FINRA Fires Three Arbitrators who Awarded $520k to Claimants
As a stock fraud attorney who’s been in the business for a long time, I experience the unique challenges of FINRA (Financial Industry Regulatory Authority) arbitration on a daily basis, but this recent Bloomberg article takes the cake.
Basically, FINRA decided to fire a panel of three FINRA arbitrator judges after the panel issued a decision forcing Merrill Lynch to pay damages totaling $520,000 (in FINRA Arbitration Case No. 09-07121. The damages were to be paid to two mom and pop investors who had filed claims for ‘breach of contract’ and ‘breach of fiduciary duty.’ FINRA’s decision to fire all three of the arbitrators came not two months after the panel issued this ruling.
As an SRO (Self-Regulating Organization), FINRA supposedly regulates itself to make sure its arbitrators are making appropriate decisions. But FINRA’s act of firing this panel certainly doesn’t make this ‘regulation’ look very friendly to investors.
Since FINRA arbitration proceedings are confidential, no one can know for sure all the particulars of this case. But I can’t help wondering: Were these arbitrators punished for issuing a sizable award against Merrill Lynch? Won’t the arbitrators who fill the seats of the fired arbitrators be more afraid to decide in favor of investors? And, just what kind of message is FINRA sending to its arbitrators with this?
Finally, I think the situation is best summarized by the words of one of the arbitrators who got fired, Fred Pinckney. He was quoted in the Bloomberg article as follows:
“To me, this undermines the credibility of the entire Finra process — I didn’t say kangaroo court — but when you have three well- credentialed people, doing their job, and there were no meritorious grounds for an appeal, and we get handed the ‘black spot’ — and not all at once — it makes for a pretty cheap novel.”
What is FINRA Arbitration?
If you have a complaint against a top-tier brokerage firm, then you’re probably aware that the day you signed the initial paperwork with your brokerage firm, you waived your right to normal court proceedings and agreed to settle any disputes by way of arbitration. In other words, if you have a case against your stock broker, you’ll probably be filing it through FINRA arbitration proceedings.
However, FINRA arbitration proceedings are not like normal court proceedings. First, the three-person arbitration panel that will decide your case is selected randomly from a vast pool of layperson arbitrators, only some of which are legally trained members of the bar. Second, these arbitration panels often include industry-biased veterans of the investment business (a.k.a. ex-stockbrokers). Third, unlike normal court proceedings it’s next to impossible to appeal an arbitration panel’s decisions to a higher authority. That’s because courts are typically very hesitant to overturn the decisions of arbitration panels.
What this all boils down to is the fact that FINRA arbitration is a different kind of ballgame, where judges often make their decisions based on how they ‘feel’ or based on who they ‘perceive’ is in the right. In other words, FINRA arbitrators may be more likely to follow their own internal guidelines, as opposed to following an in-depth knowledge of securities law. As you might expect, this could sometimes work in favor of investors, and sometimes it could work in favor of a brokerage firm, making the outcomes of FINRA arbitrations difficult to predict by way of legal analysis alone.
What are Your Thoughts?
What do you think about FINRA’s decision to fire the three arbitrators who decided against Merrill? What do you think it says about the validity of FINRA Arbitration as a forum for resolving stock brokerage customer disputes? If you have an opinion, or personal experience with FINRA arbitration, feel free to post your thoughts.