A U.S. district court has upheld an arbitration panel’s half-a-million dollar award against Merrill Lynch, capping a controversy in which the three arbitrators were fired after rendering their decision–and then re-hired.
The federal court in Atlanta on Thursday tossed out Merrill’s argument that the Financial Industry Regulatory Authority arbitration panel prejudged the case and showed bias by aggressively grilling its witnesses. The “court does not have the impression from its review of the record that the panel members had run amok or otherwise engaged in behavior that clearly exceeded their authority,” wrote Judge Willis B. Hunt Jr.
Merrill Lynch spokesman Bill Halldin said the firm is “disappointed in the court’s decision.”
The case at issue began with the panel’s ruling last year that Merrill must pay roughly $520,000 to the estate of Robert C. Postell and to his wife, Joan P. Postell, whose investments lost money and who claimed Merrill failed to adequately monitor their accounts.
Arbitration rulings can be challenged only under narrow circumstances, such as if the arbitrators showed evident partiality or exceeded their powers. Merrill’s accusations that the panel acted inappropriately weren’t only made in its appeal to have the district court vacate the award, but also by its lawyer in a complaint to Finra, which oversees the arbitration system.
One by one, over the following year, the three arbitrators received letters from Finra saying they had been removed from its rolls of arbitrators. No reason was given, beyond a reference to routine reviews of its roster. One of the arbitrators accused Finra of cutting them because of the Merrill award. Fred Pinckney’s claims were reported July 8 in a Bloomberg News column, alleging that Finra caved to pressure from Merrill, a unit of Bank of America Corp. (BAC), and suggesting that big brokerages have too much clout in the system.
Finra denied that it acted because of the award and said rulings are never a factor in the decision to remove an arbitrator. But as the controversy over the arbitrators’ ouster grew, Finra decided to re-review its decision and ended up reinstating all three arbitrators in late July.
Ryan Bakhtiari, president of the Public Investors Arbitration Bar Association, or Piaba, said Judge Hunt’s ruling Thursday wasn’t only a big win for the Postells but also for the process.
“In the end, the result in [the Postell case] is that the three arbitrators got reinstated, the investors win their award and Piaba, working with Finra, has been able to make improvements in the arbitrator removal process,” Mr. Bakhtiari said.
In a letter to Piaba earlier this week, Finra detailed the “significant enhancements” it has made to its process. These include changes to its investigation procedures, new levels of review and not sending an arbitrator a removal letter if a motion to vacate is still pending or the time to file one hasn’t yet expired, among others.
But Judge Hunt’s ruling may not be as satisfactory an ending to the story for two of the arbitrators as it is for Mr. Bakhtiari.
Jeffrey Wittenberg, a California-based attorney for arbitrators Mr. Pinckney and Ilene Gormly, said Friday that his clients have a right to know what exactly happened.
“Now that the case is final, Finra should be willing to openly and publicly discuss what happened,” he said. In a letter to the Securities and Exchange Commission last month, Mr. Wittenberg called for the commission to investigate Finra’s actions in the case and to publicly publish a report of its findings.
He has not yet received a response to his letter. Finra declined to comment.