states, the court decision found, among other things, that Wells Fargo and its counsel had manipulated the arbitrator selection process through an agreement with FINRA under which arbitrators from a prior case involving the counsel would be automatically removed from the list of potential arbitrators in any case in which the counsel appeared.

“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 firm said in its report, referring to Wells Fargo’s counsel during the arbitration proceeding, Terry Weiss.

The report added, “The evidence further demonstrated that FINRA personnel generally adhered to the policies and procedures and that their actions during the [relevant arbitration] were intended to be fair and reasonable at each step.”

Lowenstein states that it conducted 29 interviews; examined more than 150,000 documents, emails and telephone records; reviewed FINRA’s DRS arbitrator database system; and listened to recordings of relevant arbitration proceedings.

The report also states that FINRA DRS “personnel cooperated fully, and that neither FINRA management nor the Audit Committee dictated the methods of the inquiry or its conclusions.”

PIABA Responds

Responding to the report, the Public Investors Advocate Bar Association, PIABA, said in a Wednesday statement that it “respects the thorough and rigorous work supporting FINRA’s Independent Review, which concluded that there was no agreement between counsel for Wells Fargo and FINRA to remove certain arbitrators from consideration for appointment in the Leggett v. Wells Fargo arbitration.”

While the review “determined that FINRA personnel generally adhered to FINRA’s policies in the Leggett arbitration, PIABA remains concerned about the lack of transparency in the process and the appearance of impropriety in that case,” the statement said.

The appointment of arbitrators “is the single most important part of the arbitration process and investors who are forced into arbitration must have confidence in the integrity of the selection process,” PIABA stated. “Accordingly, PIABA welcomes the Report’s detailed recommendations and looks forward to working with FINRA in improving its arbitrator appointment process to prevent abuses, provide consistent results, and give greater transparency.”

The underlying purpose of FINRA’s Neutral List Selection System “was to minimize FINRA staff involvement in the most important part of every case, the appointment of arbitrators,” PIABA continued.

“The Independent Review revealed the many touchpoints where FINRA staff are involved and made recommendations for improvements to improve neutrality and transparency.”

The Independent Review’s “detailed descriptions of FINRA DRS’s internal workings in deciding a challenge to an arbitrator’s potential service are a welcome ray of sunshine into what has been an opaque decision-making process for forum users for many years,” PIABA added.


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