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

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

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

Case Overview

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

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

Effort to Vacate the Arbitration Award

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

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

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

The Decision

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

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

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

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

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

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

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

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

Case Background

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

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

Nee’s Formal Complaint

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

Expunging Negative Information From the CRD

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

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

Vacating FINRA Arbitration Decisions

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

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

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

The Decision

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

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

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

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

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

The Initial Decision

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

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

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

Stone’s Second Effort to Vacate

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

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

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

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

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

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

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

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

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

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

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

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

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

The Final Decision

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

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