Why FINRA’s Private Court Just Got Served

Lately I’ve had a lot people reaching out to me asking “Why do you provide all this research around the marketplace for free, what’s the catch?”, and so I’ve decided to tell my story.  I’m about to provide a very candid account of how I went from a seven figure banking career to effectively unemployable without ever having breached so much as an employee handbook rule.  But let me make it very clear this is not a victim piece.  This is a public awareness announcement.

While the story reads like a Hollywood movie, my hope is that it shines a light and ignites some much needed discussion on the oft hidden, and thus ignored, graft that permeates our most fundamental societal institutions.  In this intricate account I describe the incestuous relationship between FINRA and the Banks.  The affects of which can be seen in the cocksure culture of management across the entire sector and that is about to get far worse. However, this is but one root in a forest of consequences impacting everyday people.

The NY Times recently published an in depth exposé on the increasing use, by corporations, of private courts to handle customer and employee disputes.  The waiving of one’s right to civil litigation in lieu of these private courts is typically buried in the fine print within customer agreements and is simply a non-negotiable part of all financial services sector employee contracts.

As a prospective employee you either waive your right to civil litigation in lieu of a private court or you don’t work in finance.  It’s that simple.  The NY Times investigation highlighted the injustice of being forced into these private courts and the chill effect they create from litigating even the most egregious corporate behaviour.

Now The NY Times piece did a great job explaining the broad issues.  But the broad issue discussions never do the depth of depravity the justice it deserves.  To really expose the level of corruption one needs to expose the devil in the details. And so I’m going to invite you inside my story so that you can see it first hand.  It’s the only way to persuade you that a serious problem truly does exist.  I implore you, especially those of you in the financial sector, do yourself a favour and take the 20 minutes to read this piece in its entirety.  I can guarantee, the ending will have you questioning whether this is real or fiction.  I assure you, to my dismay, this is all too real.

And look I was a banker for 15 years, I know many of you are rolling your eyes and saying to yourself “There’s no crying in banking” and trust me, I agree.  But when I found myself in a situation where my business was being locked down, my relationships were being destroyed and I was being threatened with a lawsuit if I breached my non-compete I had to stand up to it.  I had nothing more to lose, or so I thought.  And in the only industry that is allowed to magically generate profit on 9x the capital it actually has, for a management team to risk additional public ire by underlining the injustices of its kangaroo court seems to me not only self-defeating but to be encouraging a fight.  Well, they got one.

How The Wheels Came Off:

It all started back in early 2012 when my boss, over lunch, said to me “Hey Thad what would you think about transitioning our group to a new house”?  Now at the time our desk was generating about $100M top line for a top tier investment bank.  My response was “Well what are the numbers”? “Pretty good”, he said.  And with that simple exchange I began my journey down the proverbial rabbit hole.  Where I ended up, however, was far from Wonderland.

After a series of negotiations with the new bank we transitioned a roughly 30 man desk. But on my first day in the new bank our old bank filed a suit against the new bank for poaching our group.  Now this was not totally unexpected, but what was unexpected is how the new bank’s management team decided to handle the situation.  Their strategy against the suit, which had the potential to award a significant sum of money, was to bury our desk’s profitability in an attempt to negate claims of damages, something the COO at the time let slip to a revenue analyst that worked on my desk.  And this situation quickly spiraled out of control.

Ultimately our desk was being buried in indirect costs to the tune of tens of millions of dollars; black box items like ‘regional and corporate allocations’ that were not a part of our contract cost structure.  When we disputed the charges we were told to sue if we didn’t like it.  Initially I just tried to leave the bank.  I was offered a spot back at the old bank and was ready to accept it.

However, when I informed my boss I was heading back to our old house the new bank refused to release me from my non-compete.  They were worried I would help the old bank with its poaching suit and so wanted to keep me locked in.  Feeling a bit awkward heading back as it were, I felt compelled to decline their offer when I knew there would be non-compete issues delaying my transition back.

So there I was having costs loaded up against us, middle and back office were being instructed by management to ice all our new business and they wouldn’t let me out of my non-compete.  So essentially I was dead in the water and not only that but our clients were being strung along and beginning to realize it.  At that point I set a meeting with HR to figure out just what in the hell was going on.  None of this made any sense, let me do my business or let me leave.  HR’s official response was “We cannot comment”.

And then the Vice Chairman called me on my personal phone and indicated that the bank wanted me to get a lawyer.  When I asked why in god’s name would they want me to do that, he simply said that’s how they handle these things.  As hard as that is to believe I was smart enough to record the call with an App I had on my iPhone.  So I have a wave file of that conversation, which I furnished the bank and that eventually led to the Vice Chair being fired due, in part, to him exposing some morally repugnant actions by the bank’s lawyers – at some point this call will be made public.  And so I got a lawyer.

Initially I had no intention of following through with a suit I was just taking the Vice Chairman’s instruction hoping that it would all get worked out through some civil discourse.  But that didn’t happen.  What did ultimately happen is I was told to leave the building one day and not go back to my desk.  Now they weren’t allowing me to book any trades at this point anyway.  I was also informed that I was still under a non-compete and that they would sue me if I breached it.

There were just so many standard compromises that would have prevented this situation from spiraling out of control but it seemed like this management team was hell bent on making the situation worse at every juncture.  Now, for some context, this was the same management team that paid $500M, a few years ago, for a 130 year old commodities firm (that had survived 2 world wars and the Great Depression) and within two years had run it into the ground, essentially having to write off that half billion investment not to mention all those jobs.  But I digress.

In any case, it was at this point that I had to seriously consider actually filing a suit.  Now this is not a decision to take lightly.  And so before filing a suit I had to really think about the long term impact.  Never a good thing to have a lawsuit with a former employer on your record and we are all, at least anecdotally, aware of the kangaroo court that are these private arbitrations.

All that digested, I figured I had an impressive record of rising through the ranks from an internal auditor to a global director of (arguably) the world’s premier base metals desk (running up to 17% of all LME volume through our desk on any given day) in less than 8 years.  To boot, I hold an MBA from the University of Chicago (with four concentrations) and so even if banking no longer wanted me, opportunities would surely knock, right?

Given I was being totally shut down by the bank, I felt that I had very little further downside and no other viable counter move.  This management team was starving our 30 man desk (literally guys were facing losing their homes) to protect their own bonuses.  And on top of it all, the bank’s board had just made the CEO the highest paid banker on Wall Street, with a $78M payout.  It was all becoming too much to swallow.

And look, I grew up in a small Canadian town fighting just about every Wednesday through Saturday night as a teenager.  You learn to stand up for yourself even if it means getting your teeth knocked out once in a while.  And so there I was facing the prospects of a David and Goliath type fight against an investment bank and I’d have to fight them inside FINRA, on their home turf.  In the end and perhaps against all better judgement I filed suit against the bank.  And it quickly became apparent I had miscalculated the risks.

Enter FINRA Arbitration:

So my lawyer, Neal Mcknight – an incredibly bright but also scrappy guy from a small but well respected law firm in Chicago filed my claim against the bank (my now former employer) with FINRA Dispute Resolution, Inc..  When you enter this arbitration process you actually sign a contract with FINRA’s subsidiary arbitration firm.  This becomes important to the story later on.  It’s also important to understand the bank’s strategy (and this is true for any David and Goliath type litigation), which is to draw the process out until David runs out of money or has a heart attack.

Now for anyone who has never been through litigation, the first stage after filing the claim is called ‘Discovery’.  This is where both sides exchange all relevant evidence and it is generally done on a good faith basis as the penalties to withholding relevant evidence from the Discovery process are meant to be severe, at least in public litigation.  The idea being that truth is ultimately the goal and so Discovery is the mechanism for getting all of the facts out so that both sides can make their best argument to an impartial judge or panel who then decides which side is right and which is wrong.

The enforcement of this process is extremely important because the bank owns all of your work related materials meaning you are legally prohibited from having these materials maintained outside of a work environment.  This means all of the items you know exist, exist on the bank’s servers and the only way you can prove they exist is through Discovery.  So right from the start we found ourselves beholden to a private court to enforce a fair Discovery process, without which, we could not argue our case.

Our Discovery process began in January of 2014 and as of last month, some two years later, we had yet to receive the documentation owed us by the bank.  Now if you are the bank and you know you can get away with not producing damaging evidence well that’s exactly what you’ll do.  And that’s what happened.

The bank refused to fulfill its good faith obligation on Discovery and so we were forced to motion for the arbitrators to compel the bank to provide all relevant materials.  Eventually in July of 2015 we were given a Discovery hearing, where we formally requested that the arbitration panel (a three member panel of assigned ‘judges’) demand the bank provide an exhaustive list of relevant materials.  To our surprise, the panel strongly sided with us and ruled by imposing an explicit and significant list of items that the bank would have to provide to satisfy their obligation of Discovery.

At this point I was beginning to feel like maybe I would get a fair shot.  The deadline for the bank to fulfill the panel’s ruling was September.  Well September came and went and while we received a few additional documents the bank had essentially ignored the panel’s ruling.  And so we motioned the panel to sanction (penalize) the bank for ignoring the panel’s own ruling.  However, before the panel ruled on this motion to sanction, the bank responded by indicating that they couldn’t produce some of the items because they had destroyed that evidence.  The bank disclosed this in a manner as though it was a viable defense.

Turns out the evidence they destroyed were all of the phone calls in and out of my trading desk.  Now, not only does the bank have a good faith obligation to maintain these calls for litigation as well as a regulatory requirement to maintain these calls but at the outset of this arbitration we sent a formal letter demanding the bank maintain those calls as they were such a key component of our case.  And so upon realizing the bank had destroyed these calls we motioned for further sanctions against the bank for not only refusing to fulfill the panel’s ruling on Discovery but now for destroying key evidence.

About a month later we received the panel’s response to our motions for sanctioning the bank; “Motion denied”.  That’s right, the arbitration panel of judges was refusing to hold the bank accountable for disregarding the panel’s own ruling on Discovery and additionally, for destroying key evidence.  And the panel had denied the motion without so much as a one sentence explanation.  With that, all hopes for a fair and equitable arbitration had just disappeared.

I’ll be honest, for a moment I was quite literally stunned when my lawyers told me of the panel’s decision.  But then it struck me like lightening, my fight wasn’t with the bank.  The behaviour of the bank is just a symptom of a much deeper problem.  This management team didn’t have the smarts to do anything other than paint by numbers.  That is to say, they were working within the system that actually rewards abhorrent behaviour by way of absolute impunity.  We see it so often we no longer pay it any mind.  At this point I decided my fight needed to focus on the system itself and I was going to use the system’s own foundation of corruption to bury it.   And so my lawyers pushed for a second Discovery hearing, which we got this past December.

In this hearing I wanted my lawyers to essentially force an up or down vote by the panel on allowing an outside third party to conduct independent electronic Discovery of the bank’s data and electronic communications (something FINRA itself commonly uses when it is targeting a bank for review).  Alternatively we would accept the bank certifying (essentially swearing under oath) that what they had produced in Discovery was a complete and exhaustive furnishing of materials under the panel’s ruling (a standard part of any public litigation and was also added to FINRA arbitration customer disputes in 2013 – but not employee disputes).

The idea was to force the panel to declare on record that they either could or couldn’t order the imposition of a third party for Discovery or a certification by the bank.  Without either there was absolutely no reasonable expectation that we would ever receive all of the materials owed us for Discovery.  Remember, the bank failed initially on its good faith obligation for Discovery and then on its adherence to the panel’s ruling on Discovery.  They then admitted to destroying key evidence and they did so because they knew there would be no consequence to any of it.

And so there was simply no way the arbitration panel nor I could have any reasonable confidence that the bank would ever fulfill its obligations on Discovery without receiving some assurance.  Regulators get that certainty via the imposition and use of a third party electronic discovery. In public courts and trials, certification of the completeness of Discovery is provided through a number of tools including oaths and affirmations.  We were looking for the same sense of assurance.  And this is where the arbitration moved to a new level of sit-com-esque slapstick humour.

During the December (second) Discovery hearing my lawyers pressed the panel for an up or down decision on assurances and the panel literally stopped the proceeding at that point, explaining they needed input from FINRA staff.  This is akin to a judge stopping a hearing and reaching out to legislators for clarification of the law.  Mind boggling.  But this circus was just getting started.

The FINRA staff, after some discussion, declared that what we were asking simply was not within the panel’s authority to impose.  And so we were at stalemate.  I was claiming that without one of these options of assurance the arbitration was failing in its mandated obligation to provide a fair and equitable process.  If I can’t receive a full production of Discovery I can’t argue my case.  If I can’t argue my case the matter cannot be resolved.  And this is where FINRA breaches not only its own contract with me but breaches the Illinois state constitution, which constitutes the right to resolution.

My lawyers responded to the FINRA staff that the panel doesn’t need the authority if the bank is willing to volunteer to certify that they have completed the Discovery ruling in full.  My lawyers suggested this knowing the bank was aware that we could prove they hadn’t done so and thus couldn’t provide the certification.  As we expected, the bank refused to certify that their production of Discovery was a complete production in accordance with the panel’s ruling.

Now the bank’s law firm actually sent a founding partner of their firm to represent the bank at this Discovery hearing (indicative that we were beginning to break some barriers not meant to be broken).  This was a four decade veteran of the law and a Harvard Law graduate.  And at this point, in what could only be described as a procedural debacle, this guy stands up and declares that it isn’t so much they didn’t fulfill the panel’s ruling on Discovery as much as it is they were confused by it.

That’s right, this high powered law firm that specializes in these types of disputes was claiming it was confused by the panel’s explicit ruling (a simple list of items) on what items needed to be furnished for Discovery.  Perhaps the only thing more incredulous than this Harvard Law veteran claiming confusion on something as complex as an adolescent’s weekend chore list was the panel accepting this explanation and immediately ruling that my lawyers would need to help the bank’s law firm understand the panel’s ruling.  What?! Specifically, the panel was forcing me to pay my lawyers to educate the bank’s high powered law firm on how to go about interpreting the private court’s ruling on Discovery but while still giving them the right to disagree with us.  I shit you not.

So after 2.5 years of getting absolutely nowhere except six figures deep in legal costs against a large investment bank and its high powered law firm, the FINRA panel had just ruled that the bank’s Discovery obligations were now effectively my obligation.  That’s right, it was on me to finance a process to un-confuse a high powered law firm that wasn’t actually confused in the first place.  So not only was I being run in circles I was now being forced to pay someone to run me in circles.

I was honestly waiting for Ashton Kutcher to walk out with a “You Got Punked” hat on.  When he didn’t I decided I had to file suit against FINRA Dispute Resolution, Inc., which my lawyers have now done in Illinois state court.  Again, having grown up in Canada I’d never even thought about suing anyone, it just isn’t part of the culture.  But, in for a penny in for a pound.  I felt this was all such an audacious act of injustice carried out with such undisguised arrogance I quite literally could not sleep at night if I didn’t at least try to fight back.

I don’t expect FINRA to roll over.  We fully expect that FINRA will try to claim SRO immunity (just in January they merged the private arbitration subsidiary into the actual regulatory entity I can only assume to make a case for immunity when their blatant disregard for justice becomes all too apparent).  But if truth and fundamental fairness, as mandated in its own by-laws and by the spirit of justice are the objective, then why would FINRA not own its failure in this case and look to amend their rules, as they did for customer disputes in 2013?  By doing so ensuring sufficient authority to impose the same procedural assurances as the public courts.

There is only one answer to that question.  They won’t because fundamental fairness is the last thing the banks, and thus FINRA, is looking to achieve.  As long as the banks can maintain an advantage within the system, they will.  Without assurance on Discovery, no claimant can ever get a fair and equitable process to argue its case against an employer inside a FINRA arbitration, a fact supported by statistics presented in the NY Times investigation.  It means the result of my case could have far reaching implications.  In effect, my case calls into question the validity of all FINRA arbitrated employee disputes.  And that is a discussion that needs to happen.

These systematic advantages to corporations and other members of the power class are the antithesis of capitalism and democracy.  Using fraudulent private courts to curate such systematic advantages is grossly unethical and encroaching on criminal, but brilliant; so pervasive and yet unnoticeable to the masses.  It is imperative, however, not to allow such corruption to go unchallenged.

Look, I’m but one small dagger in their side, I get that.  But death can come by a thousand small cuts.  And well I’ve made a small cut.  Yet it hasn’t come without a price and I don’t mean the legal costs.  While I did very well in banking, I’m far too young and intense a personality to retire.  But 2.5 years on and I can’t get beyond an HR departments initial screening process, in any industry (thank you Google).

The real cost of standing up to a system not meant to be stood against is perhaps giving up one’s natural path.  It is a loss far greater than money.  An opportunity for the camaraderie and wit of being part of a smart and highly competitive group of my peers and in an environment that shares my obsession for being brighter and righter, seems to be slipping away.

And so despite having a highly successful professional track record, a top 5 Business School MBA and choosing to continue providing value to the sector – without compensation – (having publicly predicted the August crash on Aug 2, the January crash on Jan 4 and on Feb 26 calling for a major decline in VIX accompanied by a higher S&P price level ranging between 2000 – 2030 until May, give or take – not to mention an average ZH contributor rating of 4.8/5, being a member of David Stockman’s Contra Club and being regularly published on a slew of financial and public policy publications) – I will in all likelihood end up being the world’s most financially sagacious, barista.  And maybe, just maybe, that ain’t such a bad life if I can sleep at night knowing I fought the good fight.

But all of this is what it is for me, I’ll be fine.  My point is really much bigger than any one individual story and reaches far beyond the financial sector.  A society in which impunity is assumed and realized by the banks and other members of the power class absolutely guarantees  bad behaviour by those segments of society.  And bad behaviour guarantees bad results (refer to Iraq war and credit crisis and their respective festering wounds, etc.) but not for the actor, just for everyone else.  And so lessons aren’t learnt and corrective actions aren’t implemented.  The fraudulent arbitration process discussed is no different than the bailouts, which are no different than any of the systematic advantages designed for the power class.  You incentivize bad behaviour by shifting the financial and legal risks of bad behaviour and so you get bad behaviour.

And in the end, despite rarely if ever being discussed in mainstream media, there are millions of untold stories of everyday citizens who get stuck with the tab in some form.  Until we stop focusing and really even giving a shit about the problems surrounding the Ackmans of the world (which have zero relevance to 99.9% of us) and begin focusing on the real people problems, society will continue to implode.  Step back and look at the world today.  Do you like what you see?  Then give yourself a pinch, it’s time to wake up.

Anyone interested in discussing any parts of my story further can reach out to me via email: TB@thechicagoeconomist.com

 

 

 

 

 

10 thoughts on “Why FINRA’s Private Court Just Got Served

  1. I second Devan’s comments. Our United States of America continues to lose its integrity. Many examples of it from your situation to Trump’s “wrong (but right)” abortion answer. Between the nonsense of political correctness and the allowed lawlessness of the lawyers, I believe Jack’s “hubris” comment becomes meaningless as there will be nothing left to build from the crumbles…

    And I would have to totally disagree with D’s comment – “The beauty of the U.S. Law system is anyone can sue anyone.” This is only correct if indeed you are one of the criminals posing as an attorney and counting hours and/or a cut in the winnings. Hot coffee, anyone???

    Thanks Thad.

  2. Ah, but their ‘hubris’ will be their undoing and it is only a matter of time because their edifice, built of corruption, deceit, fraud and lies, is crumbling around them and will soon collapse! There are so many examples of this: it is the way tyrannical empires and empire-makers come to grief. The lies, deceit, fraud and corruption overwhelms them so that they drown in it while the under-trodden take advantage of their ‘rulers’ sudden weakness, rise up in anger and destroy the ‘edifice’.

    Tick-tock, tick-tock.

  3. Summary: You got tricked by your boss back in 2012 to switch companies … nice gamble but it didn’t seem to work out.

  4. Two words for you:

    Civil RICO

    And if any of your former co-workers got hosed:

    Class Action

    The beauty of the U.S. Law system is anyone can sue anyone.

  5. Keep fighting! This is the new normal and things will get worse without resistance. You’ve done well to provide yet another example of systemic rot. The revelations are breath taking but sadly not unusual.

Comments are closed.