As the judgment of arbitrators and attorneys in securities arbitration faces intense scrutiny, Oppenheimer & Co. Inc., which lost a stunning $36 million claim last week to investors, said that the Financial Industry Regulatory Authority Inc. three-person panel erred in several ways in making its decision.
One problem was that arbitrators, the judge and jury in such proceedings, issued the award "where there was evident partiality against the company by one of the arbitrators," according to a company statement last Tuesday.
But the lawyer for the eight claimants, some of whom had been in the service and went on to be airline pilots, shed light on the broker-dealer's claim of bias, saying that an attorney for Oppenheimer took issue with an informal conversation between one of the arbitrators, who had been in the military, and one of the investor claimants.
"A number of our claimants were veterans of the Vietnam War," the attorney, John Chapman, said in an interview Thursday. "They served in the Air Force, and several went on to be pilots at Delta."
"One of the arbitrators was in the military, and he listened to some testimony from one of the claimants that he used to fly one of the flying gas tanks," Chapman said, referring to planes used to refuel planes in flight.
"This arbitrator's dad apparently flew the prototype of that [plane], and he went to the witness and said, my dad flew one of those," Chapman said. "And Oppenheimer wants to argue that the common military experience created a conflict because of the affinity that arose from that." The firm's attorney mentioned the issue in his closing argument, Chapman said.
Twenty-three hearing sessions about the claim were held last month in Atlanta, according to the award. The arbitrators gave no reasoning for their decision, which is standard practice in Finra arbitration proceedings.
Oppenheimer will file a motion to vacate the award as soon as possible but declined to comment on its claim of "evident partiality" by one of the arbitrators in the case, a company spokesperson said.
Oppenheimer, long dogged by regulators over its advisers’ sales of penny stocks, complex exchange-traded funds and other matters, lost the huge arbitration decision of $36.7 million last Tuesday to investors who were sold a private equity fund by a former Oppenheimer broker, John Woods, near Atlanta. Last year, the Securities and Exchange Commission charged Woods with running a $110 million Ponzi scheme.
The investors originally claimed $6 million in compensatory damages, according to the award, which was issued under the aegis of Finra Dispute Resolution Services, the industry arbitration arm of Finra. The investors alleged negligence, violation of Finra rules and other claims, and also alleged a violation of Georgia’s RICO statute, which creates the potential for triple damages in such cases.
Oppenheimer's charge of "evident partiality" in the matter once again raises the question of fairness in securities industry arbitration proceedings, which are mandatory for individual investors. Finra faced criticism earlier this year from a Georgia Superior Court judge over its process for selecting arbitrators. A law firm hired by Finra said it found no evidence of tampering or improper agreements to remove certain arbitrators from industry cases.
Oppenheimer also objected to the Finra arbitrators letting the hearings proceed without Woods and other key witnesses, as well as the panel's "prematurely rendering an award for damages" while a court-appointed receiver continues to collect assets on behalf of investors who have seen losses because of the scheme.
Chapman described Oppenheimer's claim of "evident partiality," or bias, as "just silly." Other witnesses who testified were veterans, he said.
"It’s an experience that millions of Americans have, serving in the military," Chapman said. "It was not like [the arbitrator] was a shareholder in one of the companies involved, which could lead to real bias. I think they’re grasping at straws."
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