Posts tagged with "9 U.S.C. § 10(a)"

Court Confirms FINRA Arbitration Award for Employee in the Amount of $150,000 with Interest

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Scoble v. Blaylock & Partners, L.P., 2012 U.S. LEXIS 13706 (S.D.N.Y. 2012)

Matthew W. Scoble (“Scoble”) filed a petition against his former employer, Blaylock & Partners, L.P., subsequently known as Blaylock & Company, Inc. (“Blaylock”), to confirm an arbitration award pursuant to § 9 of the Federal Arbitration Act (“FAA”), 9 U.S.C. § 9.  Scoble claimed that Blaylock breached a contract between the parties by failing to make a severance payment of $150,000 to him after Blaylock terminated his employment without cause.

The Financial Industry Regulatory Authority (“FINRA”) appointed a panel of three arbitrators to hear the matter after both parties agreed to submit the dispute to arbitration for a decision and award.  Both parties participated in the arbitration hearing that lasted several days.  Thereafter, the Arbitration Panel issued an award to Scoble in the amount $150,000 in compensatory damages.  The responsible party, Blaylock, would be liable for post-judgment interest pursuant to FINRA’s Code of Arbitration Procedure if it did not pay the award within thirty days.

The Court found that Scoble’s petition was sufficiently supported and indicated that there was no question of material fact.  Blaylock did not move to modify, vacate or correct the arbitration award and did not submit an opposition to the petition.  The petition to confirm the arbitration award was granted and judgment was entered for Scoble in the amount of $150,000 with post-judgment interest.

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If you have any question relating to FINRA or arbitration, please do not hesitate to contact Joseph Maya and the other experienced employment law attorneys at Maya Murphy, P.C. at (203) 221-3100 or JMaya@Mayalaw.com to schedule a free initial consultation.

Federal Court Found Form U-4 and FINRA Rules to Constitute a Sufficient Basis for an Arbitration Agreement Between the Parties

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Lawrence R. Gilmore v. Scott T. Brandt, 2011 WL 5240421 (D. Colo. Oct. 31, 2011).

In a case before the United States District Court for the District of Colorado, Lawrence Gilmore (“Gilmore”) filed a motion to confirm the Financial Industry Regulatory Authority (“FINRA”) arbitration award in his favor, pursuant to the Federal Arbitration Act (“FAA”), 9 U.S.C. § 9.  Scott Brandt (“Brandt”) responded by filing a motion to vacate the FINRA award pursuant to the FAA, 9 U.S.C. § 10.  The court granted Gilmore’s motion to confirm the award, entered judgment for the award, and denied Brandt’s motion to vacate the award.

Case Details

The dispute underlying the FINRA arbitration began when Brandt, a representative of Lighthouse Capital Corporation, suggested that Gilmore invest $92,000 in Diversified Lending Group, Inc. (“DLG”).  Gilmore made the investment, which was quickly decimated.  Gilmore alleged that DLG was a Ponzi scheme and filed a Statement of Claim with FINRA.  Rather than seek a stay of arbitration, Brandt contested the issue of arbitrability by appending a statement of jurisdictional objection to his FINRA Arbitration Submission Agreement and raising jurisdictional objections throughout the arbitration proceedings.

FINRA appointed a panel of arbitrators to hear the matter, however, the arbitration panel did not directly address Brandt’s jurisdictional challenge.  In December 2010, the panel issued an arbitration award in Gilmore’s favor for compensatory damages of $106,024.68, post-judgment interest, and attorneys’ fees.

Arbitrability of a Dispute

In his motion for vacatur, Brandt argued that he never entered into an arbitration agreement with Gilmore; therefore, their dispute should not have been subjected to arbitration. The district court found that Brandt had sufficiently preserved his objection to arbitrability, and that it fell to the court to decide whether the dispute was in fact arbitrable.

Because arbitration is entirely a matter of contract, a party cannot be required to arbitrate a dispute that it has not agreed to submit to arbitration. See Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 57 (1995).  When Brandt first sought to be licensed to sell securities, he executed a Uniform Application for Securities Industry Registration or Transfer (“Form U-4”), which contained a section agreeing “to arbitrate any dispute, claim or controversy that may arise between me and my firm, or a customer, or any other person, that is required to be arbitrated under the rules, constitutions, or by-laws of [FINRA].”

The court determined that the agreement embodied in Brandt’s Form U-4 would constitute an agreement to arbitrate the dispute with Gilmore only if FINRA rules required this dispute to be arbitrated.

FINRA Rule 12200

FINRA Rule 12200 is a broad provision that generally applies to any customer dispute arising in connection with the business activities of a FINRA member.  Specifically, FINRA Rule 12200 requires that a dispute must be arbitrated under the FINRA Code of Arbitration Procedure if: (1) arbitration is required by written agreement or requested by a customer; (2) the dispute is between a customer and a FINRA member or associated person; and (3) the dispute arises in connection with the business activities of the FINRA member or associated person.

By submitting his Statement of Claim to FINRA for arbitration, Gilmore was clearly requesting arbitration of the dispute.  The district court found that Gilmore was in a customer relationship with Brandt because Brandt had induced him to invest in DLG.

The Court’s Decision

Additionally, the district court found that Gilmore’s claims related to Brandt’s recommendation of an investment in particular securities fell within the class of disputes reasonably regulated by FINRA.  Therefore, the district court determined that FINRA Rule 12200 required the dispute between Gilmore and Brandt be submitted to arbitration.  Because of this result, Brandt’s U-4 Form was determined to be his agreement to submit to arbitration of the dispute.

Because the arbitration panel had jurisdiction to decide the dispute, the award decision is entitled to deference by the federal court.  9 U.S.C. § 9-11.  Because Brandt provided no argument that satisfied the statutory grounds for vacatur of an arbitration award, 9 U.S.C. § 10(a), the court granted Gilmore’s motion for confirmation of the arbitration award of compensatory damages of $106,024.68, with interest, and attorneys’ fees.

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

Federal Court Confirms FINRA Arbitration Award that Refuses to Classify a Forgivable Loan as Employee Compensation Subject to the Wage Act

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Pauline Sheedy v. Lehman Brothers Holdings, Inc., 2011 WL 5519909 (D. Mass. Nov. 14, 2011)

In a recent Massachusetts case, Pauline Sheedy (“Sheedy”), a former managing director at Lehman Brothers, Inc., filed an action in state court seeking to vacate a Financial Industry Regulatory Authority (“FINRA”) arbitration award entered in favor of Lehman Brothers Holdings, Inc. (“LBHI”).  LBHI removed the case from state to federal court, and filed a motion to dismiss Sheedy’s complaint, confirm the FINRA arbitration award, and award “collection expenses.”  The United States District Court for the District of Massachusetts allowed LBHI’s motion.

Case Background

The underlying dispute in this case involves LBHI’s efforts to collect the unpaid principal balance, plus interest and fees, for a forgivable loan that was extended to Sheedy when she began her employment with Lehman Brothers, Inc. Sheedy alleged that her compensation package included a “one-time incentive signing bonus” of $1 million; however, Lehman’s offer letter characterized the $1 million payment a loan to be forgiven in five equal installments of $200,000 on the first through fifth anniversary of her employment start date.

The offer letter further stated that if Sheedy separated from Lehman Brothers, Inc. for “any reason” prior to full forgiveness of the loan, she would be required to repay the remaining principal balance, plus interest accrued through her separation date.  In 2008, Lehman Brothers, Inc. was forced to file for bankruptcy protection and ceased doing business in Massachusetts.

As a result, Sheedy was separated from Lehman Brothers, Inc. in September 2008, approximately two months prior to the second anniversary of her employment start date. During the marshaling of assets for the bankruptcy estate, Lehman Brothers, Inc. assigned Sheedy’s promissory note for the loan to LBHI.

The Arbitration Award

LBHI initiated FINRA arbitration proceedings against Sheedy, claiming the principal balance due of $800,000, plus interest and fees.  A single FINRA arbitrator was appointed to hear the case.  In June 2011, the arbitrator entered an award ordering Sheedy to repay LBHI the outstanding balance of $800,000, plus interest and attorneys’ fees.

After the arbitration award, Sheedy filed an action in Massachusetts state court to vacate the FINRA arbitration award pursuant to the state Uniform Arbitration Act for Commercial Disputes. Mass. Gen. Laws ch. 251, §§ 1-19.   LBHI timely removed the case from state to federal court.

Sheedy sought vacatur on two grounds: (1) that the arbitrator exceeded her authority because the award requires her to “forfeit earned compensation” in violation of the Massachusetts Weekly Wage Act (“Wage Act”), Mass. Gen. Laws ch. 149, § 148; and (2) that the award violated the Massachusetts public policy prohibiting the unlawful restraint of trade and competition.

Sheedy’s Arguments

Both the Massachusetts Uniform Arbitration Act for Commercial Disputes and the Federal Arbitration Act (“FAA”) provide statutory grounds for vacating an arbitration award where an arbitrator exceeds his authority.  Compare Mass. Gen. Laws ch. 251, §§ 12(a)(3) with 9 U.S.C. § 10(a)(3).   Sheedy argued that the FINRA arbitrator exceeded her authority by issuing an award that required Sheedy to forfeit earned compensation in violation of the Wage Act.

The Wage Act defines the requirements for payment of employee wages and commissions, and prohibits the use of “special contract…or other means” to create exemptions from these requirements.  Citing Massachusetts case law, Sheedy argued that the provisions of the Wage Act cover any payment that an employer is obligated to pay an employee; therefore, once she signed Lehman’s offer letter and Lehman was bound to make the $1 million payment to her, that payment became a non-discretionary deed subject to the Wage Act.

The court disagreed with this characterization of the payment.  The court determined that the accepted offer clearly made forgiveness of the full amount of the loan contingent upon completing five years of employment at Lehman Brothers, Inc.; therefore, the portion of the payment which remained outstanding at the time of Sheedy’s termination was never “earned” within the meaning of the Wage Act.  The court denied vacatur on the grounds that the arbitrator exceeded her authority because the award was not in violation of the Wage Act.

The Court’s Decision

An arbitration award may also be challenged by reference to a “well-defined and dominant” public policy. United Paperworkers Int’l Union v. Misco, Inc., 484 U.S. 28, 43 (1987).  Arbitrators may not award relief that offends public policy or requires a result contrary to statutory provisions.  Plymouth–Carver Reg’l Sch. Dist. v. J. Farmer & Co., 553 N.E.2d 1284 (1985).  Sheedy argued that the FINRA arbitration award should be vacated because forfeiture of the payment is an unlawful penalty to punish her if she chose to leave Lehman and freely compete in the market place.

The court determined that the structure of the forgivable loan in the offer letter was not equivalent to a non-compete agreement that restricted an employee’s ability to work in the same field within a given geographic area.  Therefore, the arbitration award did not violate the state public policy against unlawful restraint of trade and competition and the court denied vacatur on these grounds.

The court allowed LBHI’s motion to dismiss Sheedy’s complaint, confirm the arbitration decision and award collection expenses.  The court gave LBHI fourteen days from the date of its order to submit a request for attorneys’ fees and a proposed form of judgment.

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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 JMaya@Mayalaw.com.

The “Manifest Disregard of the Law” Standard for Judicial Review of a FINRA Arbitration Award Excludes Questions of Fact

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Patrick R. Murray v. Citigroup Global Markets, Inc., 2011 WL 5523680 (N.D. Ohio Nov. 14, 2011)
Case Background

In a case before the United States District Court for the Northern District of Ohio, Patrick R. Murray (“Murray”) filed motions to vacate, modify, or correct portions of a Financial Industry Regulatory (“FINRA”) arbitration award.  Citigroup Global Markets, Inc., (“CGMI”) filed a cross-motion to confirm the arbitration award and to award costs and fees incurred while seeking confirmation.   The court denied Murray’s motions to vacate, modify or correct the arbitration award and granted CGMI’s motion to confirm the arbitration award.  CGMI’s request for costs and fees was denied.

In July 2000, Murray was hired as a financial advisor in a local Smith Barney office, which was later acquired by CGMI.  As required by FINRA rules, Murray executed a Uniform Application for Securities Industry Registration or Transfer (“Form U–4”).  He also executed a promissory note for a $1,508,401 forgivable loan, and an addendum to the promissory note that extended the length of the repayment period from seven years to nine years.

The instruments provided that the loan was to be repaid in nine equal annual installments commencing on the first anniversary date of its execution and that, if Murray terminated his employment prior to full repayment, the outstanding balance would be immediately payable with interest accruing from the date of termination.  In April 2009, Murray resigned after having made eight annual payments on the loan.

The Arbitration

In May 2009, Murray sued CGMI in state court alleging that CGMI fraudulently induced him to sign the addendum to the promissory note and illegally confiscated his assets related to a capital accumulation plan account.  CGMI removed the case to federal court, where it filed a motion to compel arbitration. The court found that the arbitration clauses in the Form U-4, the promissory note, the addendum to the promissory note and a separate signed acknowledgment of the CGMI employee handbook were valid and enforceable; therefore, it granted CGMI’s motion to compel arbitration.

FINRA appointed a panel of three neutral arbitrators to hear the matter.  In April 2011, the FINRA panel awarded CGMI compensatory damages of $40,153.00 representing the unpaid balance on the promissory note and awarded Murray compensatory damages of $25,705.95.

Murray filed the instant motion to vacate, modify or correct portions of the arbitration award in federal court and CGMI filed its response and cross-motion to confirm the arbitration award.  Murray challenged the arbitration award on the following grounds: (1) the award was irrational; (2) the award did not draw its essence from the contract between the parties; (3) the award violated public policy; and (4) the award manifestly disregarded the law.

Vacating an Arbitration Award

The Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1-16, defines four limited statutory grounds on which a court may vacate an arbitration award, including instances of fraud or corruption, evident partiality, misbehavior or misconduct and acts exceeding the arbitration panel’s authority.  9 U.S.C. § 10(a).  The court found that none of Murray’s first three grounds for vacatur satisfied these statutory requirements.

Several federal circuits, including the Sixth Circuit, have held that an arbitration award can be vacated “if it displays ‘manifest disregard of the law.’ ” Jacada, Ltd. v. Int’l Mktg. Strategies, Inc., 401 F.3d 701, 712 (6th Cir. 2005), overruled on other grounds, (citing Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Jaros, 70 F.3d 718, 421 (6th Cir. 1995)).

The Court’s Decision

However, the court found that Murray’s assertions of manifest disregard of the law were based on questions of fact rather than questions of law.  A federal court does not have the authority to re-litigate facts when reviewing an arbitration award to determine whether the arbitrators manifestly disregarded the law.   See Bd. Of County Commis of Lawrence County, Ohio v. L. Robert Kimball & Assocs., 860 F.2d 683, 688 (6th Cir.1988).  Therefore, the court denied Murray’s motion to vacate the arbitration award.

The court additionally determined that, although Murray was incorrect on the merits of his case, he did not engage in the degree of bad faith or vexatious behavior that would compel the court to award CGMI fees and costs for the instant litigation.  Therefore, the court confirmed the arbitration award in its entirety without awarding CGMI additional fees and costs.

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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 JMaya@Mayalaw.com.

Expunging a Dirty U-5—Be Careful What You Ask For!

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Expunging a Dirty U-5

The view from the impending “fiscal cliff” takes in much of Fairfield County’s “Gold Coast”—Greenwich, Stamford, Darien, and Westport.  We at Maya Murphy, P.C. represent many residents employed in the financial industry, both within and without the State of Connecticut.  Some of their financial employers may be considering reductions in personnel depending upon the results of the upcoming Presidential election, Congressional action (or inaction) concerning “taxmaggedon” and “sequestration,” and their own Q4 and year-end results.  If a financial firm retrenches, there will be a dirty U-5 on “the street.”

We are often asked about the possibility of “scrubbing” a U-5 or expunging it altogether.  The current economic climate and new proposed rules from FINRA warrant a warning that usually accompanies our advice.

The current FINRA Customer and Industry Codes do not afford “unnamed persons,” i.e., the subject of allegations but not named parties to the underlying arbitration, to seek expunging of allegations reported to the Central Registration Depository (“CRD”) on Form U-5 (and available to the public through such resources as “Broker Check”).  To rectify that situation (recognizing that a dirty U-5 impacts one’s livelihood), FINRA has proposed In re expungement rules seeking to balance the respective interests of the registered professional and the investing public.  Public comment on the proposed rules was closed on May 21, 2012.

The purpose of this post is not to critique the new rules that, while not problem-free, at least address the issue of incorrect allegations remaining on CRD records in the absence of an evidentiary hearing to determine the accuracy of those allegations.  The purpose of this post is to point out that the new rules, in whatever final form they may take, can be a cure worse than the disease.

The Original Language

There is no denying the injustice of having a registered representative’s U-5 amended to reflect a customer complaint without the representative being named as a respondent in subsequent arbitration. The net effect is to have the representative tried in absentia without the ability to present evidence or cross-examine witnesses by way of defense.  The proposed In re expungement rules, however, may not be all they are cracked up to be.  A recent FINRA arbitration decision points up the problem.

In the Matter of the FINRA Arbitration between Eduard Van Raay, Claimant v. Raymond James Financial Services, Inc., et al., Respondents (FINRA 11-04544, July 16, 2012), the underlying claim was settled and an arbitrator was appointed solely for the purpose of considering a request for U-5 expunging.  The original offending, terminating language was: “Violation of firm policy. Failure to disclose an outside business activity (personal representative relationship with a client).”  After the arbitration, the recommendation was for the language to be amended to read: “Permitted to resign. Advisor chose to continue unapproved outside business activity.”  This was hardly an improvement to that which he sought to have expunged.

The Post-Arbitration Language

The original language was cryptic, susceptible to differing interpretations, and perhaps easily explained.  The post-arbitration language, however, was clear, concise, damaging, and most importantly, the product of FINRA arbitration.  Instead of vague allegations of a personal relationship with a client, the representative’s CRD will now be saddled with a finding that he chose to continue an unapproved outside business activity.  The takeaway is that the outcome would not survive a rigorous pre-arbitration risk/reward analysis.  Arbitrations, as with lawsuits, are a lot like wars—they are easier to start than to stop.  They often bring with them unintended consequences.

The new In re expungement rules present registered representatives with an additional option that was previously unavailable.  Assuming their future adoption, that does not mean that every offending CRD entry should be the subject of a FINRA arbitration.

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Whether, and when, to pursue expunging is a decision that should be discussed thoroughly with a seasoned litigator familiar with the FINRA Rules and decisions.  We, here, in Maya Murphy’s Westport, Connecticut office stand ready to assist in that regard.  Please call at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.

Colorado Court Confirms FINRA Arbitration Award Denying Relief for Service Member’s USERRA Claims

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Michael H. Ohlfs v. Charles Schwab & Co., Inc., 2012 WL 202776 (D. Colo. Jan. 24, 2012)

In a case before the Colorado federal district court, Michael Ohlfs (“Ohlfs”), an investment professional employed by Charles Schwab & Co., Inc., (“Charles Schwab”), filed a motion to vacate a Financial Industry Regulatory Authority (“FINRA”) arbitration award decided in favor of Charles Schwab in August 2011.  Charles Schwab petitioned the court to confirm the arbitration award and enter judgment pursuant to the Federal Arbitration Act (“FAA”), 9 U.S.C. § 9.  The court dismissed Ohlfs claims with prejudice and entered judgment for Charles Schwab.

Case Background

The underlying dispute in this case arose when Ohlfs returned from post 9/11 active duty military service to a Grade 56 Investment Representative position with Charles Schwab, which was lower than the Grade 57 Senior Investment Specialist he held prior to his military service.  The Uniformed Services Employment and Reemployment Rights Act, 38 U.S.C. § 4301, et seq., (“USERRA”) prohibits employment discrimination against military personnel deployed for active duty.  Ohlfs initially filed his USERRA claims in federal district court; however, the court ordered the parties to FINRA arbitration pursuant to the agreement that Ohlfs executed when he registered as a securities broker.

FINRA appointed an arbitration panel of three arbitrators to hear the matter after Ohlfs executed a FINRA Arbitration Submission Agreement, which included an agreement to be bound by the award.  Ohlfs’s claims against Charles Schwab included allegations that his re-employment in 2003 and 2004 were both in violation of USERRA § 4312, that he was discriminated against by failure to promote in violation of USERRA § 4311, and that he was discriminated against for filing a Department of Labor complaint. After ten days of hearings, the FINRA arbitration panel denied all Ohlfs’s statutory claims and all relief requested with prejudice.

Ohlfs filed a motion in federal court to vacate the FINRA arbitration award on several grounds, including unfair treatment by the FINRA arbitration panel, violation of the well-established USERRA public policy, and manifest disregard of the law.

The Allegations

To support his allegation of evident partiality by the arbitration panel, Ohlfs cited nine deficiencies in the arbitration process. The court determined that these allegations, viewed both separately and cumulatively, were insufficient to satisfy Ohlfs’s burden of demonstrating that the panel was unfair to him or partial to Charles Schwab.

One of the key allegations was that two arbitrators were biased toward Charles Schwab because of their connections to the company.  Two members of the arbitration disclosed their connections to Charles Schwab prior to hearing and deciding Ohlfs’s claims.  Because he had knowledge of facts suggesting arbitrator bias or partiality but failed to object to their participation until after the entry of the award, the court determined that Ohlfs waived his right to claim arbitrator bias on these grounds.

Another key allegation was that the arbitration panel refused to consider, or otherwise disregarded evidence, that Ohlfs presented regarding having gone from a Grade 57 Senior Investment Specialist to a Grade 56 Investment Representative following his post–9/11 military service.  Without supporting transcripts from the arbitration hearing, the court determined it had no basis on which to find unfairness or partiality.

Vacating an Arbitration Award on Statutory Grounds

Federal courts may vacate an arbitration award under four narrowly defined statutory grounds, 9 U.S.C. § 10(a), including “evident partiality” on the part of the arbitrators.  An arbitration award may also be vacated for a limited number of judicially created reasons, such as violations of public policy, manifest disregard of the law, and denial of a fundamentally fair hearing. Sheldon v. Vermonty, 269 F.3d 1202, 1206 (10th Cir. 2001).   Errors in the arbitration panel’s findings of fact, interpretation of the law, or application of the law do not justify vacating an award unless such errors correlate to a manifest disregard for the law. See Hollern v. Wachovia Sec., Inc., 458 F.3d 1169, 1172 (10th Cir. 2006).

Vacating an Arbitration Award on Non-Statutory Grounds 

Courts have limited authority to vacate an arbitration award for non-statutory reasons.  An arbitration award may be set aside on public policy grounds if: (1) the award creates an explicit conflict with other laws and legal precedents as opposed to general considerations of supposed public interests; and (2) the violation of such public policy is clearly shown. United Paperworkers Int’l Union, AFL–CIO v. Misco, Inc., 484 U.S. 29, 43 (1987).

Ohlfs argued that the FINRA arbitration award in favor of his employer clearly violated USERRA’s well-defined public policy of protecting members of the armed forces from employment discrimination because the award absolved the employer of any wrongdoing without determining the merits of Ohlfs’s claims.  The court determined that this argument was an attempt to attack the arbitration award on the basis of the arbitration panel’s failure to issue a reasoned decision.  FINRA Rule 1304(g) provides for an “explained decision” that sets forth the general reasons for the arbitration award.

However, such a decision is provided only in the event that the parties jointly request such a decision twenty days prior to the first scheduled hearing.  FINRA Rule 13514(d).  An explained decision was not required in this case under FINRA’s rules because the parties did not jointly request such a decision.  Therefore, Ohlfs failed to carry his burden of proof on the matter.

Vacating an Arbitration Award Based on Disregard of the Law

In order to vacate an arbitration award based on the arbitrators’ manifest disregard of the law, “the record [must] show the arbitrator[s] knew the law and explicitly disregarded it.” Dominion Video Satellite, Inc. v. Echostar Satellite, L.L.C., 430 F.3d 1269, 1275 (10th Cir. 2005).  The court determined that, in the absence of an explanation for the award, Ohlfs cannot demonstrate that the panel manifestly disregarded the law under USERRA based on the fact that it found for Charles Schwab on his claims. The award itself provided no basis to find an “explicit” disregard of the law. Charles Schwab presented substantial evidence in its defense during the arbitration, and the court cannot second guess the panel’s factual findings.

The court denied Ohlfs’s motion for vacatur and entered judgment in favor of Charles Schwab as set forth in the FINRA arbitration award dated August 9, 2011.

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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 JMaya@Mayalaw.com.

California Court Does Not Compel FINRA Arbitration of Statutory Discrimination Claims

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John Simmons v. Morgan Stanley Smith Barney, LLC, et al, 2012 WL 1900110 (S.D. Cal. May 24, 2012)
Case Background

In January 2008, John Simmons (“Simmons”) was offered employment by Morgan Stanley Smith Barney, LLC (“Morgan Stanley”) as the Executive Director and District Manager in the Global Wealth Management Department.  The offer letter stated that Simmons would be entitled to a $1 million forgivable loan, relocation benefits and a stock award.  Simmons accepted the employment offer by signing the Morgan Stanley offer letter. In February 2008, Simmons and Morgan Stanley entered into a bonus agreement and a promissory note that each contained a clause agreeing to arbitrate disputes related to these instruments in accordance with the Financial Industry Regulatory Authority (“FINRA”) rules.

During March in 2008, Simmons signed a Uniform Application for Securities Industry Registration or Transfer (“Form U-4”) which also contained an arbitration clause citing FINRA rules.  In May 2009, Simmons and Morgan Stanley entered into a second bonus agreement and a second promissory note, each of which contained the same arbitration clauses as the previous instruments.  During March in 2011, Simmons’s employment with Morgan Stanley was terminated. In September 2011, Morgan Stanley initiated a Statement of Claim with FINRA seeking to arbitrate its claim against Simmons for violation of the bonus agreements and promissory notes.

Simmons’ Allegations

In December 2011, Simmons initiated an action in California state court asserting statutory claims for discrimination pursuant to Cal. Govt.Code section 12940(a) and for violation of 42 U.S.C. § 2000e (“Title VII”).  Simmons claimed that Morgan Stanley employees made disparaging remarks to him regarding his religious beliefs because he was a member of the Church of Jesus Christ of Latter Day Saints.

Simmons also alleged that, despite his high level of performance, he was not paid in accordance with the terms of his employment agreement.  Finally, the complaint also alleged that, in February 2011, shortly before his termination, Simmons informed his supervisor that he was aware of the fact that he was paid less than other co-workers who performed similar duties but who did not share his religious beliefs.

Simmons’s complaint stated that these discrimination claims were “inextricably related” to Morgan Stanley’s allegations that he violated the two promissory notes because he was “illegally terminated before he was able to fully perform his obligations thereunder.” In addition to the two statutory discrimination claims, Simmons’s complaint also asserted non-statutory claims of wrongful termination in violation of public policy, fraud, and breach of contract.

Enforcing an Arbitration Agreement

Morgan Stanley removed the matter to the United States District Court for the Southern District of California and filed motions to compel arbitration and stay litigation.  Simmons filed a motion for a preliminary injunction asserting that he should not be compelled to arbitrate the claims that Morgan Stanley filed with FINRA in September 2011. Simmons presented five distinct legal arguments for why he should not be compelled to arbitrate with Morgan Stanley.  The federal court dedicated the most discussion to Simmons’s argument that the arbitration agreements which he allegedly entered into did not encompass his statutory discrimination claims.

The Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1-16, embodies both a fundamental principle that arbitration is based in contract and a federal policy favoring arbitration.  A written arbitration agreement “shall be valid, irrevocable and enforceable,” unless the arbitration agreement can be invalidated by a generally applicable contract defense, such as fraud, duress and unconscionability.  9 U.S.C. §2.

Therefore, federal courts deciding motions to compel or stay arbitration examine (1) whether a valid arbitration agreement exists; and (2) whether the agreement encompasses the dispute at issue.  Cox v. Ocean View Hotel Corp., 533 F.3d 1114, 1119 (9th Cir. 2008).  Courts apply state contract law to determine whether an arbitration agreement exists and whether such agreement is enforceable.  Only if both findings are affirmative can a federal court enforce an arbitration agreement in accordance with its terms.

Statutory Remedies

Causes of action premised on statutory rights are just as subject to contractual arbitration agreements as non-statutory common law claims.  However, Congress may pass federal legislation that removes certain claims from the purview of the FAA.  Precedent within the Ninth Circuit is that “a Title VII plaintiff may only be forced to forego her statutory remedies and arbitrate her claims if she has knowingly agreed to submit such disputes to arbitration.” Renteria v. Prudential Ins. Co. of Am., 113 F.3d 1104, 1105-06 (9th Cir. 1997)(citing Prudential Ins. Co. of America v. Lai, 42 F.3d 1299, 1305 (9th Cir.1994)).

Both the public policy of protecting victims of sexual discrimination and the Congressional intent motivating Title VII legislation required that there be a knowing waiver of statutory remedies for civil rights violations, including employment discrimination based on gender.  Id. at 1108.  An earlier case within the Ninth Circuit held that parallel state anti-discrimination laws were made part of the Title VII enforcement scheme.  Lai, 42 F.3d at 1301 n.1.  Because the agreements to arbitrate in the February 2008 and May 2009 promissory notes and bonus agreements did not explicitly state that Simmons waived his right to a jury trial on claims of statutory employment discrimination, the court  refused to find that Simmons knowingly waived his statutory remedies on these claims.

Therefore, the court concluded that these arbitration provisions did not encompass Simmons’s first claim for violation of Cal. Govt. Code section 12940(a) and his second claim for Title VII violation.  However, the court determined that Simmons’s remaining non-statutory claims were encompassed by the existing arbitration agreements.

Arbitration Provisions

An arbitration provision may be challenged “upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2.   Under California law, a contract clause is unenforceable only if it is both procedurally and substantively unconscionable. Davis v. O’Melveny & Myers, 485 F.3d 1066, 1072 (9th Cir.2007)   Procedural unconscionability analysis focuses on the oppression or surprise of a contract clause.  The court found that the arbitration provisions at issue contain a minimal element of procedural unconscionability because they were standard FINRA agreements and clearly visible.  Substantive unconscionability considers the effect of the contract clause, specifically whether the clause is so one-sided as to shock the conscience.  Id. at 1075.

The court found that the arbitration provisions were substantively unconscionable because the rules of FINRA may require Simmons to pay hearing session fees in excess of what he would pay in court.  However, the single substantively unconscionable provision can be severed from the arbitration agreements; therefore, the court held that the arbitration agreements in the February 2008 and May 2009 promissory note and bonus agreements were enforceable once the unconscionable provision was severed.

The Court’s Decision

The court granted Morgan Stanley’s motion to compel arbitration on Simmons’s non-statutory claims pursuant to the arbitration provisions set out in the February 2008 and May 2009 promissory note and bonus agreements.  Likewise, pursuant to 9 U.S.C. § 3, the court granted Morgan Stanley’s motion to stay litigation on these claims pending arbitration.  Because the court found that valid arbitration provisions exist, it denied Simmons’s motion for a preliminary injunction.

With respect to Simmons’s first two claims of employment discrimination under California and federal statutes, the court denied Morgan Stanley’s motions to compel arbitration and stay litigation.  Simmons was permitted to litigate these claims in federal district court.

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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 JMaya@Mayalaw.com.

Federal Appellate Court Affirms Lower Court Ruling Not to Vacate FINRA Award

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Javier Aviles v. Charles Schwab & Co., Inc., 435 Fed.Appx. 824 (11th Cir. 2011) (per curiam)

In a case before the United States Court of Appeals, Eleventh Circuit, Javier Aviles (“Aviles”) appealed a decision by the United States District Court for the Southern District of Florida that confirmed a Financial Industry Regulatory Authority (“FINRA”) arbitration award of $1.4 million in favor of Charles Schwab & Co., Inc. (“Charles Schwab”).   The appellate court affirmed the district court ruling.

Case Background

In 2007, Aviles left his employment with Charles Schwab to join Banc of America Investment Services, Inc. (“BAI”).  Later that year, Charles Schwab came to believe that Aviles was improperly soliciting its clients.  Schwab filed a Statement of Claims with FINRA against both Aviles and BAI, alleging multiple claims arising from Aviles’s resignation from Charles Schwab and his subsequent employment with BAI

These claims included: breach of contract, misappropriation and misuse of trade secrets, breach of duty of loyalty, breach of fiduciary duty, tortious interference with contractual and business relations and unfair competition.  BAI was later dismissed from the arbitration proceedings.  In April 2009, the arbitration panel entered an award finding Aviles liable to Charles Schwab for $1.4 million.

The Court’s Decision

Aviles filed a timely motion to vacate the arbitration award in state court, and Charles Schwab removed to federal court.  After removal, Aviles filed a motion to amend in order to add a new claim of arbitrator bias.  The district court found that the grounds for vacating the award set out in the original motion were without merit.  Additionally, the district court found that the amended motion was not filed in a timely manner and did not relate back to the original motion.  Finally, the district court found that the claim of arbitrator bias contained in the proposed amended motion also failed to warrant vacatur of the arbitration award.

Appellate courts do not use a different legal standard to review arbitration related judicial decisions:  district court findings of fact are reviewed for clear error and district court legal conclusions are reviewed de novo.  The Federal Arbitration Act (“FAA”), 9 U.S.C. § 10(a), provides limited statutory grounds for vacating an arbitration award, including where arbitrators refused to hear evidence pertinent and material to the controversy, or where there was “evident partiality” or corruption in the arbitrator.

Seeking Vacatur by Challenging an Evidentiary Decision

When a party seeks vacatur by challenging an evidentiary decision of the arbitration panel, he must show that the arbitrator’s refusal to hear pertinent and material evidence prejudiced the rights of the parties to the arbitration’s proceedings.  Rosensweig v. Morgan Stanley & Co., 494 F.3d 1328, 1333 (11th Cir. 2007).

Aviles argued that the arbitrators refused to hear evidence material to the controversy because the arbitration panel excluded unsworn declarations completed by former Charles Schwab clients who had followed Aviles to BAI.  Aviles asserted that these were material to the controversy because they demonstrated that the clients decided to transfer their accounts to BAI because it was in their personal best interest to maintain the relationship with Aviles.

The chair of the arbitration panel stated that he would not allow documents that were not sworn or authenticated; however, he would sign subpoenas to allow Aviles to present this evidence in an acceptable manner and would also permit telephonic testimony if someone was out-of-town or otherwise unable to attend the hearings.

The appellate court determined that the exclusion of the unsworn declarations did not prejudice Aviles’s right to present all evidence pertinent and material to the controversy.  The chair of the arbitration panel offered Aviles alternate avenues to submit this evidence, and Aviles decided not to avail himself of those options.  Therefore, the district court did not err in its ruling that the arbitration award could not be vacated on the grounds that arbitrators refused to hear evidence.

Seeking Vacatur by Challenging Impartiality

When a party seeks vacatur by challenging the impartiality of the arbitration panel, he must show that the alleged partiality is “direct, definite and capable of demonstration rather than remote, uncertain and speculative.” Gianelli Money Purchase Plan & Trust v. ADM Investor Servs., 146 F.3d 1309, 1312 (11th Cir. 1998).

Aviles presented an affidavit from a FINRA arbitrator not serving on his panel indicating that the chair of the arbitration panel made statements illustrating a clear bias against him.  Specifically, the affidavit alleges that the chair stated that when a court enters a preliminary injunction or a temporary restraining order against a financial advisor prior to arbitration, the arbitrator’s only remaining task is to quantify and award damages.  Aviles had been served with a preliminary injunction prior to the arbitration proceedings.

The court found that the statements in the affidavit did not indicate that the chair of the arbitration panel was biased against Aviles. According to the court, the affidavit at most illustrated that the chair of the arbitration panel had an incorrect understanding of a legal issue, which is not enough to demonstrate bias or hostility toward a party.  Therefore, the district court did not err in its ruling that the arbitration award could not be vacated on grounds of arbitrator bias.

Because the district court did not err in ruling that there were insufficient grounds to vacate the arbitration award on the basis of refusal to hear evidence and arbitrator bias, the appellate court affirmed the district court ruling denying Aviles’s motion to vacate the arbitration award.

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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 JMaya@Mayalaw.com.

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

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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

In this case, the underlying dispute 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.  Over ninety-percent of the Zarecors original investment in the RMK funds was lost.

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.

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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 JMaya@Mayalaw.com.

Court Denies Motion to Vacate and Confirms FINRA Arbitration Award for Securities Brokerage of over $150,000 plus Interest

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Freedom Investors Corporation v. Kahal Shomrei Hadath and Sydney V. Pinter, 2012 WL 383944 (S.D.N.Y. Feb. 7, 2012)

Freedom Investors Corp. (“Freedom”), a securities broker-dealer and a member firm of the Financial Industry Regulatory Authority (“FINRA”), filed a petition to confirm an arbitration award pursuant to § 9 of the Federal Arbitration Act (“FAA”), 9 U.S.C. § 9.  Sydney V. Pinter (“Pinter”), who controlled Kahal Shomrei Hadath (“Kahal”), a not-for-profit religious entity, filed a cross motion to vacate the arbitration award alleging misrepresentations by Freedom’s agent and improper connections between Freedom’s Chief Executive Officer and the FINRA arbitration panel.

Case Dispute

The underlying dispute in this case arose from a brokerage account that Kahal maintained with Freedom.  In July 2008, Kahal and Pinter used margin credit to purchase preferred stock; however, the stock price dropped dramatically and prompted a margin call by Freedom’s clearing house. When Kahal and Pinter failed to deposit additional funds in the account, the clearing house liquidated the account’s remaining holdings and Freedom paid the remaining margin debt of $149,222.85. Freedom then sought to recover this amount from Kahal and Pinter.

FINRA appointed a panel of three arbitrators to hear the matter after both parties agreed to submit the dispute to arbitration for a decision and award.  On March 22, 2011, the FINRA panel entered an award in favor of Freedom, finding Kahal and Pinter jointly and severally liable for $149,223 in damages, plus eight-percent prejudgment interest, and $5,000 in sanctions for failure to produce documents during the arbitration’s discovery phase.

By August 25, 2011, Kahal and Pinter had failed to comply with the terms of the arbitration award; therefore, Freedom filed this petition for award confirmation in federal district court.  On January 4, 2012, the court received from Pinter an undated “Motion for Oral Arguments to Set Aside Arbitration Award,” which the court construed as opposition to Freedom’s petition and a cross-motion to vacate the arbitration award.  Freedom opposed the motion to vacate.

Dismissal Motion to Vacate on Two Grounds

The court dismissed Pinter’s motion to vacate on two grounds.  First, the motion to vacate was untimely.  “Notice of a motion to vacate, modify, or correct an award must be served upon the adverse party or his attorney within three months after the award is filed or delivered.” 9 U.S.C. § 12. The arbitration award was issued March 11, 2011, but the motion to vacate was not submitted until January 4, 2012, approximately ten months later.  Second, the Federal Arbitration Act (“FAA”), 9 U.S.C. § 10(a), provides four narrowly delineated circumstances in which a federal district court can vacate an arbitration award:

(1) where the award was procured by corruption, fraud or undue means;

(2) where there was evident partiality or corruption in the arbitrators, or either of them;

(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or

(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

The issue with Pinter’s Allegations

Pinter’s allegations raised no credible argument of evident partiality on the part of the arbitration panel and, therefore, he failed to carry his significant burden of showing that the arbitration panel acted in manifest disregard of the law.

The court determined that Freedom sufficiently supported its petition and demonstrated that there is no question of material fact. Therefore, the court granted Freedom’s motion to confirm the arbitration award against the defendants and denied Pinter’s petition to vacate the arbitral award.  Final judgment for Freedom was in the sum of $183,724.18 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 JMaya@Mayalaw.com.