Corporate Law

Appellate Court Upholds Evading Responsibility Conviction; Defendant Avoided Identification, Failed to Help the Victim

Written by Lindsay E. Raber, Esq.

In a criminal law matter, the Appellate Court of Connecticut rejected a defendant’s insufficiency of the evidence claim following his conviction for evasion of responsibility in the operation of a motor vehicle (evading responsibility).

The Case

In this case, the defendant and two friends were at a nightclub when they engaged in a verbal argument with another group, which included the victim. Each group left in their respective cars, with the defendant as a driver, and raced each other along Interstate 95 through Stamford. After getting off the highway, each vehicle was idling at a red light when the victim left his car and attacked the defendant through the driver’s side window.

The defendant dragged the victim down the road “in an effort to remove him,” but after swift application of the brakes failed to do so, the defendant hit the gas and the victim fell off. The victim’s friends found him lying in the road with blood running from his mouth and the back of his head, and the victim died shortly thereafter.

The defendant did not stop to provide any aid to the victim. Instead, he drove to his apartment complex, which was located nearby, and rather than notifying police of the incident himself, his friend made the phone call instead. During this phone call, the friend claimed that he was the driver and did not inform police about the victim’s injuries. The defendant and the third occupant perpetuated this lie.

However, the defendant subsequently admitted that he was the driver, and gave a new sworn statement relaying the events as they actually occurred. The defendant was charged with and convicted of negligent homicide with a motor vehicle, evading responsibility, and third-degree making a false statement. Following sentencing, the defendant appealed, claiming there was insufficient evidence to sustain his conviction of evading responsibility. He agreed that the predicate elements (first three) were proven, but claimed that he was “legally justified” in leaving the scene and complied with the statutory requirements.

Establishing a Conviction of Evading Responsibility

When a court considers a sufficiency of the evidence claim, it must first “construe the evidence in the light most favorable to sustaining the conviction.” The court must then determine whether or not the facts admitted to evidence, along with attendant inferences, support a jury’s determination of guilt beyond a reasonable doubt.

To convict a criminal defendant of evading responsibility under General Statutes § 14-224(a), the State must first prove: “(1) the defendant was operating a motor vehicle, (2) the defendant was knowingly involved in an accident and (3) the accident caused physical injury to any other person or damage to property.”

When these threshold elements are established beyond a reasonable doubt, the State must establish one or more of the following: failure to (4) immediately stop and render necessary assistance; (5) provide identifying information with the person injured or owner of damaged property; or (6) if unable to satisfy (5), call police and leave such identifying information with them. Connecticut courts have held, however, that this statute “does not leave an operator an excuse for failing to stop.”

The Court’s Decision

In this case, the Appellate Court determined that the jury reasonably concluded that the defendant evaded responsibility. He never reported the accident; rather, his friend made the call. The friend “failed to inform the police of the circumstances of the accident and the fact that the victim had been injured, [nor did he] identify the defendant as the operator.” During the initial investigation, the defendant did nothing to reveal the truth of what occurred.

The Court noted that in a previous case, the Supreme Court of Connecticut stated, “[t]he purpose of the statute on evading responsibility is to ensure that when the driver of a motor vehicle is involved in an accident, he or she will promptly stop, render any necessary assistance and identify himself or herself.” The defendant failed to satisfy the requirements of § 14-227(a), and after considering and rejecting additional matters on appeal, the Appellate Court affirmed the judgment.

When faced with a charge of evading responsibility, an individual is best served by consulting with an experienced criminal law practitioner. Should you have any questions regarding criminal defense, please do not hesitate to contact Attorney Joseph C. Maya in the firm’s Westport office in Fairfield County at 203-221-3100 or at

Connecticut Supreme Court Protects Corporate and Personal Assets By Denying Reverse Piercing of the Corporate Veil

Commissioner of Environmental Protection, et al., v. State Five Industrial Park, Inc., et al, 304 Conn. 128,  37 A.3d 724 (2012)

In a case before the Supreme Court of Connecticut,  State Five Industrial Park, Inc., (“State Five”) and Jean L. Farricielli (“Jean”) appealed a trial court judgment holding them liable for a $3.8 million judgment rendered in 2001 against Jean’s husband, Joseph J. Farricielli (“Joseph”) and five corporations (assets) that he owned and/or controlled.

The Supreme Court transferred the case from the appellate division, reversed the lower court judgment and remanded the case with direction to render judgment in favor of State Five. Although the Supreme Court concluded that the facts of this specific case did not support the application of reverse veil piercing, the court refused to address whether that doctrine should be disallowed in Connecticut under any and all circumstances.

Commissioner of Environmental Protection’s Case Against State Five

In 1999, the Commissioner of Environmental Protection (“commissioner”), the town of Hamden (“town”) and the town’s zoning enforcement officer (collectively, “the plaintiffs”) brought an environmental enforcement action against Joseph and the five corporations that he owned and/or controlled alleging egregious violations of state solid waste disposal statutes.

A bench trial took place in 2000 and, in 2001, a memorandum of decision was issued awarding the plaintiffs all relief sought, including civil penalties for each day of each alleged violation, which totaled approximately $3.8 million.  Joseph appealed and, in 2004, the Supreme Court affirmed the trial court judgment against him and the five corporations.

In 2005, the civil penalties of approximately $3.8 million were still largely unpaid; therefore, the plaintiffs initiated the present action.  They argued that principles of reverse piercing of the corporate veil should be applied to hold State Five liable for the 2001 judgment against Joseph and that principles of traditional piercing of the corporate veil should be applied thereafter to hold Jean liable for the resulting judgment against State Five.

The Court’s Ruling

The trial court concluded that reverse veil piercing was warranted because Joseph used State Five to hide assets and used State Five funds to pay thousands of dollars in personal expenses; both actions complicated the plaintiffs’ normal efforts to collect their judgment. Once Joseph’s liability was imputed to State Five, the trial court concluded that traditional veil piercing principles applied to Jean, who was the majority shareholder in State Five.  Therefore, the lower court held both State Five and Jean liable for the 2001 judgment against Joseph, plus pre-judgment interest on the outstanding amount, for a total liability of over $4.1 million.

The appeal raised the question of whether the equitable doctrine of reverse piercing of the corporate veil is a viable remedy in Connecticut.  State Five and Jean argued that the trial court improperly applied veil piercing principles because that remedy should not be recognized in Connecticut under any circumstances.  In the alternative, State Five and Jean argued that the trial court should not have applied veil piercing principles given the facts of the instant case.

A corporation generally is a distinct legal entity, and stockholders are not personally liable for the acts and obligations of the corporation.  Saphir v. Neustadt, 177 Conn. 191, 209, 413 A.2d 843 (1979).  This corporate shield of liability is pierced in only exceptional circumstances, such as where the corporation is a “mere shell, serving no legitimate purpose, and used primarily as an intermediary to perpetuate fraud or promote injustice.”  Angelo Tomasso, Inc. v. Armor Construction & Paving, Inc., 187 Conn. 544, 557, 447 A.2d 406 (1982). (internal quotation marks omitted.)

Veil Piercing vs. Reverse Veil Piercing

In veil piercing cases, the party seeking to disregard the corporate form bears the burden of proving that there is a basis to do so.  In a traditional veil piercing case, the corporate veil shields a majority shareholder or other corporate insider who is abusing the corporate fiction in order to perpetuate a wrong; therefore, the claimant requests that the court disregard the corporate form in order to reach this individual’s assets. C.F. Trust, Inc. v. First Flight, L.P., 266 Va. 3, 10, 580 S.E.2d 806 (2003).

In a reverse veil piercing case, however, the corporate form protects the corporation which gets used by a dominant shareholder or other corporate insider to perpetuate a fraud or defeat a rightful claim of an outsider; therefore, the claimant seeks to reach the assets of the corporation to satisfy claims or a judgment obtained against the corporate insider.  Tomasso, 187 Conn. at 557, 447 A.2d 406.

What to Consider Before Implementing A Reverse Veil Piercing

Three specific concerns have been identified in the distinction between these two doctrines:

  1. reverse piercing bypasses normal judgment collection procedures, prejudicing the rightful creditors of the corporation who relied on the entity’s separate corporate existence
  2. reverse piercing prejudices the rights of the non-culpable shareholders
  3. when the judgment creditor is a shareholder or other insider, their other legal remedies are potentially available to obviate the need for the more drastic remedy of corporate disregard.

Therefore, a court contemplating reverse veil piercing must weigh the impact of this action on innocent investors and creditors, and consider the availability of other remedies to satisfy the debt. C.F. Trust, 266 Va. at 12–13, 580 S.E.2d 806.

The Identity and the Instrumentality Rule

In Connecticut jurisprudence, two rules form the legal standard for the application of traditional veil piercing doctrine and reverse veil piercing doctrine:  the identity rule and the instrumentality rule.  The instrumentality rule requires proof of three elements:

  1. control, equivalent to the complete domination of finances, policy and business practice such that the corporate entity had no separate mind, will or existence of its own with respect to the contested transaction
  2. that such control was used to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal duty, or a dishonest or unjust act in contravention of the plaintiff’s legal rights
  3. that such control and breach of duty proximately caused the injury or unjust loss complained of.  Naples v. Keystone Building & Development Corp., 295 Conn. 214, 232, 990 A.2d 326 (2010) (internal quotation marks omitted.)

The identity rule requires that the plaintiff show that there was such a unity of interest and ownership between the shareholder and the corporation that the independence of the corporation had in effect ceased or had never begun, and adhering to the legal fiction of separate identity would serve only to defeat justice and equity by permitting the economic entity to escape liability. Id.

The Trial Court’s Decision

Whether the circumstances of a particular case justify the piercing of the corporate veil presents a question of fact.  Therefore, the Supreme Court defers to the trial court decision to pierce the corporate veil, as well as any subsidiary factual findings, unless these factual findings are clearly erroneous, which means that either the record contains no evidence to support the findings or the reviewing court is left with the “definite and firm conviction” that a mistake has been made.

The Supreme Court concluded that, in the present matter, the trial court should not have applied reverse veil piercing, regardless of whether it is a viable theory in Connecticut.  Certain subsidiary factual findings related to crucial factors that necessarily render reverse veil piercing inequitable lacked evidentiary support and, therefore, were clearly erroneous.  Furthermore, after reviewing the trial court’s application of the instrumentality and identity rules, the Supreme Court was left with the definite and firm conviction that a mistake has been made.

The Supreme Court determined that the trial court did not adequately ensure that third party creditors did not exist or, if they did, that these creditors would not be harmed by applying reverse veil piercing principles that made all of the corporation’s assets available to satisfy the 2001 judgment.  Permitting direct attachment of corporate assets to satisfy an individual insider’s debt undermines corporate viability, reasonably relied upon by creditors, with no forewarning.

Wrongful Application of a Reverse Veil Piercing

Testimony and printed statements in evidence at trial indicated that State Five had a line of credit with a local bank; however, the trial court concluded that this bank would not be harmed by the reverse piercing because the line of credit had been paid off in 2007 and the line was secured with Jean’s personal assets rather than corporate property.

The Supreme Court determined that this finding was clearly erroneous because the record was silent as to the outstanding balance on the line of credit as of the date of trial and the precedent in Connecticut is that a lender in this context extends credit in reasonable reliance on the existence of both a viable borrower in possession of assets and the additional security provided by a secondary obligor.

Evidence that certain State Five shareholders were not involved in running the corporation, making necessary business decisions or suggesting changes did not support the trial court’s factual finding that these shareholders were complicit in Joseph’s activities.  Because the plaintiffs did not establish that these shareholders were not innocent, the Supreme Court determined that it was improper for the trial court to apply reverse piercing without regard to whether the interests of these individuals would be impacted.

Fulfillment of the Instrumentality Rule

Finally, the Supreme Court was convinced that the trial court improperly concluded that the equitable remedy was warranted in this case.  To justify any veil piercing action pursuant to the instrumentality rule, it must be shown that the insider debtor exercised complete control over the subject corporation and used such control “to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal duty, or a dishonest or unjust act in contravention of [the plaintiffs’] legal rights; and … that the aforesaid control and breach of duty … proximately cause[d] the injury or unjust loss complained of.” Tomasso, 187 Conn. at 553, 447 A.2d 406.

To justify imposing the entire obligation of the 2001 judgment on State Five, the plaintiffs needed to show that Joseph exercised his control over State Five to divert or hide assets that belonged to him personally or to his corporations and that otherwise would have been available to satisfy that judgment.

Additionally, the plaintiffs needed to demonstrate that these maneuvers were the proximate cause of the plaintiffs’ inability to collect $3.8 million that it otherwise would have been able to recover. The Supreme Court found that the trial court’s analysis failed to specifically establish the necessary connection between Joseph’s improper actions in relation to State Five and the plaintiffs’ inability to collect on the 2001 judgment.

Fulfillment of the Identity Rule

The Supreme Court found that the identity rule was not satisfied in the present case.  It was neither unjust nor inequitable to permit State Five to avoid liability for the judgment against Joseph and his other corporations when State Five received little in the way of assets from those parties and much in the way of liabilities.  Additionally, in paying personal expenses for Joseph, State Five has been caused to pay other expenses for which it is not legally obligated.

The Supreme Court’s Final Decision

Because the Supreme Court concluded that the trial court improperly applied reverse veil piercing, Joseph’s liability for the 2001 judgment could not be imputed to State Five.  Therefore, there was no liability to transfer from State Five to Jean.

The Supreme Court had a definite and firm conviction that a mistake has been made because the trial court’s application of the equitable remedy of reverse veil piercing was based in part on unsupported factual findings, and the court employed improper reasoning when analyzing other facts.  Therefore, the Supreme Court set aside the trial court’s factual determinations as clearly erroneous, reversed the lower court judgment, and remanded the case with direction to render judgment in favor of State Five and Jean Farricielli.

Federal Court Narrows the Definition of “Customer” to Limit Compelled Arbitration Under the FINRA Code of Arbitration Procedure for Customer Disputes

Herschel and Mona Zarecor, et al, v. Morgan Keegan & Company, Inc., 2011 WL 5508860 (E.D. Ark. Nov. 10, 2011)

In a case before the United States District Court for the Eastern District of Arkansas, Herschel and Mona Zarecor (“the Zarecors”) filed a petition to confirm a Financial Industry Regulatory Authority (“FINRA”) arbitration award entered in their favor in October 2010.  Morgan Keegan & Company, Inc., (“Morgan Keegan”) filed a counterclaim to vacate the award.  The court granted Morgan Keegan’s motion for vacatur.  In a later action before the same court, the Zarecors filed a motion for reconsideration.  The court denied the motion for reconsideration.

Case background

The underlying dispute in this case is based on a Statement of Claims that the Zarecors filed with FINRA to institute an arbitration proceeding against Morgan Keegan.  The Zarecors alleged that Morgan Keegan violated state laws by failing to disclose risks associated with the Regions Morgan Keegan funds (“RMK Funds”) that the Zarecors purchased for their individual retirement accounts.  The Zarecors alleged that the prospectus and written sales materials for the RMK funds represented these funds as traditional income or bond funds, when these funds were invested instead in risky structured financial products and derivatives.  The Zarecors lost over ninety-percent of their original investment in the RMK funds.

The Arguments

In their Statement of Claims, the Zarecors asserted that FINRA had jurisdiction to arbitrate the dispute in absence of a written arbitration agreement because Morgan Keegan was a FINRA member and the Zarecors were public customers.  Pursuant to FINRA Rule 12200, a member firm must arbitrate a dispute if:  (a) arbitration is required by written agreement or requested by the customer; (b) the dispute is between a FINRA member or associated person of a FINRA member and its customer; and (c) the dispute arises in connection with the business activities of the member or the associated person.

Morgan Keegan alleged that the Zarecors did not qualify as their customers because the Zarecors never sought advice from or held accounts with Morgan Keegan; the Zarecors purchased the RMK funds from competitor brokerage firms, held accounts at competitor brokerage firms and had no direct dealings with Morgan Keegan. Morgan Keegan also filed a motion to dismiss under FINRA Rule 12504(a)(6)(B), which the arbitration panel denied after hearing oral arguments from the parties.  After three days of arbitration hearings, the FINRA arbitration panel issued an award finding Morgan Keegan liable to the Zarecors for $541,000 in compensatory damages.  In November 2010, the Zarecors commenced an action to confirm the award and Morgan Keegan filed a counterclaim to vacate the award.

Grounds for Vacating Arbitration

The Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 9-11, provides statutory grounds for judicial review to confirm, vacate or modify an arbitration award.  Where there has been an arbitration agreement between the parties, judicial review is severely limited and the arbitration decision may be vacated on very narrowly defined statutory grounds.  See 9 U.S.C. § 10(a).

Morgan Keegan asked the court to vacate the arbitration award on two grounds:  (1) there was no such arbitration agreement between the parties; and (2) the underlying dispute is not subject to mandatory arbitration under FINRA Rule 12200 because the Zarecors were not customers entitled to request arbitration.  The Zarecors countered that, because Morgan Keegan had not sought to enjoin the arbitration proceedings and had participated in the arbitration hearings, they claimed that the firm had waived its right to contest whether the underlying dispute could be submitted for arbitration.

Morgan Keegan may Contest Arbitrability

A party opposed to arbitration has several alternatives to preserve the issue for judicial review:  (1) object to the arbitrator’s authority, refuse to argue the arbitrability issue, and proceed to the merits of the agreement; (2) seek declaratory or injunctive relief from a court prior to commencement of arbitration; (3) notify the arbitrators of a refusal to arbitrate altogether; or (4) file a timely motion to vacate in district court. See International Broth. of Elec. Workers, Local Union No. 545 v. Hope Elec. Corp., 380 F.3d 1084, 1101–02 (8th Cir. 2004).

The court determined that Morgan Keegan did not waive its right to contest arbitrability by failing to enjoin the arbitration proceedings; its motion to dismiss, its objections to the arbitration panel’s jurisdiction during the hearings and its timely motion to vacate the award supported the court’s finding that Morgan Keegan sufficiently preserved its right to contest that the underlying dispute was not subject to FINRA arbitration.

Definition of “Customer”

FINRA Rule 12100(i) provides the following definition of a “customer” to be used throughout the FINRA Code of Arbitration Procedure for Customer Disputes: “A customer shall not include a broker or dealer.”  The district court was concerned that the definition of a “customer” under this rule not be construed too narrowly, nor be interpreted in a manner that would ignore the reasonable expectations of FINRA members.

For the purposes of compelling a member firm to arbitrate a dispute, precedent within the Eighth Circuit limits the definition of a “customer” to “one involved in a business relationship with [a FINRA] member that is related directly to investment or brokerage related services.” Fleet Boston Robertson Stephens, Inc. v. Innovex, Inc., 264 F.3d 770, 772 (8th Cir. 2001).   This narrower definition excludes individuals who receive only financial advice, not investment or brokerage services, from the FINRA member.  Id.

Zarecors not Qualified as Customers

In the instant case, it is undisputed that the Zarecors purchased the RMK Funds from competitor brokers and did not have a direct transactional relationship with Morgan Keegan; however, the Zarecors asserted that they qualified as customers of Morgan Keegan based on phone conversations with Morgan Keegan representatives regarding the funds, including their liquidity and exposure to the sub-prime market.

Courts have found a customer relationship based on interactions between an investor and a FINRA member’s representative only where there is conduct on the part of the representative that indicates the existence of a business or investment relationship, such as soliciting a purchase, taking money from an investor, or facilitating investment transactions. See Oppenheimer & Co., Inc. v. Neidhardt, 56 F.3d 352 (2d Cir. 1995).  The Zarecors’ interaction with Morgan Keegan did not satisfy this standard.  Therefore, the district court determined that there were no connections or customer relations between the parties that would justify compelling arbitration under FINRA Rule 12200.

Because the district court found that the requirements for compelling arbitration under FINRA Rule 12200 were not satisfied, the court denied the Zarecors’ motion for judgment confirming the arbitration award and granted Morgan Keegan’s counterclaim to vacate the award.

Motion for Reconsideration Denied

In November 2011, the Zarecors filed a motion for reconsideration pursuant to Rule 59(e) of the Rules of Federal Civil Procedure, which permits a district court to correct its own mistakes in the time period immediately following entry of judgment.  Rule 59(e) cannot be used to introduce new evidence, tender new legal theories or raise arguments that could have been offered prior to entry of judgment.  In their motion for reconsideration, the Zarecors contended that the court overlooked the material fact that Morgan Keegan signed an agreement to submit to arbitration and that this submission agreement had been part of the record.

Although the submission agreement was part of the record, the Zarecors failed to reference it or discuss its relevance in briefs filed prior to judgment.  The court’s failure to notice the submission agreement, therefore, did not amount to manifest error of law or fact.  The Zarecors additionally contended that Morgan Keegan submitted the issue of arbitrability to the arbitration panel for decision.  The court considered this argument to be a new legal theory, contradictory to the Zarecors’ previous argument that Morgan Keegan had waived its right to object to arbitrability by failing to contest the issue before the arbitration panel. Therefore, the district court rejected both contentions as sufficient bases for reconsideration under Rule 59(e).

The district court determined that that the Zarecors were not entitled to relief under Rule 59(e) and, therefore, denied their motion for reconsideration.  The court’s previous order and judgment to vacate the FINRA arbitration award were undisturbed.

Should you have any questions relating to FINRA or arbitration issues, please do not hesitate to contact Attorney Joseph C. Maya in the firm’s Westport office in Fairfield County, Connecticut at 203-221-3100 or at

Federal Court Enforces FINRA Arbitration Award Based Solely on the Plain Language of the Award Because the Award was not “Patently Ambiguous”

Luby’s Restaurants Limited Partnership v. Credit Suisse Securities (USA) LLC, 2011 WL 1740196 (S.D. Tex. May 5, 2011)

In a case before the United States District Court for the Southern District of Texas, Luby’s Restaurants Limited Partnership (“Luby’s”) sought to confirm a Financial Industry Regulatory Authority (“FINRA”) arbitration award pursuant to the Federal Arbitration Act (“FAA”), 9 U.S.C. § 9.  In its petition, Luby’s also sought a court ruling to interpret the arbitration award as requiring Credit Suisse Securities (USA) LLC (“Credit Suisse”) to recompense an additional $186,000 in damages.  Luby’s originally filed the petition in state court, but Credit Suisse removed to federal court.  The federal district court confirmed the arbitration award in Luby’s favor and denied Luby’s petition to order Credit Suisse to pay the additional sum.

The Dispute

The underlying dispute in this case is based on Luby’s purchase of over $30 million in auction rate securities from Credit Suisse.  Credit Suisse had falsely represented that these securities were suitable to Luby’s investment goals because they were equivalent to money market funds, highly liquid, and safe investments for short term investing.

In October 2008, when Luby’s filed arbitration proceedings, the company had redeemed all but $8.9 million worth of the securities, which could not be sold at par value.  In September 2009, after proceedings had been initiated but before the arbitration hearings had begun, Luby’s redeemed one of the remaining securities for less than par value, sustaining a $186,000 loss.  In May 2010, the FINRA arbitration panel ruled that Credit Suisse was liable to Luby’s for the re-purchase of the disputed auction rate securities at par value, and that Credit Suisse was also liable to Luby’s for interest on the par purchase price of these securities from a specific date after the arbitration award through the date the award was paid in full.

The Arbitration Award

Pursuant to the terms of the arbitration award, Credit Suisse purchased all of Luby’s remaining securities at par value and paid the required interest.  Neither party contested the award and both parties sought its confirmation.

However, Luby’s and Credit Suisse disputed whether the award included the $186,000 loss that Luby’s sustained when it sold securities for less than par value after filing for arbitration. Luby’s did not request the court to modify or correct the award, but to confirm the award as written and interpret the writing as including the additional loss.   In raising this issue, neither Luby’s nor Credit Suisse argued that FINRA arbitration did not fully resolve their dispute, nor did they assert that the language of the arbitration award created a collateral dispute.

Interpretations of an Ambiguous Arbitration Award

Courts are required to enforce arbitration awards only as written by the arbitrator; therefore, if an arbitration award is ambiguous, it is unenforceable and must be remanded to the arbitrator with instructions to clarify the particular ambiguities.  Brown v. Witco Corp., 340 F.3d 209, 216 (5th Cir. 2003) (citing Oil, Chem. & Atomic Workers Int’l Union Local 4–367 v. Rohm & Haas, Tex., Inc., 677 F.2d 492, 495 (5th Cir. 1982).  Remand is only appropriate where: (1) an arbitration award is patently ambiguous; (2) the issues submitted to arbitration were not fully resolved; or (3) the language of the arbitration award created a collateral dispute.  Oil, Chem. & Atomic Workers, 677 F.2d at 495.

Although both Luby’s and Credit Suisse argued different interpretations of the FINRA arbitration award, the district court did not find that the award itself was patently ambiguous.  The plain language of the award makes no mention of additional damages sustained by Luby’s during the pendency of the arbitration hearings.  Credit Suisse could clearly not purchase back the securities that were sold because they were no longer in Luby’s possession.

The Decision

The award clearly denied any relief other than that which was expressly granted in its plain language.  Additionally, during the arbitration hearings, Luby’s presented this loss as a claim distinct from the claim to buy back the auction rate securities at par.  The arbitrators did not include this relief in the arbitration award, thereby effectively denying such relief.  Therefore, because the federal district court found the arbitration award to be unambiguous, it confirmed and enforced the award as written.

The court ordered that the final FINRA arbitration award in Luby’s favor be confirmed and adopted as the judgment of the court.  Luby’s petition to order Credit Suisse to make additional payment of $186,000 was denied as not having been ordered in the final award of the arbitration panel.

Should you have any questions relating to FINRA or arbitration issues, please do not hesitate to contact Attorney Joseph C. Maya in the firm’s Westport office in Fairfield County, Connecticut at 203-221-3100 or at

FINRA Arbitrators are Immune from Civil Liability When Making Decisions within Their Jurisdiction

Richard Sacks, d/b/a Investors Recovery Service, v. Dean Dietrich and Teri Coster Boesch, 663 F.3d 1065 (9th Cir. 2011)

In a case before the Ninth Circuit, Richard Sacks (“Sacks”), doing business as Investor Recovery Services, appealed a United States District Court ruling dismissing his claims of intentional and negligent interference with contract and negligent interference with prospective economic advantage against Financial Industry Regulatory Authority (“FINRA”) arbitrators Dean Dietrich and Teri Coster Boesch (“the challenged arbitrators”).  The Ninth Circuit affirmed the United States District Court for the Northern District of California ruling that Sacks’s claims were barred by arbitral immunity.

FINRA Arbitration Agreement

Sacks entered into a written contract with a client to represent him in a FINRA securities arbitration proceeding.  In order to submit his dispute to FINRA, Sacks’s client signed a FINRA submission agreement.  On behalf of his client, Sacks submitted a Statement of Claim, paid filing fees and requested a hearing. FINRA appointed a panel of three arbitrators, including the challenged arbitrators, to hear and decide the claims of Sacks’s client.

After two telephone hearings, the respondents in the arbitration moved to have Sacks disqualified on the grounds that he was ineligible under FINRA Rule 13208, which disallows representation by a person who is not an attorney and who is also “currently suspended or barred from the securities industry in any capacity.”  Sacks was not an attorney and was barred from the securities industry in 1991.

Sacks’ Response

In his response to the motion to disqualify, Sacks objected to the arbitration panel’s consideration of the issue arguing that the panel did not have the authority to make a decision on his client’s representation and that he had not contracted with the panel to make any such decision.  However, Sacks disputed neither the fact that he was not an attorney nor the fact that he had been barred from the securities industry.  The challenged arbitrators signed an order disqualifying Sacks from representing his client. The third arbitrator did not join in the order.

Sacks filed a complaint in state court against the challenged arbitrators alleging that, by preventing him from representing his client, the challenged arbitrators exceeded their authority under his client’s FINRA submission agreement, FINRA rules and state law.  The challenged arbitrators removed the case to federal district court.  The district court ruled that Sacks’s claims were barred by arbitral immunity, granted the challenged arbitrators’ motion to dismiss and entered judgment dismissing all claims with prejudice.  Sacks appealed.

The Doctrine of Arbitral Immunity

The doctrine of arbitral immunity aims to protect decision makers from undue influence and the decision making process from reprisals by dissatisfied litigants. Wasyl, Inc. v. First Boston Corp., 813 F.2d 1579, 1582 (9th Cir.1987).  The doctrine only applies to claims that effectively seek to challenge the decisional act of an arbitrator or an arbitration panel. More specifically, it limits arbitrators’ immunity to “civil liability for acts within their jurisdiction arising out of their arbitral functions in contractually agreed upon arbitration hearings.”  Id. at 1582.

Sacks argued that the doctrine of arbitral immunity was inapplicable to bar his claims because the challenged arbitrators exceeded their jurisdiction.  The first basis for this argument was that FINRA rules and applicable law prevented the challenged arbitrators from deciding a representational issue.  Specifically, Sacks argued that FINRA Rule 13208 itself did not give arbitrators the authority to prohibit him from representing his client.  However, the appellate court determined that, taken as a whole, FINRA rules and applicable law dictate that the challenged arbitrators were acting within their jurisdiction.  FINRA Rule 13413 grants the arbitration panel authority to interpret and determine the applicability of FINRA rules and provides that “[s]uch interpretations are final and binding upon the parties.”

There was no issue regarding Sacks’s lack of qualification under FINRA Rule 13208 because it was undisputed that he was not an attorney and had been barred from the securities industry.  Therefore, the challenged arbitrators did not exceed their authority in issuing the disqualification order.

The Decision

The second basis for Sacks’s argument that the challenged arbitrators exceeded their authority is that he could not be bound by the arbitration panel because he was not a party to the arbitration agreement.  The appellate court determined that Sacks was still bound by the arbitration agreement under ordinary contract and agency principles.  When Sacks’s client submitted his claim to FINRA, the FINRA arbitrators had jurisdiction to issue binding interpretations of FINRA rules.  Therefore, because the challenged arbitrators acted with full authority under the client’s arbitration agreement, they could not be subject to suit by a party representative.

The appellate court determined that the arbitrators were acting within their jurisdiction and Sacks’s claims arose out of a decisional act.  Therefore, the district court properly applied the doctrine of arbitral immunity to bar Sacks’s claims.  The appellate court affirmed the district court rulings.

Should you have any questions relating to FINRA or arbitration issues, please do not hesitate to contact Attorney Joseph C. Maya in the firm’s Westport office in Fairfield County, Connecticut at 203-221-3100 or at

Court Finds that FINRA Arbitrators Did Not Exceed Their Authority

Augusto H. Andrade, Jr., and Maria A. Andrade v. Michael Ewanouski and Wachovia Securities, LLC. 962 N.E.2d 245 (Mass. App. Ct. 2012)

In a case before the Appeals Court of Massachusetts, Augusto and Maria Andrade (“the Andrades”) appealed a trial court judgment confirming a Financial Industry Regulatory Authority (“FINRA”) arbitration award in favor of Michael Ewanouski (“Ewanouski”) and Wachovia Securities, LLC (“Wachovia”).  The appellate court affirmed the lower court ruling.

The Case

In 2000, the Andrades opened an investment account with Ewanouski, who was a registered representative and branch manager at a company that was later acquired by Wachovia.  The Andrades’ client profile contained several critical errors, including the type of investment sought.  Therefore, their funds were placed in investments with an above average degree of risk, performed poorly and lost money.

In 2007, the Andrades filed a Statement of Claims with FINRA against both Ewanouski and Wachovia.  During the arbitration, the arbitration panel found that many of the  claims were barred because of  lack of jurisdiction. In accordance with FINRA Rule 12206(a), claims are ineligible for FINRA arbitration if six years have elapsed from the occurrence or event that gave rise to the claim.  Therefore, the arbitration panel determined that claims arising from activities prior to June 1, 2001 were ineligible for arbitration.  The FINRA arbitration panel rendered its decision in April 2010.  The Andrades prevailed on two claims, and the remaining claims were dismissed by the arbitration panel.

The Appeal

In their appeal, the Andrades stated that the trial judge erred in failing to strike the arbitrators’ finding that certain dismissed claims were ineligible for arbitration or, in the alternative, that the trial judge erred in not vacating the arbitration award.  The Andrades grounded their appeal on the basis that the arbitration panel recorded its findings on matters ineligible for arbitration and, therefore, exceeded its authority in its interpretation of the FINRA rules governing time limits for the submission of claims and for the dismissal of claims. The Andrades also allege in their appeal that they should be permitted to pursue the claims that are ineligible for arbitration in court.

Both the Massachusetts General Laws and the Federal Arbitration Act (“FAA”) provide very narrow statutory grounds for judicial review of arbitration awards. Compare Mass. Gen. Laws ch. 251, §§ 12(a) with 9 U.S.C. § 10(a).  The Andrades made no claims that the arbitration decision was tainted by fraud or other  procedural irregularity, which could potentially provide grounds for vacatur  under Mass. Gen. Laws ch. 251, §§ 12(a)(1), 12(a)(4)-(5).  Whether an arbitration panel exceeded its authority first depends on what matters were properly before him for consideration.  Local 589, Amalgamated Transit Union v. Massachusetts Bay Transp. Authy., 392 Mass. 407, 412 (1984).

The Arbitration Award

The appellate court determined that, by bringing ineligible claims before the arbitration panel, the Andrades gave the arbitration panel the power to discuss their dismissal of those matters.  Pursuant to FINRA Rule 12206(a), the arbitration panel “will resolve any questions regarding the eligibility of a claim under this rule.”  Additionally, FINRA Rule 12904(e) requires the arbitration award to contain “a statement of issues resolved.”  The arbitration panel’s statements in the arbitration award were in direct response to the Andrades’ argument that the statute of limitations should be tolled on their claims.

The arbitration award stated that fraudulent activity or bad faith is required for tolling to apply, and that the panel found that Ewanouski had not engaged in either conduct.  The arbitration award also contained its conclusions that tolling did not apply and that the Andrades’ claims based on events or occurrences prior to June 1, 2001 were ineligible for FINRA arbitration.  The appellate court determined that the arbitrators did not exceed the scope of their authority by including this explanation in the arbitration award.   Therefore, the trial judge appropriately denied the Andrades’ claims.

Modifying an Arbitration Award

The Massachusetts Uniform Arbitration Act provides limited exceptions under which a court may modify or correct an arbitration award. Mass. Gen. Laws. Ch. 251 § 13(a)(2).  A court may only modify or correct an award if “the arbitrators have awarded upon a matter not submitted to them and the award may be corrected without affecting the merits of the decision upon the issues submitted.”  This provision is substantially similar to the FAA, 9 U.S.C. § 11(b).  The appellate court determined that this exception was not applicable in the instant case because the contested matter was properly before the arbitrators.

Although the appellate court affirmed the lower court decision to confirm the FINRA arbitration award in favor of Ewanouski and Wachovia, its opinion reiterated the Andrades’ existing right to file suit in court on the claims that the arbitration panel clearly stated were ineligible for arbitration.  FINRA Rule 12206(b) specifically states that dismissal of claims from FINRA arbitration “does not prohibit a party from pursuing the claim in court.”

Should you have any questions relating to FINRA, arbitration or employment issues, please do not hesitate to contact Attorney Joseph C. Maya in the firm’s Westport office in Fairfield County, Connecticut at 203-221-3100 or at

California Appellate Court Upholds Vacatur of FINRA Arbitration Award Based on Denial of Due Process

Roland  Hansalik v. Wells Fargo Advisors, LLC, 2012 WL 1423014 (Cal. Ct. App.  April 25, 2012)

In a case before the California Court of Appeals, Wells Fargo Advisors, LLC (“Wells Fargo”) appealed the trial court order to vacate the Financial Industry Regulatory Authority (FINRA) arbitration award in its favor against Ronald Hansalik (“Hansalik”).  The appellate court found no error in the trial court ruling and affirmed the decision.

Case Overview

The underlying dispute in this case arose from Wells Fargo’s action to collect from Hansalik the unpaid balance of $1,239,044.16 due on a promissory note that contained a clause agreeing to arbitrate before FINRA.  Prior to the initiation of arbitration proceedings, Hansalik moved from California to Switzerland, and failed to notify FINRA of his change of address as required by a notice sent to all members of FINRA’s predecessor, the National Association of Securities Dealers (“NASD”).

FINRA mailed Wells Fargo’s Statement of Claim and other notices to Hansalik’s prior residential address in California.  The post office notified FINRA that Hansalik’s forwarding address was an incomplete address in Zurich, Switzerland.  Wells Fargo provided FINRA with the street address of the private bank where Hansalik worked in Switzerland.  FINRA continued to mail arbitration notices to Hansalik’s former residential address in California. In April 2010, FINRA issued a default award against Hansalik for the principal sum of $1,297,694.14, plus interest, costs and attorney fees.  The award also stated that the arbitrator determined that Hansalik had been properly served notice of the Statement of Claim and Notification of the Arbitrator.

Effort to Vacate the Arbitration Award

After the award, Wells Fargo hired a Swiss attorney who demanded payment from Hansalik.  Hansalik immediately filed a petition to vacate the FINRA arbitration award under the relevant provisions of California law, claiming that he never received notice and challenging the fundamental fairness of the entire arbitration proceeding.

The trial court granted the petition on the grounds that Hansalik was not properly served under FINRA rules and that he was denied due process.  Wells Fargo appealed contending that the arbitrator found that service complied with FINRA rules, that Hansalik was not denied due process, and that there was substantial evidence that Hansalik received actual notice of the arbitration.

Under California law, the limited grounds for vacating an arbitration award include instances when an arbitrator exceeds his authority by denying the litigant a fair hearing.  Code Civ. Proc. § 1286.2, subd. (a)(4). This is substantially similar to the statutory grounds for vacatur in the Federal Arbitration Act (“FAA”), 9 U.S.C. § 10(a).  California case law provides precedent for reversal of an arbitration award when the arbitrator “did not give appellant notice of any hearing, nor did he give it any opportunity to be heard.” Smith v. Campbell & Facciolla, Inc. 202 Cal.App.2d 134, 135 (1962).

The Decision

FINRA Rule 13301(a) requires that the initial Statement of Claim be served on the individual at his residential address or “usual place of abode.”  The rule further provides that if service cannot be completed at this address, the initial Statement of Claim will be served at the person’s business address.

The appellate court concurred with the trial court determination that FINRA did not give Hansalik notice and an opportunity to be heard because it knowingly sent notices to his previous residential address instead of sending them to the current business address provided by Wells Fargo.  Furthermore, the appellate court concurred that even if Hansalik had actual notice of the initial Statement of Claim from Wells Fargo via Federal Express and e-mail, he was entitled to such notice from FINRA.

FINRA Rule 13413 provides that the arbitration panel has the authority to interpret and determine the applicability of all provisions under the FINRA rules.  The appellate court held that proper notice is so intrinsic to the fundamental fairness of a hearing that it denied Wells Fargo’s argument that this rule gave the arbitrator the power to interpret the FINRA notice rule and determine if service was proper under FINRA rules.

In light of FINRA’s unfair procedure and Hansalik’s lack of actual notice, the appellate court determined that the trial court properly vacated the FINRA arbitration award.

Should you have any questions relating to FINRA or arbitration issues, please do not hesitate to contact Attorney Joseph C. Maya in the firm’s Westport office in Fairfield County, Connecticut at 203-221-3100 or at

California Court Modifies FINRA Arbitration Award to Provide for a Setoff

UBS Financial Services, Inc. and Piper Jaffray & Co. v. Mark C. Riley, 2012 WL 1831720 (S.D. Calif. May 18, 2012)

In a case before the Southern District of California involving a setoff in a FINRA arbitration award, UBS Financial Services, et al, (“UBS”) petitioned to confirm, or in the alternative modify, a Financial Industry Regulatory Authority (“FINRA”) Arbitration Award issued September 2, 2011.  Mark Riley (“Riley”), a former USB employee, filed a reply.  The court granted UBS’s alternative motion to modify the award and awarded UBS pre and post judgment interest.  All other motions were denied.

Case Background

The underlying dispute in this case arose when Riley failed to satisfy his indebtedness on two promissory notes after he terminated his employment with UBS, which had acquired his previous employer, Piper Jaffray.  The two loans were received during Riley’s course of employment with Piper Jaffray and UBS.  Because submission to FINRA arbitration was included in Riley’s employment agreement with UBS, the firm initiated a FINRA arbitration claim against Riley to recover the outstanding balances, as well as interest and attorneys’ fees.   Riley filed a counterclaim against UBS and Piper Jaffray, alleging claims related to his employment with the firms.

FINRA appointed a panel of three arbitrators to hear the matter.  The panel issued an arbitration award in favor of UBS for $377,024.83, including principal, interest and attorneys’ fees.  The panel also held UBS and Piper Jaffray jointly and severally liable to Riley in the amount of $127,024.83.  One week after the award, UBS filed a motion with the arbitration panel requesting clarification of the award to provide for Riley’s award to be offset against the UBS award.

Debate about Setoff

The Director of Arbitration rejected the motion because it did not comply with the FINRA Code of Arbitration Procedure for Industry Disputes Rule 13905, which provides that parties may not submit documents to arbitrators in cases that have been closed except under limited circumstances.  Therefore, UBS petitioned the federal district court to confirm, or alternatively modify, the award with a setoff of the amount awarded to Riley against the larger amount awarded to UBS, and to enter a single judgment in favor of UBS in the net amount of $250,000, plus interest, attorneys’ fees and costs.

The Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1–16, governs the role of federal courts in reviewing arbitration decisions and provides very limited grounds on which a federal court may correct, modify or vacate such decision.  “Under the statute, confirmation [by federal court] is required even in the face of erroneous findings of fact and misinterpretations of law.” Kyocera Corp. v. Prudential–Bache T Serv’s, Inc., 341 F.3d 987, 997 (9th Cir. 2003) (internal quotation marks and citation omitted)

Riley argued the award should be confirmed without setoff on three separate grounds: (1) the court does not have the authority to provide a setoff; (2) UBS and Piper Jaffray are jointly and severally liable so to allow an offset against the money awarded to UBS would deprive him of the ability to recover from Piper Jaffray; and (3) his counsel’s attorneys’ fee lien on his award takes priority over UBS’s right to a setoff.   He opposed modification of the award for the same reasons.

Section 11 of the FAA

The court denied UBS’s motion to confirm the arbitration award with a setoff because it was unable to find any authority in the Ninth Circuit to permit a setoff in the confirmation of an arbitration award.  However, section 11 of the FAA permits a federal court to modify or correct an award “as to effect the intent thereof and promote justice between the parties” under the following circumstances:

(a) Where there was an evident material miscalculation of figures or an evident material mistake in the description of any person, thing, or property referred to in the award.

(b) Where the arbitrators have awarded upon a matter not submitted to them, unless it is a matter not affecting the merits of the decision upon the matter submitted.

(c) Where the award is imperfect in matter of form not affecting the merits of the controversy.

Decision for Setoff

The court determined that allowing for a setoff in the instant case was consistent with the requirements of section 11(c).  The court was not required to reconsider the merits of the arbitration decision, and the modification did not affect the amount of damages awarded to either party.  Setoff only modified the form of the award to avoid the potentially unjust consequences of UBS paying Riley a substantial sum of money in a situation where there was a high likelihood that Riley would not pay UBS in return.  Finally, allowing Riley to pay just his net obligation would avoid “the absurdity of making A pay B when B owes A.” Studley v. Boylston Nat’l Bank of Boston, 229 U.S. 523, 528 (1913).

The court ordered the FINRA arbitration award be modified to a single judgment of $250,000 in favor of UBS.  It also awarded UBS prejudgment interest at the state interest rate of nine percent per annum on the sum of $250,000.00 from the date of the arbitration award until the judgment was entered in federal court, and post-judgment interest at the federal interest rate as provided for in 28 U.S.C. § 1961 from the entry of the judgment until the judgment award is paid in full.

Should you have any questions relating to FINRA, employment or arbitration issues, please do not hesitate to contact Attorney Joseph C. Maya in the firm’s Westport office in Fairfield County, Connecticut at 203-221-3100 or at

State Court Cannot Vacate a FINRA Arbitration Award FINRA to Expunge Negative Information from a Broker’s Complaint History

Thomas F. Nee, Jr. v. Financial Industry Regulatory Authority, Inc., 29 Mass.L.Rptr. 437 (2012).

In a case before Massachusetts state court, Thomas F. Nee, Jr., (“Nee”) filed a complaint against the Financial Industry Regulatory Authority (“FINRA”) seeking an order that all references to a claim lodged against him by customers of the brokerage firm where he worked, and the FINRA arbitration award in favor of these customers be expunged from the FINRA Central Registration Depository (“CRD”) database.  FINRA filed a motion to dismiss Nee’s complaint on failure to state a claim upon which the court can grant relief.  The court allowed FINRA’s motion.

Case Background

The underlying dispute in this case arose in 2003 when customers of the brokerage firm that employed Nee asserted claims against him, two other employees and the brokerage firm.  The customers alleged that their investments had been mismanaged and sought compensatory damages.  Nee and the other respondents contested the customers’ claims, requested that these claims be dismissed, and also requested that the claims be expunged from their regulatory records. The National Association of Securities Dealers (“NASD”), the predecessor of FINRA, convened an evidentiary hearing before a panel of three arbitrators.

In January 2005, the panel issued its decision, holding that Nee, one of his colleagues and the brokerage firm were jointly and severally liable to the claimants for compensatory damages in the amount of $187,628.  With respect to Nee’s other colleague, the arbitration panel recommended expungement of all references to the claim and the arbitration from his CRD, but noted that he must obtain confirmation of the expungement from a court of competent jurisdiction.  Nee took no action to challenge the arbitration award until he filed the instant complaint in July 2011.

Nee’s Formal Complaint

In his complaint, Nee asked the court to order FINRA to expunge any reference to the customers’ claim and the arbitration award from his CRD.  He complained that the arbitration award did not explain the reasons for the panel’s decision and that the arbitration panel erred in finding him liable to the claimants because, among other things, he had no direct dealings with them.

Expunging Negative Information From the CRD

FINRA Rule 2080 addresses expungement of negative information from the CRD, which is the FINRA database used by brokerage firms, investors, and regulators to assess the complaint history concerning a broker or investment advisor.  According to this rule, “persons seeking to expunge information from the CRD system arising from disputes with customers must obtain an order from a court of competent jurisdiction directing such expungement or confirming an arbitration award containing expungement relief.” The court disagreed that FINRA Rule 2080 gave it jurisdiction over FINRA and the authority to vacate the 2005 arbitration award.  Construing the rule as such would conflict with the statutory requirement that arbitration awards be confirmed unless a prompt motion to vacate is filed with the court.

Previous Massachusetts state court decisions granting expungement orders to brokers were based on actions filed under the section of Massachusetts general laws, G.L. c. 251, § 11 to confirm an arbitration award recommending expungement.  The Massachusetts statute is analogous to the Federal Arbitration Act (“FAA”) provision, 9 U.S.C. §  9; therefore, precedents in federal district court and other states have reached the same conclusion.

Vacating FINRA Arbitration Decisions

FINRA Rule 2080 does not provide claimants with a substantive right to override the finality of arbitration decisions.  Matters fully litigated in arbitration are subject to the same res judicata effect as if they had been litigated in a court of competent jurisdiction or before an administrative agency.  When arbitration affords opportunity for presentation of evidence and argument substantially similar in form and scope to judicial proceedings, the arbitration award should have the same effect as a court judgment.  Bailey v. Metropolitan Property & Liab. Ins. Co., 24 Mass.App.Ct. at 36–37, quoting from Restatement (Second) of Judgments § 84 comment c.

Nee asked the arbitration panel to find that he was not liable to the claimants and to order expungement, but the panel ruled against him on both requests. His current complaint asks the court to reconsider the expungement issue that was expressly resolved by the panel. Because that matter was “deemed arbitrable and [was] in fact arbitrated,” it cannot be collaterally attacked in a new complaint. TLC Construction Corp. v. A. Anthony Tappe & Associates, Inc., 48 Mass.App.Ct. 1, 4 (1999).

Massachusetts state law establishes a short 30-day window for filing a petition to vacate an arbitration award in order to accord such awards finality in a timely fashion,  G.L. c. 251, § 12(b).  Nee filed his complaint over six years after the arbitration award that denied his request for expungement.  Therefore, the complaint was not properly before the court.

The Decision

The court allowed FINRA’s motion to dismiss Nee’s complaint seeking an expungement order on the basis that the court has no authority to overrule the arbitration panel award denying expungement and that a motion to vacate the award was not filed in a timely fashion.

Should you have any questions relating to FINRA or arbitration issues, please do not hesitate to contact Attorney Joseph C. Maya in the firm’s Westport office in Fairfield County, Connecticut at 203-221-3100 or at

Failure to Disclose Challenge to FINRA Arbitration Award Requires Court to Scrutinize FAA Statutory Grounds for Vacatur

Laurence Stone v. Bear, Stearns & Co., Inc., et al., 2012 WL 1946938 (E.D. Pa. May 29, 2012)

In a case before the Eastern District of Pennsylvania, Laurence Stone (“Stone”), a businessman and investor, filed a petition to vacate a Financial Industry Regulatory Authority (“FINRA”) Arbitration Award issued in July 2011.  Bear, Stearns & Co, and other named respondents filed a cross-petition to confirm the FINRA arbitration award.  The court addressed several open questions of law concerning the judicial review of an arbitration award and denied the motion to vacate.

The Initial Decision

The underlying dispute in this case arose from Stone’s investments in a Bear Stearns hedge fund that held residential securities before that market collapsed in 2007.  In April 2008, Stone filed a FINRA arbitration claim seeking damages of $7.6 million based on the allegation that Bear Sterns had fraudulently induced and misled him into investing in the fund.

Pursuant to FINRA Rule 12403, FINRA generated and provided to the parties the following random lists of arbitrators: (1) a list of eight arbitrators from the FINRA non-public arbitrator roster; (2) a list of eight arbitrators from the FINRA public arbitrator roster; and (3) a list of eight public arbitrators from the FINRA chairperson roster.

An arbitrator disclosure report (ADR) was provided for each individual. Using the ADR and publicly available information, the parties ranked and/or struck the arbitrators on the lists. Stone relied on his attorneys to conduct due diligence on the arbitration panel candidates and did no independent research on the arbitrators at that time. Based on parties’ input, FINRA appointed a panel of two public arbitrators and one non-public arbitrator to hear the case.  The panel unanimously rejected all of Stone’s claims.

Stone’s Second Effort to Vacate

After the adverse decision, Stone conducted his own background investigation into each of the three arbitrators looking for evidence that would support vacatur of the judgment.  Stone discovered that one of the arbitrator’s husband was a finance professor at a well-known business school and had close ties to the securities sector.

The arbitrator had made full disclosure of her husband’s activities to FINRA; however, the ADR that FINRA provided to the parties only stated that the arbitrator’s “Family Member has a relationship with [the] University of Pennsylvania.”  Stone alleged that this summarization constituted a failure to disclose on the part of the arbitrator and petitioned to vacate the arbitration award.

Failure to disclose is not a sufficient basis for vacating a FINRA arbitration award; it is relevant only to the extent that it can be linked to one of the statutory grounds for vacatur defined by the Federal Arbitration Act (“FAA”), 9 U.S.C.  §§ 1- 16.  In his petition, Stone linked the arbitrator’s alleged failure to disclose her husband’s connections to three statutory bases for vacatur: evident partiality under FAA §10(a)(2), misbehavior under §10(a)(3), and exceeding powers under §10(a)(4).

Vacating an Arbitration Award According to FAA §10(a)(2)

Vacating an arbitration award pursuant to FAA §10(a)(2) requires “evident partiality or corruption in the arbitrators, or either of them.”  The FAA does not provide an explicit definition of “evident partiality;” therefore, courts have struggled with its interpretation.  “Evident partiality” can be defined either with respect to an “appearance of bias” standard or with respect to an “actual bias” standard.

Under the appearance of bias standard, a court may vacate an arbitration award whenever an arbitrator fails to “disclose to the parties any dealings that might create an impression of possible bias.” Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145, 149 (1968).  Under the actual bias standard, “the challenging party must show ‘a reasonable person would have to conclude that the arbitrator was partial’ to the other party to the arbitration.” Apperson v. Fleet Carrier Corp., 879 F.2d 1344, 1358 (6th Cir.1989).

The court in the instant case adopted the actual bias standard, reiterating that in order to prevail on an evident partiality challenge, Stone “require[d] proof of circumstances powerfully suggestive of bias.” Kaplan v. First Options of Chicago, Inc., 19 F.3d 1503, 1523 n. 30 (3d Cir. 1994) (citations and internal quotations omitted).  The court then concluded that Stone failed to show such circumstances.

Vacating an Arbitration Award According to FAA §10(a)(3)

Vacating an arbitration award pursuant to FAA §10(a)(3) requires the arbitrator to have engaged in “misbehavior by which the rights of any party have been prejudiced.” The Supreme Court pronounced in Hall Street Associates, L.L.C. v. Mattel, Inc. that the terms “misconduct” and “misbehavior”  in section 10 of the FAA denote “extreme arbitral conduct.”  552 U.S. 576, 586 (2008).  Federal courts may not vacate an arbitration award for “misbehavior” under FAA §10(a)(3) unless the arbitrator shows misconduct so severe that it denied the aggrieved party a fundamentally fair hearing.

Therefore, the court found in Stone’s case that there was no “misbehavior” by the arbitrator that could fairly be characterized as “extreme arbitral conduct,” especially since the record reflects no scienter on the part of the arbitrator.

Vacating an Arbitration Award According to FAA §10(a)(4)

Vacating an arbitration award pursuant to FAA §10(a)(4) requires the arbitrators to have exceeded their powers. The Third Circuit delineated the categories of conduct that may suffice for a court to vacate an award as in excess of the arbitrators’ powers: “when [an arbitrator] [1] decides an issue not submitted to him, [2] grants relief in a form that cannot be rationally derived from the parties’ agreement and submissions, or [3] issues an award that is so completely irrational that it lacks support altogether.” Sutter v. Oxford Health Plans LLC, 675 F.3d 215, 219-220 (3d Cir. 2012).

If an arbitrator makes a “good faith attempt” to comply with his or her mandate, “even serious errors of law or fact will not subject [the arbitrator’s] award to vacatur.” Id. at 220.  The court found that none of the arbitration panel exceeded their powers by presiding over Stone’s dispute with Bear Stearns.

The Final Decision

Courts afford the arbitrators’ decision extreme deference because, if a losing party could easily overturn an adverse arbitration award through judicial review, it would make little sense for parties to arbitrate a dispute in the first place.  Based on its interpretation of the three cited sections of the FAA, the court denied Stone’s petition to vacate and granted the respondents’ cross–petition to confirm the FINRA arbitration award.  Because resolving the dispute required the court to confront several open questions of law, the court denied the respondents’ request for attorneys’ fees and costs.

Should you have any questions relating to FINRA or arbitration issues, please do not hesitate to contact Attorney Joseph C. Maya in the firm’s Westport office in Fairfield County, Connecticut at 203-221-3100 or at