Wednesday, March 26, 2014

FINRA Removes Arbitrator For False Disclosure

According to a report at CNBC, FINRA has removed an arbitrator from pending cases and its roster who claimed to be an attorney, but is not.

According to the reports, the arbitrator's profile reflects that he graduated from law school and is admitted to practice in New York, California and Florida. Apparently, none of that is true.

These events have led to discussion of the possibility that arbitration awards that he participated in could be in jeopardy. However, since there are three arbitrators, and there is no requirement that any arbitrator be an attorney, the possiblity of a successful attack on the awards is slim. Further, under most arbitration statutes a motion to vacate the award has to be filed within 90 days of the award.

The larger concern is the integrity of FINRA's arbitration disclosure process. While FINRA claims to do extensive background checks on its arbitrators, this is not the first time that a FINRA arbitrator has been found to have filed misleading information with FINRA, and it is not the first time that FINRA has failed to uncover the false information, and, sometimes awards have been overturned.

One of the most significant cases to date is Goldman  Sachs & Co., et al. v. Athena Venture Partners, In that case the court vacated an arbitration award and was extremely critical of FINRA’s failure to provide the parties with qualified arbitrators to decide the dispute as bargained for by  the parties in submitting their claims to the forum. 

This new disclosure, and the cases that come before it, demonstrate the need for FINRA to get serious about vetting arbitrators. FINRA has the ability, and the resources, to perform background checks on arbitrators, and it needs to insure the parties that the disclosures that are made are accurate. All parties to the process rely heavily on the disclosure reports provided by FINRA during the arbitrator selection process, and FINRA encourages that reliance. In fact, given the fact that the parties are presented with 30 potential arbitrators and have less than 20 days to review the disclosures and make their selections, FINRA has made it impossible to perform any significant investigation - assuming a party had the funds available to conduct that investigation.

But FINRA does have the funds, and can conduct that investigation on behalf of all parties to insure that the arbitrator disclosures we all rely upon are accurate and complete.

Mark Astarita is a securities attorney who has represented parties in over 600 arbitrations across the country. For more information, contact him by email.