In the case of Elba Margarita Nogueras, an AWC (Acceptance, Waiver, and Consent) was issued by FINRA, detailing her violation of the Care Obligation of Rule 15l-1 under the Exchange Act (Regulation Best Interest). While the regulatory body provided extensive information about the sanctions imposed, including a deferred fine, suspension, and disgorgement of commissions, it notably omitted the identification of the specific non-traded REIT at the center of the case.

The Call for Transparency

The argument for naming the non-traded REIT in such cases is rooted in the principles of transparency, investor awareness, and market integrity.

1. Transparency and Investor Awareness:

• Investors have a right to know the details of past violations associated with specific securities.
• Disclosure of the non-traded REIT’s name would contribute to transparency, allowing investors to make more informed decisions about similar investments.

2. Educational Value:

• Knowledge about the specific non-traded REIT involved in the case would provide educational value.
• Investors could gain insights into the potential risks and pitfalls associated with that particular investment, fostering a more educated investor base.

3. Deterrence and Accountability:

• Naming the non-traded REIT could act as a deterrent to other financial professionals engaging in similar misconduct.
• Holding the specific investment product accountable for any issues related to its marketing or sale contributes to accountability in the financial industry.

4. Market Integrity:

• Identifying the non-traded REIT supports the overall integrity of the financial markets.
• Investors and market participants may have more confidence in the regulatory process knowing that specific cases are thoroughly examined and disclosed.

Conclusion

In the quest for a fair and transparent financial marketplace, the disclosure of specific securities involved in regulatory actions becomes crucial. Providing investors with the complete picture empowers them to make informed decisions, fosters accountability within the industry, and upholds the integrity of financial markets. Striking the right balance between transparency and mitigating potential risks is the key to achieving a regulatory framework that truly serves the interests of investors and the broader financial community.

Notably, the FINRA Arbitrator’s Guide states that “expedited cases” (cases that involve an elderly or seriously ill claimant) should usually have an evidentiary hearing (similar to a trial) within 6 months of the initial pre-hearing conference. The Arbitrator’s Guide also states that non-expedited cases should usually have an evidentiary hearing within 9 months of the initial pre-hearing conference. In practice, however, FINRA takes much longer to adjudicate cases.

Here are some other factors that can influence the timeline of a FINRA arbitration:

1. Case Complexity: More complex cases involving numerous parties, a wide range of financial products, or intricate legal issues may take longer to resolve.
2. Arbitrator Availability: The availability of arbitrators can affect the scheduling of hearings and the overall timeline. Arbitrators may have other commitments that impact the speed of the arbitration process.
3. Discovery Process: The discovery phase of the arbitration, during which parties gather and exchange evidence, can extend the timeline if there are disputes or delays in this process.
4. Mediation and Settlement Discussions: Parties may engage in mediation or settlement discussions, which can expedite or extend the arbitration timeline depending on the outcomes.
5. Motions and Pre-hearing Briefs: Motions and pre-hearing briefs filed by the parties can add additional time to the process, as arbitrators must review and address these submissions.
6. Hearing Scheduling: The scheduling of the actual arbitration hearing can also affect the timeline. Arbitrators and parties must coordinate their schedules for the hearing.
7. Post-Hearing Considerations: After the hearing, arbitrators need time to deliberate and issue a final award.

It’s important to note that the duration of FINRA arbitration may vary significantly from case to case. Parties involved in a FINRA arbitration can work with their legal representatives to manage the process efficiently and effectively.

In 2022, a Georgia court issued a bombshell opinion that found that FINRA had made an illegal secret agreement with a lawyer, Terri Weiss, who represented brokerage firms in FINRA arbitrations.

Specifically, FINRA told Weiss that it would make sure certain arbitrators that had served on one of Weiss’s cases, called the Postell case, were not assigned to arbitrate any of that lawyer’s cases in the future. Weiss memorialized the secret agreement with FINRA in a letter, which stated, in part, “[i]t was made clear to me verbally that none of the Postell arbitrators would have the opportunity to serve on any one of my cases…”

The Postell Case

In 2011, FINRA received a call from Weiss detailing his concerns about the Postell arbitrators’ conduct in the Postell arbitration. Weiss complained that the arbitrators had been biased against him just because the arbitrators asked his witnesses difficult questions (which is, in reality, part of the arbitrators’ job).

Incredibly, because of Weiss’s complaints, FINRA fired the Postell arbitrators. FINRA just sent a letter to the three arbitrators letting them know that they would no longer be permitted to serve as FINRA arbitrators. When the arbitrators asked FINRA for an explanation or relevant files, FINRA refused. Unfortunately, FINRA is not required to publicize their termination of arbitrators or explain their decisions.

Bloomberg found out about FINRA secretly firing the Postell arbitrators, and it published an article opining that FINRA fired the Postell arbitrators because they “had the temerity to find in favor of a customer in a securities arbitration against Merrill Lynch.”

Shortly after Bloomberg published the article, FINRA reinstated the Postell arbitrators, presumably because of the bad publicity.

But as noted above, according to Weiss’s letter, after FINRA reinstated the arbitrators, it made a secret agreement with Weiss promising that the Postell arbitrators would not be allowed to serve on Weiss’s cases.

Georgia Court Opinions And The Lowenstein Investigation

After reviewing Weiss’s letter describing his secret agreement with FINRA to prevent the Postell arbitrators from serving on Weiss’s cases, the Georgia court’s bombshell opinion opined: “Permitting one lawyer to secretly redline the neutral list makes the list anything but neutral, and calls into question the entire fairness of the arbitral forum.” Accordingly, the court vacated a FINRA arbitration award where the makeup of the arbitration panel may have been affected by FINRA’s secret agreement. An appellate court later reversed that decision citing the very high degree of deference that courts give to arbitration tribunals.

FINRA then hired a law firm called Lowenstein Sandler to conduct an “independent” review to determine whether the secret agreement ever happened.

After Lowenstein finished the investigation, it released a report finding—unbelievably—that there was “no documentary evidence” that FINRA had made the secret agreement with the lawyer to not put certain arbitrators on the panel. It apparently found “no documentary evidence” despite Weiss’s letter that expressly states “[i]t was made clear to me verbally that none of the… arbitrators would have the opportunity to serve on any one of my cases.”

Lowenstein’s first reason for believing there was no secret agreement was that Weiss apparently denied that he ever “suggested that [an agreement between Weiss and FINRA] existed.” That statement that Weiss never “suggested” the existence of an agreement is absurd; there was no ambiguity in Weiss’s letter describing the agreement. Of course, Weiss’s post-letter denial of the secret agreement also lacks credibility because Weiss was motivated to deny that the secret agreement existed; he knew the agreement could be grounds to vacate an award entered in his favor.

Lowenstein’s second reason for exonerating FINRA was that the firm interviewed FINRA personnel who could have been part of such an agreement, and those personnel denied that any such agreement ever existed. Those denials, of course, also lack credibility. Anybody who admitted to those agreements would have been fired. Yet, according to the investigation report, “Lowenstein found all these witnesses to be credible.”

In the end, I believe FINRA probably did have a secret agreement with Weiss to remove certain arbitrators from his cases, notwithstanding the Lowenstein Report. At a minimum, Lowenstein’s and FINRA’s assertions that there was “no documentary evidence” of the agreement are absurd. Aside from the letter, the circumstantial evidence also points toward the existence of a secret agreement. In particular, after bad publicity forced FINRA to arbitrators whom FINRA apparently believed had been biased against Weiss, it would make sense for FINRA to make a secret agreement with Weiss.