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J. Weil: Wall St. Arbitration ‘Plenty Rigged’

Posted by Larry Doyle on February 18, 2014 6:34 AM |

Bill Cohan, Susan Antilla, Gretchen Morgenson.

Although these individuals are not the only financial journalists whom I hold in high regard, they are certainly among the very few.

Who else is in their company? Bloomberg’s Jonathan Weil, who just the other day wielded a very sharp pen in addressing the arbitration process on Wall Street, or what I define as ‘the kangaroo court.’

Truth be told, the folks at FINRA who oversee Wall Street arbitration seem to be getting a little weary of being used as a punching bag and have made some tweaks to the system. Weil is not impressed.

He hits back hard in writing, Feeling Ripped Off? Don’t Rely On The Street’s Arbitrators:

Here’s some good news for anyone who ever gets ripped off by a securities broker. Wall Street’s self-policing body has decided to make its mandatory-arbitration system a little less rigged. The bad news? It still will be plenty rigged.

So-called public arbitration panels no longer could include people who used to work for brokerage firms, under a new proposal by the Financial Industry Regulatory Authority. Finra’s rules now say former stockbrokers, securities lawyers and others can serve on such panels after they have been out of the industry for five years. The rule change will go to the Securities and Exchange Commission for approval.

Finra has two classifications of arbitrators: non-public and public. Non-public arbitrators have experience in the securities industry. Public arbitrators aren’t required to have any industry knowledge. Investors get a choice of having claims heard by one kind or the other. They choose all-public panels in most cases, although that’s a misnomer because the hearings in this shadow-court system are conducted in private.

The tweak would be an improvement — who could be against having neutral arbitrators? — but only at the margins. The fundamental problem is that industry-sponsored arbitration is a racket. Customers have no choice but to sign away their right to sue in court if they want to open a brokerage account. (Lots of other industries get away with this too, from mobile-phone service providers to credit-card companies.)

The arbitrators are picked from a list compiled by Finra, which is financed by and functions as an arm of the securities industry. Arbitrators are independent contractors who serve at Finra’s discretion. Payments to claimants are notoriously low. Arbitrators’ rulings often include no explanation of why they decided the way they did.

If the arbitration system had been designed by fleeced investors and their attorneys, it probably would be biased against the securities industry. Not surprisingly, Finra’s system is designed to favor the industry it represents.

Back in 2005, Massachusetts Secretary of the Commonwealth William Galvin explained how things work while testifying before Congress about the securities arbitration process, back when Finra was known as the National Association of Securities Dealers. One example he offered was of a man he knew named John J. Mark.

“Mark was an arbitrator with the Commonwealth of Massachusetts for many years, and an adjunct professor at Harvard and Boston University,” Galvin said in his written remarks. “As far as I know he’s a man of impeccable credentials. And yet he was dropped from the NASD’s pool of arbitrators. Why? As he told a meeting of state securities regulators last summer, (and I quote): `The word on the street is if you rule against the (brokerage) houses, you will be removed from the list.'”

That perception has stuck through the years. Bloomberg View columnist William Cohan wrote an article in 2012 describing how Finra “seemingly out of nowhere fired three arbitrators in the months after a May 2011 case in which they awarded $520,000 to the estate” of a deceased Merrill Lynch customer. One after another, the arbitrators received “black spot” letters from Finra, removing them from its roster. Finra said at the time that the removals weren’t related to complaints by Merrill. As Cohan wrote, Finra’s explanations rang hollow. Two weeks after his column ran the three arbitrators were reinstated. (Sometimes shaming works.)

This is the reputation that Finra has created for itself, notwithstanding its claims that its arbitrators are neutral, qualified, fair and impartial. Here’s how the securities industry could help fix that: Stop requiring its customers to give up their right to a day in court as a condition of doing business.

I fully concur. Those commenting on Mr. Weil’s article would seem to as well.

What is the best way of dealing with Wall Street arbitration? Navigate accordingly with every precaution so you do not have to enter into it in the first place.

Larry Doyle

Please order a hard copy or Kindle version of my book, In Bed with Wall Street: The Conspiracy Crippling Our Global Economy.

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The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • James

    Having worked previously in arbitrations I have more to add.

    Basically it works like this – over time the litigation departments develop a playbook with the disposition, background, case history, ruling size, etc for each arbitrator in the system. When firms decide not to settle cases they are not only doing so for basic defensive purposes but also for informational purposes – adding to their playbook as new rulings occur for everyone in the system.

    Now consider an additional procedural component – when a claimant and firm square off, they are presented with peremptory challenge options via a form in which their choices of arbitrators are ranked. It resembles the process in which jurors can be struck by either side in a court case, but we are talking about the “judges” here who have jurisdiction to make discovery rulings, approve or deny motion requests, etc.

    Wouldn’t you love to go to court when you have your pick of judges and have them wired? Slip and fall case?

    Let’s strike judge Smith, he has presided over two big jury verdicts last year. Etc.

    Now, what chance do you suppose an individual – likely facing their only arbitration panel – has to make the correct call ? If they happen to pick a former PIABA litigator that person will likely be struck by the firm. Talk about insider trading. To be fair, FINRA provides basic background info to both sides (and web searches come in handy), but you can rest assured that a claimant is still at a disadvantage unless they pay up and pick a plaintiffs trial firm with similar info in their own bank.

    The theory from FINRA is somewhat sound, but the execution is flawed in the context of the larger problem you have highlighted of mandatory arbitration.

    You had better believe that issue is hotly litigated with quite a bit at stake.

    It will literally take an act of Congress to change.






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