The fairness of FINRAs arbitration process is being called into question as lawyers and clients consider legal action to obtain new hearings or revisit decisions amid allegations that a former arbitrator lied about being an attorney.
James H. Frank, the former arbitrator, who, according to FINRA, falsely claimed to be a lawyer, oversaw more than 30 cases involving more than $15 million in claims while working with the regulatory agency and its predecessor, the NASD. Those involved in cases that Frank oversaw during his 15-year tenure say they feel they were treated unfairly.
For example, Erwin Shustak, a San Diego-based lawyer at Shustak & Partners, represented Tule River Tribal Council before a FINRA arbitration panel that Frank oversaw in a 2008 dispute with executives from Lehman Brothers. Shustak says the panel made decisions on the discovery process, disallowing certain documents he deemed material to his case, which altered its outcome.
Its a travesty of justice that will go unrectified, says Shustak, who has himself served as an arbitrator.
FINRA acknowledges that Frank was dropped last year after the agency learned that he was not a lawyer, but a FINRA spokeswoman declined to discuss the implications.
The revelations came to light when an attorney, Benjamin Blakeman, involved in another arbitration case overseen by Frank, investigated his background.
Frank disputes the allegations and maintains that he was at one time a member of the California bar association, but has since retired.
There is a James H. Frank listed in the State Bar of California online database of attorneys, but this Frank is another individual who has never been an arbitrator. He says he was unaware that there was another Frank claiming to be an attorney until contacted by Blakeman last year.
A spokeswomen for the State Bar confirmed in an email that Every person who has ever been licensed in California is listed on our website, indicating that if more than one James H. Frank had ever been licensed to practice law by the state all would be listed.
The industry regulator does not require its arbitrators to be attorneys. Nonetheless FINRA has an obligation to vet applicants thoroughly, argues Jason Doss, president of the Public Investors Arbitration Bar Association.
They are obviously not doing their due diligence before making people arbitrators, Doss says. From the investors point of view, they are forced into this process. They have to pay a filing fee to participate, actually do the arbitration, and they deserve better.
Joseph Fogel, an attorney based in Sherman Oaks, Calif., represented a client in a 2009 arbitration case in which Frank participated according to FINRA documents. Fogel says the revelations are very troubling, and add to concerns about the integrity of the arbitration process.
Of course, those hearings involving him, and also any arbitration which had him on a panel, have been tainted in a way no court would permit, Fogel said in an email.
Having a lawyer on the panel, particularly as the chair, affects how one approaches a case, says Scott Silver, an attorney who represented a client in a case overseen by Frank in 2004 and has been involved in arbitration cases for over 20 years. This is the judge you get to know who is deciding your case, he says. Having an attorney as a chairperson impacts your thinking.
FINRAs critics say that the arbitration process is flawed, and that investors should have the option of taking their case to court in lieu of arbitration.
This highlights some fundamental flaws in the FINRA system, says Christine Hines, consumer and civil justice counsel for Public Citizen, a consumer rights group. It is further proof for us that the SEC should end forced arbitration for investors.
The SEC, which oversees FINRA, declined to comment.
Legal experts say its not clear whether these cases can be reopened, since the statute for limitations on vacating a decision is 90 days. FINRA arbitration awards are rarely, if ever, vacated after the statute of limitations has passed, experts say.
Arbitrators have immunity for civil liability, but that does not apply in situations of fraud or corruption, explains Christine Lazaro, director of the securities arbitration clinic at St. Johns University School of Law.
Ronald J. Colombo, a professor at Hofstra University School of Law who also regularly serves as a FINRA arbitrator, does not expect the cases to be reopened based on Frank having falsified his credentials.
"I don't think it can be argued that his lying about his credentials would have affected these rulings, especially since FINRA does allow non-lawyers to serve as arbitrators," says Colombo, who prior to 2006 supervised regulatory inquiries at Morgan Stanley. "I think thats going to be very difficult to argue."
But for many lawyers and their clients, the impartiality of arbitrators has been called into question.
Michael Gold, a Tampa, Fla., lawyer, represented clients in a 2003 arbitration dispute which Frank oversaw as the presiding chairman, according to FINRA documents. Gold says he doesnt know if his clients would want to revisit their case, but it will affect how hell approach future cases.
If I now have to go into arbitration, I am going to be very worried that my arbitrator wont be impartial. They cant prove to me that he will be, Gold says.
Shustak, the San Diego attorney, believes the vetting process needs improvement and that FINRA needs to provide more oversight. Obviously, they are falling asleep at the switch, he says.
Despite the legal hurdles, a few clients and lawyers plan on taking action. Parviz Paul Oshideri, a Long Beach, Calif.-based real estate agent, says he will try to get a new hearing for his 2010 dispute with Fidelity Brokerage Services and National Financial Services over Oshideris claims of unauthorized trading and a breach of fiduciary duty. According to FINRA documents, Frank participated as one of the arbitrators.
I would love to because I lost all my savings, Oshideri says.
For some, the revelations about Frank likely have come to light too late. John Monteleone, a CPA based in southern California, represented his aunt and uncle, Pat and Ann Desmond, in a dispute with Smith Barney in 2004. The panel, of which Frank was the chair, dismissed their case in 2005 based on a ruling concerning statute of limitations, choosing Californias shorter timeframe over New Yorks longer timeframe, according to Monteleone.
The Desmonds, having died, cant try to reopen the case, Monteleone says. All we were looking for was a clean hearing to say this is what the stock broker did, he says. We never got our day in court.
- Regulation Produces More Questions for Advisors than Answers
- Former Baird Advisor Wins Arbitration Case; Baird to Pay $170,000
- SIFMA Blasts FINRA Proposal Over Costs, Data Security