By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She is currently writing a book about textile artisans.
Last week, Senator Elizebeth Warren and Representative Katie Porter, sent a withering letter to Robert Cook, president and CEO of Financial Industry Regulatory Authority, Inc. (FINRA), the self regulator that oversees the mandatory arbitration system for settling disputes between brokers and their customers. The letter was sparked by a January ruling by Belinda Edwads, a superior court judge in Fulton County, Georgia.
The issue: not content with relying on the systemic bias of mandatory arbitration towards defendants – usually corporations – instead of plaintiffs – you and me – FINRA apparently allowed Well Fargo to strike certain names off the putatively neutral list from which arbitrators are chosen. Basically, the regulator allowed Well Fargo to select who would hear claims against it – a direct way for Wells Fargo to game the system.
Over to Warren and Porter:
We are writing regarding a highly disturbing report earlier this week indicating that Wells Fargo rigged the Financial Industry Regulatory Authority (FINRA) arbitration system in a case involving a customer’s claim against the bank’s mishandling of his investments by “improperly manipulat[ing] a list of arbitrators who could decide on the customer’sclaim—with the permission of” FINRA.
According to the findings of Superior Court Judge Belinda Edwards, “FINRA for years has used a computer system to randomly generate a neutral list of potential arbitrators from which the parties agree on three to decide the case. But in this case, multiple names were removed from the list at the request of Wells Fargo’s lawyer and with the permission of Finra.” Judge Edwards wrote that, “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.”
We have a long public record of concerns about the wide-ranging and long-lasting pattern of illegal and abusive behavior by Wells Fargo.4 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.6 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 [citations omitted].
Ouch! Now, as the letter incidtates, Warren has hammered FINRA before. So, the letter later quoted back to Cook FINRA’s previous paean to the putative fairness of its arbitration system. From the Warren/Porter letter:
In response to that letter, you made a series of assertions about the fairness of your arbitration system. You wrote that:
FINRA’s primary role in the arbitration process is to administer cases brought to the forum in a neutral, efficient and fair manner. In its capacity as a neutral administrator of the forum, FINRA does not have any input into the outcome of arbitrations. Investors have the option to have their case decided exclusively by public arbitrators, who have no ties to the securities industry. To provide transparency about awards rendered in the forum, FINRA makes all awards publicly available and publishes detailed arbitration statistics on its website, including the number of cases filed and their respective outcomes. FINRA recognizes the importance of providing a diverse pool of arbitrators from which parties can choose. FINRA has embarked on an aggressive campaign to recruit new arbitrators with a particular focus on adding arbitrators from diverse backgrounds […] FINRA staff review arbitration claims and disclosures reporting arbitration awards or settlements to determine whether the issues raised in the arbitration or settlement require a further regulatory review or response [citations omitted].
Warren and Porter didn’t content themselves with a simple scolding. Instead, they laid out a series of questions to which Cook must respond before February 23:
These findings by a Federal judge in the Wells Fargo case raise serious questions about your assertions that the FINRA arbitration process is “neutral, efficient and fair,” and about whether Wells Fargo has once again sought to undermine consumer protection rules. To address these questions, we ask that you provide answers to our questions no later than February 23, 2022.
- (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:
- Which arbitrators did Wells Fargo request be removed?
- Why did they make these requests?
- How did FINRA respond to these requests?
- Were the attorneys representing Mr. Leggett and Bryson Holdings giventhe 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”?
I’ll be watching and will report back with further details, when they become available.
Forced Arbitration: Some Background
Before I close, I should review why forced arbitration is such an important issue for consumers. Mandatory arbitration is one of several so-called legal reforms that corporations have successfully promoted over the past couple of decades that make it more difficult for plaintiffs – e.g., you and me, whether acting alone or with others in a class action lawsuit – to prevail in legal actions against corporate defendants.
The Consumer Financial Protection Bureau (CFPB) waded into the mandatory arbitration cesspit, defining it as a signature issue. By wading into this particular morass, the new agency signalled it was serious about its consumer protection mandate. Alas, that effort foundered, due to mismanagement by the CFPB head, Richard Cordray, as I wrote in FAIR Act: Will Congress Finally Complete the Project the CFPB Fumbled and Ban Mandatory Arbitration Clauses?:
The Consumer Financial Protection Bureau (CFPB) did not cover itself in glory even before the hostile Trump became President and started actively opposing its efforts. In fact, under its first director, Richard Cordray, the bureau fumbled its biggest opportunity, its attempt to ban pre-dispute mandatory arbitration agreements. After withering and dithering, in 2017 the CFPB adopted the Arbitration Agreements Rule “[banning] companies from using mandatory arbitration clauses to deny groups of people their day in court.”
Alas, the agency’s delay in promulgating the rule until well into the Trump administration meant it was soon overturned under the provisions of the Congressional Review Act (CRA), as I wrote in RIP, Mandatry Arbitration Ban …
When the Biden team rolled into two accompanied by thin Democratic majorities in each house of Congress, Democrats promised legislation to fix the mess the Cordray CFPB had made. Promises, promises. As with so many of their other promises, this one’s also proven to be empty. Although the then-House passed a predecessor bill in September 2019, The latest version of the FAIR Act, H.R. 963, introduced by Representative Hank Johnson, stalled. It’s yet to pass the full House. Senator Richard Blumenthal introduced a companion measure into the Senate.
Now, I can hear snickering from the commentariat – why should I expect anything different from Democrats – with consumers on one side, and corporations on the other?
Yet there’s another factor to consider. Trial lawyers have in the past been significant Democratic donors. I haven’t looked at the latest data, but at one time, IIRC, trial lawyers were the single biggest source of Democratic campaign funds. So I don’t understand why they’re not pushing for this legislation. To be sure, their motives for supporting a mandatory arbitration ban are clearly self-interested, With forced arbitration banned, the number of lawsuits would increase. Banning forced arbitration would also benefit consumers.