Posts tagged with "9 U.S.C. § 10(a)(3)"

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

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.

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.

Fourth Circuit Confirms District Court Decision that FINRA Arbitration Panel is Not Bound to Apply State Procedural Law

Wachovia Securities, LLC, v. Frank J. Brand, et al, 671 F.3d 472 (4th Cir. 2012)

In a case before the Fourth Circuit, Wachovia Securities, LLC (“Wachovia”) appealed a decision by the U.S. District Court for the District of South Carolina in which the court denied Wachovia’s motion to vacate a Financial Industry Regulatory Authority (“FINRA”) arbitration award that denied the firm’s claims in the arbitration of an employment dispute with Frank Brand and three other former employees (“the former employees”).  The Fourth Circuit affirmed the district court’s ruling that denied vacatur and confirmed the arbitration award.

Case Background

The underlying dispute in this case began when Wachovia filed a Statement of Claim with FINRA against four former employees alleging that the former employees had violated contractual and common law obligations.  The former employees were employed as individual financial advisors by A.G. Edwards & Sons, Inc. until its merger with Wachovia in October 2007.  After the merger, the former employees were employed by Wachovia until their termination in June 2008.

All four former employees later found employment with a competing brokerage firm in the same geographic area.  Wachovia alleged that the former employees had conspired with the competing brokerage firm to open an office in the area, that they had misappropriated confidential and proprietary information, and that they were soliciting current Wachovia clients and employees to join the new firm.

Arbitration

In its Statement of Claims, Wachovia requested a permanent injunction, the return of records and attorneys’ fees associated with the arbitration.  In their answer, the former employees described the dispute as “meritless” and requested the arbitration panel award them attorneys’ fees and costs incurred in defending themselves.  FINRA appointed a panel of three arbitrators to hear the matter, and requested that the parties submit proposals regarding requested attorneys’ fees and other costs during the final two days of hearings.  Wachovia was unprepared to submit its brief on the penultimate date of hearings and requested a one-day extension, which the arbitration panel granted.

On the last day of arbitration hearings, both parties submitted their briefs, each of which contained new arguments.  Wachovia argued that, under the South Carolina Arbitration Act, neither party was entitled to attorneys’ fees.   The former employees argued that they were entitled to attorneys’ fees under the  Frivolous Civil Proceeding Act (“FCPA”), codified at S.C. Code Ann. § 15-36-10.  In South Carolina, the FCPA provides both a mechanism for litigants to seek sanctions against attorneys filing frivolous claims and safeguards for attorneys facing such sanctions. These safeguards include a notice period affording the accused 30 days to respond to a request for FCPA sanctions and a separate hearing on sanctions after the verdict.

Wachovia expressed its concern that it was not being afforded either of these procedural safeguards. The arbitration panel neither held additional hearings nor requested additional briefings.  On December 18, 2009, the FINRA panel entered an award in favor of the former employees, awarding them $1.1 million for attorneys’ fees and costs under the FCPA only and denying all of Wachovia’s claims.

Review of the Arbitration Award

Following arbitration, the former employees filed a motion in federal court to confirm the arbitration award pursuant to the Federal Arbitration Act (“FAA”), 9 U.S.C. § 9.  Wachovia filed its own motion to vacate the portion of the arbitration award granting relief to the former employees.  Wachovia contended that the arbitration panel exceeded its authority and manifestly disregarded the law in violation of the FAA, 9 U.S.C. § 10(a)(4) and that the arbitration panel also deprived Wachovia of a fundamentally fair hearing in violation of FAA, 9 U.S.C. § 10(a)(3).

The district court considered these claims in turn and rejected both claims.  Wachovia appealed the district court’s holding that the arbitrators neither deprived Wachovia a fundamentally fair hearing nor manifestly disregarded the law.

In general, judicial review of an arbitration award in federal court is severely circumscribed, 9 U.S.C. § 9-11.  When the district court denies vacatur of an arbitration award, the appellate court reviews the district court’s legal findings de novo and reviews the district court’s factual findings for clear error.

Misconduct and Misbehavior

Vacating an arbitration award on the basis of FAA §10(a)(3) requires the court to find “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.”  “Misconduct” and “misbehavior” are different from “mistake” in this context.  The first two imply that the arbitrators intentionally contradicted the law.  Mistakes lack the requisite intentionality to fall within FAA § 10(a)(3).

Wachovia did not allege that the FINRA arbitration panel acted with an intention to contradict the law, only that the arbitrators made a mistake in handling the former employees’ FCPA claim. Because Wachovia did not allege intentional misconduct, § 10(a)(3) cannot be grounds for vacatur.  Furthermore, the appellate court did not find that the arbitration panel made a mistake in not following the procedural safeguards of the FCPA.  A U.S. Supreme Court case held that the FAA pre-empted state law.  See AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011).

Although parties may consent to particular arbitration procedures in advance, it is inconsistent with the FAA for one party to demand particular state law procedural requirements after the fact.  Id. at 1750.  Therefore, the FINRA arbitration panel was not compelled to follow FCPA procedural mandates and their failure to do so does not satisfy the requirements of § 10(a)(3).

Manifest Disregard 

The Fourth Circuit adopted the position that manifest disregard continues to exist either as an independent grounds for judicial review of arbitration awards or as a judicial gloss on arbitration awards.  A court may vacate an arbitration award for manifest disregard of the law if: (1) the applicable legal principle is clearly defined and not subject to reasonable debate; and (2) the arbitrator refused to heed that legal principle.  Long John Silver’s Rests., Inc. v. Cole, 514 F.3d 345, 349 (4th Cir. 2008).  In this case, the appellate court found that whether the Panel erred by not applying the FCPA’s procedural requirements was a question that was itself not clearly defined and was certainly subject to debate. Therefore, the court held that the arbitrators did not manifestly disregard the law when they awarded the former employees $1.1 million in attorneys’ fees and costs under the FCPA.

The appellate court affirmed the decision of the district court denying Wachovia vacatur of the FINRA arbitration award.

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 Does Not Vacate FINRA Arbitration Award Denying ERISA Claims

Stephen P. Finkelstein v. UBS Global Asset Management (US) Inc. and UBS Securities LLC, 2011 WL 3586437 (S.D.N.Y. Aug 9, 2011)

In a case before the Southern District of  New York, Stephen P. Finkelstein (“Finkelstein”) filed a petition to vacate part of a Financial Industry Regulatory Authority (“FINRA”) Arbitration Award dated October 20, 2010, pursuant to the Federal Arbitration Act (“FAA”), 9 U.S.C. § 10. UBS Global Asset Management (US), Inc., and UBS Securities LLC, (collectively “UBS”) filed a cross-motion to confirm the arbitration award pursuant to the FAA, 9 U.S.C. § 9.  The court denied Finkelstein’s motion to vacate and granted UBS’s motion to confirm the arbitration award in their favor.

Case Background

The underlying dispute is based on UBS’s denial of Finkelstein’s claim for a special payment under the UBS severance pay plan, which is governed by the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1132.  Finkelstein began his employment with UBS in 2002.  In April 2006, he was internally transferred to a hedge fund as a portfolio manager responsible for a variety of subprime securities.  Within a year of his transfer, the hedge fund suspended his trading authority due to losses of over $300 million in his positions.  A few months later, UBS closed the hedge fund based on its overall losses; hedge fund employees were either offered new jobs or terminated.  Finkelstein was terminated without cause in August 2007.

The UBS separation program contained a provision offering a special payment to employees who were terminated on or after October 1, but before the date on which bonuses are usually paid.  As part of the closure of the hedge fund, UBS adopted a supplemental program that amended the special payment provision to provide eligible employees with a special payment at the discretion of the hedge fund’s management, even though these employees were not terminated on or after October 1.

The written eligibility requirements of the supplemental program specified dates of employment and involuntary termination; the hedge fund’s management exercised its discretion to define the formula for calculating the amount of the special payment and to exclude employees who were responsible for substantial losses at the time of the hedge fund’s closure.  Therefore, despite having satisfied the written eligibility requirements of supplemental program, Finkelstein was offered a separation package that did not include a special payment.

Finkelstein’s Claims

Pursuant to the separation program’s grievance procedures, Finkelstein submitted a claim for benefits demanding a special payment that was equivalent to 25-percent of his 2006 bonus, which was in accordance with the formula determined by the hedge fund management.  Although he acknowledged the losses on his 2007 trading book, Finkelstein attempted to explain that greater than half the losing positions were purchased by his partner without his consent and that the remainder of the losses could be recovered over time.

The severance committee denied Finkelstein’s claim, stating that the hedge fund’s management had appropriately exercised its discretion in denying him a special payment.  Finkelstein requested a review of the severance committee’s denial of his claim, and was again denied his demand for a special payment.

In December 2008, Finkelstein filed a Statement of Claim with FINRA seeking an award of the special payment.  FINRA appointed a panel of three arbitrators to hear the matter and, in October 2010, entered an award in favor of UBS without any explanation or rationale.

Finkelstein filed a petition in federal district court to vacate the arbitration award on the following three grounds: (a) the arbitration panel decision was in “manifest disregard” of ERISA, 29 U.S.C. § 1145; (b) the arbitration award was procured through the fraudulent concealment of material information by UBS; and (c) the arbitrators refused to hear evidence pertinent and material to the controversy.

Basis of Manifest Disregard

Vacating an arbitration award on the basis of manifest disregard of the law requires the challenging party to demonstrate that the arbitrators clearly defied the law either by rejecting precedent or pronouncing a decision that strains credulity.  See Stolt–Nielsen SA v. AnimalFeeds Int’l Corp., 548 F.3d 85, 92–93 (2d Cir.2008), reversed on other grounds, 130 S.Ct. 1758 (2010).

However, even if the arbitrators do not explain the reasons for their decision, the court will uphold the arbitration award “if a justifiable ground for the decision can be inferred from the record.”  Id. at 97. In his petition, Finkelstein contended that the FINRA arbitration panel manifestly disregarded ERISA, 29 U.S.C. § 1145, on four different grounds.  The most significant basis for his contention was that the arbitration panel should have rejected UBS’s unwritten, oral modification of the ERISA severance pay plan to exclude employees responsible for substantial losses from special payment eligibility.  Both the ERISA statute, 29 U.S.C § 1102(a)(1), and case law within the Second Circuit require that all amendments to employee benefit plans be in writing.

Court’s Ruling on Manifest Disregard

However, the written documents of the hedge fund supplemental program expressly conferred the hedge fund management with certain discretionary powers; therefore, the court determined that it was not erroneous for the arbitration panel to conclude that the unwritten rule excluding employees who incurred substantially losses was a permissible exercise of this discretionary authority, rather than an oral modification of the supplemental program.  Because the ERISA provision on oral modifications cited by Finkelstein was inapplicable, the arbitration panel had colorable justification to conclude that it was not violated.

Consequently, the court determined that Finkelstein failed to demonstrate manifest disregard of ERISA on these grounds. The court also found that each of the remaining challenged panel determinations was supported by a colorable justification.  Therefore, the court concluded that the arbitration award could not be vacated for manifest disregard of the ERISA statute.

Court’s Ruling on Fraud

Vacating an arbitration award on the basis of fraud under the FAA, 9 U.S.C. § 10(a)(1), requires the challenging party to produce clear and convincing evidence that there was fraud that could not have been discovered during the arbitration process and that such fraud is materially related to the award. Chimera Capital, L.P. v. Nisselson (In re MarketXT Holdings, Corp.), 428 B.R. 579, 590 (S.D.N.Y. 2010) (citing A.G. Edwards & Sons, Inc. v. McCollough. 967 F.2d 1401, 1404 (9th Cir. 1992) (per curiam).   Finkelstein alleged that UBS concealed material information relevant to the dispute.

However, the court determined that UBS could not have fraudulently concealed information that they had no obligation to disclose, and also determined that UBS did voluntarily disclose the challenged information in an accurate manner.  Therefore, the court concluded that the arbitration award could not be vacated on the basis of fraud under the FAA.

Court Ruling on Refusing to Hear Evidence

Vacating an arbitration award on the basis of refusing to hear evidence pertinent to the dispute, 9 U.S.C. § 10(a)(3), has been interpreted by courts to mean that an arbitration award will not be opened to evidentiary review except “where fundamental fairness is violated.”  Tempo Shain Corp. v. Bertek, Inc., 120 F.3d 16, 20 (2d Cir.1997) (quoting Bell Aerospace Co. Div. of Textron v. Local 516, 500 F.2d 921, 923 (1974)).

The arbitration panel denied Finkelstein’s request for production of evidence concerning the value of any parallel investments held by the UBS Investment Bank.  He contended this evidence was highly relevant because it would have negated UBS’s assertion that his trading activities sustained substantial losses.  It was within the arbitration panel’s broad discretion to determine that the requested materials would have been irrelevant and/or unduly burdensome for UBS to produce.

The court determined that the arbitration panel’s refusal to compel UBS to produce this evidence did not deny Finkelstein a “fundamentally fair” hearing because the scope of inquiry afforded him was sufficient to provide him with a reasonable opportunity to be heard and to enable the arbitration panel to make an informed decision.  Therefore, the court concluded that the arbitration award could not be vacated on the basis of refusing to hear evidence.

The court denied Finkelstein’s petition to vacate the FINRA arbitration award, and entered judgment to confirm the arbitration award in UBS’s favor.

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.