Posts tagged with "Form U5"

Form U5 – Employment Termination in the Securities Industry

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Broker-dealers, investment advisors, and issuers of securities routinely use Form U5 to terminate the registration of an individual whose employment has ended and to notify the appropriate jurisdiction or self-regulatory organization.  Employees are still subject to the jurisdiction of regulators for at least two years after the registration has been terminated and may have to provide information about the association with their former employer.  The section of Form U5 that may be the most problematic concerns the reason for the termination that must be provided by the employer.

Reason for Termination

If the employer elects to describe a full termination as “permitted to resign,” “discharged,” or “other,”, then an explanation must be provided.  No such explanation is necessary if the full termination is deemed “voluntary.”  Disclosure of the employee’s involvement in investigations, internal reviews, regulatory actions, criminal matters and customer complaints must also be made by the employer.

In many cases, an employer and employee may disagree on what led to an employment termination and on the circumstances of the departure.  A disparaging remark, untrue statement or misleading explanation on Form U5 can jeopardize the ability of an individual to continue working in the securities industry.  A prospective employer may pass over a job candidate who has what has come to be known as a “Dirty U5” from a previous employer.

Dirty U5s

The Financial Industry Regulatory Authority (“FINRA”) does provide a forum for an employee to pursue arbitration against a former employer to contest a “Dirty U5.”  However, the best course of action is to avoid the problem from ever arising.  Registered employees in the securities industry are well advised to seek legal advice and counsel once it becomes apparent that their employment may be coming to an end.  In many cases, the disclosures made in the Form U5 by the employer may be mutually agreed upon before the employment termination ever occurs.

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Should you have any questions relating to the Form U5, or employment issues generally, please feel free to contact Joseph Maya or the other experienced education attorneys at Maya Murphy, P.C. today at (203) 221-3100 or by email at JMaya@Mayalaw.com.

Expunging a Dirty U-5—Be Careful What You Ask For!

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Expunging a Dirty U-5

The view from the impending “fiscal cliff” takes in much of Fairfield County’s “Gold Coast”—Greenwich, Stamford, Darien, and Westport.  We at Maya Murphy, P.C. represent many residents employed in the financial industry, both within and without the State of Connecticut.  Some of their financial employers may be considering reductions in personnel depending upon the results of the upcoming Presidential election, Congressional action (or inaction) concerning “taxmaggedon” and “sequestration,” and their own Q4 and year-end results.  If a financial firm retrenches, there will be a dirty U-5 on “the street.”

We are often asked about the possibility of “scrubbing” a U-5 or expunging it altogether.  The current economic climate and new proposed rules from FINRA warrant a warning that usually accompanies our advice.

The current FINRA Customer and Industry Codes do not afford “unnamed persons,” i.e., the subject of allegations but not named parties to the underlying arbitration, to seek expunging of allegations reported to the Central Registration Depository (“CRD”) on Form U-5 (and available to the public through such resources as “Broker Check”).  To rectify that situation (recognizing that a dirty U-5 impacts one’s livelihood), FINRA has proposed In re expungement rules seeking to balance the respective interests of the registered professional and the investing public.  Public comment on the proposed rules was closed on May 21, 2012.

The purpose of this post is not to critique the new rules that, while not problem-free, at least address the issue of incorrect allegations remaining on CRD records in the absence of an evidentiary hearing to determine the accuracy of those allegations.  The purpose of this post is to point out that the new rules, in whatever final form they may take, can be a cure worse than the disease.

The Original Language

There is no denying the injustice of having a registered representative’s U-5 amended to reflect a customer complaint without the representative being named as a respondent in subsequent arbitration. The net effect is to have the representative tried in absentia without the ability to present evidence or cross-examine witnesses by way of defense.  The proposed In re expungement rules, however, may not be all they are cracked up to be.  A recent FINRA arbitration decision points up the problem.

In the Matter of the FINRA Arbitration between Eduard Van Raay, Claimant v. Raymond James Financial Services, Inc., et al., Respondents (FINRA 11-04544, July 16, 2012), the underlying claim was settled and an arbitrator was appointed solely for the purpose of considering a request for U-5 expunging.  The original offending, terminating language was: “Violation of firm policy. Failure to disclose an outside business activity (personal representative relationship with a client).”  After the arbitration, the recommendation was for the language to be amended to read: “Permitted to resign. Advisor chose to continue unapproved outside business activity.”  This was hardly an improvement to that which he sought to have expunged.

The Post-Arbitration Language

The original language was cryptic, susceptible to differing interpretations, and perhaps easily explained.  The post-arbitration language, however, was clear, concise, damaging, and most importantly, the product of FINRA arbitration.  Instead of vague allegations of a personal relationship with a client, the representative’s CRD will now be saddled with a finding that he chose to continue an unapproved outside business activity.  The takeaway is that the outcome would not survive a rigorous pre-arbitration risk/reward analysis.  Arbitrations, as with lawsuits, are a lot like wars—they are easier to start than to stop.  They often bring with them unintended consequences.

The new In re expungement rules present registered representatives with an additional option that was previously unavailable.  Assuming their future adoption, that does not mean that every offending CRD entry should be the subject of a FINRA arbitration.

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Whether, and when, to pursue expunging is a decision that should be discussed thoroughly with a seasoned litigator familiar with the FINRA Rules and decisions.  We, here, in Maya Murphy’s Westport, Connecticut office stand ready to assist in that regard.  Please contact Joseph Maya and the other experienced attorneys at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com to schedule a consultation today.

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

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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 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.

What is FINRA?

“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.

Codes for Industry Disputes and Customer Disputes

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.

Code Requirements

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).

Interfering with Productive Arbitration

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.

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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 us at the Maya Murphy, P.C. office located in Westport, Connecticut, at (203) 221-3100.

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.

[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.

Court Finds That Form U5 Employment Termination Statement is Absolutely Privileged Under New York Law

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Rosenberg v. Metlife, Inc., 493 F.3d 290; 2007 U.S. App. LEXIS 15341 (2d Cir. 2007)

Mr. Rosenberg brought an action against his former employer, MetLife, Inc. (“MetLife”).  Mr. Rosenberg’s allegations included an assertion that MetLife’s statements on his Form U5 were malicious and defamatory.  Form U5 stated the following reason for Mr. Rosenberg’s employment termination from MetLife:

An internal review disclosed Mr. Rosenberg appeared to have violated company policies and procedures involving speculative insurance sales and possible accessory to money laundering violations.

Judge Rakoff of the United State District Court for the Southern District of New York held that such statements are absolutely privileged and granted summary judgment to MetLife on the libel claim.  Rosenberg v. Metlife, Inc., 2005 U.S. Dist. LEXIS 2135 (S.D.N.Y. 2005).  The United States Court of Appeals for the Second Circuit found on appeal that the issue of whether the statements were subject to an absolute or qualified privilege was a question of New York law.  Rosenberg v. Metlife, Inc., 453 F.3d 122 (2d Cir. 2006). 

The Second Circuit certified to New York State’s highest court, the New York Court of Appeals, to rule on the issue.  Id.  The New York Court of Appeals ruled that such statements are subject to an absolute privilege.  Rosenberg v. Metlife, Inc., 866 N.E.2d 439, 8 N.Y.3d 359, 368, 834 N.Y.S.2d 494 (2007).  Thereafter, the Second Circuit affirmed the initial summary judgment ruling on the libel claim.

Should you have any questions relating to the Form U5, expunging information on the Form U5 or employment issues generally, please feel free to contact Joseph Maya and the other experienced attorneys by telephone at (203) 221-3100 or by e-mail at JMaya@Mayalaw.com.

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

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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.

Case Details

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.

The Decision

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 the 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.

Court Confirms FINRA Arbitration Award for Employee in the Amount of $150,000 with Interest

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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.

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If you have any question relating to FINRA or arbitration, please do not hesitate to contact Joseph Maya and the other experienced employment law attorneys at Maya Murphy, P.C. at (203) 221-3100 or JMaya@Mayalaw.com to schedule a free initial consultation.

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

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

In a case before the 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.

Case Details

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 challenge.  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.

Arbitrability of a Dispute

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

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.

The Court’s Decision

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

ERISA Claim Challenges Vague Language of FINRA Arbitration Award in order to Include Back Pay as Benefits-Eligible Compensation

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Ronald A. Roganti  v .Metropolitan Life Insurance Company, et el, 2012 WL 2324476 (S.D.N.Y.  June 18, 2012)

In a case before the Southern District of New York, Ronald Roganti (“Roganti”), a former employee of the Metropolitan Life Insurance Company (“MetLife”), asserted claims under the Sarbanes–Oxley Act of 2002, 18 U.S.C. § 1514A (“SOX”), and the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1132 (“ERISA”). Both claims challenge MetLife’s denial of Roganti’s request that a 2010 Financial Industry Regulatory Authority (“FINRA”) arbitration award be treated as benefits-eligible compensation.  MetLife moved to dismiss both claims on several grounds.  The court granted MetLife’s motion with respect to the SOX claim and denied the motion with respect to the ERISA claim.

Case Background

The underlying dispute in this case arose during Roganti’s employment with MetLife, which lasted from 1971 to 2005.  In 1999, Roganti began to voice concerns regarding allegedly-suspect business practices at MetLife and continued to do so until he terminated his employment in 2005.   Roganti claimed that throughout that time period, MetLife repeatedly disregarded his complaints and actively retaliated against him, including undermining his authority within the business subsets he oversaw and reducing his compensation with the specific purpose of reducing his pension benefits.

In July 2004, Roganti filed his initial Statement of Claim with the National Association of Securities Dealers (“NASD”) to arbitrate his disputes with MetLife.  FINRA, the successor to NASD, appointed a panel of three arbitrators to adjudicate four claims brought by Roganti: (1) the breach of contract claim, based on MetLife’s reduction of Roganti’s compensation; (2) violation of SOX retaliation provisions, based on MetLife’s retaliation against Roganti for reporting questionable business practices; (3) for the value of services rendered by Roganti; and (4) for violating ERISA, on the theory that, in reducing Roganti’s compensation, MetLife also sought to reduce his pension benefits.

In August 2010, the FINRA panel held that MetLife was liable to Roganti for $2,492,442.07 in “compensatory damages … above [MetLife’s] existing pension and benefit obligation to Claimant.” The arbitral award explain neither how the arbitrators arrived at this sum nor for what the award was intended to compensate Roganti. FINRA Docket Number 04-04876.

Benefits Claim

On March 24, 2011, Roganti filed a benefits claim with MetLife, in its capacity as the Plan Administrator, asking that the arbitral award be treated as compensation for income which MetLife had improperly denied him, and that the award be factored into the calculation of the benefits which he was entitled to under his pension plan with MetLife. MetLife denied the request for three reasons.

First, only income of current employees was benefits-eligible; therefore, since Roganti was not employed by MetLife when he received the award, it did not qualify as benefits-eligible compensation.  Second, FINRA broadly termed the award as “compensatory damages” rather than stating it was compensation for lost income.  Finally, the FINRA award did not indicate to which years of Roganti’s employment the award applied; therefore, even if the award represented unpaid income, it would be impossible for MetLife to determine concretely how the award should affect Roganti’s pension benefits. Roganti appealed this decision to MetLife, and MetLife again denied his claim.  Subsequently, Roganti filed SOX and ERISA claims in federal district court.

Because Roganti’s current SOX and ERISA claims are based on the 2011 denial of pension benefits, the court determined that these have not already been dispositioned by the 2010 FINRA arbitration.  Therefore, the court denied MetLife’s motions to dismiss both claims on grounds of res judicata and collateral estoppel.  However, because Roganti did not exhaust administrative remedies before filing his SOX claim in federal district court, the court determined that his SOX claim must be dismissed.

ERISA Claims

Roganti made two claims under ERISA, which creates a private right of action to enforce the provisions of a retirement benefits plan. 29 U.S.C. § 1132(a)(1)(B).  First, he alleged that the FINRA arbitral award compensated him for unpaid wages that resulted from MetLife’s retaliation against him.  Second, he argued that because the award constituted back pay, it must be taken into account in calculating his pension benefits.  The court determined that central to both claims is the issue of whether the FINRA arbitration award constitutes back pay to compensate Roganti for services rendered while he was a MetLife employee, which would properly be included in pension benefits calculations.

The Court’s Decision

Neither the brevity of the FINRA arbitration award nor Roganti’s statement of claims to FINRA provided the court with sufficient clarity to resolve the factual issue of exactly what the award represented. The court, therefore, construed the ambiguity in the award language in the light most favorable to Roganti.  The court concluded that he had met his burden and denied MetLife’s motion to dismiss the ERISA claim.

Because the three-month timeframe to seek clarification from a FINRA arbitration panel pursuant to 9 U.S.C. § 12 had elapsed, the court ordered the ERISA Plan Director to closely review the arbitral record, in the context of the evidence offered and arguments made by both sides at the arbitration, to determine whether or not the award represented back pay for Roganti.  The court found it unacceptable that the initial denials of benefits were based on the terse language of the arbitration award, rather than a more detailed analysis as to what the award amounts represented.

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

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

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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.

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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.

The “Manifest Disregard of the Law” Standard for Judicial Review of a FINRA Arbitration Award Excludes Questions of Fact

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Patrick R. Murray v. Citigroup Global Markets, Inc., 2011 WL 5523680 (N.D. Ohio Nov. 14, 2011)
Case Background

In a case before the United States District Court for the Northern District of Ohio, Patrick R. Murray (“Murray”) filed motions to vacate, modify, or correct portions of a Financial Industry Regulatory (“FINRA”) arbitration award.  Citigroup Global Markets, Inc., (“CGMI”) filed a cross-motion to confirm the arbitration award and to award costs and fees incurred while seeking confirmation.   The court denied Murray’s motions to vacate, modify or correct the arbitration award and granted CGMI’s motion to confirm the arbitration award.  CGMI’s request for costs and fees was denied.

In July 2000, Murray was hired as a financial advisor in a local Smith Barney office, which was later acquired by CGMI.  As required by FINRA rules, Murray executed a Uniform Application for Securities Industry Registration or Transfer (“Form U–4”).  He also executed a promissory note for a $1,508,401 forgivable loan, and an addendum to the promissory note that extended the length of the repayment period from seven years to nine years.

The instruments provided that the loan was to be repaid in nine equal annual installments commencing on the first anniversary date of its execution and that, if Murray terminated his employment prior to full repayment, the outstanding balance would be immediately payable with interest accruing from the date of termination.  In April 2009, Murray resigned after having made eight annual payments on the loan.

The Arbitration

In May 2009, Murray sued CGMI in state court alleging that CGMI fraudulently induced him to sign the addendum to the promissory note and illegally confiscated his assets related to a capital accumulation plan account.  CGMI removed the case to federal court, where it filed a motion to compel arbitration. The court found that the arbitration clauses in the Form U-4, the promissory note, the addendum to the promissory note and a separate signed acknowledgment of the CGMI employee handbook were valid and enforceable; therefore, it granted CGMI’s motion to compel arbitration.

FINRA appointed a panel of three neutral arbitrators to hear the matter.  In April 2011, the FINRA panel awarded CGMI compensatory damages of $40,153.00 representing the unpaid balance on the promissory note and awarded Murray compensatory damages of $25,705.95.

Murray filed the instant motion to vacate, modify or correct portions of the arbitration award in federal court and CGMI filed its response and cross-motion to confirm the arbitration award.  Murray challenged the arbitration award on the following grounds: (1) the award was irrational; (2) the award did not draw its essence from the contract between the parties; (3) the award violated public policy; and (4) the award manifestly disregarded the law.

Vacating an Arbitration Award

The Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1-16, defines four limited statutory grounds on which a court may vacate an arbitration award, including instances of fraud or corruption, evident partiality, misbehavior or misconduct and acts exceeding the arbitration panel’s authority.  9 U.S.C. § 10(a).  The court found that none of Murray’s first three grounds for vacatur satisfied these statutory requirements.

Several federal circuits, including the Sixth Circuit, have held that an arbitration award can be vacated “if it displays ‘manifest disregard of the law.’ ” Jacada, Ltd. v. Int’l Mktg. Strategies, Inc., 401 F.3d 701, 712 (6th Cir. 2005), overruled on other grounds, (citing Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Jaros, 70 F.3d 718, 421 (6th Cir. 1995)).

The Court’s Decision

However, the court found that Murray’s assertions of manifest disregard of the law were based on questions of fact rather than questions of law.  A federal court does not have the authority to re-litigate facts when reviewing an arbitration award to determine whether the arbitrators manifestly disregarded the law.   See Bd. Of County Commis of Lawrence County, Ohio v. L. Robert Kimball & Assocs., 860 F.2d 683, 688 (6th Cir.1988).  Therefore, the court denied Murray’s motion to vacate the arbitration award.

The court additionally determined that, although Murray was incorrect on the merits of his case, he did not engage in the degree of bad faith or vexatious behavior that would compel the court to award CGMI fees and costs for the instant litigation.  Therefore, the court confirmed the arbitration award in its entirety without awarding CGMI additional fees and costs.

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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.