Motions to vacate an adverse arbitration award are rarely granted by courts. Indeed, that should come as no surprise to anyone inasmuch as the awards rendered at the conclusion of the arbitral process are explicitly designed to be “final.” As a matter of both federal and state law, there are very, very few available bases on which a court may overturn an award rendered by an arbitration panel. (In some jurisdictions, lawyers can be – and have been – sanctioned for filing a motion to vacate without a sound basis for it.) As everyone who participates in arbitrations understands (except, perhaps, clients on the losing end of arbitrations), even errors of law and errors of fact committed by an arbitration panel are not grounds for vacatur. By comparison, adverse decisions issued by a court can be appealed pretty much for any reason one is capable of conjuring up, even silly ones.
Last week, however, a Superior Court Judge in Fulton County, Georgia – my old stomping grounds – actually granted a motion to vacate that a customer filed after losing a FINRA arbitration he had brought against Wells Fargo Advisors. What makes the Order remarkable is not that it was granted, a rarity, as I said, but why it was granted.
In fact, the Judge identified five separate reasons to vacate the award. I will not focus on all of them; you can read them for yourself, and it’s not very pretty. Rather, I want to focus on the most troubling, and the one that should cause anyone who appears in FINRA’s arbitration forum to have questions about the fairness of the process. Namely, the Judge found that FINRA’s administration of the arbitrator selection process was not fair, and it wasn’t fair because it wasn’t, as advertised, neutral.
Here is the pertinent part of the story in a nutshell, according to the Judge’s Order:
- As in any customer arbitration, FINRA supplied both parties the same list of potential arbitrators, who together comprise the “pool.”
- From that list, the parties each strike the potential arbitrators they don’t want to sit on the panel – and that can be for any reason whatsoever – and rank the remaining candidates in order of preference. That is the so-called “Neutral List Selection System” identified in Rule 12400, namely, “a computer system that generates, on a random basis, lists of arbitrators from FINRA’s rosters of arbitrators.” Emphasis on random.
- In the case at hand, however, an extra step was inserted: when counsel for WFA got the list, he noticed that it included a potential arbitrator who he was not expecting to see.
- The reason the lawyer was not expecting to see this person is that, apparently, he had had the same arbitrator on the panel in a prior case (one not involving WFA), and claimed that the arbitrator “harbored personal bias” against him based on how that prior case had been conducted. Following that, WFA’s lawyer entered into an “agreement” with FINRA that none of the three members of the arbitration panel in that prior case would ever be included in any lists in any subsequent cases in which the lawyer participated. Accordingly, prior to submitting his rankings, WFA’s lawyer requested that FINRA strike this one arbitrator from the list and replaced with someone else, since it violated the terms of his agreement with FINRA.
- Although claimant objected, FINRA did remove the arbitrator and replaced him in the pool with someone else.
The Judge did not approve of this, at all, and the words she used to express her view on the subject say it perfectly: “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.”
It has been reported, following the publication of this Order, that FINRA flat-out denied the existence of any supposed agreement with the lawyer to exclude certain potential arbitrators from lists he is provided. One article I read includes this quote from a FINRA spokesperson: “There has never been any agreement between Finra Dispute Resolution Services and [the] attorney . . . regarding appointment of arbitrators. Any assertions to that effect are false.” The spokesperson went on to say that FINRA has “reviewed all cases involving [the attorney] . . . and none of the three arbitrators in question was excluded or removed from ranking lists prior to sending the lists to the parties.”
Frankly, I do not know how to account for the 180° difference between what the FINRA spokesperson said – i.e., what agreement? – and what the lawyer represented to Fulton County Judge in a legal brief – “It was made clear to me verbally [by FINRA] that none of the . . . arbitrators [from the prior case] would have the opportunity to serve on any one of my cases given the horrific circumstances surrounding the underlying case.” All I know is that these cannot both be true. I also know that I am damn careful when I make representations to a judge that what I am saying is true, and demonstrably so. I think it’s fair to say that any competent lawyer is similarly careful.
There is nothing in the Order that suggests that WFA was aware of any of these supposed shenanigans. And I expect that WFA will appeal (with different counsel, no doubt). But, for now, the Order stands, and FINRA (among others), for now, looks awfully bad.
And that is a problem for everyone who participates in FINRA arbitrations. Win or lose, but particularly when I lose, I have to be able to look my client in the eye and say, well, at least you got a fair shot. Arbitrations are not perfect, but neither are jury trials. But, as long as the process is fair, then the imperfections are annoyances, at best, but not grounds to throw the whole system away. But what this case presents is not some silly annoyance that makes for a good war story; it goes to the heart of the arbitral process, that is, to its fairness. If, in fact, FINRA played games here with the arbitrator lists pursuant to some secret agreement with one of the lawyers, then there should be hell to pay. And Senator Elizabeth Warren would be justified in ensuring that something be done to FINRA.
 It should be noted that in the prior case, i.e., the one that supposedly caused the arbitrator to develop his “personal bias” against the lawyer, the lawyer filed a motion to vacate the adverse arbitration award, claiming his client had lost as a result of that supposed bias. The motion to vacate was denied, however. which raises questions, of course, about the legitimacy of the claim of bias.