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.
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.
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.