Wells Fargo Collects Underpants and Makes Profit But Can't Prove Phase 2 Arbitration Agreement

January 14, 2021

The South Park Gnomes had Phase 1: Collect Underpants. The Gnomes had Phase 3: Profit. What the Gnomes never had -- could never quite figure out -- was Phase 2: How do you manage to turn a profit from stolen underpants? In a recent lawsuit brought by a former Wells Fargo employee, the defendants wanted the court to find that there was an enforceable arbitration agreement. They had some Forms U4. They had FINRA's rulebook. They also had a former regulator called NASD and a former employer whose name had changed. Problem was, where the hell was Phase 2?

2017 South Carolina Circuit Court Lawsuit

In 2017, Robert F. Berry filed a lawsuit in the South Carolina state Circuit Court asserting, inter alia, wrongful termination, breach of contract, and defamation against Scott A. Spang, Wells Fargo Clearing Services, LLC, f/k/a Wells Fargo Advisors, LLC, Wachovia Securities Financial Holdings, LLC, Wells Fargo & Company, and Wells Fargo Bank, N.A. Robert F. Berry, Respondent, Scott A. Spang, Wells Fargo Clearing Services, LLC, f/k/a Wells Fargo Advisors, LLC, Wachovia Securities Financial Holdings, LLC, Wells Fargo & Company, and Wells Fargo Bank, N.A., Appellants (Opinion, South Carolina Court of Appeals, Appellate Case No. 2017-001690, Opinion No. 5792 / January 13, 2021)(the "2021 Opinion")
As asserted in part in the 2021 Opinion:

[B]erry alleged that, in 2014, Appellants forced him to resign from his position as a Wealth Manager and Senior Vice President with Wells Fargo Advisors.3 He claimed this was in retaliation for his challenges to changes in his compensation arrangement and his refusal to participate in an allegedly illegal cross-selling program. In addition, Berry alleged that in 2016, he learned Wells Fargo Advisors had filed a Form U5 termination notice, which appeared on his official record. The Form U5 stated Wells Fargo Advisors had permitted him to resign, and it noted that his branch office manager had discovered several binders of customer information in the trunk of Berry's vehicle.  

= = = = =

Footnote 3: Berry stated he joined the brokerage firm of "Wheat Butcher Singer" in 1994; in 1997, First Union Corporation acquired Wheat Butcher Singer, and the firm became "Wheat First Union"; in 2001, the firm's parent company merged with Wachovia Corporation, and its name changed to "Wachovia Securities"; finally, in 2008, "Wells Fargo" acquired "Wachovia," and the retail brokerage changed to "Wells Fargo Advisors" in 2009. Berry asserted that due to the 2009 acquisition, he became an employee of Wells Fargo Clearing Services, LLC, formerly known as Wells Fargo Advisors, LLC, and its parent company, Wachovia Securities Financial Holdings, LLC (collectively, Wells Fargo Advisors).

at Page 2 of the 2021 Opinion

Motion to Compel FINRA Arbitration

In response to Berry's state lawsuit, the Appellants moved to dismiss/stay the state court proceeding and sought to compel FINRA arbitration. In support of the Motion to Compel, Appellants submitted to the South Carolina Circuit Court:

a supporting memorandum, three Forms U4, and the affidavit of Beverly W. Jackson. The three Forms U4 were dated November 5, 1994, January 16, 1995, and September 28, 1995, respectively. Each form included the following language: 

I agree to arbitrate any dispute, claim, or controversy that may arise between me and my firm, or a customer, or any other person, that is required to be arbitrated under the rules, constitutions, or by-laws of the organizations indicated in Item 10 as may be amended from time to time . . . .

at Pages 2 -3 of the 2021 Opinion

NASD? What's that got to do with FINRA?

In considering the motions before it, the Circuit Court entertained the following during its hearing [Ed: footnotes omitted]:

Appellants argued brokers wishing to work in the securities industry must sign a Form U4, register with and be licensed through FINRA, and abide by FINRA's rules. They asserted Berry completed a Form U4 in 1994 when he began working for the predecessor entity and the arbitration provision contained within the form was binding upon Berry and Wells Fargo Advisors. In addition, Appellants argued Berry was a registered representative or associated person under FINRA and that FINRA Rule 13200(A) bound the parties to arbitration. 

Berry neither admitted nor denied that he was registered with FINRA or that he was a registered associate of Wells Fargo Advisors. He argued Appellants, as the parties seeking to compel arbitration, failed to satisfy their burden to prove that FINRA rules applied, that Berry was registered with FINRA, or that an agreement to arbitrate existed. Berry argued Jackson's affidavit was insufficient to authenticate the Forms U4 and Appellants were not parties to any of the forms. In addition, Berry asserted the form designated SROs that no longer operated arbitration forums. He agreed that there was a "consolidation" of the NASD and NYSE arbitration forums in 2007, and he conceded the new entity became FINRA. However, Berry contended neither NASD nor NYSE continued to operate a separate arbitration forum and the court could not substitute FINRA for NASD in the agreement. He acknowledged FINRA operated an arbitration forum but asserted the arbitration clause in the Form U4 failed because Item 10 did not include FINRA as a possible forum. 

In response, Appellants suggested the court take judicial notice that, in the mid-2000s, NASD turned over its responsibilities for the regulation of the financial services industry, broker-dealers, and brokers to, and "essentially morphed" into, a newly created entity called FINRA. In addition, Appellants argued it was routine in the financial industry for disputes of this nature to proceed to arbitration and that they were entitled to enforce the arbitration agreement contained in the Forms U4 because Berry laid out the "transformation" of Wheat First Securities into Wells Fargo Advisors.

at Pages 3 -4 of the 2021 Opinion

No Substitutions

Following the hearing, the Circuit Court issued an Order denying Appellants' Motion to Stay/Compel because:

(1) Appellants did not properly authenticate the forms; (2) the three Forms U4 did not satisfy Appellants' burden to prove the existence of an agreement by Berry to arbitrate his dispute with Appellants; and (3) even assuming an arbitration agreement arose between the parties by virtue of the 1994 Form U4, the agreement was void because the arbitration forums specified in the agreement no longer existed. Specifically, the circuit court concluded the 1994 and 1995 Forms U4 did not establish an agreement to arbitrate because Appellants were not parties to the forms. The court reasoned that the predecessor, Wheat First, was the named firm on the forms, and the forms contained no language stating that an arbitration obligation would extend to successors or assigns of that firm. The court noted that even if it were appropriate to take judicial notice of FINRA Rule 13200, Appellants failed to show it applied to Berry such that it would bind him to its arbitration procedure. The court concluded the selection of the designated forums constituted an integral term of the arbitration clause in the 1994 form. It found that because none of the identified forums existed and Appellants failed to show the court could simply substitute FINRA as a forum, the arbitration agreement was impossible to perform and void.

at Page 4 of the 2021 Opinion

Appeal to South Carolina Court of Appeals

After the Circuit Court denied Appellants' motion for reconsideration, they appealed to the South Carolina Court of Appeals, where two issues were cited:

1. Did the circuit court err by refusing to reconsider its order denying the motion to compel arbitration when Appellants submitted an affidavit and newly discovered evidence showing Berry agreed to arbitrate his claims? 

2. Did the circuit court err by denying the motion to compel arbitration when public records and FINRA rules established Berry was obligated to arbitrate his claims against Appellants as a condition of his admitted registration with FINRA?  

at Page 5 of the 2021 Opinion

None So Blind As . . .

The Court of Appeals found that the [Ed: footnote omitted]:

circuit court abused its discretion by excluding the 1994 and 1995 Forms U4 submitted with the motion to compel based on Rule 901(a), SCRE. Jackson attested that, as a paralegal of Wells Fargo & Company, she had "access to certain personnel records of current and former employees . . . and related corporate entities." In addition, she stated "[t]he [attached] Form U4 for Mr. Berry show[ed] that he was employed by Wheat First Securities Inc. at the time of its filing." We acknowledge Jackson's affidavit did not explain what a Form U4 was, identify the actual custodian of the document, or indicate that it was a true and correct copy. However, because the burden to authenticate is low, we find the foregoing was sufficient to satisfy Rule 901, SCRE, and the circuit court erred by excluding these documents. . . . 

at Page 7 of the 2021 Opinion

You Leave Us "No Choice" (of forum)

Having opened the door for the possibility of reversing the lower court, the Court of Appeals quickly slams the portal shut and found that the Forms U4 did not create an enforceable agreement among the parties to arbitrate:

We find the failure of the choice of forum invalidated the agreements contained in the 1994 and 1995 Forms U4. Here, all three of the Forms U4 Appellants submitted with their motion to compel arbitration listed "Wheat First Securities, Inc." as the firm name, and the only SROs selected were the ASE, NASD, NYSE, and PHLX. Even if any of these SROs still existed, the parties did not dispute they no longer provided arbitration services. We find the arbitration forum was a material and integral term of the agreement, and because the indicated organizations no longer existed or provided arbitration services, there was no enforceable agreement to arbitrate. 

Further, we find none of the Forms U4 established an agreement to arbitrate between Berry and Appellants. First, the agreements contained in the 1994 and 1995 Forms U4 were between Berry and a firm that no longer existed, and they contained no language binding successors or assigns to the named firm. Appellants, therefore, could not enforce any purported agreement to arbitrate contained therein. Second, the 1999 and 2014 Forms U4 that Appellants submitted with their motion to reconsider likewise failed to establish an enforceable agreement to arbitrate between Berry and Appellants. Jackson's affidavit stated "Wachovia Securities Financial Holdings, Inc." was the parent company of Wells Fargo Clearing Services, LLC, formerly known as Wells Fargo Advisors, LLC, and an "indirect subsidiary of Wells Fargo & Company." She attested "Wheat First Securities, Inc." was "the predecessor in interest to Wells Fargo Advisors, LLC" and gave the history of the mergers and acquisitions that resulted in the creation of this entity. The 1999 Form U4 designated "Everen Securities" as the firm name and contained the same arbitration clause that was included on the 1994 and 1995 Forms U4. However, this form contained no language indicating it bound successors and assigns to the named firm. Further, FINRA was not yet in existence and therefore was not included as an SRO on the 1999 Form U4. Finally, the 2014 Form U4 designated Wells Fargo Advisors as the firm and FINRA as an SRO, but it contained no arbitration agreement. Therefore, although we acknowledge the 2014 form indicated Berry was registered with FINRA in 2014, we find neither the 1999 nor the 2014 form established Berry agreed to arbitrate his claims against Appellants. . . .

at Page 9 of the 2021 Opinion

FINRA Rule 13200

The Appellants argued that even if the Forms U4 had not established an enforceable arbitration agreement that a separate basis for same was promulgated under FINRA Code of Arbitration Procedure for Industry Disputes Rule 13200: Required Arbitration, which states:

(a) Generally
Except as otherwise provided in the Code, a dispute must be arbitrated under the Code if the dispute arises out of the business activities of a member or an associated person and is between or among:
  • Members;
  • Members and Associated Persons; or
  • Associated Persons.
(b) Insurance Activities
Disputes arising out of the insurance business activities of a member that is also an insurance company are not required to be arbitrated under the Code.

The Circuit Court declined to find that Rule 13200 was a stand-alone basis for an enforceable arbitration agreement among the parties [Ed: footnotes omitted]:

Even assuming Berry was registered as an associated person with FINRA, no precedent requires us to conclude FINRA Rule 13200, in and of itself, constituted an enforceable arbitration agreement between Berry and Appellants. Although Appellants assert courts have uniformly interpreted a similar FINRA rule-Rule 12200-as an enforceable agreement to arbitrate, Rule 12200 pertains to disputes between members and customers. See Waterford Inv. Servs., Inc. v. Bosco, 682 F.3d 348, 353 (4th Cir. 2012) ("The FINRA Code provides that a customer can compel arbitration of a dispute 'between a customer and a member or associated person of a member' when the dispute 'arises in connection with the business activities of the member or the associated person.'" (quoting FINRA Rule 12200)); Id. ("This provision 'constitutes an "agreement in writing" under the F[AA,] . . . which binds . . . [a FINRA] member, to submit an eligible dispute to arbitration upon a customer's demand.'" (second alteration in original) (quoting Wash. Square Secs., Inc. v. Aune, 385 F.3d 432, 435 (4th Cir. 2004))). We have been unable to identify any precedent extending the foregoing interpretations to FINRA Rule 13200. Notwithstanding the language of FINRA Rule 13200, we conclude the record must demonstrate the parties agreed to arbitrate their disputes, independent of either party's registration with FINRA. See Towles, 338 S.C. at 37, 524 S.E.2d at 843-44 ("Arbitration is available only when the parties involved contractually agree to arbitrate."). As we stated, the Forms U4 Appellants included with their motion to compel arbitration did not demonstrate an agreement to arbitrate existed between Appellants and Berry. We conclude that without such an agreement, FINRA Rule 13200 does not bind an associated person to arbitrate his disputes with a member. Accordingly, even assuming Berry was registered as an associated person with FINRA, we conclude FINRA Rule 13200 did not constitute an independent basis upon which to compel him to arbitrate his claims. We therefore affirm the circuit court's denial of the motion to compel arbitration.

at Pages 11 - 12 of the 2021 Opinion

Bill Singer's Comment

Certainly, the 2021 Opinion will have its detractors, but, for me, it is an articulate bit of jurisprudence that declines the invitation to create an enforceable arbitration agreement where none actually exists. Before another court at another time, these same facts might prompt a finding of an arbitration agreement. But not today in South Carolina. And not here with Robert F. Berry. Given the often overly-generous findings of an enforceable arbitration agreement against former Wall Street employees by many courts, I'm not shedding any tears and I tip my hat to the South Carolina Court of Appeal's rationale that refuses to engage in legal alchemy. For my recent take on FINRA's mandatory industry arbitration rules, see "Voya Racial Discrimination Case Sheds Harsh Light On Wall Street Mandatory Arbitration" (BrokeAndBroker.com Blog / January 11, 2021)