Posts tagged with "Federal Court"

Federal Court Case of First Impression-Statute of Limitations Defense

This afternoon, the Honorable Stefan R. Underhill of the United States District Court for the District of Connecticut issued a decision denying summary judgment to a defendant in a case in which Maya Murphy P.C., represents the Plaintiff (Chappetta v. Soto, 3:06 cv 1913(SRU)).  Andrea Chappetta was injured in a rear-end motor vehicle collision on I-95 in Connecticut in 2003; following surgery to address her injuries, she fell in a movie theater (in New York) owned by Regal Cinemas, which fall irreparably and significantly damaged her surgically repaired shoulder while also causing new injuries.

Plaintiff commenced one lawsuit against two defendants in different states, suing both the Connecticut motor vehicle operator and the New York movie theater in the United States District Court in June of 2005.  Following initial motion practice, the lawsuit against the Connecticut driver was dismissed by the Court for lack of personal jurisdiction, on the basis of a claimed statute of limitations defense.

Plaintiff re-filed the action, invoking the protections and applicability of the Connecticut “Savings Statute” (C.G.S. Sec. 52.592), and immediately faced a second attack by the Connecticut defendant, who sought to escape liability and dismiss the lawsuit rather than proceed to trial on the merits of Ms. Chappetta’s claims.

After exhaustive discovery, comprehensive motion practice, and extensive oral argument before the Court, this afternoon’s decision represents a landmark interpretation and clear definition of the Connecticut savings statute in federal diversity jurisdiction cases.  The Court held that the mere filing of an action in federal court (the filing was prior to the expiration of the statute of limitations, even though personal service was not completed until after the statute of limitations had expired) was sufficient to satisfy the savings statute and allow a case to be heard on the merits.  This was clearly a case of first impression; indeed, the Court acknowledged during oral arguments that no case existed under State or Federal case law which was directly on point.  Today’s decision carefully analyzed and expanded the Connecticut Supreme Court’s 2004 holding in Rocco v. Garrison, 268 Conn. 541 (2004), stating, in part:

“In my view, however, the better reading of Rocco is that the Court held that the defendant’s receipt of actual notice of the pendency of a federal court action is sufficient, but not necessary, to commence an action for purposes of the savings statute.  In other words, by indicating that the action was commenced ‘when’ the defendant received notice, the Court meant that on that date, which was within the statute of limitations, the Rocco plaintiffs’ action had been commenced; it did not mean that the action had been commenced because the defendant received actual notice or that the action was commenced by reason of the receipt of actual notice…”

The Court went on to reason the following:

“In a real sense, therefore, an action is commenced in federal court upon filing; indeed, with federal court cases other than diversity of citizenship cases, the statute of limitations is satisfied upon the filing of the complaint rather than service of process.  Although commencement in the sense of opening a federal court case and assigning a docket number does not satisfy the statute of limitations under Connecticut law, the Rocco Court suggested that it might constitute ‘commencement’ of an action for purposes of the savings statute…if an action governed by Connecticut law is filed in federal court within the statute of limitations but is not properly served pursuant to Connecticut law so that it has not been timely commenced for purposes of the statute of limitations, the savings statute permits it to be brought again within one year.”

And so, with the Court’s adept reasoning and today’s clear decision – after persistent, aggressive legal work and detailed argument from counsel – Ms. Chappetta will soon have the opportunity to have a jury consider the gravity of her injuries and all parties responsible for her damages.  A link to the 11-page decision will be posted when the decision is officially published.

If you have questions regarding a statute of limitations or any personal injury matter, contact Joseph Maya at 203-221-3100 or by email at JMaya@MayaLaw.com.

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

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

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

In a recent case before 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.

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 objection. 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.

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 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. 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 in the firm’s Westport office in Fairfield County, Connecticut at 203-221-3100 or at JMaya@Mayalaw.com.

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

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

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

In a recent case before 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.

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 objection. 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.

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 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. 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 in the firm’s Westport office in Fairfield County, Connecticut at 203-221-3100 or at JMaya@Mayalaw.com.

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Mediating a Sexual Harassment Claim

Statistically, the overwhelming majority of sexual harassment cases are resolved prior to trial by “alternate dispute resolution” in the form of mediation or arbitration. These proceedings (mediation in particular) are more informal than a courtroom trial, but you still need a zealous and experienced advocate on your side.

Fairfield County is home to many Fortune 1000 companies. Executives from Greenwich, Stamford, New Canaan, Norwalk, Westport, and Fairfield come to Maya Murphy, P.C. for legal counsel and trial advocacy when they have been victims of sexual harassment. Sometimes these cases are adjudicated administratively before the Connecticut Commission on Human Rights and Opportunities (“CHRO”) and tried before the United States District Court for the District of Connecticut. More often, however, they gain closure through non-binding mediation before a disinterested third party—frequently a retired federal or state judge.

Maya Murphy recently represented a senior female executive of a large company who had been sexually harassed by her direct report, i.e., her “boss.” A preliminary investigation indicated that the claimant had a solid cause of action and we immediately filed a Complaint with CHRO as a predicate to suing in federal court, if the need arose. As is often the case, however, counsel for the employer suggested mediation. Because mediation can produce an acceptable and quicker result if it is handled properly, our client agreed. The parties proceeded to mediate before a mutually selected retired U.S. District Judge and the case settled for a representative six-figure sum.

The key to successful mediation of a sexual harassment claim is always to be prepared to take your case to trial in federal court. Stated differently, the key to successful mediation is always to be prepared to walk away if the process is not leading toward an acceptable settlement. This takes courage on the part of the claimant and discipline on the part of her attorney. If, however, the attorney has approached the mediation with all the seriousness and intensity of a jury trial, more often than not, a settlement can be achieved on terms approaching a best-case, in-court scenario.

Virtually all mediators require preliminary submission of a confidential “mediation statement” outlining the factual and legal parameters of the underlying claim. For the seasoned trial lawyer, the mediation statement is both his Stradivarius violin and his Louisville Slugger baseball bat. A well-crafted mediation statement can both tug at the mediator’s heart strings and pound incessantly at egregious facts and undisputed points of law. Simply stated, mediation success depends in large measure on the quality of the mediation statement and its ability to persuade the mediator in the first instance that the claimant’s cause is well-founded and the law requires fair and just compensation. Lawyers who submit “pro-forma” mediation statements do so at their client’s risk. Such statements should be as comprehensive and compelling as any trial memorandum or appellate brief submitted to a court of law.

Another key to mediation success is “reasonableness.” In sexual harassment cases, emotions run high and client expectations have to be properly managed. An experienced litigator can evaluate a case and establish for the client a “realm of reason” within which the case should be able to settle. This is often a function of experience and ensures that any agreed upon settlement reflects the true value of the underlying case without “leaving any money on the table” as negotiations unfold. Here, an experienced mediator can be of assistance in managing the expectations of a client and rounding down an unrealistic demand by counsel. At the end of the day, however, attorney and client have to be prepared to walk away from the mediation if the mediator’s “shuttle diplomacy” is not moving the parties toward a reasonable and rational compromise. Litigation always remains as a viable alternative and the lawyer who is prepared for mediation will be prepared for trial, as well.

The employment lawyers at Maya Murphy who handle sexual harassment cases throughout Connecticut are equally adept at mediating or trying such cases. We approach each case with the intention and attention that it deserves. For further information, contact Robert L. Keepnews, Esq. at Maya Murphy, P.C. (203) 221-3100, or rkeepnews@mayalaw.com

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Courts Cannot Extend Expired Non-Compete Agreements Under Connecticut Law

Courts Cannot Extend Expired Non-Compete Agreements Under Connecticut Law
Aladdin Capital Holdings, LLC v. Donoyan, 2011 U.S. Dist. LEXIS 61095

Ms. Harumi Aoto Donoyan worked as a Senior Managing Director for Japan Sales and Marketing at Aladdin Capital Holdings, LLC, a boutique investment bank in Stamford, Connecticut. The firm promoted her to this position in 2008 contingent on executing a restrictive covenant wherein she promised not to complete with the firm following termination while she continued to receive compensation and other benefits from the firm. Aladdin terminated Ms. Donoyan in April 2010 with the agreement that she would receive her full salary and benefits through May 5, 2011. This arrangement made prohibitions in the non-compete effective until May 5, 2011 since the restrictions were applicable while she received benefits from the firm.
Aladdin alleged that Ms. Donoyan engaged in activities that amounted to competing with the firm while she was still receiving a salary and benefits. It filed a suit in federal court on April 25, 2011 and served Ms. Donoyan on April 28, 2011, ten and seven days respectively before the expiration of the restrictive covenant. The case reached the federal district court in June 2011, well after the non-compete agreement had expired. Aladdin asked the court to declare that Ms. Donoyan had breached the agreement and issue an injunction prohibiting any further violations. The court noted that the request for injunctive relief was moot since the time restriction had already expired.
The court did however analyze its authority as a court sitting in equity to extend the duration of a restrictive covenant as a remedy for a previous breach of a non-compete agreement. Restrictive covenants can have built-in provisions that extend the time restriction upon a breach by the former employee. This however, was not the case with the dispute before the court and the only way for the time restriction to be extended was for the court to unilaterally amend the agreement. While some states’ highest courts have held that the lower courts have “broad equitable power to extend even an expired restrictive covenant as a remedy for breach”, the federal court here did not see any evidence that the Connecticut Supreme Court held this legal stance. In light of this, the federal court held that it lacked the authority under Connecticut state law to extend an expired non-compete agreement. The federal court’s holding with regard to this issue was that “a request for injunctive relief based on a restrictive covenant becomes moot upon the expiration of the period specified in the parties’ restrictive covenant, unless the restrictive covenant contains language that expressly permits extension of the restrictive covenant”. Aladdin could have placed an automatic extension mechanism in its non-compete agreement but chose not to do so. Even though the court acknowledged that Ms. Donoyan had in fact breached the non-compete agreement, it ultimately denied Aladdin’s request to extend and enforce the restrictive covenant based on the fact it lacked the authority to do so under Connecticut law.
If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.

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FINRA Arbitration Awards Employer Over $500,000 for Promissory Notes Accelerated by Employee’s Termination

In the Matter of the Arbitration between Claimants Morgan Stanley Smith Barney and Morgan Stanley Smith Barney FA Notes Holdings, LLC v. Respondent Robert W. Hathaway (2012 WL 2675417)

In a recent Financial Industry Regulatory Authority (FINRA) arbitration, a sole FINRA arbitrator held that an employee is liable to satisfy his indebtedness on promissory notes, including interest, to his employer upon termination of employment.

In this case, Morgan Stanley Smith Barney (“MSSB”) and Morgan Stanley Smith Barney FA Notes Holdings, LLC, alleged that Robert W. Hathaway (“Hathaway”) was in breach of two promissory notes executed while he was employed by MSSB. In its arbitration filing, MSSB claimed the principal balances due under both notes, per diem interest for both notes, and costs of collection and arbitration. This matter proceeded pursuant to Rule 13806 of the Code of Arbitration Procedure because Hathaway neither filed a Statement of Answer nor appeared at the hearing.

On or about March 8, 2008, Hathaway executed the first promissory note with MSSB for $729,560, at an interest rate of three-percent per annum, to be repaid in nine consecutive annual installments beginning on March 19, 2009. The terms of the note included an agreement to pay all costs and expenses of collection, including reasonable attorneys’ fees. On or about June 9, 2009, Hathaway executed the second promissory note for $75,257.83 at an interest rate of 2.25-percent per annum, to be repaid in eight consecutive annual installments beginning on June 9, 2010.

On or about September 19, 2011, Hathaway’s employment at MSSB ended. MSSB alleged that termination of employment triggered acceleration of the promissory notes and made a demand for immediate re-payment. Hathaway failed and refused to satisfy the indebtedness.

After considering the pleadings and the submissions, the sole arbitrator decided that Hathaway was liable for the principal balance due under each promissory note. Hathaway was also liable for per diem interest accruing from the date employment was terminated through the date of payment on each note. Finally, Hathaway was to reimburse MSSB for non-refundable portion of its initial claim filing fee. The final award to MSSB totaled $542,816.00.

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

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FINRA Arbitration Awards Employer Over $500,000 for Promissory Notes Accelerated by Employee’s Termination

In the Matter of the Arbitration between Claimants Morgan Stanley Smith Barney and Morgan Stanley Smith Barney FA Notes Holdings, LLC v. Respondent Robert W. Hathaway (2012 WL 2675417)

In a recent Financial Industry Regulatory Authority (FINRA) arbitration, a sole FINRA arbitrator held that an employee is liable to satisfy his indebtedness on promissory notes, including interest, to his employer upon termination of employment.

In this case, Morgan Stanley Smith Barney (“MSSB”) and Morgan Stanley Smith Barney FA Notes Holdings, LLC, alleged that Robert W. Hathaway (“Hathaway”) was in breach of two promissory notes executed while he was employed by MSSB. In its arbitration filing, MSSB claimed the principal balances due under both notes, per diem interest for both notes, and costs of collection and arbitration. This matter proceeded pursuant to Rule 13806 of the Code of Arbitration Procedure because Hathaway neither filed a Statement of Answer nor appeared at the hearing.

On or about March 8, 2008, Hathaway executed the first promissory note with MSSB for $729,560, at an interest rate of three-percent per annum, to be repaid in nine consecutive annual installments beginning on March 19, 2009. The terms of the note included an agreement to pay all costs and expenses of collection, including reasonable attorneys’ fees. On or about June 9, 2009, Hathaway executed the second promissory note for $75,257.83 at an interest rate of 2.25-percent per annum, to be repaid in eight consecutive annual installments beginning on June 9, 2010.

On or about September 19, 2011, Hathaway’s employment at MSSB ended. MSSB alleged that termination of employment triggered acceleration of the promissory notes and made a demand for immediate re-payment. Hathaway failed and refused to satisfy the indebtedness.

After considering the pleadings and the submissions, the sole arbitrator decided that Hathaway was liable for the principal balance due under each promissory note. Hathaway was also liable for per diem interest accruing from the date employment was terminated through the date of payment on each note. Finally, Hathaway was to reimburse MSSB for non-refundable portion of its initial claim filing fee. The final award to MSSB totaled $542,816.00.

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

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Court confirms FINRA Arbitration Award for Employee in the amount of $150,000 with interest

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.

Should you have any questions relating to FINRA, arbitration or employment issues generally, please feel free to contact Russell J. Sweeting, Esq. by telephone at (203) 221-3100 or by e-mail at rsweeting@mayalaw.com.

What is “FINRA” and What Does (Should) It Do?

Attorneys here at Maya Murphy frequently are called upon to represent individuals who are the subject of a FINRA inquiry, or a party to a FINRA arbitration. We routinely post to our website client alerts regarding FINRA-related decisions but it recently occurred to us that we should take a step back and issue a post about FINRA itself—what it is, what it does (or doesn’t do), and where it came from. Knowledge is power and because FINRA so pervades the financial industry to be forewarned is to be forearmed.

“FINRA” is an acronym for the “Financial Industry Regulatory Authority,” a so-called “Self Regulating Organization.” On July 30, 2007, the New York Stock Exchange and the National Association of Securities Dealers (“NASD”) combined to form FINRA. To be sure, FINRA is cloaked in official garments of the purest silk. It was established under § 15A of the Securities Exchange Act of 1934, 15 U.S.C. § 78o-3, Karsner v. Lothian, 532 F.3d 876, 879 n.1 (D.C. Cir. 2008). It is authorized to exercise comprehensive oversight over “all securities firms that do business with the public.” Sacks v. SEC, 648 F.3d 945 (9th Cir. 2011) (quoting 72 Fed. Reg. 42170 (Aug. 1, 2007)). With respect to the creation of FINRA, the NASD, itself, made it clear that the new entity was directed at “the regulation of the financial markets.” Id. “By virtue of its statutory authority, NASD wears two institutional hats: it serves as a professional association, promoting the interests of its members; and it serves as a quasi-governmental agency, with express statutory authority to adjudicate actions against members who are accused of illegal securities practices and to sanction members found to have violated the Exchange Act or Securities and Exchange Commission . . . regulations issued pursuant thereto.” NASD v. SEC, 431 F.3d 803, 804 (D.C. Cir. 2005) (citations omitted).

FINRA is a private corporation and the largest “independent” regulator of securities firms in the United States, overseeing approximately 4,800 brokerage firms, 172,000 branch offices, and 646,000 registered securities representatives. It (not necessarily by claimant choice or mere happenstance) benefits from up to 9000 arbitration filings every year. FINRA has a staff of approximately 3,000 employees and in 2009, collected revenue of $775 Million. Senior FINRA management enjoys seven-figure annual salaries.

FINRA maintains two separate but similar “Codes of Arbitration Procedure”: one for “customer disputes” and another for “industry disputes.” In drafting its Industry Code, FINRA has apparently chosen to “trim some of the fat” off of the controlling law. For example, Rule 13209 (amended December 15, 2008) states: “During an arbitration, no party may bring any suit, legal action, or proceeding against any other party that concerns or that would resolve any of the matters raised in the arbitration.” In Arnold Chase Family, LLC v. UBS AG, 2008 U.S. Dist. LEXIS 58697 (D. Conn. Aug. 4, 2008), Judge Kravitz (in analyzing the analogous FINRA “customer” Rule 12209) demonstrated remarkable restraint in reminding UBS that within the Second Circuit (which includes Connecticut and New York) since at least 1998, United States District Courts have had not only the right, but also the duty to entertain requests for preliminary injunctions during the pendency of arbitration. See Am. Express Fin. Advisors, Inc. v. Thorley, 147 F.3d 229, 231 (2d Cir. 1998). But FINRA’s arbitral disdain for the twin plinths of fundamental fairness and the opportunity to confront one’s accusers does not stop there.

The Code’s §§ 13400-13402 require that at least one “non-public arbitrator” (i.e., one who within the last five years was associated with, or registered through, a broker or a dealer) serve on every three-person arbitration panel. Given the state of the economy, in general, and the sudden appearance, disappearance, and consolidation of Wall Street firms, in particular, it is not unreasonable for a “non-public arbitrator” to have past connections or future aspirations with respect to a corporate party to the arbitration.[1] This ethical tar pit is bottomless, as evinced by Rule 13410, which vests in the “Director of FINRA Arbitration” discretion to retain an arbitrator who fails to make a required disclosure, notwithstanding a timely notice of disqualification by one of the parties. See, generally, Credit Suisse First Boston Corp. v. Grunwald, 400 F.3d 1119 (9th Cir. 2005).

FINRA also makes it clear that it will not permit its Code to let the discoverable truth get in the way of an otherwise productive arbitration. Rule 13506(a) ostensibly permits pre-arbitration requests for documents or information, provided such requests do “not require narrative answers or fact finding,” thereby rendering such requests virtually useless. Rule 13510 states outright that depositions are “strongly discouraged” and permitted “only under very limited circumstances.” The absence of meaningful pre-arbitration discovery makes the proceeding something akin to “trial by ambush.” Rule 13604(a) states: “The panel will decide what evidence to admit. The panel is not required to follow state or federal rules of evidence.” Finally, Rule 13904 permits rendition by the panel of a skeletal or elliptical award devoid of underlying factual findings or legal reasoning. Even if the parties jointly request an “explained decision” (requiring an additional $400.00 “honorarium” to the FINRA chairperson), only “general reasons” for the award are required, and inclusion of legal authorities and damage calculations is specifically not required. Under these circumstances, mere comprehension of the basis for the award, much less meaningful judicial review of the award even under the most stringent “manifest disregard” standard (assuming such standard of review still exists, see Stmicroelectronics, N.V. v. Credit Suisse Securities (USA) LLC 648 F.3d 68, 78 (2d Cir. 2011), is rendered impossible.

The take-away from this is that for financial industry professionals, FINRA rules, investigations, and arbitrations (however unsatisfying) are often the only game in town. If you find yourself trying to negotiate the FINRA minefield and need help, contact Bob Keepnews, Esq. at the Maya Murphy, P.C. office located in Westport at (203) 221-3100 or rkeepnews@mayalaw.com.

[1] In Arnold Chase Family, LLC v. UBS AG, 2008 U.S. Dist. LEXIS 58697 (D. Conn. Aug. 4, 2008), Judge Kravitz made pointed reference to both the sudden demise of Bear Stearns and the fact that securities customers do not have much say in the writing of FINRA’s rules. Id. at *8-9, *13-14.

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Sufficient Consideration for At-Will Employees

Sufficient Consideration for At-Will Employees
Home Funding Group, LLC v. Kochmann, 2007 U.S. Dist. LEXIS 41376

Home Funding Group, LLC was a New York corporation with primary business operations in Connecticut that engaged in the residential mortgage brokerage business. The company employed Mr. Nicholas Kochmann and Mr. Patrick Dougherty in its New Jersey office. They worked for the company from January 2004 to May 1, 2006 and July 18, 2006 respectively. The company had both employees sign an Employment Agreement that contained non-compete and non-solicitation clauses to protect Home Funding’s business interests. The employees later signed an “Invention Assignment Agreement” stating that Home Funding was the sole owner of any invention connected to their employment and that it would maintain full intellectual property rights. The agreement stated that Connecticut law would govern any legal disputes and litigation in state and/or federal court. Both employees signed a new restrictive covenant in March 2006 that amended and superseded the 2004 Employment Agreement.
Misters Kochmann and Dougherty both voluntarily terminated their employment with Home Funding and Hamilton Financial, a direct competitor in the mortgage broker industry, hired them shortly thereafter. Home Funding sued its two former employees for breach of the non-compete agreements and requested they be enjoined from further employment with Hamilton Financial. Misters Kochmann and Dougherty asserted that the agreements were not legally binding on them because they lacked valid consideration, claiming that continued employment is inadequate consideration for a covenant executed after the start of employment. The federal court sitting in Bridgeport, Connecticut rejected this argument and held that the agreements were properly executed, contained adequate consideration, and were binding upon the parties.
The former employees argued that Connecticut law requires an employer to promise to something different from what it is already obligated to do when it wants to modify/amend a restrictive covenant with one or more of its employees. The court however applied Home Funding’s legal assertion that at-will employees may be terminated at any time at the employer’s discretion and thus continued employment amounted to adequate consideration to support a valid non-compete agreement. The court noted that in this case, Home Funding had the burden of proof at trial to demonstrate that the agreement was correctly executed and enforceable. Home Funding was able to provide such proof and the federal court held in its favor. Had Misters Kochmann and Dougherty not been at-will employees however, the court would have likely held that the agreement did not have the requisite consideration and could have invalidated the agreement in its entirety.
If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.

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