The Financial Industry Regulatory Authority has granted a request by Stifel Financial to remove two arbitrators from a list of potential panelists in an upcoming case, according to Advisor Hub.
The request was made as part of Stifel’s challenge to a decision last year by a FINRA arbitration panel that awarded Stifel clients $132.5 million in damages and legal fees in a dispute over the structured note strategy of Miami broker Chuck A. Roberts.
FINRA has now sided with the firm’s position that the two prospective arbitrators were biased because each had ruled against the firm in prior cases involving Roberts.
In its letter explaining the move, FINRA stated: “It is reasonable to infer” that arbitrators “are biased or lack impartiality” when they have earlier awarded “substantial damages and attorneys’ fees” in cases that involve the same firms, financial advisor, supervisors and products. As a result, both arbitrators were removed from the list of candidates on the ranking form.
The decision is based on FINRA Rule 12407, which determines when an arbitrator may be removed before the first hearing session begins. The rule requires the FINRA Director to grant removal “if it is reasonable to infer” that an arbitrator is “biased, lacks impartiality, or has a direct or indirect interest in the outcome of the arbitration.” The bias must also be “definite and capable of reasonable demonstration, rather than remote or speculative.”
The Public Investors Advocate Bar Association (PIABA), a national organization of investment fraud lawyers dedicated to representing investors in disputes with the securities industry, said FINRA had departed from its prior policy in removing the arbitrators and added that the decision could assist other firms attempting to do the same in cases involving a single product or broker.
“This changed policy appears to be a one-way street in favor of the financial industry, granting them additional arbitrator strikes to further stack the deck against customers,” said PIABA President Michael C. Bixby, who leads an eponymous firm in Pensacola, Florida. “Removal of an arbitrator for having ruled against a party in a prior case is simply not supported by the relevant legal authorities.”
Bixby said FINRA’s “departure from the legal standards appears to be an unfortunate effort to appease the industry” and also “in conflict” with its “own prior actions.” He added that courts have long rejected claims that arbitrators can be seen as partial or biased based on their decisions in separate cases.
“It is an outrageous position,” Adam Gana, the immediate past president of PIABA, said about FINRA’s decision, adding, “Any repeat player could systematically disqualify arbitrators simply because they once ruled for investors. Prior adverse rulings do not qualify” as such conflicts, Gana added.
An industry lawyer who spoke with AdvisorHub on condition of anonymity said he supported Stifel’s motion to remove the arbitrators. It is reasonable to assume that an arbitrator who has made a punitive damages finding involving the same firm and broker is already operating a mindset that makes it harder for that brokerage firm and broker to get a fair hearing, he said.
The case Stifel is challenging involves David Jannetti of Miami and his three children, who alleged that they were misled into believing that Stifel was using low-risk structured notes in their investments. They accused the Missouri-based firm of breach of fiduciary duty, negligence, negligent supervision, fraud, breach of contract, and violation of the Florida Securities and Investor Protection Act. In ruling against Stifel, the FINRA arbitrators said that Stifel “had actual knowledge of the wrongfulness of the conduct and the high probability that injury or damage to [the Jannettis] would result and, despite that knowledge, intentionally pursued that course of conduct, resulting in damage.”
The attorneys at Hyman Cotter PC have handled hundreds of arbitrations before FINRA, the Chicago Board Options Exchange, the Chicago Board of Trade, JAMS, the American Arbitration Association and other self-regulatory organizations nationwide. We have also appeared in courts throughout the United States in various securities-related matters. For more information about our arbitration and litigation services, please contact Hyman Cotter PC at (888) 959-9760 or through our online contact form.
