Five years ago, Sean Martin, a registered representative at Deutsche Bank Securities in New York, saw something troubling on his trading desk.
A few of his colleagues, he said, were letting preferred hedge fund clients listen in on confidential market commentary by the firm’s analysts before their views were made public. He alerted his superiors and was almost immediately given a negative review, a first in more than 10 years at the firm, he said. His bosses also removed him from the group he’d been working with and cut his compensation.
Mr. Martin, who continues to work at Deutsche Bank, said he believed that he was being punished for reporting misconduct and took the one avenue of redress that was open to him. In August 2012, he brought an arbitration case against the firm, contending retaliation and asking to recover his lost earnings. As is typical in the financial industry, his employment contract required that any dispute between him and his employer go through private arbitration, not the courts. Mr. Martin’s matter is being heard by three arbitrators associated with the Financial Industry Regulatory Authority, a self-regulatory organization that operates the largest dispute resolution forum in the securities industry.
But Mr. Martin’s experience with arbitration, both he and his lawyer say, has raised questions of fairness in the process. The three-member panel hearing his case has barred him from testifying about certain crucial aspects of what he saw at Deutsche Bank and disallowed the introduction of documents that bolster his claims. This led his lawyer to conclude that the panel was not interested in specifics of the behavior at the heart of his accusations — and to ask a state court to step in.
“When I filed this arbitration, I expected that Finra would resolve the dispute between Deutsche Bank and me in a fair way,” Mr. Martin, 41, said in a statement provided by his lawyer. “I was surprised and disappointed when the arbitrators refused to listen to important parts of what I wanted to say and rejected or redacted my exhibits. I can’t see how a dispute can be fairly resolved if one party is not even allowed to tell their side.”
Because Mr. Martin’s allegations involve the integrity of the markets and how Deutsche Bank responded to a whistle-blowing employee, he and his lawyer say the case goes beyond a simple employment dispute. Federal regulators have pursued cases involving possible abuse of internal brokerage firm communication systems, known as squawk boxes, at other firms. Last year, for example, six men charged with misusing confidential information from internal communication systems like the one in Mr. Martin’s case reached deferred-prosecution agreements with the Justice Department.
“How can a panel of arbitrators for the regulator justify not hearing evidence of wrongdoing?” asked Robert Kraus, a partner at Kraus & Zuchlewski in New York, who represents Mr. Martin. “It is completely upside-down.”
Finra rules require that arbitrators learning of rule violations in cases refer them to the organization’s enforcement unit. But such referrals are allowed only after an arbitration is finished. In Mr. Martin’s matter, that could be a long time; Deutsche Bank has asked for hearings in the case to extend into 2015, six years after Mr. Martin said the conduct took place.
Finra has proposed a rule that would allow arbitrators to refer possible violations to its enforcement unit while a case is still going on, alleviating the potential that information might be too stale to be pursued. That proposal was sent in 2010 to the Securities and Exchange Commission, which must approve all Finra rules; four years later, it is still awaiting the regulatory nod.
None of the panelists hearing Mr. Martin’s matter returned phone calls seeking comment.
Nancy Condon, a spokeswoman for Finra, declined to comment on the arbitration because it is ongoing, but she confirmed that Finra’s enforcement arm is investigating Mr. Martin’s allegations that hedge funds listened in on confidential analysts’ comments. The regulator scans all arbitration matters for possible wrongdoing, she said, and Mr. Martin’s accusations were flagged when it was filed.
A Deutsche Bank spokeswoman declined to comment on Mr. Martin’s allegations, citing the litigation.
Even though Mr. Martin filed his case in 2012, the first set of hearings did not occur until March of this year. At that hearing, the arbitrators excluded four pieces of evidence that Mr. Martin’s lawyer deemed crucial, court filings show.
Arbitrators, like judges, decide what evidence can be considered when hearing a case. They barred Mr. Martin from testifying about a September 2009 conversation he had with a colleague discussing his concerns over the use of the squawk box and about his conversation with a compliance official soon after. Mr. Martin says that official warned him not to report the conduct to another manager. The arbitrators also excluded the introduction of an email corroborating the timing of this conversation.
Finally, Mr. Martin sought to introduce a set of contemporaneous notes he had made recording the conduct in September 2009. But the arbitrators allowed Deutsche Bank to review the notes and black out the names of the hedge funds that Mr. Martin said were allowed to listen to the analysts’ commentary as well as the securities that he said were discussed. Because the arbitration proceedings are already confidential, allowing Deutsche Bank to redact the information seemed to indicate the panel’s disinterest in the conduct, Mr. Kraus said.
Distressed by these rulings, Mr. Kraus requested last May that all three arbitrators withdraw. Finra rules state that when arbitrators are asked to withdraw, they should do so unless, after careful consideration, “the arbitrator determines that the reason for the challenge is not substantial, and the arbitrator can nevertheless act and decide the case impartially and fairly.”
The arbitrators declined to withdraw and didn’t consult Finra about their decision, according to an email supplied by Mr. Kraus. A second round of arbitration hearings is scheduled for next week.
But Mr. Kraus, worried that his client would not get a fair hearing, last week filed a motion in New York State Supreme Court asking to stay the arbitration hearings. Arguments are on the docket for Wednesday in Manhattan. If the judge grants Mr. Kraus’s request, the court will hear arguments on whether the arbitrators should be removed.
Such challenges seem to be rare. In arbitration cases, both parties agree to the membership of the arbitration panel and typically allow it to complete the process.
Mr. Kraus’s request for the court to intervene has brought Mr. Martin’s private arbitration into the public realm. Possible misconduct involving Deutsche Bank’s squawk box system has not previously been reported.
Mr. Kraus said he did not take the decision lightly to file his request with the court. He said he’s had success in other Finra arbitrations over the years but that this case was different.
“Unlike other hearings where you question a ruling here and there, these arbitrators repeatedly excluded evidence that lies at the heart of our case,” Mr. Kraus said. “From time to time, you get these panels that go off the rails, and then the question is how do you remedy that?”