Advisor Marc Torres claimed that the Finra arbitration panel that decided his case was tainted because one arbitrator failed to disclose a total of 30 liens and judgments against her.
An ex-Wells Fargo financial advisor who was ordered to pay the firm more than $2 million in a clawback case has been awarded a do-over because an arbitrator failed to disclose potential conflicts of interest.
The ruling was issued earlier this month by New York County Supreme Court Justice Verna Saunders in response to an appeal filed by New York–based advisor Marc Torres
Torres, who has been in the industry since 2000 and spent nearly seven years at Wells, left the wirehouse in August 2022 for J.P. Morgan and remains employed at that firm. In April 2023, he filed a claim against Wells in the
Financial Industry Regulatory Authority’s dispute-resolution system alleging breach of implied and express promises. He sought more than $6 million in damages, according to a Finra filing.
Wells counter claimed to claw back more than $1.36million, representing the outstanding balance on five promissory notes plus interest, per the filing.
In March of last year, a Finra arbitration panel found in favor of Wells on the clawback claim and denied Torres’claims. Wells was awarded the full amount in damages it requested plus nearly $800,000 in legal fees and costs for a total of $2,166,381.58.
Torres was also assessed all but about $1,200 of the $56,025 in hearing-session fees.
Torres appealed, claiming in a petition to the court that his rights were “severely and objectively prejudiced” by arbitrator Alfreida Kenny’s failure to disclose, in her arbitrator oath, that she had 30 liens or judgments asserted against her. Kenny, who chaired the arbitration but declined to do so, according to Torres’ petition.
Torres argued that he should have had the opportunity to consider whether the liens and judgments indicated financial instability and a possible bias toward individuals who owe significant sums to third parties.
Torres in the petition said the decision to assign nearly all the hearing-session fees to him was a “red flag” indicating that Kenny had not seriously considered his claims and that the “astounding” award of legal fees suggested that Kenny’s presence “tainted” the arbitration panel.
Kenny did not respond to a request for comment.
Saunders, noting that the Court of Appeals “has expressed a policy of maximum pre-hearing disclosure in arbitration proceedings,” ruled that Kenny should have fully disclosed any information that could have suggested possible bias, including the liens and judgments, all of which had been satisfied. Saunders also said that one of the liens Kenny failed to disclose involved Wells.
“Such nondisclosure concealed pertinent information that tainted the integrity of the arbitration process and created, at the very least, an appearance of impropriety,” Saunders wrote in her opinion.
A Wells spokesperson told FA-IQ that the firm is reviewing the matter and has no further comment.
Torres’ attorney, Edgar Rivera, of Garden City, New York–based Borrelli & Associates, told FA-IQ in an emailed statement that the “material failure of arbitrators to disclose significant background histories and conflicts unquestionably prejudices, or at least appears to prejudice, the selection process, the hearings, and the decisions in ways that are both subtle and overt.”
Studio City, California–based attorney David Harrison, whose firm was not involved in the case, told FA-IQ that one of the more common ways attorneys try to vacate arbitration awards is by uncovering information an arbitrator failed to disclose.
Harrison said the issue is not necessarily whether the undisclosed information establishes partiality but rather that the omission can create the perception of partiality.
“It looks like a no-brainer that the judge got it right: The appearance of impropriety tainted the integrity of the arbitration process,” Harrison told FA-IQ.
FINRA in its disclosure guidelines to arbitrators “recommends that ‘any doubt as to whether or not disclosure is to be made should be resolved in favor of disclosure.'”
Finra in its Rule 12405, titled “Disclosures Required of Arbitrators,” says that “[e]ach potential arbitrator mustmake a reasonable effort to learn of, and must disclose …any circumstances which might preclude the arbitrator from rendering an objective and impartial determinationin the proceeding.”
The rule does not provide a list of specific types ofinformation that must be disclosed but casts a broad net that covers “[a]ny existing or past financial, business, professional, family, social, or other relationships or circumstances with any party, any party’s representative, or anyone who the arbitrator is told may be a witness in the proceeding, that are likely to affect impartiality or might reasonably create an appearance of partiality orbias.”
Harrison said that the practice of creating broad disclosure requirements versus specific lists is intended to produce greater disclosure, rather than gleaning only the information that precisely matches the listed requirements.
He added that the “failure of an arbitrator to disclose and truthfully complete his or her oath of arbitration should not only be grounds for vacatur but should be grounds for removing that arbitrator from the pool entirely.”