FINRA is once again accused of bias in favor of the brokerage industry, this time, in the context of its closed door arbitration proceedings.
“Sunlight is said to be the best of disinfectants,” the future Supreme Court Justice Louis Brandeis famously wrote in a 1913 article for Harpers’ Weekly, and now, almost 100 years later, there is evidence that Brandeis was right.
On July 9th Bloomberg News reported that, seemingly out of nowhere, FINRA fired three arbitrators in the months after a May 2011 case in which they awarded $520,000 to the estate of the late Robert Postell. The finding was against Postell’s former broker, Merrill Lynch, a subsidiary of Bank of America Corp. One after another over a period of about a year, each of the three arbitrators on the Panel received what are known as “black spot” letters from FINRA, removing them from the roster of those empowered to adjudicate the thousands of lawsuits brought each year by Wall Street employees and customers against financial firms. FINRA officials have maintained that these arbitrators weren’t removed because Merrill’s lawyer and executives complained about the sizable award against Merrill. FINRA derives the vast majority of its more than $1 billion in annual revenue from securities firms, and executives in the industry serve on FINRA’s board of governors.
The column ruffled some feathers at FINRA, and on July 25 the organization took the remarkable step of reinstating all three arbitrators to the FINRA roster. In a letter to the arbitrators, Linda Fienberg, the president of FINRA’s dispute resolution and its chief hearing officer, explained that “after reading the commentary” from Bloomberg View she and her fellow FINRA executives “re-opened the matter.” They listened to tapes of the Postell arbitration proceedings and “reached a different conclusion regarding the alleged inappropriate conduct from the conclusion previously reached.” Still, Fienberg alleged unspecified “inaccuracies” in Cohan’s reporting and disputed the causal relationship between the firing of the three arbitrators and the complaints from Merrill and its attorney about the Postell award. “There is no validity to this assertion,” Fienberg wrote. “FINRA simply does not remove arbitrators from the roster based upon their awards, and never has.”
Meanwhile, Merrill Lynch’s lawyers have asked a federal judge in Atlanta to throw out the $520,000 award to the Postells, arguing that the arbitrators “exhibited evident partiality,” “misbehaved such that Merrill Lynch’s rights were prejudiced,” “exceeded their powers by taking over the arbitration, conducting hostile cross examination of Merrill Lynch’s witnesses on irrelevant topics” and “refusing Merrill Lynch’s request that the biased arbitrators recuse themselves.” Merrill cited the termination of those arbitrators as the smoking gun showing they had done something egregiously wrong in the Postell arbitration.
Columnist Cohan, sharing the sentiment of many who have sat through a FINRA arbitration, called it a ”sham that so often passes for justice on Wall Street these days…The millions of people who either work there or who have brokerage accounts sign away, upfront, their legal right to resolve financial disputes in a court of law. They are forced into FINRA arbitration and most don’t have a clue they have relinquished their ability to resolve it any other way…. FINRA’s treatment of the arbitrators – despite their reinstatements — illustrates just how shoddy the system is. It needs to be scrapped, and those with a grievance against Wall Street should get their day in a real court.”