A set piece of Voltaire’s 18th century masterpiece, “Candide,” is a scene in which the British, after losing a battle, execute one of their own admirals “pour encourager les autres.”

The analogy may be a bit heavy-handed, yet in many ways it fits what Finra -- the Financial Industry Regulatory Authority, Wall Street’s self-regulatory organization -- did to three arbitrators who, in May 2011, had the temerity to find in favor of a customer in a securities arbitration against Merrill Lynch, the nation’s largest brokerage and a unit of Bank of America Corp. After awarding the estate of the customer more than $520,000 -- a large amount by arbitration standards --Finra heard from unhappy Merrill executives and fired the arbitrators, two of whom had many years of experience.

“You mete out justice, and then you get slapped in the face,” one of the fired arbitrators, Fred Pinckney, told me in an interview.

The matter began in December 2009, after Robert C. Postell, of Alpharetta, Georgia, and his wife, Joan, filed an arbitration claim against Merrill Lynch for more than $640,000 plus attorney’s fees. Postell, who had a successful automotive-safety-equipment business, claimed that his Merrill broker failed “to adequately monitor” his accounts, according to a publicly available copy of the Finra arbitration summary. The Postells also asserted claims of “breach of contract” and “breach of fiduciary duty” against Merrill. Not surprisingly, the brokerage, through its attorney, Terry Weiss, of Greenberg Traurig LLP, in Atlanta, denied the Postells’ claims.

Finra Waiver

Anyone who works on Wall Street or has a brokerage account must agree, from the outset, that any financial claims made against their employer or broker will be adjudicated not in the courts but in an arbitration process overseen by Finra, a private organization that derives the bulk of its $1 billion in revenue from the Wall Street companies that are its members. This upfront agreement by millions of Americans to submit to a Finra arbitration process -- which I experienced first hand in 2003-2004 -- constitutes one of the largest ongoing abdications of legal rights in the U.S., and nobody seems to be bothered enough to rectify it.

(To make matters worse, Mary Schapiro, the chairman of the Securities and Exchange Commission, was previously head of Finra, whose board awarded her a $9 million bonus when she left that post in January 2009.)

In May 2011, the Postells’ arbitration claim was heard in seven sessions over four days by the three Finra-appointed arbitrators: Ilene Gormly, the chairperson and a former compliance executive at a commercial bank; Daniel Kolber, a securities-law attorney and the founder of Intellivest Securities Inc., a small Georgia investment bank; and Pinckney, an Atlanta attorney. The arbitrators are paid about $200 a day.

According to Pinckney, at the final hearing, on May 6, the arbitrators were informed that Postell had committed suicide in February. His estate, along with Joan, would be the claimants in the arbitration and the beneficiaries of any award. Also during the final hearing, according to Pinckney, Weiss, Merrill’s attorney, sensed that he was losing the case and repeatedly “exploded at the panel,” accusing the arbitrators of being biased in their views and rulings against Merrill. The panel took a break, called Finra executives and explained Weiss’s accusations. With Finra’s blessing, the arbitrators decided to proceed to final arguments and conclude the matter. Soon thereafter, the arbitrators found in favor of the Postells and awarded Joan and her husband’s estate $520,000 in damages.

Culled Roster

According to Pinckney, about two months later, Kolber got what Pinckney called a “black spot letter” from Finra explaining that the private regulator periodically examined its “roster” and culled people from it. “As a result,” Kolber’s letter read, “please be advised that you are no longer being listed as an active member of Finra’s dispute resolution roster of arbitrators.”

Then, in January 2012, Gormly, who has about 20 years experience as an arbitrator, got her “black spot letter.” In June, Pinckney was notified that he was relieved of his duties. According to Pinckney, Finra executives denied a request from Kolber for a meeting. Then, Gormly sent a “whistle-blower” letter to the SEC, describing the situation. She hasn’t heard back.

“I told her that she will probably be waiting until hell freezes over,” Pinckney said.

Pinckney is pretty disgusted by this turn of events, especially since there were no grounds to appeal the arbitrators’ decision in the Postell case and no appeal was filed. Nothing about what the three arbitrators did was ever questioned, except by Weiss, the Merrill lawyer who saw his case being lost. Pinckney said his fellow arbitrators weren’t looking for reinstatement or compensation. He contacted me to share his story because he was so outraged that Wall Street has the ability to exact revenge on arbitrators in a quasi-judicial system where it already holds most of the cards anyway.

“It’s unbelievable that they would take such an experienced panel and get rid of it,” Pinckney said. “To me, this undermines the credibility of the entire Finra process -- I didn’t say kangaroo court -- but when you have three well-credentialed people, doing their job, and there were no meritorious grounds for an appeal, and we get handed the ‘black spot’ -- and not all at once -- it makes for a pretty cheap novel.”

Where does it all end? Will there really be zero accountability for bankers, traders and executives who caused a calamitous financial crisis, or the collapse of MF Global Holdings Ltd., or who were gambling with $350 billion of depositors’ money, or who were manipulating Libor, or for those who are further cheapening a Wall Street-administered arbitration system that already reeks of injustice?

(William D. Cohan , a former investment banker and the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. The opinions expressed are his own.)

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To contact the writer of this article: William D. Cohan at wdcohan@yahoo.com.

To contact the editor responsible for this article: Max Berley at mberley@bloomberg.net.