On the heels of the decision by Fulton County Superior Court Judge Belinda E. Edwards in Leggett v. Wells Fargo Clearing Services, LLC, No. 2019CV328949 (Ga. Super Jan. 25, 2022), finding that the potential arbitrator list preparation process had been compromised, and subsequent calls by PIABA for Congressional and SEC investigations, two Democratic lawmakers have written to FINRA CEO Robert Cook demanding answers. And FINRA has agreed to conduct an independent review.

We reported on this one in SAAs 2022-05 (Feb. 10) & -04 (Feb. 3). Our coverage included: 1) PIABA’s February 2 Statement from President Mike Edmiston commenting on the court decision and calling for Congress and the SEC to investigate FINRA’s operation of its arbitration forum; and 2) FINRA’s response that: “There has never been any agreement between FINRA Dispute Resolution Services and attorney Terry Weiss regarding appointment of arbitrators. Any assertions to that effect are false.”

Long-Standing Concerns

In their February 9 letter, Sen. Elizabeth Warren (D-MA) and Rep. Katie Porter (D-CA) say: “We have a long public record of concerns about the wide-ranging and long-lasting pattern of illegal and abusive behavior by Wells Fargo. Similarly, we have long had concerns about FINRA’s ability to effectively enforce rules against fraudulent and abusive behavior by brokers and dealers. And we have for years attempted to address the problems for consumers and workers caused by forced arbitration processes that limit their rights. This latest report brings all three problems into focus: it reveals troubling new allegations about the atrocious behavior of Wells Fargo, the inability of FINRA to effectively police the financial system, and the unfairness of the arbitration process” (footnotes omitted).

Answers Sought

The legislators go on to say that FINRA must address their concerns by answering a series of questions by February 23 (ed: repeated verbatim):

(1) What was the specific process by which arbitrators were chosen in the Wells Fargo vs. Brian Leggett/Bryson Holdings case?

(2) Was this process consistent with FINRA’s policies and precedents for choosing arbitrators?

(3) Does FINRA believe that this process was conducted in “a neutral, efficient and fair manner”?

(4) Did Wells Fargo’s attorneys communicate with FINRA officials regarding the arbitrators that would be chosen – or not chosen – to hear this case? If so, what was the nature of these communications?

(5) Specifically, did Wells Fargo request that any arbitrators be removed from the list of those available to hear the case? If yes:

  1. Which arbitrators did Wells Fargo request be removed?
  2. Why did they make these requests?
  3. How did FINRA respond to these requests?
  4. Were the attorneys representing Mr. Leggett and Bryson Holdings given the same opportunity to strike arbitrators from this case? Did they avail themselves of this opportunity?

(6) Does FINRA notify the public of instances where arbitrators are struck from having the ability to hear an arbitration case? If so, how does the organization do so?

(7) Does FINRA believe the issues raised in this arbitration case “require a further regulatory review or response”?

Postscript: Wells Responds

According to a February 10 Barron’s story, Lawmakers Want Answers From Finra on Alleged Secret Wells Fargo Arrangement, Wells Fargo has weighed in: “We adamantly deny all of the allegations cited in this decision, which we believe are not supported by the facts or the extensive record. Finra has well-established rules for admitting arbitrators to its roster, and the process is fair to all parties. Wells Fargo Advisors followed this process, and both parties had the opportunity to make arguments regarding each of these issues to the arbitrators and to Finra.”

Post-Postscript: FINRA to Conduct Independent Investigation

FINRA has agreed to conduct an independent investigation. A February 18 Press ReleaseFINRA Hires Firm to Conduct Independent Review of Arbitrator Selection Process, announces that the Authority: “has hired the Lowenstein Sandler law firm to conduct an independent review of how FINRA Dispute Resolution Services (DRS) complied with its rules, policies and procedures for arbitrator selection in an arbitration proceeding whose award was recently vacated by an Atlanta Superior Court judge…. 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 served as President of the North American Securities Administrators Association” (link to bio added by the Alert). No specific timetable is mentioned, but the release uses the term “coming months.”

(ed: *The SEC shoe has not yet dropped, but we are sure it will. **As we’ve said before, this is surely not the last of it.)

This post first appeared on the Securities Arbitration Alert blog.  The blog’s editor-in-chief is George H. Friedman, Chairman of the Board of Directors for Arbitartion Resolution Services, Inc.