In 2017, Brian Leggett, a Wells Fargo customer, filed an arbitration claim against the bank and one of its financial advisors, accusing them of negligence and breach of fiduciary duty in how they handled his investments. An arbitration panel ultimately ruled against him and issued an award in Wells Fargo’s favor, ordering Leggett in 2019 to pay $83,000 to Wells Fargo to cover its costs.
Fast forward to this January, when a Georgia state judge has not only vacated the award Leggett was ordered to pay, but accused Wells Fargo of withholding evidence, stonewalling document requests, and unfairly tilting the arbitration process in its favor.
The firm “committed fraud on the arbitration panel by procuring perjured testimony, intentionally misrepresenting the record, and refusing to turn over a key document to [the investor] until after the close of evidence,” Judge Belinda E. Edwards wrote in her ruling issued Jan. 25.
The news for the bank gets worse: The judge’s 38-page order also found fault with the Atlanta-based arbitration panel’s rulings and with the selection of the individual arbitrators who heard the case. Wells Fargo’s attorney allegedly had a secret agreement with Wall Street self-regulator Finra to block certain arbitrators, according to the ruling. Most investor claims for damages are heard in Finra arbitration forums, which are typically closed-door affairs.
“Permitting one lawyer to secretly redline the neutral [arbitrator] list makes the list anything but neutral, and calls into question the entire fairness of the arbitral forum,” wrote Edwards, who serves in the Superior Court of Fulton County in Georgia.
Wells Fargo
Victor J. Blue/Bloomberg
Wells Fargo “adamantly” denies all of the allegations cited in the judge’s decision, a company spokeswoman said in a statement. “Finra has well-established rules for admitting arbitrators to its roster and the process is fair to all parties,” she said. “Wells Fargo Advisors followed this process, and both parties had the opportunity to make arguments regarding each of these issues to the arbitrators and to Finra. We intend to appeal this decision.”
A Finra spokeswoman said in a statement that there have never been any agreements between itself and Wells Fargo’s attorney in the case, regarding the appointment of arbitrators.
“As the neutral administrator, we continually strive to make the Finra forum the fairest, most efficient program available and stand behind the integrity of our neutral list selection process,” the spokeswoman said.
Reached for comment, Wells Fargo’s attorney, Terry Weiss, referred a Barron’s reporter to Wells Fargo. Weiss worked at a private law firm at the time of the case.
The advisor named in the case, Jay Pickett, did not return a request for comment. Investor Brian Leggett, who filed the case, and his attorney, Craig Kuglar, also did not return requests for comment.
The judge’s ruling adds fuel to ongoing criticism from investor advocates and securities attorneys that Finra’s arbitration process is biased in favor of Wall Street.
“Investors should have confidence that if something goes wrong there is a fair system to hear their grievances,” says Christine Lazaro, a professor and director of the Securities Arbitration Clinic at St. John’s University School of Law.
Judge Edward’s order vacating Wells Fargo’s arbitration win is unusual because arbitration awards are rarely overturned and for the window it provides into Finra private arbitration forums.
“This opinion offers a soup-to-nuts overview of what’s wrong with the Finra arbitration process,” says Joseph Peiffer, managing partner of law firm Peiffer Wolf Carr Kane Conway & Wise and a former president of Piaba.
Piaba, an association of attorneys representing investors in arbitration that has long been critical of the Finra arbitration process, called for immediate investigations by Congress and the SEC, which oversees Finra. “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 President Michael Edmiston said in a statement.
An SEC spokesman declined to comment.
The initial claim from Leggett and co-plaintiff Bryson Holdings was for $1.5 million in damages, according to a copy of the arbitration award. Leggett accused Wells Fargo and an advisor of negligence; failure to supervise; churning; breach of fiduciary duty; and other misconduct. Leggett allegedly had lost money in a merger arbitrage strategy executed by his Wells Fargo advisors. Leggett sought Wells Fargo denied Leggett’s claims, according to the award.
The three-person arbitration panel ruled against Leggett and Bryson Holdings on July 31, 2019, ordering them to pay $83,000 to Wells Fargo to cover its costs for the arbitration. The panel also ordered the client complaints to be removed from the official regulatory records of two Wells Fargo advisors.
Leggett’s attorney filed a motion to vacate the award in October 2019. In January, Judge Edwards issued her ruling, finding five reasons to vacate the arbitration award, beginning with how the arbitrators were chosen for the case.
Finra arbitrators are normally selected from randomly generated lists issued by Finra to both sides in an arbitration dispute, according to the regulator’s rules. Each side has an opportunity to strike arbitrators off the list, and then rank the remaining arbitrators in terms of preference.
But that’s not quite what happened here, according to Judge Edwards’ decision. Rather than ranking and striking arbitrators pursuant to the rules, Wells Fargo’s attorney, Weiss, wrote a letter to Finra requesting one of the listed arbitrators be removed on the grounds that he harbored personal bias stemming from a prior arbitration case. Weiss’ letter said there existed a verbal agreement that no arbitrators from the prior arbitration “would have the opportunity to serve on any one of my cases,” according to the July 13, 2017 letter cited in Judge Edwards’ decision.
This information allegedly was not disclosed to Leggett and his attorney. Finra granted Weiss’ request, produced an edited list of arbitrators, and did not respond to Leggett’s attorneys’ questions about why it did so, according to the judge’s decision.
Judge Edwards found fault with some of the testimony. The hearings kicked off in September 2018. Amid testimony from one Wells Fargo advisor with regard to allegedly texting with clients about business in violation of Wells Fargo’s compliance policies, the company’s attorney had a medical emergency and the hearings were put on hold, according to the judge’s order. Hearings resumed in June 2019, and the advisor allegedly changed his testimony, and Wells Fargo’s attorney mischaracterized prior testimony, according to the judge’s ruling.
“The audio tapes [of the hearings], 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,” the judge wrote.
The judge also found that the arbitrators refused to postpone the start of hearings and provided no basis for their decision despite the investors providing ample cause for postponement. Wells Fargo allegedly had withheld documents from Leggett’s side and “stonewalled” document requests, according to the judge’s decision. When the company did hand over one batch of documents totaling 1,882 pages two weeks prior to hearings commencing, Leggett’s attorney requested additional time to read the lengthy release, according to the judge’s order. The arbitration panel denied the request.
Wells Fargo also did not hand over a key document requested by Leggett until after closing arguments, according to the judge’s ruling. “The refusal to hand over this document, like the perjured testimony, amounted to a fraud on the [arbitration] panel,” the judge wrote.
The judge also found that the arbitrators wrongfully denied Leggett’s side their right to present testimony from two relevant witnesses even though Wells Fargo was permitted to introduce a last-minute “surprise witness” who was not on the potential witness list. The arbitration panel then “severely restricted” Leggett’s attorney’s cross-examination, the judge wrote.
Finally, the judge ruled that the arbitration panel had wrongly ordered Leggett to pay Wells Fargo for its costs incurred during the arbitration process.
The lengthy ruling by the judge calls into question whether Finra should maintain oversight of the arbitration process, says Lisa Bragança, a Chicago-based attorney not affiliated with this case and a former SEC Enforcement branch chief. Bragança says Finra has made previous attempts at changing the arbitration process in response to criticism.
“If there’s going to be an alternative dispute resolution forum, it should be managed by someone other than Finra,” she says. “Finra has had plenty of opportunities to get this right.”
Leggett’s legal battles, nearly five years old, are not over given that Wells Fargo says it intends to appeal the judge’s ruling.
Write to Andrew Welsch at [email protected]
