Wells Fargo Clearing Servs. v. Leggett

• Decision Date: 02 August 2022
• Docket Number: A22A1149
• Parties: WELLS FARGO CLEARING SERVICES, LLC et al. v. LEGGETT et al.
• Court: Georgia Court of Appeals

WELLS FARGO CLEARING SERVICES, LLC et al. v. LEGGETT et al.

No. A22A1149

Court of Appeals of Georgia, Fourth Division

August 2, 2022

DILLARD, P.J., MERCIER and MARKLE, JJ.

MERCIER, JUDGE.

Alleging that their investments had been mismanaged, Brian Leggett and Bryson Holdings, LLC (collectively, "the investors") filed an arbitration claim against Wells Fargo Clearing Services, LLC d/b/a Wells Fargo Advisors, LLC and Wells Fargo broker Jay Windsor Pickett, III (collectively, "Wells Fargo") before the Financial Industry Regulatory Authority ("FINRA").^[1] A three-judge panel of FINRA arbitrators denied the claim and ordered Leggett to pay various costs and fees associated with the arbitration. The investors subsequently petitioned the superior court to vacate the arbitration award. The superior court granted the petition, and Wells Fargo appeals. For reasons that follow, we reverse.

This dispute arose after the investors allegedly lost over $1,000,000 between 2015 and 2016 on securities managed at different times by Pickett and Jacob McKelvey, another Wells Fargo broker. The parties' investment relationship was governed by a Wells Fargo client agreement that required arbitration of any dispute before a FINRA arbitration panel. The agreement further provided - and the parties do not question - that such arbitration would proceed pursuant to the Federal Arbitration Act, 9 USC § 1 et seq. ("FAA"). See also American Gen. Financial Svcs v. Jape, 291 Ga. 637, 638 (1) (732 S.E.2d 746) (2012) ("The FAA applies in state and federal courts to all contracts containing an arbitration clause that involves or affects interstate commerce.").

In April 2017, the investors filed a claim for arbitration with FINRA, asserting, among other things, that Wells Fargo failed to properly train and supervise its brokers, who had mismanaged the investors' accounts. The arbitration hearing was conducted over nine days, four in September 2018 followed by five in June 2019. After receiving testimony from numerous witnesses and reviewing thousands of pages of exhibits, the arbitration panel denied the investors' claims, assessed hearing fees against investor Leggett, and ordered Leggett to reimburse Wells Fargo for $51,000 in costs. In particular, the panel concluded:

Upon consideration of the full record of evidence, including documents and testimony, the Panel finds that the claims asserted by [the investors] against Respondent Pickett, and the allegations concerning Non-Party McKelvey . . . are without merit and false. Specifically, the Panel finds that the losses sustained by the [investors] were solely caused by the trading strategy devised, implemented and undertaken by Claimant Leggett. None of [the investors'] alleged losses were caused by Respondent Pickett's and/or Non-Party McKelvey's action, inaction, or advice. The Panel finds that neither Respondent Pickett nor Non-Party McKelvey engaged in any wrongful conduct. Claimant Leggett alleges that he was misled by both Respondent Pickett and Non-Party McKelvey. The Panel finds that neither Respondent Pickett nor Non-Party McKelvey misled Claimant Leggett in any way, and that these allegations are without merit and false. Claimant Leggett's testimony as to these issues was not credible.

The investors petitioned the superior court to vacate the arbitration award, and Wells Fargo moved to confirm it. Because the FAA "imposes a heavy presumption in favor of confirming arbitration awards . . . confirmation of an arbitration award is usually routine or summary." Cat Charter, LLC v. Schurtenberger, 646 F.3d 836, 842 (II) (A) (11th Cir. 2011) (citation and punctuation omitted);^[2] see also 9 USC § 9 (arbitration award must be confirmed unless vacated, modified, or corrected under specific provisions of the FAA). A trial court may not vacate an award absent "very unusual circumstances" involving "corruption, fraud, evident partiality, misconduct, misbehavior, [or] exceed[ed] powers." Brown v. RAC Acceptance East, LLC, 303 Ga. 172, 177 (2) (c) (809 S.E.2d 801) (2018) (citations and punctuation omitted). More specifically, the FAA authorizes a court to vacate an arbitration decision:

(1) where the award was procured by corruption, fraud, or undue means;

(2) where there was evident partiality or corruption in the arbitrators, or either of them;

(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or (4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

9 USC § 10 (a).

Relying on 9 USC § 10 (a) (1), (3) and (4), the superior court vacated the arbitration award, finding that: (1) FINRA and the arbitrators overstepped their authority in selecting the arbitration panel; (2) the arbitrators engaged in misconduct by refusing to postpone the arbitration hearing after the investors requested a continuance; (3) the arbitrators engaged in misconduct by refusing to hear certain evidence and limiting the investors' cross-examination of a Wells Fargo witness; (4) the award was procured by fraud; and (5) the arbitrators improperly assessed Leggett with payment of costs and fees. On appeal, we review the superior court's conclusions of law de novo and its factual findings for clear error. See EGI-VSR, LLC v. Coderch, 963 F.3d 1112, 1121 (III) (11th Cir. 2020); see also Wells v. Wells-Wilson, 360 Ga.App. 646, 648 (860 S.E.2d 185) (2021).

1. Pursuant to FINRA's Code of Arbitration Procedure for Customer Disputes ("the Code"),^[3] parties choose a three-judge arbitration panel by striking and ranking arbitrators from a list randomly generated by a computer program known as the "Neutral List Selection System." See FINRA Rule 12403; see also FINRA Rule 12400 (a) (describing the Neutral List Selection System). The Code imposes a continuing duty on arbitrators to disclose "any circumstance which might preclude the arbitrator from rendering an objective and impartial determination in the proceeding," and it sets forth a procedure for arbitrator recusal. FINRA Rule 12405 (a) & (b); FINRA Rule 12406. The Code also permits the Director of FINRA Dispute Resolution Services ("the Director") to remove an arbitrator for cause before an arbitration hearing commences:

Before the first hearing session begins, the Director may remove an arbitrator for conflict of interest or bias, either upon request of a party or on the Director's own initiative.

(1) The Director will grant a party's request to remove an arbitrator if it is reasonable to infer, based on information known at the time of the request, that the arbitrator is biased, lacks impartiality, or has a direct or indirect interest in the outcome of the arbitration. The interest or bias must be definite and capable of reasonable demonstration, rather than remote or speculative. Close questions regarding challenges to an arbitrator by a customer under this rule will be resolved in favor of the customer.

(2) The Director must first notify the parties before removing an arbitrator on the Director's own initiative. The Director may not remove the arbitrator if the parties agree in writing to retain the arbitrator within five days of receiving notice of the Director's intent to remove the arbitrator.

FINRA Rule 12407 (a). See also FINRA Rule 12100 (m) (full title of "Director").

(a) The record shows that after FINRA provided the parties with a computer-generated list of arbitrators for the selection process, Wells Fargo requested that the Director remove arbitrator Fred Pinckney from the list. Wells Fargo asserted that a serious and very public personal conflict had arisen between Wells Fargo counsel Terry Weiss and Pinckney during a prior arbitration (the Postell arbitration), in which Weiss challenged the conduct of Pinckney and the other Postell arbitrators. Claiming that it was unlikely to receive fair and impartial treatment from Pinckney, Wells Fargo asked that Pinckney be removed from the list for cause and replaced by another arbitrator for the parties to consider and rank. When the investors objected to Wells Fargo's request, Weiss responded: "It [has been] 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 [Postell] case, the SEC investigation, the publicity and the aftermath. It was a most unusual set of circumstances." The Director granted Wells Fargo's request and removed Pinckney from the pool.

In their petition to vacate the award, the investors argued that Wells Fargo improperly "manipulated" the FINRA arbitrator selection system by having Pinckney removed without using a strike. They further claimed that the incident "disclosed a secret agreement between FINRA and [Weiss] pertaining to the pool of arbitrators available to his clients in all of his cases." The superior court adopted these arguments, concluding that Wells Fargo manipulated the pool and that the arbitrators acted outside of their authority by proceeding without a fully neutral panel selected pursuant to FINRA's rules.

We disagree. Nothing indicates that Wells Fargo "manipulated" the arbitrator pool. It simply asked that Pinckney be removed under FINRA Rule 12407. We fail to see how the Director's decision to grant that request - which was made after all parties had a chance to address the issue - constituted manipulation by Wells Fargo.

Although the investors claim that a "secret agreement" existed between FINRA and Weiss to automatically exclude...