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Two years ago, the Financial Industry Regulatory Authority discovered that one of its arbitrators was not what he claimed. James Frank had claimed to be a lawyer and member of several state bars. That, however, was not true. But the deception didn't come to light until after Frank had overseen nearly 40 securities arbitration cases over a period of 15 years, involving major brokers and billions of dollars -- all the while maintaining that he was an attorney.
Now those who lost before Frank are seeking to have their arbitration decisions vacated. That puts the winners in the tough spot of defending an arbitration chaired by a fake lawyer, as Citigroup Global Markets discovered this week.
FINRA is Wall Street's self-regulatory organization, tasked with regulating the securities industry. As such, it operates the largest arbitration program in the country, hearing thousands of arbitration cases a year. Franks alleged misrepresentation were revealed just as consumer and investor advocates were calling for an end to mandatory arbitration at FINRA, Reuters reports.
On Tuesday, Move, Inc., went before the Ninth Circuit seeking to have its arbitration decision under Frank vacated. Frank had chaired a three-arbiter panel which ruled against its securities claim against Citigroup. Move argued that Frank violated the intent of the parties at the time. "Move did not intend or consent to have its $131 million securities claim arbitrated by a panel chaired by a fraud," Move's attorney argued. Frank's presence alone was prejudicial to Move's right to a properly conducted, properly constituted arbitration, according to the company.
Citigroup, however, argued that Frank's presence wasn't unfair enough to allow vacatur. The Ninth Circuit panel didn't seem to be buying it, responding incredulously to Citigroup's claims that the arbitration could have been fair or unbiased, often becoming exasperated by Citigroup's defenses.
You can watch the arguments below. Citigroup's portion begins shortly after the ten minute mark, and the change in the panel's tone is palpable.
FINRA's fake attorney fiasco is a good reminded of the importance of conducting background research, particularly when the stakes are so high. Though dozens of parties came before Frank during his time as an arbiter at FINRA, none seem to have looked up his bar membership, accepting his stated qualifications on face value.
The Ninth Circuit panel was a bit stunned that Move, with so much money at stake, hadn't done its due diligence and looked in to Frank's background, including the fact that he almost always ruled against claimants. "It just seems like, with that much money at stake, somebody would do some investigation before they said, 'Oh yeah, we'll pick this person,'" Judge Elaine E. Bucklo wondered.
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