Friday, August 1, 2014
Inquirer Daily News

Merrill loses at arbitration? Fire the arbitrators!

The widow and estate of a Georgia businessman won a $520,000 arbitration against Merrill Lynch. So what did FINRA do? It axed the arbitrators.

Merrill loses at arbitration? Fire the arbitrators!

Georgia businessman Robert C. Postell and his wife, Joan, lost a bundle in the market, and believed his brokerage, Merrill Lynch, had failed in its duties to him. So in December 2009 they did what their contract with Merrill required if they wanted to seek damages: They filed an arbitration claim against Merrill, now part of Bank of America, for more than $640,000 plus attorney’s fees. In May 2011, a three-arbitrator panel ordered Merrill to pay $520,000 in damages.

So how did the organization in charge of the panel, the Wall Street self-regulatory body known as the Financial Industry Regulatory Authority, respond?

It fired the arbitrators, according to this Bloomberg View column by William D. Cohan, a former investment banker and author of “Money and Power: How Goldman Sachs Came to Rule the World.”

The case is a bit complicated. Merrill's attorney, Terry Weiss, denied the Postell's claims, and Robert Postell committed suicide in February 2011, which the arbitrators learned during the May 2011 hearings. Though Weiss accused the arbitrators of bias, FINRA allowed the arbitration to proceed, Cohan writes.

But Cohan says this much is clear: Each of the three arbitrators later got what FINRA calls a "black spot" letter, saying their $200-a-day services were no longer needed. The experience was enough to prompt one, Fred Pinckney, to call Cohan to complain about the evidence of captive regulators. “You mete out justice, and then you get slapped in the face,” he told Cohan.

Cohan writes:

Pinckney is pretty disgusted by this turn of events, especially since there were no grounds to appeal the arbitrators’ decision in the Postell case and no appeal was filed. Nothing about what the three arbitrators did was ever questioned, except by Weiss, the Merrill lawyer who saw his case being lost. Pinckney said his fellow arbitrators weren’t looking for reinstatement or compensation. He contacted me to share his story because he was so outraged that Wall Street has the ability to exact revenge on arbitrators in a quasi-judicial system where it already holds most of the cards anyway.

“It’s unbelievable that they would take such an experienced panel and get rid of it,” Pinckney said. “To me, this undermines the credibility of the entire FINRA process -- I didn’t say kangaroo court -- but when you have three well-credentialed people, doing their job, and there were no meritorious grounds for an appeal, and we get handed the ‘black spot’ -- and not all at once -- it makes for a pretty cheap novel.”

Where does it all end? Will there really be zero accountability for bankers, traders and executives who caused a calamitous financial crisis, or the collapse of MF Global Holdings Ltd., or who were gambling with $350 billion of depositors’ money, or who were manipulating Libor, or for those who are further cheapening a Wall Street-administered arbitration system that already reeks of injustice?

All good questions - as is the underlying question of whether mandatory arbitration is ever a good way to achieve justice between mega-corporations and indivdual consumers or investors. Imbalances in power matter in the courts, too - deep-pocketed parties can always hire the best lawyers. But at least the judges don't get fired if they occasionally rule the "wrong" way.

Jeff Gelles Inquirer Business Columnist
About this blog

Jeff Gelles, who writes the Inquirer's weekly Consumer 14.0 and Tech Life columns, takes a broad look at the marketplace of goods, services, and ideas.

Reach Jeff at jgelles@phillynews.com.

Jeff Gelles Inquirer Business Columnist
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