A Memphis, Tennessee judge recently granted brokerage firm Morgan Keegan’s request a Financial Industry Regulatory Authority (FINRA) arbitration award be vacated due to Panel bias. The court’s decision sent shock waves through the arbitration community and call into question FINRA’s ability to administer a large number of arbitration case involving the same product or investment. Excerpts from mutual fund newsletter Ignites appears below:
A Tennessee court ruling last week may have exposed a critical problem in the arbitration process used by Finra to settle investor claims against brokerages. The court vacated an arbitration award of more than $700,000 to claimants in a case they brought against Morgan Keegan over losses in the firm’s proprietary bond funds.
Morgan Keegan had appealed the arbitration panel’s award on grounds that two of the arbitrators had ruled in other, similar cases involving the firm and were, therefore, biased. At the outset of the arbitration, Morgan Keegan had asked the Financial Industry Regulatory Authority to remove the arbitrators from the panel, but the self-regulatory organization refused to do so.
The situation has lawyers familiar with the spate of Morgan Keegan claims before Finra questioning the organization’s arbitration process. Indeed, they say the recent court decision may pose huge problems for Finra because it appears to be common practice for arbitrators hearing Morgan Keegan claims to have sat on multiple other panels involving similar claims against the firm. (The court’s decision was recently handed down from the bench and has not yet been published.)
For example, a review of Finra’sarbitration awards shows that Eugene Katz, one of the arbitrators who made the award now vacated by the recent Tennessee court decision, has served on at least four panels dealing with Morgan Keegan claims.
Prior to the arbitration award that was disputed by Morgan Keegan, made last November, Katz had sat on two panels that heard similar claims against the brokerage over its bond funds. In both of those previous claims, the arbitration panels awarded damages to the claimants. Last month, Katz sat on a fourth arbitration panel involving claims against Morgan Keegan; the panel also awarded damages to the claimant.
This is not an isolated case, according to awards granted in the Morgan Keegan cases. Elton Chartrand, another arbitrator, has also sat on four Morgan Keegan arbitration panels, as has Donald Milo Helton. The arbitrators Mark Myers, Jay Robinson and David Coates have each sat on three Morgan Keegan arbitration panels.
A spokesman for Finra did not provide clarification of its policy in this area. The spokesman did not respond to requests for information about the number of times parties involved in Morgan Keegan claims had asked for the removal of arbitrators and how many times Finra had granted those requests. He declined to comment on the recent court decision, which he said Finra had not yet reviewed.
Part of the problem is that Finra’s resources have been stretched by the Morgan Keegan claims. Approximately 400 investor claims have stacked up against three Morgan Keegan funds that got hit with steep losses from subprime-related holdings, The Wall Street Journal reported. To deal with the heavy caseload, Finra has moved to quickly add arbitrators, according to the paper.
Finra has rapidly increased the pools of available arbitrators in cities where many of the Morgan Keegan hearings are taking place, including Atlanta, New Orleans, Orlando and Birmingham, Ala. The pools of arbitrators in those cities have increased more than eightfold, from an average of 87 to 721, according to the Journal. Linda Fienberg, Finra’s president of dispute resolution, told the paper the build-up was unprecedented.
About 80 arbitration cases have been heard to date, with 39 resulting in dismissal of the claims against Morgan Keegan, according to a spokeswoman for the firm. Those claimants have sought approximately $50 million in compensatory damages and have received $11.2 million in awards. Also, 117 cases seeking more than $25 million in damages have been abandoned by claimants prior to hearing, she says.