Lack of Transparency and Investor Choice Taint the Securities Arbitration Process

 

A recent arbitration incident and the circumstances surrounding it have enraged investor advocates who contend that securities industry-sponsored arbitration is inherently unfair to investors and that the Financial Industry Regulatory Authority’s monopoly over investor dispute resolution should be ended. The Financial Industry Regulatory Authority (FINRA), the securities brokerage industry’s self-regulatory organization, is alleged to have secretly removed three arbitrators from its arbitrator pool in the months after a May 2011 arbitration in which they ordered Merrill Lynch to pay $520,000 to the estate of a former customer, Robert Postell. The removal occurred after Merrill Lynch’s attorney complained about what he contended was “misconduct” by the arbitrators. After FINRA’s machinations came to light, and a firestorm of protest erupted, FINRA executives listened to the tapes of the hearing, concluded there was no misconduct by the arbitrators, and reinstated all three of them.

In the year following their award in the Postell matter, each of the three arbitrators received a so-called “black spot” letter from FINRA (at different times), summarily removing them from FINRA’s roster of arbitrators without notice or a hearing or even so much as a conversation with them to hear what they might have to say. The arbitrators were Ilene Gormley, Daniel Kolber and Fred Pinckney. Mr. Pinckney is an Atlanta attorney who has practiced law since 1973 and served as General Counsel to a healthcare company. Ms. Gormly is the chairperson and former compliance executive at a commercial bank. Mr. Kolber is a securities law attorney and founder of Intellivest Securities, Inc., a small Georgia investment bank.

What makes FINRA’s actions particularly suspect is that the removed arbitrators received their “black spot” letters at different times over a period of approximately 12 months after the Merrill Lynch hearing. One would think that, if the removal was based on conduct in one specific case, all of the arbitrators would have been removed at the same time. If, on the other hand, the arbitrators were removed for reasons unrelated to the Merrill Lynch case, why would FINRA executives reinstate the arbitrators after having reviewed the case hearing tapes? It appears that much of the story remains untold.

FINRA has denied that it removed the arbitrators because Merrill’s lawyer complained about the award. But was it truly just a coincidence, William D. Cohan wonders? As implied in the title of his Bloomberg article, “Wall Street’s Kangaroo Court Gets a Black Eye,” he doubts it.

As Mr. Cohan points out, FINRA is a captive of the securities industry. FINRA receives the vast majority of its more than $1 billion in annual revenue from securities firms, and securities industry executives sit on FINRA’s board of governors.

Initially, FINRA tried to justify its removal of the three arbitrators but its justifications “rang hollow,” according to Cohan. Soon afterward, FINRA “took the remarkable step of reinstating all three arbitrators.” Rocked by protests, FINRA executives listened to tapes of the Postell arbitration proceedings and were forced to conclude that the removals were wrong.

Yet FINRA continues to insist that it “does not remove arbitrators from the roster based upon their awards, and never has.” Many attorneys who represent investors in FINRA arbitrations do not believe that assertion.

Unfortunately, despite FINRA’s reversal and reinstatement of the three arbitrators, Merrill Lynch, through its attorney, has filed a petition to vacate the $520,000 award, reportedly claiming 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.”

But “with FINRA having cleared the arbitrators of wrongdoing, Merrill Lynch may have boxed itself into a corner in the legal argument department,” writes Mr. Cohan.

Mr. Cohan concludes: “What I am against is the sham that so often passes for justice on Wall Street these days. ‘ [Investors] are forced into FINRA arbitration and most don’t have a clue they have [given up their right to sue their broker in court]. FINRA’s treatment of Gormly, Kolber and Pinckney — 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.”

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.