(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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