Happy Wednesday, and welcome back to Dry Powder.

In today’s note, I take a look at the paradoxical motivations of FINRA—Wall Street’s de facto arbitration system—through the lens of a peculiar case, one that I first covered years ago for Bloomberg, which pitted a trio of arbiters against one of the world’s biggest banks. Newsworthy developments have caused me to return to the case, but the saga is also fascinating in and of itself.

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Bill

Nevertheless, FINRA is perhaps best known for attempting to regulate the hundreds of thousands of Wall Street brokers, who invest the savings of some 145 million Americans in the stock and bond markets. FINRA operates an online database of brokers that contains information about where brokers have worked, what required tests they have taken and passed (Series 7, Series 63, etc.) and whether they have misbehaved. Less well known is that FINRA also largely operates the justice system on Wall Street—a bureaucracy of arbitration that people who have brokerage accounts, or people who work on Wall Street, have no choice but to employ if they have a monetary dispute with the banks.

This is in the small print of the contracts of adhesion that customers sign with their brokers and that Wall Street employees sign with their employers. If you don’t sign, you don’t get a brokerage account. If you don’t sign, you can forget about working on Wall Street. It may be one of the most profound examples of the abridgement of civil rights in our culture since it denies access to the real justice system, such as it is, for monetary disputes by forcing people into arbitration. (Nearly 20 years ago, I brought an arbitration case against my former Wall Street employer, JPMorgan Chase, after I was constructively dismissed after September 11 from my job as one of the leaders of the firm’s M&A group. I lost the case.)

So it’s all very simple yet incredibly complex: FINRA offers an adjudication system for people with monetary disputes with Wall Street, despite the fact that 80 percent of its annual revenue comes from Wall Street. And that can make it awfully hard to be a FINRA arbitrator—an independent contractor, usually with some affiliation to the securities industry, who FINRA pays around $250 a day—especially for those who find too often for plaintiffs against Wall Street.

Weiss was upset that during the three-day hearing, two of the arbitrators—Gormly and Kolber—questioned a Merrill Lynch witness about information that Weiss had previously said was not in the record. Weiss then argued that the entire line of questioning was biased against him and his client and demanded that the full panel recuse itself. FINRA denied his request. In a subsequent letter to FINRA before the panel had found for Postell, Weiss wrote that the situation with the three arbitrators was “so extreme and severe” that he was “forced to interrupt the Panel” and ask that they cease actions that he deemed to be a “tag team inquisition of Merrill Lynch.” Subsequently, the three arbitrators received one of FINRA’s “black spot” letters, which are sent out periodically to cull the list of arbitrators. Their letters arrived after their decision to award the money to Postell’s wife, Joan, who survived him after his death during the pendency of the case.

For its part, FINRA officials said the “black spot” letters were just a coincidence and that Gormly, Kolber and Pinckney weren’t removed from the arbitration rolls because Merrill’s lawyer and executives complained to FINRA about the award granted to Postell. (Weiss later appealed the Postell award to the federal district court, in Atlanta, but lost; Merrill had to pay Mrs. Postell.) The S.E.C. also reportedly investigated the matter.

After I wrote a column for Bloomberg about the fate of these three arbitrators a decade ago, a minor miracle occurred: FINRA decided to reinstate them to its roster of arbitrators, at least on paper. The FINRA executives listened to a tape of the Postell proceedings and reached the conclusion that the arbitrators had handled things properly, despite Weiss’s assertions of the “tag team inquisition” and bias against him and Merrill. FINRA “reached a different conclusion regarding the alleged inappropriate conduct from the conclusion previously reached,” according to the organization’s letter reinstating the three arbitrators.

You’d think that would have been the happy end of the story. But it wasn’t, and isn’t. In 2017, after about five years without being asked to serve as a FINRA arbitrator despite his reinstatement, Fred Pinckney became aware that he was under consideration to be on the panel that was hearing a case against Wells Fargo and its broker, Jay Windsor Pickett III, brought by Brian Leggett, who claimed that Wells Fargo and Pickett had cost him $1 million. By coincidence, Terry Weiss just happened to represent Wells Fargo and Pickett.

When Pinckney’s name surfaced as a potential arbitrator in the Leggett case, Weiss wrote two letters to Daniel Zailskas, a FINRA arbitration administrator, asking Pinckney to be removed. In his first letter to Zailskas, a copy of which I have seen, Weiss referenced the Postell case and Pinckney’s alleged “egregious and outrageous behavior” during that arbitration. Weiss further alleged that Pinckney “exhibited evident partiality,” was “prejudiced” against Merrill Lynch’s “rights,” and exceeded his “powers” as an arbitrator. He argued that if Pinckney were put on the Leggett panel, his clients at Wells Fargo were “unlikely” to receive “full and impartial treatment.” He wanted Pinckney gone. (“Weiss has developed his own Thesaurus,” Pinckney told me. “...He kept writing to FINRA saying that I evidenced ‘egregious and outrageous’ conduct in the Postell matter, which was a joke.”)

Two days later, Weiss wrote another letter to Zailskas. Once again, he mentioned the Postell case and also my July 2012 column about what had happened, which he described as Pinckney’s “version of events” about an arbitration that was “supposed to be cloaked with a sense of confidentiality,” whatever that means. (He neglected to write that I asked him to share any comment that he had about the Postell arbitration and that he declined to respond.) He wrote that Pinckney had “actual bias” against him and that this was what FINRA was “evaluating” when Pinckney was removed from another of Weiss’s arbitration cases.

Weiss made another point in his letter, too. He wrote: “It was made clear to me verbally that none of the Postell arbitrators would have the opportunity to serve on any one of my cases given the horrific circumstances surrounding the underlying case, the subsequent S.E.C. investigation, the publicity and the aftermath.” Pinckney was removed from the Leggett panel pool.

Shortly after the judge’s ruling, FINRA decided to conduct an investigation into whether Weiss did in fact have a “secret agreement,” as the Georgia judge described it, with FINRA to keep the Postell arbitrators out of the arbitration system. FINRA hired the law firm Lowenstein Sandler to try to figure it out. Lowenstein’s review occurred between February and June of this year. In a 40-page document Lowenstein concluded that Weiss did not have a “secret agreement” with FINRA to keep the Postell arbitrators from serving on FINRA arbitration panels. In short, Lowenstein’s investigation came down on the side of Weiss and FINRA. “Lowenstein does not believe that there was any agreement between Weiss and FINRA regarding the panels for Weiss’s cases,” the law firm concluded. “The evidence further demonstrated that FINRA personnel generally adhered to the policies and procedures and that their actions during the Leggett Arbitration were intended to be fair and reasonable at each step.”

Notably, during the investigation, Weiss essentially disavowed what he himself had written to FINRA. According to Lowenstein’s report, Weiss asserted that “The quoted language of ‘unwritten agreement with FINRA,’ while attributed to me, is not something I ever said and is not something I wrote… There was no ‘secret agreement’ between [him] and FINRA either, and [he has] never said or suggested that such an agreement existed.”

Despite Weiss’s second July 2017 letter referring to the verbal agreement with FINRA not to have any of the Postell arbitrators on his future panels, Lowenstein wrote that it found “credible” Weiss’s denial of the agreement and that of the other FINRA administrators that it interviewed. Lowenstein interviewed Weiss in April and accepted his explanation that he intended to use the FINRA rules on the selection of arbitrators to exclude each of the three Postell arbitrators every time their names surfaced as a potential arbitrator in his arbitration cases. Weiss told Lowesntein that a FINRA administrator, whose name he could not recall, told him, “Yes you can do that.”

FINRA declined to discuss the Lowenstein conclusion or report with me. “We are letting the report speak for itself,” Ray Pellecchia, FINRA’s head of communications wrote to me. Weiss declined my request for an interview, and passed along a nice compliment. “Because your ‘reporting’ is inaccurate, incomplete and disingenuous, I have no interest in speaking with you,” he wrote me in an email from his new law firm, Maynard Cooper.

He suggested that Weiss be removed from the list of attorneys who can represent Wall Street firms in arbitration cases for a period of time “because his conduct was so unprofessional.” In an email to me, Pinckney wrote that “for more than a decade,” Weiss “has repeatedly abused” Pinckney’s “reputation… with unsupported allegations of bias in connection with the Postell Arbitration and subsequent FINRA arbitration selection processes for numerous FINRA disputes.” He told me that he became “the whipping boy” for FINRA because he “had the balls” to speak with me about what had happened in the Postell arbitration. “So much for ethics and standards at Finra,” Pinckney wrote to me.

There’s little question that Wall Street’s arbitration system is deeply flawed, is rife with conflicts of interest, and needs serious fixing. How can there be genuine justice for the plaintiffs in a system that is run by an organization that gets 80 percent of its revenue from the defendants in the monetary disputes that arise between Wall Street and its customers and employees? Whatever one makes of the Leggett-Weiss-Pinckney Affair, this compromised system will continue to suffer optically and with its credibility, if nothing else. In an email to me, Pinckney referred to this as “kangaroo justice.”