Former Wells Fargo clients who accused the bank and its Wall Street regulator of making a secret deal involving the selection of FINRA arbitrators won a shocking victory in state court.
The Jan. 25 decision vacated an August 2019
The clients sought to vacate the award through a lawsuit, filed in October 2019. Fulton County Superior Court Judge Belinda Edwards ruled in their favor, citing Wells Fargo, FINRA and the arbitrators for misconduct throughout the proceeding.
“In this case (1) Wells Fargo and its counsel manipulated the arbitrator selection process (2) the arbitrators refused to postpone the hearing and provided no basis for their decision despite the investors providing ample cause for postponement; (3) the arbitrators denied the investors their statutory right to present testimony from two relevant, noncumulative witnesses; (4) Wells Fargo witnesses and its counsel introduced perjured testimony, intentionally misrepresented the record and refused to turn over a key document until after the close of evidence; and (5) the arbitrators improperly and without legal justification imposed costs and fees on the investors in violation of the contractual framework that bound the parties,” Edwards wrote.
She found that Wells Fargo and its counsel, Terry R. Weiss, had “committed fraud on the arbitration panel” and said that “each of these violations provides separate, independent grounds to vacate the award in its entirety.”
The parties’ responses
Edwards therefore threw out the arbitration award, although it’s not immediately clear if the decision will have an effect on the expungement of the complaint from the brokers’ records. The order to vacate the award came nearly five years after the clients filed their initial complaint and after a nine-month delay in the middle of the arbitration hearings due to a medical emergency.
“My clients are pleased with the judge's order,” Craig Kuglar, the attorney representing Leggett and Bryson Holdings, said in an email. “Given what happened here, we are hoping that Wells Fargo sees the wisdom in fully compensating my clients — both as to the fee and costs of the arbitration as well as their underlying investment losses — without having to resort to a third arbitration hearing in this case.”
Wells Fargo plans to argue the case before a higher state court.
“FINRA has well-established rules for admitting arbitrators to its roster, and the process is fair to all parties,” spokeswoman Jackie Knolhoff said in a statement. “Wells Fargo Advisors followed this process, and we intend to appeal this decision.”
Representatives for FINRA denied the allegation that there has ever been an agreement between the regulator’s Dispute Resolution Services division with Wells Fargo’s attorney, Weiss, about the appointment of arbitrators. FINRA never excluded any arbitrators involved with a controversial case in 2011 from any pools of arbitrators, including this one, spokeswoman Michelle Ong said in an email.
“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,” Ong said.
Wells Fargo’s attorney, Weiss, and one of the two brokers, Jay Windsor Pickett III, didn’t respond to requests for comment. The other broker, Jacob McKelvey, declined to comment when reached by phone.
Two arbitrators that the clients and Edwards alleged were improperly removed from the case, Fred Pinckney and Kenneth Canfield, didn’t respond to inquiries seeking to discuss the case. Efforts to reach the presiding chairperson of the arbitration panel, Robert L. Lestina, were not successful.
The Public Investors Advocate Bar Association, an advocacy group for investor attorneys,
“What the heck happened with the [arbitrator] appointment process? If somebody's fingers are on the scale denying one party or another a neutral panel, that's inappropriate,” Edmiston said. “FINRA has worked very hard over the years, particularly since it's become the only securities arbitration forum, to become the gold standard. I’m shocked by this order. Some part of me hopes this isn't true, but it's pretty hard to deny the words when they're in front of your nose.”
Arbitration fraud allegations
In particular, Edwards took FINRA, Wells Fargo and its attorney, Weiss, to task over a “secret agreement” between the lawyer and the regulator. Under an unwritten pact, FINRA and Weiss agreed that none of the three arbitrators who got fired and then reinstated during
The conduct denied the clients “their contractual right to a neutral, computer-generated list of potential arbitrators,” Edwards wrote. “Permitting one lawyer to secretly redline the neutral list makes the list anything but neutral and calls into question the entire fairness of the arbitral forum.”
Later, after the firm and the clients agreed to three arbitrators out of the new pool, FINRA’s director of dispute resolution improperly eliminated one of them at the request of Wells Fargo, according to the ruling. An unrelated lawsuit filed by Doffermyre Shields Canfield & Knowles against Wells Fargo didn’t represent a sufficient conflict of interest to take attorney Kenneth S. Canfield off the panel that was hearing the case, Edwards said.
In addition, Edwards found that McKelvey, who had been the clients’ broker before they began working with Pickett, had offered “perjured testimony” about text messages between himself and the client. During the intervening nine months of the delay in the hearing due to the medical emergency, McKelvey’s testimony about the texts changed over time, according to the ruling.
When asked in September 2018, McKelvey admitted that certain text messages had never gone through Wells Fargo’s required compliance procedures, according to transcripts from the hearings. He acknowledged that was a violation of company protocol and SEC rules, as well as a “bad thing” and “a no-no,” the transcripts show. Once the hearings resumed in June 2019, McKelvey testified that he couldn’t recall his earlier testimony. At that time, he said the texts didn’t violate any rules as long as they didn’t discuss specific transactions, the transcripts show.
“The arbitrators were clearly misled by McKelvey’s second round of testimony (after the medical break) and the affirmation of Wells Fargo’s counsel, who falsely mischaracterized his prior testimony,” Edwards wrote. “The presentation of perjured testimony along with counsel’s mischaracterization of the previous testimony, which he knew was not yet transcribed, resulted in a fraud on the arbitrators that had an obvious impact on their final award.”
The further snafus in the case came from the timing of evidence introduced into the case and the client attorney’s request for more time to review it, the panel’s handling of Wells Fargo’s request for the claimant to pay the firm’s costs and other conduct, according to the decision.
The initial claim
All of the legal wrangling stemmed from the original claim in July 2017 against Wells Fargo and Pickett, in which the clients sought damages, costs and attorney fees amounting to more than $1.9 million over allegations including negligence, failure to supervise, and breaches of fiduciary duty and contract. The eight days of testimony and thousands of pages of exhibits “revealed that Claimant Leggett’s complaints about Respondent Pickett and Non-Party McKelvey have no factual basis,”
“The panel finds that the losses sustained by claimants were solely caused by the trading strategy devised, implemented and undertaken by Claimant Leggett,” according to the ruling. “None of Claimants’ alleged losses were caused by Pickett’s and/or non-party McKelvey’s action, inaction or advice. The panel finds that neither respondent Pickett, nor non-party McKelvey engaged in any wrongful conduct.”
Therefore, since Leggett was “not a credible witness,” and his complaints “were false and untrue,” the panel found “no meaningful regulatory or investor protection value” in keeping the complaint on BrokerCheck, according to the decision. The award document had excerpts from text messages between McKelvey and Leggett in 2016 that almost certainly figured in McKelvey’s testimony about whether they were violations of the rules.
As Leggett pressed the case in Georgia seeking to vacate the award in October 2019, the brokers filed their own motion in New York Supreme Court to confirm the expungement. Citing the finding that the underlying allegations were false, Judge W. Franc Perry approved the expungement of their records in December 2019, court records show. If Wells Fargo follows through on its stated intent to appeal the decision, the order to vacate the award will go to a state appeals court and potentially on to the Georgia Supreme Court.
