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Judge Has Harsh Words For Finra Arbitration

3/22/2012

Dow Jones Compliance Watch

Judge Max O. Cogburn Jr. has let anyone who cares know how he feels about the system that obliges investors and employees at brokerage firms to take all disputes to arbitration.

Cogburn, a U.S. district court judge in North Carolina, expressed a deep dislike for the mandatory arbitration system managed by the Financial Industry Regulatory Authority.

He made it clear in a recent decision he thinks brokerages enjoy a clear advantage in the forum. “Arbitration under the Federal Arbitration Act is a process that, although retaining the appearance of constitutionality by involving the courts in confirming an award, does not even attempt to retain the appearance of fairness,” he wrote in the decision.

He also made it clear he dislikes when his authority is questioned. His criticism of Finra arbitration appears to have been set off by what he described in his ruling as an “open challenge” to his court’s powers by a lawyer for Wells Fargo Advisors.

Wells Fargo wanted the court to confirm an arbitration panel’s ruling that a former broker must repay the outstanding balance on his promissory note. According to the decision, the lawyer, Deborah Gale Evans, irked Cogburn by claiming she handles 30 to 40 arbitrations a year and never loses. “I’ve never lost one and I’ve never not gotten attorney’s fees. I always win these cases,” she is quoted as saying during the hearing.

Cogburn’s sarcastic response: “Now there’s a level playing field.”

Cogburn ultimately did confirm the award, finding the promissory-note contract to be legal. Attorneys say it’s extremely difficult for brokers to win such cases, so Evans’ track record on them isn’t too surprising.

But Cogburn seized upon Evans’ statement to question the inherent fairness of Finra’s arbitration system, which requires brokers and customers to bring their disputes with firms to arbitration instead of the courts. And arbitration rulings can only be challenged in court under narrow circumstances.

“Because of its constant and prolific participation in FAA arbitration, the claimant bank enjoys a clear advantage over the individual employee or customer,” Cogburn wrote.

Evans couldn’t immediately be reached for comment.

Ryan K. Bakhtiari, president of the Public Investors Arbitration Bar Association, agrees with Cogburn’s assertion that the odds in arbitration aren’t even.

“I think Wall Street can enjoy an advantage over employees or customers in these cases,” he said. “There’s still a ways to go to level the playing field between customers and employees and Wall Street.”

Bakhtiari believes customers should be able to choose whether they want to go to court or have their claims heard in Finra arbitration.

In the decision, Cogburn explains that in arbitration, a bank will know from experience which arbitrators are more likely to favor it and will choose those people. In contrast, an individual employee or customer has very limited knowledge of the arbitrator, Cogburn notes.

“Couple that with the proposition that the arbiter’s mistakes of facts or law are not reviewable by the courts, and the result is a process in which, as in this case, counsel for the bank can remain undefeated 30 or 40 times a year,” Cogburn adds.

But a Finra official stressed that there were measures in place to ensure fairness during the arbitration process, which she says is a neutral forum.

“The fact that our data show the industry loses roughly half the number of customer claimant arbitration award cases clearly demonstrates that no such ‘repeat player advantage’ exists,” said Linda Fienberg, president of Finra Dispute Resolution.

Jonathan Uretsky, a securities attorney who often represents broker-dealers, said a bank doesn’t necessarily have the upper hand just because it’s in arbitration more often than an employee or customer.

“If you assume both sides hire experienced counsel, and they will, the claimant and respondent will both have lawyers who do this 40 times a year and probably have been doing it for 10 to 20 years,” he said.

Although Cogburn ultimately confirmed Wells Fargo’s award, he vacated the award of attorney’s fees, citing the lack of an itemized list of hours worked and rates claimed.

Thomas B. Lewis, head of the employment litigation group at Stark & Stark in Princeton, N.J., notes that despite Cogburn’s disdain for arbitration, he found the arbitration award enforceable and the legal fees would likely have been enforced if there were proper documentation.

“We have to respect the judge’s opinions on arbitration but I think the uniform view among practitioners is that Finra’s arbitration process is a fair process,” Lewis said.


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