Updated Friday, August 28, 2015 as of 10:49 AM ET

Why Wall Street's Overlords Always Win in Arbitration

(Bloomberg) -- Larry Stone is just your typical wealthy businessman who trusted millions of his hard-earned dollars to Colin P. Gordon, a hedge-fund manager at the now defunct Bear Stearns, and then lost most of those millions when the hedge fund crashed and burned in 2007.

Understandably peeved, Stone wanted to see if he could recover some of his losses from Bear Stearns, so he filed an arbitration claim against Bear’s successor, JPMorgan Chase & Co., under the auspices of the Financial Industry Regulatory Authority, known as Finra.

The Finra arbitration system forces millions of people to forgo their legal rights -- and most of them don’t even realize it. If you have the misfortune of ending up in a monetary dispute with a Wall Street firm (as I once did) and you either work on Wall Street or have a brokerage account with a Wall Street firm, your only redress is a Finra arbitration.

Of course, Finra arbitrations are rigged against the plaintiffs who bring the cases because the arbitrators who decide the cases work for Finra, which of course owes its very existence to the Wall Street firms that control it and provide much of its $1 billion in annual revenue.

Needless to say, if you are an arbitrator who has an inclination to reward plaintiffs against the Wall Street overlords, you are not going to be an arbitrator for long, as I have previously written.

In July 2011, after a series of hearings in Philadelphia, Stone lost his arbitration. He had asked for $7.6 million, a figure that included both his lost principal and forgone interest. (He recovered about $3.5 million of his $9 million investment.) His basic argument in the arbitration was that Gordon had invested a portion of his hedge fund in subprime mortgage-backed securities without informing him or the other investors. Stone claimed he was therefore unaware of the risks inherent in that kind of investment. It’s the same argument that other investors made in lawsuits against the now infamous Bear Stearns hedge funds managed by Ralph Cioffi and Matthew Tannin. Stone ended up with nothing.

Now fully miffed, he started doing some online digging into the backgrounds of the three arbitrators who had heard his case. He should have done that before the case started, of course, because had he found anything that might have suggested a conflict, his lawyers could have rejected that arbitrator. He left that checking to his lawyers, though, because potential conflicts were supposed to be disclosed on a Finra form and everything seemed to be in order.

But as he started investigating the background of one arbitrator -- Jerrilyn Marston -- he discovered that she was married to Richard Marston, a well-known finance professor at the Wharton School of the University of Pennsylvania, from which Stone had graduated years earlier. It turned out that Richard Marston had worked as a consultant to JPMorgan in the 1990s, before it merged with Chase Manhattan. He trained young employees about foreign exchange and international risk and, in 2009, gave a speech at a JPMorgan-sponsored conference, for which he received $12,000. In 2009, Marston also joined the board of directors of W.P. Carey, a small brokerage firm.

Why hadn’t these obvious conflicts been disclosed on Jerrilyn Marston’s Finra arbitrator disclosure form, Stone wondered? Had it been disclosed, he reasoned, he or his lawyer would have disqualified her from his arbitration panel, as was their right. He may still have lost the arbitration -- the usual outcome -- but at least Stone would have felt that he had been treated somewhat more impartially. Stone argued, in a subsequent lawsuit in which he sought to vacate the arbitrators’ decision, that Richard Marston’s role “created an impression of partiality and concealed Ms. Marston’s lack of qualification to serve.”

The plot thickens. He discovered later, to his astonishment, that when Jerrilyn Marston applied to be an arbitrator in the mid-1990s, she disclosed on her application that her husband “has spoken to brokers, traders, and financial consultants from various investment banks and brokerage houses.” She offered to provide Finra with more information about her husband’s ties to Wall Street. No one from Finra followed up and somehow her disclosure got translated on a form to “family member has a relationship with the University of Pennsylvania.”

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Comments (6)
Interesting conclusion of the corruption at FINRA, I agree that the system of arbitration is not perfect and each case someone is going to be unhappy and perhaps both parties. I have found that if you do your research in advance you avoid the situation you have cited.
Posted by Michael Z | Monday, April 28 2014 at 3:11PM ET
I think FINRA arbitration is significantly flawed but not for the reasons stated in the article. I do not think FINRA is trying to protect member firms. Their policy to list any arbitration or complaint forever on broker check is testament that they are not on the side of reps. The biggest problem with arbitration is they decide an award without explaining what (if any) of the charges they found valid and do not give any explanation regarding awards such as how they came to the figure. It is an expensive time consuming process after which neither side is likely to feel that justice was served.
Posted by Jeremy K | Monday, April 28 2014 at 8:50PM ET
Based on my experience, Bill's article is spot-on!

If you Google "Mensack" & "Fairness" the first hit will be "FINRA Arbitration: Kangaroo Court or Model of Fairness."

I challenge anyone to read the article and substantiating evidence linked in the footnotes, and argue that my arbitration wasn't a sham and that FINRA's leadership wasn't complicit.

If nothing else listen to the arbitrators own words linked at footnote #4. Better still, read FINRA's responses to this sham linked at footnotes #16 and #19.

Due to the coverage of my arbitration, including a March 2012 article by Bill, dozens of advisors have contacted me with similarly outrageous stories regarding their FINRA arbitration experience.

Mark Mensack
Posted by Mark M | Wednesday, April 30 2014 at 12:04PM ET
Mr. Cohan,
I appreciate your writing the article regarding "Wall Street's Overlords"
Both Michael Z is way off base and either is an attorney trying to maintain status quo, or he is horribly misinformed, and has never been in an arbitration.

Like many advisors, I have had to suffer the abuses of the FINRA mandatory arbitration process, even though I had originally filed a complaint within the Cook County, IL. Circuit Court. It was remanded to FINRA for arbitration due to my signing a required U-4 as a condition of employment.

In mandatory FINRA arbitration, financial advisors lose over 90% of the actions against member firms, and forces > 70% into personal bankruptcy.

Please remember, FINRA is owned by the investment banks and securities firms that it oversees.

To provide further information regarding FINRA arbitrations, and the abuse of due process; you might view the following www.RJAvsRBRoweFINRAarb.com, which contains the testimony and perjury of witness, and many abuses with in the hearings.

FINRA's response?, "Our principle role within arbitrations is as an "administrator", and unable to reverse any judgment", even when they have been given irrefutable evidence of the perjury and lying committed throughout the hearing

Further it is estimated that 99% of appeals go in favor or the Member Firms, thus I, unfortunately, am not at all surprised at the results Mr. Stone had to endure from a horribly biased and orchestrated system.

If you have any questions, or would like any further information, please do not hesitate in contacting me.
Posted by Robert R | Wednesday, April 30 2014 at 1:43PM ET
Jeremy K and Michael Z--- ARE YOU KIDDING ME !!! ARE YOU DRINKING THE BD AND FINRA KOOL-AID ???? I am not as nice as Mark M and Robert R. But let me just tell you that FINRA is a criminal organization and should be dismantled with a wrecking ball. With the BD lawyers and the arbitrators inside. (okay, so sue me for libel.) Can't you see it's the fox guarding the henhouse?! I have been in the trade publishing industry for 35 years. I was the cofounder of RR magazine and I have seen it all. Believe me. Advisors call me on a regular basis, brutalized, ruined, and forced into bankruptcy by firms and lawyers who have no scruples and no respect for advisors who are ethical and hard-working. Don't forget the story of Steve Sawtelle vs Waddell and Reed. Don't know it? Google it. 7 years of arbitration and in and out of court. He spent his life savings defending himself. And don't forget Bob Rowe and Mark Mensack, both icons in our industry for many many years...fiduciaries and institutional consultants...RUINED. Google them. I love this industry, or should I say, I love the honest and brave advisors in this industry. It's the only reason I am still in it. Need to read more tales of slander and battery? Read Jane Wollman Rusoff's article in ThinkAdvisor. And then call me and I'll give you the names of about 1,000 advisors who have been destroyed. And that's just the tip of the iceberg. Stop sleepwalking and do your research. Then you will understand what is really going on. Put down the Kool-Aid.
Jane's story: www.thinkadvisor.com/2014/04/07/brutalized-breakaway-brokers-speak-out-7-stories-f? OR GOOGLE: Brutalized Breakaway Brokers Speak.... Sydney LeBlanc
Posted by sydney l | Wednesday, April 30 2014 at 3:08PM ET
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