Until March 12, 2012, Deborah Gale Evans, a partner in the Boston law firm of Michaels, Ward & Rabinovitz, was enjoying great professional success. The Michaels Ward firm is well known for its expertise in securities litigation and regulation. According to its website, the firm represents banks, broker dealers and others in court and arbitration proceedings. Ms. Evans specializes in representing broker-dealers in arbitrations before the Financial Industry Regulatory Authority (FINRA).
If you have an account with a retail broker, or are employed by one, you signed an agreement requiring you to submit all disputes to mandatory arbitration administered by FINRA. The idea of requiring investors and employees to arbitrate disputes before a tribunal appointed by the very industry being sued is deeply troubling. Because it deprives American citizens of their constitutional rights to access to the courtroom and trial by a jury of their peers, it has neither the appearance nor the reality of impartiality. Among others, I testified before Congress and urged it to enact legislation prohibiting mandatory arbitration clauses as being fundamentally unfair.
A study I co-authored of more than 14,000 FINRA arbitration awards over a ten-year period found that investors with significant claims suing major brokerage firms could expect to recover only 12 percent of the amount claimed. It is not surprising that many investors required to submit to this process perceive it to be biased against them.
Ms. Evans represented Wells Fargo Advisors in a dispute with a former financial adviser, Clifford J. Watts, III. Watts had signed a promissory note in favor of his former employer, Wachovia, which was later bought by Wells Fargo. The note provided for payment of the unpaid principal, plus interest upon termination. Watts quit Wells Fargo but refused to pay the balance due on the note, claiming that it was really a bonus and that the terms of his employment were materially changed after the acquisition, forcing his termination.
The FINRA panel decided in favor of Wells Fargo and ordered Watts to pay the principal, interest and to reimburse Wells Fargo for its attorney's fees in the amount of $60,480.25. Stung by this defeat, Watts filed a motion in the United States District Court for the Western District of North Carolina to overturn the award (case # 5:11cv 48, reported at 2012 LEXIS U.S. Dist. LEXIS 32244). Wells Fargo asked the Court to enforce it. Normally, efforts to overturn an arbitration award are unsuccessful because the legal grounds for doing so are very narrow. Motions to enforce an award are almost always granted.
That's where it got interesting.
The U.S. District Judge assigned to decide the case was Max O. Cogburn Jr. He joined the Court in 2011, after being appointed by President Obama.
Judge Cogburn heard oral argument on the motions to vacate and confirm. Ms. Evans argued for Wells Fargo.
In a stinging rebuke to both Ms. Evans and (more importantly) to the FINRA arbitration process, Judge Cogburn has some choice words for both. When he asked Ms. Evans if the Court has the power to vacate an award if it found the underlying agreement was illegal (which it clearly does), Ms. Evans "... immediately challenged the Court's statement." Apparently not sensing Judge Cogburn's concerns, Ms. Evans told him that Wells Fargo "... handles hundreds of arbitrations a year" and that she handles 30 or 40 of them as counsel. She then uttered these words, which I am sure she now regrets: "I've never lost one and I've never not gotten attorney's fees. I always win these cases."
Judge Cogburn was not impressed with this track record, noting: "Now there's a level playing field."
Either Ms. Evans is a combination of Clarence Darrow and F. Lee Bailey or the process is rigged in favor of the securities industry. Judge Cogburn made it clear how he came out on this issue.
The Court noted that the securities industry's "constant and prolific participation" in these arbitrations gave it "a clear advantage over the individual employee or customer" because the industry knows which arbitrators will favor its position. That fact, coupled with the limited review permitted by the Courts, results in a "... process in which, as in this case, counsel for the bank can remain undefeated 30 or 40 times a year."
Ms. Evans lectured the Judge on the "voluntary" nature of arbitration and its cost savings benefits. Judge Cogburn rejected these arguments as "disingenuous," correctly noting that employees and customers have no recourse other than to sign these agreements. He turned the "saving money" argument on its head, noting that "... since the individuals seldom win and are forced to reimburse costs and attorneys fees, the only ones saving money are large institutions like the claimant."
Nevertheless, and with obvious misgivings, the Court confirmed that part of the arbitration award requiring repayment of principal and interest of the note. However, it vacated the award of attorney's fees, finding that the amount of those fees was pulled "out of thin air" and was "completely arbitrary."
To date, congressional efforts to ban mandatory arbitration have met with formidable and highly effective resistance from the securities industry and business lobbies. Maybe Judge Cogburn's decision will spur renewed interest in this legislation, which is long overdue. In the interim, attorneys like Ms. Evans should ask themselves whether their stunning success is attributable to their legal skill or the lack of impartiality of FINRA arbitration panels.
I called Ms. Evans and sent her several e-mails asking for her comments on this decision. I received no response.
Dan Solin is a senior vice president of Index Funds Advisors. He is the New York Times bestselling author of "The Smartest Investment Book You'll Ever Read," "The Smartest 401(k) Book You'll Ever Read," "The Smartest Retirement Book You'll Ever Read" and "The Smartest Portfolio You'll Ever Own." His new book is "The Smartest Money Book You'll Ever Read." The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.
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Brokers do however win on their counterclaims, which may have the effect of winning the defense of the note, and this is where arbitration is important. If the promissory note cases are in court, the firm files a motion for summary judgement at the start of the case, and wine. NOW go and pursue your counterclaim, while the firm enforces its judgement against you. (Which is why Merrill tried to end-run the arbitration rule last year.)
In arbitration, the arbitrators decide the whole case, the claim on the promissory note, and the counterclaim, at the same time. And with the right counterclaim, and I dare say, the right lawyer, brokers win on the note case. We just won one against Merrill Lynch, where the arbitrators CANCELLED a $700,000 note.
Try getting that result in court.
Arbitrators will rule against a brokerage firm. The broker/customer needs to have the right facts, and unfortunately, in the majority of cases, the firm has the right set of facts, which is why they win more often.
Any finanical advisor who thinks otherwise....ask him or her if they predicted the 2008 melt down...
http://en.wikipedia.org/wiki/FINRA
There is no conspiracy here. FINRA is in the business of protecting investors by regulating its members. If this "big bad industry that's screwing investors" were out to REALLY screw investors - they'd disband FINRA and do away with all the rules and regulations. The existence of an independent regulatory body that supervises its member broker-dealer is a GOOD thing; but go ahead and bash it if you like, it IS so vogue these days. Completely misinformed and failing in basic fact-checking, but vogue nevertheless.
FINRA chooses and pays the Arbitrators. And since FINRA was created by the Financial Industry, and they provide the lions-share of FINRA's revenues.....how many seconds does it take an "Arbitrator" to figure out what is in his best interest to stay on gravytrain?
In one of the more insane decisions I have witnessed in my lifetime, Mary Schapiro was chosen to Chair the SEC. She is more well known for her years and Chair at FINRA (ne NASD) and Handmaiden to the Wall Street Banks.
The obvious qualifier, was that during the time the SEC wasn't doing their job, Mary and her self-regulating group, clearly chose not do so, also.
But it gets better.
During that period, Mary was an advocate on behalf of the Banks. She was often invited by (all manner of financial system) Committees. And her opinion was often sought to support/vet the SEC's policy of non-regulation and non-action.
So Mary of FINRA, has a tough time at the SEC. With a couple of hundred testimonies and providing "amicus"-like briefs to Capitol hill.
It's difficult for her to make any worthwhile, substantive recommendations.
Because she is already on the public record against many of them.
As in, the "gravytrain" conspiracy theory is just that - BS.
"investors with significant claims suing major brokerage firms could expect to recover only 12 percent of the amount claimed". The banks and investment firms are screwing people over to the tune of 88% of what they are owed.
And it doesn't matter what party you are affiliated with, you still get screwed.
Anyone can be an arbitrator, you don't have to be a lawyer. Many arbitrators are not lawyers. Many arbitrators are lawyers who represent investors rather than banks. And, the parties choose their arbitrators - not FINRA.
In sum: one is getting screwed, so please calm down.
http://www.finra.org/AboutFINRA/Leadership/P009756
FINRA's list of members (available at: http://www.finra.org/AboutFINRA/MemberFirms/ListOfMembers/P012908) consists of brokers and other members of the securities industry.
Please don't just to conclusions before you know what you're talking about. The wave of public opinion is against banks generally, and by confusing that with this - you're mixing apples with oranges in a very ignorant fashion.
"Most often, this process is not about two evenly matched parties to a dispute seeking the middle ground and a resolution to their conflict from knowledge, independence and unbiased fact finders, rather what we have in America today is an industry sponsored damage containment and control program masquerading as a juridical proceeding."