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 recent 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.
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.
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 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.
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 JMaya@Mayalaw.com.