Notwithstanding The Lowenstein Report, FINRA Probably Made A Secret Agreement With A Broker’s Lawyer To Manipulate Arbitrator Selection

FINRA’s Secret Agreement To Rig Arbitrator Selection

In 2022, a Georgia court issued a bombshell opinion that found that FINRA had made an illegal secret agreement with a lawyer, Terri Weiss, who represented brokerage firms in FINRA arbitrations.

Specifically, FINRA told Weiss that it would make sure certain arbitrators that had served on one of Weiss’s cases, called the Postell case, were not assigned to arbitrate any of that lawyer’s cases in the future. Weiss memorialized the secret agreement with FINRA in a letter, which stated, in part, “[i]t was made clear to me verbally that none of the Postell arbitrators would have the opportunity to serve on any one of my cases…”

The Postell Case

In 2011, FINRA received a call from Weiss detailing his concerns about the Postell arbitrators’ conduct in the Postell arbitration. Weiss complained that the arbitrators had been biased against him just because the arbitrators asked his witnesses difficult questions (which is, in reality, part of the arbitrators’ job).

Incredibly, because of Weiss’s complaints, FINRA fired the Postell arbitrators. FINRA just sent a letter to the three arbitrators letting them know that they would no longer be permitted to serve as FINRA arbitrators. When the arbitrators asked FINRA for an explanation or relevant files, FINRA refused. Unfortunately, FINRA is not required to publicize their termination of arbitrators or explain their decisions.

Bloomberg found out about FINRA secretly firing the Postell arbitrators, and it published an article opining that FINRA fired the Postell arbitrators because they “had the temerity to find in favor of a customer in a securities arbitration against Merrill Lynch.”

Shortly after Bloomberg published the article, FINRA reinstated the Postell arbitrators, presumably because of the bad publicity.

But as noted above, according to Weiss’s letter, after FINRA reinstated the arbitrators, it made a secret agreement with Weiss promising that the Postell arbitrators would not be allowed to serve on Weiss’s cases.

Georgia Court Opinions And The Lowenstein Investigation

After reviewing Weiss’s letter describing his secret agreement with FINRA to prevent the Postell arbitrators from serving on Weiss’s cases, the Georgia court’s bombshell opinion opined: “Permitting one lawyer to secretly redline the neutral list makes the list anything but neutral, and calls into question the entire fairness of the arbitral forum.” Accordingly, the court vacated a FINRA arbitration award where the makeup of the arbitration panel may have been affected by FINRA’s secret agreement. An appellate court later reversed that decision citing the very high degree of deference that courts give to arbitration tribunals.

FINRA then hired a law firm called Lowenstein Sandler to conduct an “independent” review to determine whether the secret agreement ever happened.

After Lowenstein finished the investigation, it released a report finding—unbelievably—that there was “no documentary evidence” that FINRA had made the secret agreement with the lawyer to not put certain arbitrators on the panel. It apparently found “no documentary evidence” despite Weiss’s letter that expressly states “[i]t was made clear to me verbally that none of the… arbitrators would have the opportunity to serve on any one of my cases.”

Lowenstein’s first reason for believing there was no secret agreement was that Weiss apparently denied that he ever “suggested that [an agreement between Weiss and FINRA] existed.” That statement that Weiss never “suggested” the existence of an agreement is absurd; there was no ambiguity in Weiss’s letter describing the agreement. Of course, Weiss’s post-letter denial of the secret agreement also lacks credibility because Weiss was motivated to deny that the secret agreement existed; he knew the agreement could be grounds to vacate an award entered in his favor.

Lowenstein’s second reason for exonerating FINRA was that the firm interviewed FINRA personnel who could have been part of such an agreement, and those personnel denied that any such agreement ever existed. Those denials, of course, also lack credibility. Anybody who admitted to those agreements would have been fired. Yet, according to the investigation report, “Lowenstein found all these witnesses to be credible.”

In the end, I believe FINRA probably did have a secret agreement with Weiss to remove certain arbitrators from his cases, notwithstanding the Lowenstein Report. At a minimum, Lowenstein’s and FINRA’s assertions that there was “no documentary evidence” of the agreement are absurd. Aside from the letter, the circumstantial evidence also points toward the existence of a secret agreement. In particular, after bad publicity forced FINRA to arbitrators whom FINRA apparently believed had been biased against Weiss, it would make sense for FINRA to make a secret agreement with Weiss.