COMPLY-New case alleges improprieties at Wall St. watchdog

Mon Feb 24, 2014 6:25pm EST

Feb 24 (Reuters) - Allegations of bad behavior at the Boca Raton, Florida, office of Wall Street's industry-funded watchdog are igniting concerns about how the Financial Industry Regulatory Authority (FINRA) manages its securities arbitration unit.

A wrongful termination lawsuit against the regulator filed this month in the U.S. District Court for the Southern District of Florida by Jill Wile, a former deputy regional director, paints a picture of supposedly independent arbitrators enjoying a champagne toast after the end of a case and a staff member saying he wished older arbitrators would die and ridiculing Linda Fienberg, head of FINRA's arbitration unit.

FINRA has denied the allegations in a response to a separate complaint that Wile filed with the Equal Employment Opportunity Commission last year. A FINRA spokeswoman declined to comment on the lawsuit.

Wile's allegations have become a hot topic among lawyers for both investors and brokerages. Her lawsuit raises questions about the neutrality of FINRA arbitrators and the regulator's process for removing arbitrators.

The champagne toast, for example, came immediately after the end of a highly publicized and drawn-out case. FINRA arbitrators and staff members raised their glasses in a FINRA conference room after ordering Bank of America Corp's Merrill Lynch unit to pay $10.2 million to two former brokers in 2012, according to Wile's Feb. 11 complaint.

Those present were not celebrating the case's outcome, but simply that the nearly four-week-long hearing was over, said Fred Abramoff, a Miami-based arbitrator who was there. Also in the room where the drinking occurred was Manly Ray, the southeast regional director of FINRA's dispute resolution office and two other staff members, Wile alleges.

"I would be livid," said Jonathan Uretsky, a New York-based lawyer who represents brokerages. "It's so easily foreseeable how that could come across wrong," said Uretsky, who was not involved in the case.

A spokesman for Bank of America's Merrill Lynch unit declined to comment.

ALLEGATIONS OF AGEISM

The 52-year-old Wile, who had nearly 25 years with FINRA, alleges she was wrongfully fired because of her gender, age, and an anxiety condition. FINRA has not yet responded to the lawsuit, but it will first likely try to get the court to dismiss the suit, say lawyers.

Wile's separate EEOC complaint is also pending. She must prove the difficult standard of "intentional" discrimination to receive back pay and other damages.

According to Wile's complaint, Ray, the regional director, frequently joked about FINRA's older arbitrators, saying he hoped they would die before he had to "go through the trouble" of having to track them in a process for problem arbitrators.

Ray also joked about Linda Fienberg, who heads FINRA's arbitration unit, because she is in her 70s, Wile said in her complaint.

Ray declined to comment. Fienberg wasn't immediately available for comment.

Wile also alleged that FINRA violated federal disability law by forcing her to speak publicly and participate in a mock arbitration despite her long history of having panic attacks and an anxiety disorder.

SPOTLIGHT ON REMOVAL

Wile's lawsuit also sheds light on FINRA's handling of arbitrators in a contentious case against Merrill Lynch filed by an elderly couple who accused the firm of misconduct in handling their investments.

Merrill's lawyer complained to Wile during the hearing in 2011 that the three arbitrators hearing the case were showing bias and engaging in misconduct, including making accusations against witnesses. The arbitrators finished the case, ordering Merrill to pay $540,000. FINRA, however, eventually removed the arbitrators from its roster.

Their removal set off a fire storm of press coverage and criticism by lawyers for investors after the arbitrators' plight publicly surfaced in 2012. At least one of the arbitrators complained to the U.S. Securities and Exchange Commission. FINRA later reinstated the arbitrators, also in 2012. Merrill tried to overturn the award in court and lost.

Wile alleged FINRA wrongly blamed her for the arbitrators' removal. She was the first to review recordings of the proceedings and recommended only counseling for the arbitrators. But her superiors urged her to change her recommendation to removal, she said. They even told her what to write in a memo to justify the recommendation, Wile said.

FINRA procedures would have required that two other officials, including Fienberg, as well as a FINRA arbitration committee sign off on the removal, Wile said. Nonetheless, Wile took the heat for the removal, she said.

"We had assurances from FINRA that their process followed FINRA's written policies for (removing arbitrators)," said Jeffrey Wittenberg, a lawyer in Santa Monica, California, who represented two of the arbitrators. "But these allegations raise serious questions about the integrity of the process."

Several securities arbitration lawyers interviewed by Reuters described Wile as competent and professional.

UNCORKING COMPLAINTS

The champagne toast was controversial and, if disclosed, may have affected the final outcome of the case. In Wile's complaint, she said she believed the toast was inappropriate because FINRA and its arbitrators are supposed to be impartial, according to the complaint. Wile later reported the toast to a senior FINRA official so he could determine whether to disclose the incident to Merrill. He did not take action, Wile said.

By then, Merrill had filed a court petition to overturn the award, claiming the arbitration panel's chairwoman, Bonnie Pearce, was biased against the brokerage and did not disclose that she was married to a lawyer who represented clients against Merrill. It was later revealed that Merrill knew about Pearce's husband before the start of the hearings. The court denied Merrill's petition in September, 2012. Pearce did not return a call or reply to an email requesting comment.

It is unclear whether FINRA disclosed the toast. Several lawyers have told Reuters they believed a toast in FINRA's offices was inappropriate. "At least, go to a restaurant or a bar," Uretsky said.