[T]he causes of action relate to Respondent Wells Fargo's alleged failure to adequately train, monitor and supervise two of its representatives, Respondent Pickett and Non-Party Jacob McKelvey ("McKelvey"), and the representatives alleged mismanagement of Claimants' accounts.
SIDE BAR: Although the FINRA Award states that by "Order dated May 14, 2018, the Panel denied Claimants' Motion to Strike Respondents' Defenses and Other Sanctions for Failure to Maintain Books and Records," it's a bit puzzling how a Motion that was first filed in August 2018 was retroactively denied in May 2018.
1. Claimants' claims are denied in their entirety.2. Claimant Leggett is liable for and shall pay to Respondents the sum of $51,000.00, representing costs incurred by Respondents in connection with this matter.3. Any and all claims for relief not specifically addressed herein, including Claimants' requests for punitive damages and attorneys' fees, are denied.4. The Panel recommends the expungement of all references to the above-captioned arbitration from registration records maintained by the CRD, for Respondent Pickett (CRD #2041509) and Non-Party McKelvey (CRD #5288433), with the understanding that, pursuant to Notice to Members 04-16, Respondent Pickett and Non-Party McKelvey must obtain confirmation from a court of competent jurisdiction before the CRD will execute the expungement directive.Unless specifically waived in writing by FINRA, parties seeking judicial confirmation of an arbitration award containing expungement relief must name FINRA as an additional party and serve FINRA with all appropriate documents.Pursuant to Rule 12805 of the Code of Arbitration Procedure ("Code"), the Panel has made the following Rule 2080 affirmative findings of fact:
- The claim, allegation, or information is factually impossible or clearly erroneous; and
- The claim, allegation, or information is false.The Panel has made the above Rule 2080 findings based on the following reasons:Upon consideration of the full record of evidence, including the documents and testimony, the Panel finds that the claims asserted by Claimants against Respondent Pickett, and the allegations concerning Non-Party McKelvey set forth in Claimants' Statement of Claim, are without merit and false. Specifically, the Panel finds that the losses sustained by Claimants were solely caused by the trading strategy devised, implemented and undertaken by Claimant Leggett. None of Claimants' alleged losses were caused by Respondent Pickett's and/or Non-Party McKelvey's action, inaction, or advice. The Panel finds that neither Respondent Pickett nor Non-Party McKelvey engaged in any wrongful conduct. Claimant Leggett alleges that he was misled by both Respondent Pickett and Non-Party McKelvey. The Panel finds that neither Respondent Pickett nor Non-Party McKelvey misled Claimant Leggett in any way, and that these allegations are without merit and false. Claimant Leggett's testimony as to these issues was not credible.By e-mail dated April 18, 2016 Claimant Leggett accused Non-Party McKelvey of misleading him with respect to a call option on Amazon. Claimant Leggett's testimony was that Claimant Leggett did not have option experience, did not know how options worked, that he relied on Non-Party McKelvey, and Non-Party McKelvey misled him. However, in a text message from Claimant Leggett to Non-Party McKelvey, dated April 13, 2016, Claimant Leggett stated, "anytime I've ever put in an option to sell it [sic] a certain strike it should automatically execute. . ." The Panel concluded from this text message that Claimant Leggett did have option experience, that his testimony to the contrary was untrue, and that his complaints about Non-Party McKelvey were false and untrue.By e-mail dated November 8, 2016, Claimant Leggett complained to Respondent Pickett about the NXPI trades stating, "Jay, I'm [sic] not taking the loss on this trade. . ." Further, by e-mail to Respondent Pickett, dated November 11, 2016, Claimant Leggett stated, "Jay, I'm writing to comment about the matter below and let you know after further thought and review of our discussion, that there was simply a misunderstanding about our discussion . . ." Based upon Respondent Pickett's testimony at the hearing, and Claimant Leggett's November 11, 2016 e-mail, the Panel concluded that Claimant Leggett's complaints about Respondent Pickett were false and untrue.The Panel's decision to grant the expungement requests of Non-Party McKelvey and Respondent Pickett is buttressed by the Panel's conclusion that Claimant Leggett was not a credible witness, and his complaints about NonParty McKelvey and Respondent Pickett were false and untrue. Claimant Leggett's testimony was inconsistent and untrue, his testimony was in conflict with the documents entered into evidence, and his testimony was not corroborated by the documents. Accordingly, the Panel finds that the information to be expunged has no meaningful regulatory or investor protection value.
The Award denying the Investors' claims against Wells Fargo and imposing $51,000.00 in costs and $32,200.00 in hearing session fees against the Investors must be vacated.First, Wells Fargo rigged the arbitrator selection process in direct violation of the FINRA Code of Arbitration Procedure, denying the Investors' of their contractual right to a neutral, computer generated list of potential arbitrators.Second, the Arbitrators are guilty of misconduct for denying the Investors' request to postpone the hearing after Wells Fargo dumped thousands of pages of relevant documents on the eve of the hearing, well beyond the timeframe required by the FINRA Code of Arbitration Procedure and scheduling orders set forth by the Arbitrators. The Arbitrators provided no reasoning for their refusal to grant the Investors' request.Third, the Arbitrators are guilty of misconduct for denying the Investors their statutory right to present testimony from their current stockbroker and cross-examine Wells Fargo's expert witness. At the hearing, Wells Fargo introduced evidence and elicited testimony relating to the Investors' investments and investment making decisions after they moved their accounts from Wells Fargo to Schwab. The Investors requested the Arbitrators hear evidence from the Investors' new stockbroker at Schwab after the Arbitrators permitted Wells Fargo to introduce testimony and documents pertaining to those accounts, and the witness indicated he was available to testify. Despite this, the Arbitrators refused to allow this witness to testify. The Arbitrators did permit Wells Fargo, on the other hand, to present an expert witness by telephone at the last minute who was never identified as a potential witness. Were this not enough, the Arbitrators severely restricted the cross examination of the expert, thus refusing to permit counsel for the Investors to fully cross-examine this surprise witness in violation of their statutory right to present evidence.Fourth, Wells Fargo committed fraud on the arbitration panel by procuring perjured testimony, intentionally misrepresenting the record, and hiding and refusing to turn over a key document to the Investors until after the close of evidence.Fifth, the Arbitrators exceeded their powers and manifestly disregarded the law by (1) awarding Wells Fargo $51,000.00 in costs in violation of FINRA's Code of Arbitration Procedure; and (2) purporting to impose hearing session fees against the Investors that far exceeded the hearing session fees permitted under the FINRA Code of Arbitration Procedure.
Events Giving Rise to the ArbitrationThe record shows that the Investors were securities customers of Wells Fargo. During 2015 and 2016 , the Investors sustained losses totaling $1,178,446.78 investing in a merger arbitrage strategy executed by their Wells Fargo broker Jacob McKelvey. Between April 2015 and May 2016 , McKelvey managed the Investors' accounts. The Investors alleged that Wells Fargo permitted the account to be over-concentrated in single stocks and industries. McKelvey encouraged this activity, telling Leggett at one point that he should "[G]et all you can, back the truck up." After suffering major losses and complaining to the firm, the Investors were provided a new broker, Pickett, who managed the accounts between April 2016 and November 2016.Wells Fargo's customer agreement contained a binding arbitration agreement ("Arbitration Agreement") mandating arbitration at FINRA pursuant to the FINRA Code of Arbitration Procedure. The Arbitration Agreement does not contain any fee/cost shifting provision requiring the losing party to pay the attorneys' fees or costs incurred by the prevailing party.The record shows that the Investors became increasingly concerned that Wells Fargo mishandled their accounts. Thereafter, the Investors initiated arbitration. The Investors asserted a number of claims against Wells Fargo and Pickett including violation of the Georgia Securities Act, failure to supervise, and breach of fiduciary duty.Arbitrator SelectionThe parties set about selecting arbitrators in accordance with the Arbitration Agreement. Pursuant to the Arbitration Agreement , the parties contractually agreed to select arbitrators pursuant to FINRA Code of Arbitration Procedure Rule 12400 ("Neutral List Selection System and Arbitrator Rosters"). That Rule provides that "[t]he Neutral List Selection System is a computer system that generates, on a random basis, lists of arbitrators from FINRA' s rosters of arbitrators for the selected hearing location for each proceeding. The parties will select their panel through a process of striking and ranking the arbitrators on lists generated by the Neutral List Selection System."On June 20, 2017, FINRA provided the parties with its list of proposed arbitrators generated by the Neutral List Selection System and requested the parties submit their ranking lists by July 10, 2017, which was extended by agreement of counsel to July 14, 2017. Rather than ranking and striking pursuant to the Code, on July 10 , 2017, counsel for Wells Fargo submitted a letter to FINRA insisting that one of the proposed arbitrators on the list of potential arbitrators be removed from the computer generated list on the ground that he harbored personal bias against Wells Fargo's lead counsel, Terry Weiss. The alleged bias resulted from a previous case (outside) counsel Weiss had worked on (and lost) for another FINRA member firm in which Weiss filed an unsuccessful motion to vacate alleging arbitrator misconduct. . . .
SIDE BAR: Spread out over 18 or so pages in the Superior Court Order are eye-opening and jaw-dropping references to the manner in which the FINRA Arbitration Panel conducted the hearing. There is no way that I could convey the entirety of the events with anything other than anger and bias, so I encourage you to read the Court's narrative and draw your own conclusions.
The Court's factual review of the record evidence leads to its finding that Wells Fargo and its counsel manipulated the FINRA arbitrator selection process in violation of the FINRA Code of Arbitration Procedure, denying the Investors' their contractual right to a neutral, computer-generated list of potential arbitrators. Wells Fargo and its counsel, Terry Weiss, admit that FINRA provides any client Terry Weiss represents with a subset of arbitrators in which certain arbitrators (at least three, but perhaps more) are removed from the list Wells Fargo agreed, by contract, to provide to the Investors in the event of a dispute. 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.
The Arbitrators provided no basis for their decision to deny the Investors' request for a short delay - a delay necessitated not by the Investors' failure to prepare but rather due to Wells Fargo' s late production of documents outside the time periods set forth by the FINRA Code of Arbitration Procedure. Wells Fargo argues there was no harm because the hearing was ultimately delayed mid-testimony due to Wells Fargo counsel's medical emergency. The fact that the hearing was suspended due to a medical emergency after opening statements and multiple witnesses had already testified did not erase the harm the Investors and their counsel had already sustained.
[T]he Arbitrators decision to deny the Investors' their right to present this relevant testimony was undoubtedly influenced by the possibility that the appearance of the witness would require one of the three Arbitrators to recuse himself. And, the Arbitrators permitted Wells Fargo to present an expert witness by telephone at the last minute who was never identified as a potential witness. Having so ruled, the Arbitrators then severely restricted the Investors' cross-examination of the expert, refusing to permit counsel for the Investors to fully cross-examine this surprise witness in violation of their statutory right to present evidence.
The transcripts satisfy the Investors' burden of proving the fraud on the panel by clear and convincing evidence. The audio tapes, which were not available to the Investors until after the close of the hearing, confirm that Wells Fargo's key witness used the delay caused by the medical emergency to materially change his testimony and offer perjured testimony in direct contravention of the earlier testimony. In addition, counsel for Wells Fargo inserted himself as a fact witness and purported to testify to the Panel himself to support the changed story. The relevance of this testimony cannot be understated. The Arbitrators specifically held that "the Panel finds that neither Respondent Pickett nor Non-Party McKelvey engaged in any wrongful conduct." The Arbitrators were clearly misled by McKelvey's second round of testimony (after the medical break) and the affirmation of Wells Fargo's counsel, who falsely mischaracterized his prior testimony. The presentation of perjured testimony along with counsel's mischaracterization of the previous testimony, which he knew was not yet transcribed, resulted in a fraud on the Arbitrators that had an obvious impact on their final Award.The same is true for the key document intentionally withheld from the Investors until after the close of the evidence. During the hearing, a number of Wells Fargo witnesses testified about and characterized in their own words a key internal Wells Fargo Rule pertaining to brokers text messaging their customers. For instance, their broker's testimony after the medical break changed, and his new story was that texting with the Investors was permitted so long as "you're not conducting business." Wells Fargo stonewalled producing this document to the Investors until after the conclusion of the hearing. That document in fact states that "the Firm prohibits Associates from sending or responding to business communications by text message." The refusal to hand over this document, like the perjured testimony, amounted to a fraud on the Panel.
Judicial review of arbitration awards, while limited in nature, ensure that the arbitration process is fundamentally fair to all parties involved. In this case (1) Wells Fargo and its counsel manipulated the arbitrator selection process; (2) the Arbitrators refused to postpone the hearing and provided no basis for their decision despite the Investors providing ample cause for postponement; (3) the Arbitrators denied the Investors their statutory right to present testimony from two relevant, noncumulative witnesses; (4) Wells Fargo witnesses and its counsel introduced perjured testimony, intentionally misrepresented the record, and refused to turn over a key document until after the close of evidence; and (5) the Arbitrators improperly and without legal justification imposed costs and fees on the Investors in violation of the contractual framework that bound the parties. The Court finds that each of these violations provides separate, independent grounds to vacate the Award in its entirety. Accordingly, the Panel's award is VACATED .
44. When Wile arrived, Ray was already in the conference room, along with Lisa Lasher, Senior Case Administrator and Margaret Blake, Case Assistant. The three panel members appointed to the above-referenced case - Bonnie A. Pearce (Chairperson) ("Pearce"), Fred Abramoff, and Harriet A. Kottick - were also present in the conference room. When Wile entered the conference room, she observed a celebration taking place, which appeared to conflict with the arbitrators' sworn impartiality. She was immediately handed a glass of champagne in order to participate in a champagne toast that Pearce was making to the issuance of the award in the case. Wile did not drink the champagne. She was later informed by FINRA that Pearce had provided the champagne.45. Upon departing the conference room, Wile advised Ray that she thought the champagne toast regarding the arbitration was inappropriate in light of FINRA's mandated neutrality. In response, Ray ordered Wile not to disclose the celebratory gathering and champagne toast to Berry.46. One purpose of Wile's October 12, 2012 letter to Berry was to permit him to determine whether the celebration of April 3, 2012 in the Smolcheck case should be disclosed to Respondent Merrill Lynch, in view of its existing federal court challenge to the impartiality of the Panel Chair. See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Tamara Smolchek and Meri Ramazio (S.D. Fla. Sept. 17, 2012) (denying petition to vacate and confirming arbitration award) (case settled following appeal to the Court of Appeals for the Eleventh Circuit, Case No. 12- 15166). No action was taken in response to Wile's letter, with the exception of a letter from Berry to her, dated December 6, 2012. In that letter, Berry reported that Ray denied instructing Wile not to report the champagne toast to him, and criticized her for not reporting the toast earlier. This action was unjustified, and an obvious retaliation for Wile's report of Ray's conduct.
49. On May 11, 2011, prior to the issuance of the Postell Award, Wile received a telephone call from Respondent's counsel, Terry Weiss ("Weiss"), wherein he expressed detailed concerns regarding the panel's conduct throughout the evidentiary hearing. On or about May 13, 2011, Wile received Weiss's letter asserting, among other things, that all three arbitrators exhibited bias and engaged in arbitrator misconduct. Weiss included numerous examples of the alleged misconduct in his letter. On that same date Wile received a letter from Claimants' counsel, William Leonard ("Leonard"), wherein he disagreed with Weiss's characterization of the hearing and the conduct of the panel.50. Immediately following her call with Weiss, Wile advised Ray of Weiss's concerns. She also showed Ray copies of the two above-referenced letters from counsel. In a letter dated May 23, 2011, she advised Weiss that FINRA would investigate the allegations contained in his letter. Ray then instructed her to follow FINRA's procedures for investigating an arbitrator complaint. The procedures included listening to the digital recording of the hearing and taking detailed notes. Ray listened to small portions of the hearing, including the portion that addressed Weiss's motion to recuse the panel. After Wile listened to the recording, she discussed with Ray what she had heard and her detailed notes of the recording. After consultation with Ray, on June 13 and 14, 2011, Wile sent emails to members of the senior management team, George Friedman ("Friedman"), Berry and Barbara Brady ("Brady"), wherein she recommended counseling for all three arbitrators and included copies of Weiss's and Leonard's May 13, 2011 letters.51. A conference call among management followed on June 15, 2011. Berry, Brady, Ray, and Wile all participated in the conference call. To Wile's recollection, Friedman was also present. During the conference call, senior management strongly encouraged Wile to change her recommendation from counseling to removal for all three arbitrators. Senior management then directed her to prepare a removal memorandum for all three arbitrators that contained the following language: "In my many years of experience, and after listening to the tapes over and over again, I have never experienced something so egregious. While this type of behavior has not been indicated in the past, they should not be allowed the opportunity to remain on the roster." Wile provided Ray with her initial draft of the removal memorandum on June 15, 2011. She submitted at least four additional drafts to Ray in order to incorporate all of the edits he instructed her to make to the document. Ray thereafter submitted the arbitrator removal form to senior management and attached the referenced memorandum. Pursuant to FINRA procedure, the removal form would have been signed by Brady and Fienberg and thereafter approved by the National Arbitration and Mediation Committee. FINRA then removed the arbitrators from the roster.52. All three arbitrators complained about the removal. The chairperson complained to the SEC and the non-public arbitrator discussed the removal with William D. Cohan who, in response, wrote an article entitled "Wall Street's Captive Arbitrators Strike Again" discussing the situation. The SEC initiated an investigation regarding the arbitrators' removal, and as a result FINRA reinstated all three arbitrators.
"The Collision Of The Inept With The Incompetent -- A Wall Street Compliance And Regulatory Tale" (BrokeAndBroker.com Blog / December 22, 2021)http://www.brokeandbroker.com/6207/finra-suntrust-email/"Wall Street Whistleblower Johnny Burris Speaks Truth To Power" (BrokeAndBroker.com Blog / June 30, 2017)http://www.brokeandbroker.com/3516/burris-whistleblower/
The more serious criticisms of Mr. Burris began to show up on his disciplinary record soon after he went public with his grievances against JPMorgan. In the course of two weeks, three client complaints showed up on his regulatory records.During his arbitration case, Mr. Burris's lawyer asked a JPMorgan supervisor at his old branch in Arizona whether the client complaints were "written by someone at JPMorgan" or if any JPMorgan employee had "helped" draft them."Absolutely not," the JPMorgan employee, Umbreen Kazmi, responded to both questions.It was only after the arbitration case was over that Mr. Burris tracked down the clients and learned that the letters had, in fact, been drafted by one of his old colleagues at JPMorgan, Ms. Gavin, a close associate of Ms. Kazmi.
On January 25, 2022, a Georgia state court vacated a FINRA arbitration award in favor of Wells Fargo finding that Wells Fargo and its counsel manipulated the arbitration process. The manipulation was accomplished with the help of FINRA Dispute Resolution.Judge Belinda E. Edwards excoriated the conduct of FINRA Dispute Resolution in managing the arbitration selection process and the arbitration panel for permitting a variety of misconduct by Wells Fargo Clearing Services and its counsel.. . .The surprising revelation of a corrupted arbitrator appointment system comes on the heels of the General Accounting Office on December 15, 2021, questioning the Securities and Exchange Commission's supervision of FINRA and its operations. https://www.gao.gov/products/gao-22-105367.Investors must have the assurance that the industry-sponsored FINRA arbitration forum is not tipping the scales against investors by excluding arbitrators who have issued pro-Claimant awards in prior cases.PIABA calls for an immediate investigation by the SEC and Congressional hearings as to FINRA'S operation of its arbitration forum.
There has never been and there is not now an "active and continuous engagement" by FINRA with its stakeholders. Stakeholders have no meaningful role in FINRA and are not inclined to provide "constructive feedback." There is no partnership or trust between the regulator and the regulated. There is no sense of community for public investors, their advocates, and the industry's hundreds of thousands of disenfranchised registered representatives. FINRA's years of interest in harvesting "expertise" from among its stakeholders was little more than doling out patronage and sinecures. Too many of those who served on too many of FINRA's committees, subcommittees, and advisory boards performed no service of value. It all comes off as certificates of participation. Unquestionably, there are those who serve with honor and distinction, and their efforts have yielded recommendations of value and merit; but there is also far too much redundancy and window dressing. The metastatic growth of FINRA's committees/boards is of no value. There is a saying that a camel is a horse created by committee; and FINRA has a stable full of camels.
I challenge the Special Notice's premise that FINRA "remains an effective regulator." I do not believe that goal has been met for nearly three decades. Similarly, it is not merely a proposition that "insufficient member engagement" may cause FINRA to fail as an SRO; insufficient member engagement has caused FINRA to fail as an SRO. FINRA and its predecessor NASD pursued a hostile agenda to alienate smaller member firms while advancing the needs of larger firms. After fragmenting its membership and fracturing the partnership between the regulator and regulated, FINRA learned nothing from such discredited organizational politics. Nothing better illustrates that point than this insulting quote from the Special Notice:
"On the other hand, inappropriate member influence on regulatory programs could result in the failure to adequately proscribe, sanction and deter behavior that may harm investors and markets or undermine public confidence in the regulation of the broker-dealer industry."
FINRA, a member organization, fears "inappropriate" member influence. One question: Who gets to decide when member influence crosses over from appropriate to inappropriate? Ay, there's the rub! As long as those in power at FINRA remain in power, then the members' influence seems to be deemed appropriate. When the winds shift, however, and members desire reform and seek to enhance the composition of the Board so as to widen the stakeholders' base, that behavior is characterized as "inappropriate influence."
[F]INRA should establish an Anti-Fraud Fund whereby all defrauded public customers would obtain restitution in the event that member firms or associated persons fail to timely honor any awards for compensatory damages, costs, and fees. Finally, I would abolish mandatory arbitration for customers and associated persons.
From my perspective, FINRA is often little more than an inept and frequently ineffective regulator. Unabashedly and without any hesitation, I have long characterized FINRA as the lap dog of its larger member firms and little more than a hijacked trade group intent on eliminating its smaller members and promoting financial superstores and regional brokerages. Harsh words? Absolutely. Off the mark and unfair? I think not.
As a former Series 7 and 63 registered representative; in-house brokerage, mutual fund, and investment company lawyer; American Stock Exchange lawyer and NASD attorney; as one of the founders of the NASD and then the FINRA Dissident Movement; as one of the four 1998 original petition candidates who first contested NASD's nominated Board candidates; and as a long-time advocate for industry reform, I remain disappointed with FINRA's persistent failure to embrace disparate views and to constructively reach out to dissidents. I have a big mouth. I have bellowed from the wilderness since the 1990s; but there is a difference, after all, between hearing and listening. I'm not questioning whether FINRA hears me; I'm questioning whether FINRA listens.