Share on Facebook
Share on X
Share on LinkedIn

by Andrew Flake

Especially on appeal, courts are selective about which facts to include in opinions. For reasons both of style and precedential value, they may omit facts, even ones the lawyers might consider crucial.

Sometimes, the omission may be inadvertent: Years ago, as our team prepared for trial, one appellate opinion was bedeviling our legal analysis. It did not fit with all of the other decisions and certainly not with our case theory. So I trekked down to the appellate archives, finding a microfiche machine, and scrolled through the physical case record until I found the trust document being discussed — and as it turned out, there was language in the trust, not referenced in the opinion, that led to a legal win.

In other cases, though, the factual recitation is incredibly detailed, and that thoroughness, too, may be by design. That struck me as the case in reading an August 2 arbitration opinion from the Georgia Court of Appeals, an investor-broker dispute involving Wells Fargo.

After losing upwards of $1,000,000 invested with a Wells Fargo brokerage, an unhappy investor, Leggett, filed a claim in arbitration against both the institution and the individual broker handling the funds. The arbitration proceeded before a three-arbitrator panel under the rules of the Financial Industry Regulatory Authority (FINRA), which not only denied Leggett’s claims, but — after finding that all of his losses resulted from his own trading strategy and describing his allegations as “without merit and false” — ordered that he pay some $51,000 of Wells Fargo’s legal costs.

It doesn’t require too much reading between the lines of the panel’s award to determine that part of this result was some very-poorly received arbitration testimony from the investor. Here’s a portion of what the panel determined, after a record running to thousands of pages and nine days of hearings:

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’s testimony as to these issues was not credible.

“False” is a strong word, and to have the panel so explicitly call out a lack of credibilty suggests some real problems with Leggett’s testimony. Combine those findings, an extensive record, and the Federal Arbitration Act’s very narrow grounds for vacatur, and you have an outcome that, in the end, may not be surprising.

Some aspects of the case are, however, worth mentioning.

First is the difference between the panel’s view and the trial court’s. Despite the strong panel language, the Superior Court in the case was willing to vacate the entire arbitration award, making determinations that at least three of the exceptions to confirmation under the FAA applied: that FINRA and the panel overstepped their authority; there was arbitrator “misconduct” in refusing to continue the matter; and surprisingly, that the award was procured by fraud. It was that decision, in fact, that gave rise to the appeal, and although the Court of Appeals reversed the Superior Court, it is worth considering the reasons for the disconnect. What happened? The arguments raised by Leggett, rather than challenging the substance, largely focused on process: He alleged that Wells Fargo, with improper assistance from FINRA, improperly used requests to disqualify certain proposed panelists to “game” the selection system.

As the Court of Appeals related it, Wells Fargo’s counsel had been involved in a contentious FINRA matter previously, such that those arbitrators were acknowledged by FINRA to be subject to disqualification. The FINRA director determined that they could be removed without Well’s lawyer needing to use one of his strikes.

If the trial court agreed with that view — which it did — it renders the extensive record and the strong findings less relevant, because of the presence of perceived bias. By focusing on arguments that the selection process itself was flawed, the investor’s team seemed to choose the sounder ground for challenge. They added to that a miscellany of arguments concerning other process elements that they believed further limited the fairness of the proceeding, for example, alleged harm from failure to grant continuance and limitations on the scope of certain cross-examinations. In the end, however, because the FINRA rules vest the administration and its Director with substantial discretion concerning party arbitrator challenges, and because of the narrowness of the FAA’s bases for award challenge, the Court of Appeals reversed.

Second is the basis for affirmance of the award of attorney’s fees. FINRA’s procedures, as do other arbitral rule-sets, defer to the parties’ agreement as to whether the panel has the power to award fees. In this case, the agreement lacked any affirmative “prevailing party” or similar fee-enabling language. Referring back to the FINRA panel’s findings about Leggett’s testimony and allegations, though, the Court of Appeals cited a well-established, if not so frequently invoked basis, that justified the fee award: a panel’s inherent power, shared with the courts under the common law, to respond to bad faith conduct with a sanction. Citing an Eleventh Circuit opinion, Judge Mercier wrote that “[a]lthough parties generally bear their own costs in litigation, judicial and quasi-judicial bodies (including an arbitration panel operating under the FAA) are authorized to award attorney fees and/or costs under the bad faith exception to this general rule.” This application of inherent power in the arbitral context is really the proposition for which I’d expect to see this case cited in other opinions and in party submissions.

At this point, the investor in the case has sought Supreme Court review; should that not be granted, the case will be returned to the Superior Court for award confirmation.

[The case is Wells Fargo Clearing Services, LLC v. Leggett, 2022 WL 3038377 (Ga. Ct. App., 2022).] [The Eleventh Circuit opinion is Marshall & Co., Inc. v. Duke, 114 F.3d 188 (11th Cir. 1997.]