Forced arbitration is common in investor cases. If an investor has a dispute with a member of FINRA, such as a broker or brokerage firm, and the dispute involves the investment business of the broker or brokerage firm, the investor very likely is required by contract to arbitrate before FINRA. Many financial advisers and other professionals in the investment industry are not brokers and are not regulated by FINRA. Instead, they are investment adviser representatives (IARs) of registered investment advisers (RIAs) regulated by the SEC or one or more states. Many investor agreements with RIAs also force investors to litigate claims in arbitration. For example, many RIA customer agreements require arbitration before the American Arbitration Association.
Because of the Federal Arbitration Act and other laws, investors rarely have much if any say about whether to seek relief in court or arbitration. Instead, if the investor’s account agreement says the investor must arbitrate, that requirement more often than not is enforced.
A Georgia judge recently called out misconduct by Wells Fargo and FINRA in an order vacating a FINRA arbitration award in favor of Wells Fargo and against an investor. According to the Honorable Belinda E. Edwards of the Superior Court of Fulton County, “Wells Fargo and its counsel manipulated the FINRA arbitrator selection process” by removing names of potential arbitrators from what was supposed to be a randomly generated list. Judge Edwards wrote, “Permitting one lawyer to secretly red line the neutral list makes the list anything but neutral, and calls into question the entire fairness of the arbitral forum.”
Judge Edwards went on to discuss problematic decisions by the arbitrators during the arbitration. In one example, a broker testified about text messages that did not go through Wells Fargo’s compliance process. The broker testified that he knew this was a “no-no,” “a bad thing,” and a violation of supervisory procedures, but the broker testified he “did it anyway.” This testimony was interrupted by a “medical emergency.” The FINRA arbitrators, for unknown reasons, did not sequester the broker. When the broker’s testimony resumed more than 6 months later, he claimed to not recall the damaging testimony, and his testimony changed in favor of Wells Fargo.
Judge Edwards’ opinion has received national attention. In a letter to FINRA’s president and CEO, Senator Elizabeth Warren and Representative Katie Porter described Wells Fargo’s manipulation of the arbitrator selection process as “highly disturbing.” Senator Warren and Representative Porter wrote, “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.”