FINRA Blackballing Arbitrators For Customer Awards

July 11, 2012 by Thomas F. Burke, P.C.

Most people perceive the securities industry as being unfair to the average investor and in favor of the large brokerage houses and the people who work in the industry. There are constant headlines in the newspapers relating to insider trading (Raj Rajaratnam), unexplained missing funds (MF Global Holdings, Peregrine Financial Group) and market manipulation (LIBOR). Add to this list that any arbitrator in a Financial Industry Regulatory Association ("FINRA") arbitration who rules against one of the large brokerage houses may be blackballed and ousted as a FINRA arbitrator for any future cases. In other words, the deck will be stacked against the average investor and in favor of the brokerage houses since any noncompliant arbitrators will be weeded out of the FINRA arbitration selection process.

In December of 2009, Robert C. Postell and Joan Postell filed an action against Merrill Lynch, seeking damages of $640,000.00 plus attorney fees. The claim was based on "a failure to adequately monitor" the accounts, "breach of contract" and "breach of fiduciary duty". Merrill Lynch, through its attorney, denied having any liability for the claims.

In May of 20011, the Postell's claim was heard in seven sessions over four days by a three person panel assigned by FINRA to hear the case. The three arbitrators were Ilene Gormly (chairperson), Daniel Kolber and Fred Pinckney. During the final hearing session, the panel was informed that Robert Postell had committed suicide in February and that his wife, Joan and his estate would substitute as claimants. According to Pinckney, it was at this final session that Terry Weiss, the attorney for Merrill Lynch, sensed that he was losing the case and repeatedly "exploded at the panel" and accused them of being biased against Merrill Lynch. The panel immediately contacted FINRA about Weiss' accusations and was told to proceed with final arguments and conclude the matter. The panel subsequently ruled in favor of the Postells and awarded damages of $520,000.00.

Approximately two months after the ruling, arbitrator Kolber received a letter from FINRA advising him that he would no longer be listed as an arbitrator with FINRA. In January of 2012, arbitrator Gormly, who had twenty years experience as an arbitrator, received the same letter from FINRA informing her that she would no longer be listed as an arbitrator with FINRA. In June of 2012, Pinckney received the letter from FINRA informing him that he was no longer a listed arbitrator with FINRA. Kolbert requested a meeting with FINRA executives which was denied. Gormly filed a "whistle blower" letter to the Securities Exchange Commission ("SEC") setting forth the events relating to the matter. The SEC has yet to respond to her letter.

Apparently, Merrill Lynch has enough clout with FINRA to systematically remove arbitrators that dare to rule against it. What is so disturbing about the blackballing of the three arbitrators is that securities customers are required by contract to arbitrate all disputes with brokerage firms at FINRA rather than in state or federal courts. The justification for this is that FINRA, a private self- regulatory organization for the securities industry, will provide a fair and unpartisan forum for investor's claims against the brokerage houses.

And how is FINRA financed? FINRA derives the bulk of its $1 Billion in revenue from Wall Street companies that are its members. So maybe it should not come as a shock to find out that if Merrill Lynch doesn't like the way the arbitrators ruled, then the arbitrators won't be around for any future hearings. No wonder that the brokerage houses want to ensure that customers have to file claims with FINRA rather than in courts.