Exclusive: FINRA beefs up policing of arbitrators
Wall Street’s industry-funded watchdog said it was beefing up oversight of its 6,500 securities arbitrators after one of them was criminally indicted and suspended from the practice of law but failed to properly disclose those legal run-ins.
The Financial Industry Regulatory Authority’s new policy comes after Reuters asked questions about the background of Demetrio Timban, a Medford, New Jersey-based arbitrator who has become a central figure in a lawsuit between Goldman Sachs Group Inc (GS.N) and a wealthy investor. “In light of your questions, we reexamined our paneling process and initiated this change,” a FINRA spokeswoman said in an email.
Timban was indicted by the state of New Jersey for practicing law without a license, although charges were later dropped under a state program to deal with nonviolent offenses. He was also reprimanded by a Michigan regulator for the New Jersey incident and passing $18,000 in bad checks.
Timban said in an interview that he had closed his New Jersey office and the check-writing incident was “accidental,” as a family member was supposed to wire funds to cover the check. But FINRA said it did not learn of the New Jersey indictment for five months and that Timban failed to tell it about the Michigan problems altogether, while he arbitrated the Goldman case.
Investors and the securities industry must use FINRA’s arbitration system to resolve their legal disputes, such as battles over brokers’ signing bonuses or investor claims of mistreatment. Timban’s failure to meet his obligations to disclose his legal problems led to questions about how FINRA polices its arbitrators and the reliability of their decisions.
In response to questions from Reuters over the past few days, a FINRA spokeswoman said late on Thursday that the regulator has adopted a new policy of conducting annual background checks on its arbitrators and an additional review before appointing arbitrators to a case. Previously, FINRA checked its arbitrators only when they applied, and required them to self-report new information, such as any legal troubles.
While FINRA’s new policy is in response to the Timban matter, there have been other instances in which arbitrators have failed to self-report information, the spokeswoman said.
“The integrity of our arbitrator roster is of utmost importance to FINRA,” she said.
The new policy could help weed out problem arbitrators early on and lead to fewer lawsuits seeking to overturn awards.
The change is “really at the heart of the fairness of the process,” said Phil Aidikoff, a lawyer in Beverly Hills, Calif. who represents investors.
Terry Weiss, a lawyer for Greenberg Traurig LLP in Atlanta who represents brokerages, said the new policy might unearth extreme problems in an arbitrator’s past, but it would not solve everything. Arbitrators may still be sloppy about not disclosing other facts that can reveal bias against a party, said Weiss, who declined to comment on the Goldman case.
FINRA began background checks for all new arbitrator applicants in 2003, covering everything from employment verification to potential criminal run-ins.
In 2009, the regulator took on a year-long project to run checks on about 4,000 arbitrators in its pool who had not been checked because they were already serving as arbitrators when the new system came in.
The check did not reveal any negative information about Timban, the FINRA spokeswoman said.
She said the regulator had taken numerous other steps in recent years to enhance disclosure by arbitrators, including training materials and newsletters. FINRA also looks into parties’ allegations about arbitrators that occur during a case and relies on parties’ evaluations of arbitrators at the end of each case to detect problems.
Arbitrators do not have to be lawyers and are typically paid $200 per half-day session.
Timban has become a central figure in a lawsuit filed by the family investment vehicle of Richard Caruso, who founded Integra LifeSciences Holdings Corp in 1989. Goldman Sachs won the arbitration against the investment vehicle, Athena Venture Partners LP, which sought to recoup a $1.4 million loss.
Athena is claiming that Timban’s legal troubles had an impact on its arbitration and is asking the U.S. District Court for the Eastern District of Pennsylvania to throw out the FINRA ruling, according to a June 7 court filing.
Timban was acting as a “public arbitrator” – one who is not affiliated with the securities industry and is typically more consumer-friendly than an industry arbitrator, said Athena’s attorney, David Moffitt, in Wayne, Pennsylvania. Athena was depending on him in that role.
Had Timban disclosed his situation, been removed and replaced with a different public arbitrator, the case could have turned out differently, Moffitt said. Instead he abandoned the case in the wake of his problems with his Michigan law license, Athena alleged. That left the two remaining arbitrators in the case to decide themselves, Athena said.
A FINRA spokeswoman, however, said that Timban participated in the decision and agreed with the other two arbitrators.
A Goldman spokeswoman said the arbitrators’ ruling was correct and that Athena’s claims were not proven in arbitration. “We will continue to defend ourselves in any venue if necessary,” she said.
Timban said he fulfilled his obligations in the Goldman case and that Athena was “reaching for straws.”