FINRA Arbitration Suffers Reputational Setback in Suit That Highlights Unfair Expungement System

Lawyers who represent victims of investment fraud frequently criticize the FINRA arbitration process as being tilted in favor of stockbrokers. Biased arbitrators, cherry-picked by the industry and beholden to their interests, is a common complaint. A recent filing by the Alabama Securities Commission against a FINRA arbitrator for numerous violations has added credence to the claims of unfairness.

According to Financial Advisor, the Alabama Securities Commission has filed papers to vacate a FINRA arbitration ruling, accusing FINRA arbitrator Harvey Linder of “fraud, corruption and undue means” after he expunged five customer complaints from the record of a Merrill Lynch broker. Customer complaints form part of a stockbroker’s disciplinary record and serve as a valuable public resource for investors who want to research a potential broker. Knowing this, stockbrokers will go to great lengths to have all traces of securities fraud erased from their public record, which includes cherry-picking arbitrators who are predisposed to grant expungement.

Arbitrators are selected pursuant to an established process in which FINRA sends a list of arbitrators, both public and industry, to the investor and the stockbroker to rank or strike. FINRA then averages the rankings and selects the arbitrator(s) with the highest average. Unlike the initial claim process, investors for any number of reasons typically don’t engage in the post-hearing expungement process, which leaves the stockbroker as the only party to submit rankings.

Out of this atmosphere has grown a special cadre of arbitrators. One such arbitrator in high demand is Harvey Linder. According to the Alabama filing, Linder has ordered expungement of brokers’ disciplinary records in almost every case over which he has presided, in one instance erasing 29 customer complaints against one broker. This raises a plausible inference that Linder is not an impartial arbitrator of disputes between stockbrokers and their customers.

In this particular case, Linder ordered the expungement of five customer complaints from the stockbroker’s disciplinary record. One of the more egregious affronts to the process was when Linder barred, for no apparent reason, an aggrieved investor who attended the hearing to contest expungement of the stockbroker’s record. According to Alabama Securities Commissioner Joseph Borg, “the arbitrator basically kicked the investor out of the hearing.” It leaves open the question of how many other “Harvey Linders” are out there.

This is the second time in 2022 that FINRA arbitration has come under fire for being a corrupt process. In February, a judge in Georgia ruled that Wells Fargo and its counsel “manipulated” FINRA’s arbitrator selection process and deprived investors their legal right to a neutral panel of potential arbitrators. According to the order, Wells Fargo and its lawyer had an unwritten arrangement with FINRA in which the Wells Fargo lawyer could “secretly red line” the arbitrator list and construct a panel favorable to their interests. The process was contrary to the principles of fairness that FINRA claims its arbitration process has. As a result, the judge vacated the arbitration order that had found in Wells Fargo’s favor.

Erasing stockbroker misconduct from the public record defeats the important goal of investor protection. Calls for reforming a perceived corrupt system are increasing in both number and volume.

If you have questions or concerns about whether you have been the victim of securities fraud, Sanford Heisler Sharp has a number of financial services lawyers in San Diego, New York and Washington, D.C. with extensive experience dealing with complex investment data and investor documents to evaluate whether you have been the victim of securities fraud. To speak with a member of our team, call 646-681-7373 or contact us online.

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