Understanding the arbitrator selection process and the importance of arbitrator vetting in FINRA arbitrations.  

By T.J. Mitchell, securities lawyer for JHKM

When an investor has an unresolved dispute with their FINRA-registered broker or investment adviser, they have a few options: (1) try to resolve the dispute informally with the broker-dealer; (2) contact the state securities regulator and hope it takes action; or (3) initiate a FINRA arbitration against the broker-dealer, broker or investment adviser. Most investors have customer agreements requiring them to forego traditional litigation and arbitrate any disputes through FINRA’s arbitration program. FINRA is to serve as nothing more than a facilitator of the arbitration—not taking sides—to ensure that a neutral panel of arbitrators is selected to oversee and decide the arbitration claims on their merits. Investors must know they have a fair, cost-effective forum where they can pursue their grievances. FINRA member firms, their reps and affiliated advisors must know that they have a private forum in which they can defend customer claims.

The selection of which arbitrators sit on the panel is one of the most pivotal points in a FINRA arbitration. Pursuant to FINRA Code of Arbitration Procedure for Customer Disputes 12400, FINRA is to provide the parties with a randomly generated list of proposed arbitrators. Each party ranks the proposed arbitrators and has the ability to strike a pre-determined number of arbitrators from the list. The number of arbitrators that preside over an arbitration is determined based upon the amount of money in dispute.

In light of the importance the arbitrator selection process serves in a FINRA arbitration, at Jennings Haug Keleher McLeod we employ the help of data-gathering vendors that allow us to analyze the proposed arbitrators’ prior ruling history. The assistance of this historical data allows us to make an informed decision as to how best to rank/strike the proposed arbitrators on FINRA’s proposed list.

A recent 38-page order out of a Georgia Superior Court in highlights the importance of the arbitrator selection process, together with the importance of arbitrator vetting to preserve the fairness and neutrality of the forum.

In 2017, Claimants in Leggett filed a FINRA Arbitration against Respondent and one of its brokers over losses Claimants’ investments incurred in their accounts held by Respondent. In June 2017, FINRA sent Claimants and Respondents its list of proposed arbitrators to rank and/or strike. Counsel for Respondents wrote a letter to FINRA insisting that one of the proposed arbitrators on the list be removed because the proposed arbitrator held a personal bias against Respondents’ lead attorney in the case.

Claimants opposed Respondents’ efforts. In response, in July 2017 Respondents wrote a second letter to FINRA. This letter claimed that there was an agreement between Respondents’ counsel and FINRA that three arbitrators who had presided over a previous arbitration in which Respondents’ counsel had participated would not be allowed on any panel in which counsel participated moving forward: “It was made clear to me verbally that none of the [arbitrators in a previous arbitration] would have the opportunity to serve on any one of my cases given the horrific circumstances surrounding the underlying case, the SEC investigation, the publicity and the aftermath. It was a most unusual set of circumstances.”

FINRA complied with Respondents’ request and struck the arbitrator. Claimants and Respondents proceeded to rank the remaining arbitrators and exercise their allocated strikes. Interestingly, counsel for Respondents chose not to use one of its strikes one potential arbitrator who was an experienced Atlanta litigator who had represented claimants against financial institutions in the past. In August 2017, after the three-arbitrator panel was ultimately selected (which included the Atlanta litigator), Respondents contacted FINRA and asked FINRA to strike this arbitrator for cause on the basis that other lawyers at the arbitrator’s law firm were representing a plaintiff suing Respondents. Despite Claimants’ pleas to the contrary, FINRA agreed with Respondents and struck this arbitrator from the panel.

After several delays, the arbitration panel served their award on August 1, 2019. The Award denied Claimants’ claims in their entirety and awarded Respondents over $80,000 in costs and fees. Shortly thereafter Claimants filed a Motion to Vacate the arbitration award in the Superior Court of Fulton County, Georgia. Respondents filed a Cross Motion to Confirm Arbitration Award.

In her 38-page order, the judge found there was procedural and substantive missteps throughout the entire arbitration. The judge granted Claimants’ Motion to Vacate the arbitration award. In her order, the judge expressed concern about the arbitrator selection process:

[Respondents] 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. . . . [p]ermitting 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 record here shows that [Respondents] . . . insisted on three potential arbitrators be [sic] removed from the neutral list itself, prior to arbitrator selection, without notification to any parties, in every case in which [Respondents’ counsel] appeared for any client. The only reason this secret agreement came to light was because FINRA accidentally included one of the three [arbitrators that presided over the prior arbitration] on the neutral computer-generated list.
(emphasis added).

The Order is the subject of a current appeal.

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At Jennings Haug Keleher McLeod, our experienced securities attorneys regularly represent both claimants and respondents in FINRA arbitrations. We work to ensure the selection of experienced and knowledgeable arbitrators for our clients. Contact our securities attorneys today.