The Financial Industry Regulatory Authority has reinstated three securities arbitrators that it crossed off its roster following a 2011 decision they made against Merrill Lynch, according to a letter reviewed by Reuters on Wednesday.
FINRA’s removal of the three arbitrators between mid-2011 and early 2012 raised questions among lawyers and others about whether the influence of a major Wall Street firm was powerful enough to prevent arbitrators who make decisions adverse to the industry from continuing to serve.
“FINRA simply does not remove arbitrators from the roster based on their (rulings) and never has,” Linda Fienberg, the head of FINRA’s dispute resolution wrote in a letter on Wednesday to a national organization of lawyers who represent investors in securities arbitration cases. It is likely the first time FINRA has ever reinstated arbitrators.
FINRA’s initial decision to remove the arbitrators was made based on “the findings of an experienced senior staff member who had initially reviewed the hearing record,” Fienberg wrote in the letter to Ryan Bakhtriari, president of the Public Investors Arbitration Bar Association, or PIABA.
Fienberg explained that the three arbitrators — Ilene Gormly, Fred Pinckney and Daniel Kolver — were reinstated following a second review of the arbitrators’ dismissal by Fienberg and other senior dispute resolution managers. Gormly is a former compliance executive at a commercial bank while Pinckney is an attorney and Kolver is an attorney as well as founder of a small securities firm.
The decision highlights questions about FINRA’s process for removing arbitrators. It still remains unclear as to why the three were removed from its roster of about 6,400 arbitrators.
The regulator, however, appears to have followed a multistep process required for reaching that conclusion, that includes several reviews by FINRA’s dispute resolution team, according to a PIABA official.
“We also have taken steps to ensure that a similar situation does not occur in the future,” Fienberg wrote in her letter.
FINRA dismisses about 30 arbitrators per year from its roster, for reasons ranging from unprofessional conduct to mental impairment. But the near-simultaneous dismissal of all three arbitrators who served on the same case was “unprecedented,” said Andrew Stoltmann, a Chicago-based lawyer who represents investors.
But the arbitrators are not putting the matter to rest.
“We will continue our investigation,” said Jeffrey Wittenberg, a lawyer in Santa Monica, California, who represents the arbitrators. “The facts revealed to date reveal serious concerns about FINRA’s processes in regards to the arbitrator selection and termination process,” he said, adding a lack of transparency is driving those concerns.
FINRA’s removal of the three arbitrators followed their decision against Merrill Lynch in a case filed in 2009 by a Georgia couple, Robert and Joan Postell. The couple alleged that Merrill Lynch failed to adequately monitor their accounts and initially sought $640,633, according to a FINRA ruling in May 2011. Robert Postell died during the course of the proceedings.
The panel found Merrill liable, awarding Joan Postell and her husband’s estate a total of $520,000, according to the award. An attorney for the investors declined to comment on the reinstatement.
In the months that followed, FINRA notified the three arbitrators that it was removing them from its roster.
Merrill Lynch, which is trying to overturn the panel’s ruling in a court proceeding, also declined to comment on the arbitrators’ reinstatement.
The controversy about the arbitrators’ dismissal erupted following a July 8 Bloomberg column about their plight.
Lawyers for investors are encouraged by FINRA’s willingness to reexamine its decision.
“I’m sure it was a tough decision for FINRA,” said Ryan K. Bakhtiari, PIABA president. “It’s good to see that FINRA went back to the drawing board and presumably reached the right result,” he said.