It's not easy to recover what you lost from Bear Stearns. Photographer: Andrew Harrer/Bloomberg
It's not easy to recover what you lost from Bear Stearns. Photographer: Andrew Harrer/Bloomberg

Larry Stone is just your typical wealthy businessman who trusted millions of his hard-earned dollars to Colin P. Gordon, a hedge-fund manager at the now defunct Bear Stearns, and then lost most of those millions when the hedge fund crashed and burned in 2007.

Understandably peeved, Stone wanted to see if he could recover some of his losses from Bear Stearns, so he filed an arbitration claim against Bear’s successor, JPMorgan Chase & Co., under the auspices of the Financial Industry Regulatory Authority, known as Finra.

The Finra arbitration system forces millions of people to forgo their legal rights -- and most of them don’t even realize it. If you have the misfortune of ending up in a monetary dispute with a Wall Street firm (as I once did) and you either work on Wall Street or have a brokerage account with a Wall Street firm, your only redress is a Finra arbitration.

Of course, Finra arbitrations are rigged against the plaintiffs who bring the cases because the arbitrators who decide the cases work for Finra, which of course owes its very existence to the Wall Street firms that control it and provide much of its $1 billion in annual revenue.

Needless to say, if you are an arbitrator who has an inclination to reward plaintiffs against the Wall Street overlords, you are not going to be an arbitrator for long, as I have previously written.

In July 2011, after a series of hearings in Philadelphia, Stone lost his arbitration. He had asked for $7.6 million, a figure that included both his lost principal and forgone interest. (He recovered about $3.5 million of his $9 million investment.) His basic argument in the arbitration was that Gordon had invested a portion of his hedge fund in subprime mortgage-backed securities without informing him or the other investors. Stone claimed he was therefore unaware of the risks inherent in that kind of investment. It’s the same argument that other investors made in lawsuits against the now infamous Bear Stearns hedge funds managed by Ralph Cioffi and Matthew Tannin. Stone ended up with nothing.

Now fully miffed, he started doing some online digging into the backgrounds of the three arbitrators who had heard his case. He should have done that before the case started, of course, because had he found anything that might have suggested a conflict, his lawyers could have rejected that arbitrator. He left that checking to his lawyers, though, because potential conflicts were supposed to be disclosed on a Finra form and everything seemed to be in order.

But as he started investigating the background of one arbitrator -- Jerrilyn Marston -- he discovered that she was married to Richard Marston, a well-known finance professor at the Wharton School of the University of Pennsylvania, from which Stone had graduated years earlier. It turned out that Richard Marston had worked as a consultant to JPMorgan in the 1990s, before it merged with Chase Manhattan. He trained young employees about foreign exchange and international risk and, in 2009, gave a speech at a JPMorgan-sponsored conference, for which he received $12,000. In 2009, Marston also joined the board of directors of W.P. Carey, a small brokerage firm.

Why hadn’t these obvious conflicts been disclosed on Jerrilyn Marston’s Finra arbitrator disclosure form, Stone wondered? Had it been disclosed, he reasoned, he or his lawyer would have disqualified her from his arbitration panel, as was their right. He may still have lost the arbitration -- the usual outcome -- but at least Stone would have felt that he had been treated somewhat more impartially. Stone argued, in a subsequent lawsuit in which he sought to vacate the arbitrators’ decision, that Richard Marston’s role “created an impression of partiality and concealed Ms. Marston’s lack of qualification to serve.”

The plot thickens. He discovered later, to his astonishment, that when Jerrilyn Marston applied to be an arbitrator in the mid-1990s, she disclosed on her application that her husband “has spoken to brokers, traders, and financial consultants from various investment banks and brokerage houses.” She offered to provide Finra with more information about her husband’s ties to Wall Street. No one from Finra followed up and somehow her disclosure got translated on a form to “family member has a relationship with the University of Pennsylvania.”

She tried to amend that disclosure in 2005 to add that her husband “gives seminars to financial consultants and investors.” But, mysteriously, that information never appeared on her disclosure form, either. Nor did she disclose that information at the beginning of the hearing, as she was required to do. So Stone and his legal team never knew about Richard Marston’s relationships to Wall Street.

After these discoveries, Stone appealed to a federal court in Pennsylvania. In May 2012, the court ruled against him. He appealed that decision to the Third Circuit Court of Appeals. He lost that appeal in October 2013. In February, he appealed the Third Circuit decision to the U.S. Supreme Court.

In their brief to the highest court in the land, Stone’s lawyers argue that his case “presents important questions regarding the standard for vacating an arbitration award based on an arbitrator’s undisclosed conflicts of interest.”

He is now waiting to see if the court will take his case. The odds are long for any case being heard by the Supreme Court, of course, so his chances are slim.

Still, Stone remains determined. “Most of this is because of principle, and I can’t just fold up and go away,” he said in an interview.

Whether or not the Supreme Court hears Stone’s appeal, his case proves once again how corrupt the Finra arbitration process is. The sooner it is eliminated, along with Finra itself, the better for everyone.

(William D. Cohan, author of "The Price of Silence: The Duke Lacrosse Scandal, the Power of the Elite, and the Corruption of Our Great Universities," is a Bloomberg View columnist. He was an investment banker at Lazard Freres, Merrill Lynch and JPMorgan Chase, against which he lost an arbitration case over his dismissal. He is now involved in litigation with JPMorgan.)

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

To contact the editor responsible for this article: Paula Dwyer at pdwyer11@bloomberg.net.