Posts tagged with "vacatur"

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.

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.

Fourth Circuit Confirms District Court Decision that FINRA Arbitration Panel is Not Bound to Apply State Procedural Law

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Wachovia Securities, LLC, v. Frank J. Brand, et al, 671 F.3d 472 (4th Cir. 2012)

In a case before the Fourth Circuit, Wachovia Securities, LLC (“Wachovia”) appealed a decision by the U.S. District Court for the District of South Carolina in which the court denied Wachovia’s motion to vacate a Financial Industry Regulatory Authority (“FINRA”) arbitration award that denied the firm’s claims in the arbitration of an employment dispute with Frank Brand and three other former employees (“the former employees”).  The Fourth Circuit affirmed the district court’s ruling that denied vacatur and confirmed the arbitration award.

Case Background

The underlying dispute in this case began when Wachovia filed a Statement of Claim with FINRA against four former employees alleging that the former employees had violated contractual and common law obligations.  The former employees were employed as individual financial advisors by A.G. Edwards & Sons, Inc. until its merger with Wachovia in October 2007.  After the merger, the former employees were employed by Wachovia until their termination in June 2008.

All four former employees later found employment with a competing brokerage firm in the same geographic area.  Wachovia alleged that the former employees had conspired with the competing brokerage firm to open an office in the area, that they had misappropriated confidential and proprietary information, and that they were soliciting current Wachovia clients and employees to join the new firm.

Arbitration

In its Statement of Claims, Wachovia requested a permanent injunction, the return of records and attorneys’ fees associated with the arbitration.  In their answer, the former employees described the dispute as “meritless” and requested the arbitration panel award them attorneys’ fees and costs incurred in defending themselves.  FINRA appointed a panel of three arbitrators to hear the matter, and requested that the parties submit proposals regarding requested attorneys’ fees and other costs during the final two days of hearings.  Wachovia was unprepared to submit its brief on the penultimate date of hearings and requested a one-day extension, which the arbitration panel granted.

On the last day of arbitration hearings, both parties submitted their briefs, each of which contained new arguments.  Wachovia argued that, under the South Carolina Arbitration Act, neither party was entitled to attorneys’ fees.   The former employees argued that they were entitled to attorneys’ fees under the  Frivolous Civil Proceeding Act (“FCPA”), codified at S.C. Code Ann. § 15-36-10.  In South Carolina, the FCPA provides both a mechanism for litigants to seek sanctions against attorneys filing frivolous claims and safeguards for attorneys facing such sanctions. These safeguards include a notice period affording the accused 30 days to respond to a request for FCPA sanctions and a separate hearing on sanctions after the verdict.

Wachovia expressed its concern that it was not being afforded either of these procedural safeguards. The arbitration panel neither held additional hearings nor requested additional briefings.  On December 18, 2009, the FINRA panel entered an award in favor of the former employees, awarding them $1.1 million for attorneys’ fees and costs under the FCPA only and denying all of Wachovia’s claims.

Review of the Arbitration Award

Following arbitration, the former employees filed a motion in federal court to confirm the arbitration award pursuant to the Federal Arbitration Act (“FAA”), 9 U.S.C. § 9.  Wachovia filed its own motion to vacate the portion of the arbitration award granting relief to the former employees.  Wachovia contended that the arbitration panel exceeded its authority and manifestly disregarded the law in violation of the FAA, 9 U.S.C. § 10(a)(4) and that the arbitration panel also deprived Wachovia of a fundamentally fair hearing in violation of FAA, 9 U.S.C. § 10(a)(3).

The district court considered these claims in turn and rejected both claims.  Wachovia appealed the district court’s holding that the arbitrators neither deprived Wachovia a fundamentally fair hearing nor manifestly disregarded the law.

In general, judicial review of an arbitration award in federal court is severely circumscribed, 9 U.S.C. § 9-11.  When the district court denies vacatur of an arbitration award, the appellate court reviews the district court’s legal findings de novo and reviews the district court’s factual findings for clear error.

Misconduct and Misbehavior

Vacating an arbitration award on the basis of FAA §10(a)(3) requires the court to find “the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to  hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced.”  “Misconduct” and “misbehavior” are different from “mistake” in this context.  The first two imply that the arbitrators intentionally contradicted the law.  Mistakes lack the requisite intentionality to fall within FAA § 10(a)(3).

Wachovia did not allege that the FINRA arbitration panel acted with an intention to contradict the law, only that the arbitrators made a mistake in handling the former employees’ FCPA claim. Because Wachovia did not allege intentional misconduct, § 10(a)(3) cannot be grounds for vacatur.  Furthermore, the appellate court did not find that the arbitration panel made a mistake in not following the procedural safeguards of the FCPA.  A U.S. Supreme Court case held that the FAA pre-empted state law.  See AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011).

Although parties may consent to particular arbitration procedures in advance, it is inconsistent with the FAA for one party to demand particular state law procedural requirements after the fact.  Id. at 1750.  Therefore, the FINRA arbitration panel was not compelled to follow FCPA procedural mandates and their failure to do so does not satisfy the requirements of § 10(a)(3).

Manifest Disregard 

The Fourth Circuit adopted the position that manifest disregard continues to exist either as an independent grounds for judicial review of arbitration awards or as a judicial gloss on arbitration awards.  A court may vacate an arbitration award for manifest disregard of the law if: (1) the applicable legal principle is clearly defined and not subject to reasonable debate; and (2) the arbitrator refused to heed that legal principle.  Long John Silver’s Rests., Inc. v. Cole, 514 F.3d 345, 349 (4th Cir. 2008).  In this case, the appellate court found that whether the Panel erred by not applying the FCPA’s procedural requirements was a question that was itself not clearly defined and was certainly subject to debate. Therefore, the court held that the arbitrators did not manifestly disregard the law when they awarded the former employees $1.1 million in attorneys’ fees and costs under the FCPA.

The appellate court affirmed the decision of the district court denying Wachovia vacatur of the FINRA arbitration award.

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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.

Colorado Court Confirms FINRA Arbitration Award Denying Relief for Service Member’s USERRA Claims

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Michael H. Ohlfs v. Charles Schwab & Co., Inc., 2012 WL 202776 (D. Colo. Jan. 24, 2012)

In a case before the Colorado federal district court, Michael Ohlfs (“Ohlfs”), an investment professional employed by Charles Schwab & Co., Inc., (“Charles Schwab”), filed a motion to vacate a Financial Industry Regulatory Authority (“FINRA”) arbitration award decided in favor of Charles Schwab in August 2011.  Charles Schwab petitioned the court to confirm the arbitration award and enter judgment pursuant to the Federal Arbitration Act (“FAA”), 9 U.S.C. § 9.  The court dismissed Ohlfs claims with prejudice and entered judgment for Charles Schwab.

Case Background

The underlying dispute in this case arose when Ohlfs returned from post 9/11 active duty military service to a Grade 56 Investment Representative position with Charles Schwab, which was lower than the Grade 57 Senior Investment Specialist he held prior to his military service.  The Uniformed Services Employment and Reemployment Rights Act, 38 U.S.C. § 4301, et seq., (“USERRA”) prohibits employment discrimination against military personnel deployed for active duty.  Ohlfs initially filed his USERRA claims in federal district court; however, the court ordered the parties to FINRA arbitration pursuant to the agreement that Ohlfs executed when he registered as a securities broker.

FINRA appointed an arbitration panel of three arbitrators to hear the matter after Ohlfs executed a FINRA Arbitration Submission Agreement, which included an agreement to be bound by the award.  Ohlfs’s claims against Charles Schwab included allegations that his re-employment in 2003 and 2004 were both in violation of USERRA § 4312, that he was discriminated against by failure to promote in violation of USERRA § 4311, and that he was discriminated against for filing a Department of Labor complaint. After ten days of hearings, the FINRA arbitration panel denied all Ohlfs’s statutory claims and all relief requested with prejudice.

Ohlfs filed a motion in federal court to vacate the FINRA arbitration award on several grounds, including unfair treatment by the FINRA arbitration panel, violation of the well-established USERRA public policy, and manifest disregard of the law.

The Allegations

To support his allegation of evident partiality by the arbitration panel, Ohlfs cited nine deficiencies in the arbitration process. The court determined that these allegations, viewed both separately and cumulatively, were insufficient to satisfy Ohlfs’s burden of demonstrating that the panel was unfair to him or partial to Charles Schwab.

One of the key allegations was that two arbitrators were biased toward Charles Schwab because of their connections to the company.  Two members of the arbitration disclosed their connections to Charles Schwab prior to hearing and deciding Ohlfs’s claims.  Because he had knowledge of facts suggesting arbitrator bias or partiality but failed to object to their participation until after the entry of the award, the court determined that Ohlfs waived his right to claim arbitrator bias on these grounds.

Another key allegation was that the arbitration panel refused to consider, or otherwise disregarded evidence, that Ohlfs presented regarding having gone from a Grade 57 Senior Investment Specialist to a Grade 56 Investment Representative following his post–9/11 military service.  Without supporting transcripts from the arbitration hearing, the court determined it had no basis on which to find unfairness or partiality.

Vacating an Arbitration Award on Statutory Grounds

Federal courts may vacate an arbitration award under four narrowly defined statutory grounds, 9 U.S.C. § 10(a), including “evident partiality” on the part of the arbitrators.  An arbitration award may also be vacated for a limited number of judicially created reasons, such as violations of public policy, manifest disregard of the law, and denial of a fundamentally fair hearing. Sheldon v. Vermonty, 269 F.3d 1202, 1206 (10th Cir. 2001).   Errors in the arbitration panel’s findings of fact, interpretation of the law, or application of the law do not justify vacating an award unless such errors correlate to a manifest disregard for the law. See Hollern v. Wachovia Sec., Inc., 458 F.3d 1169, 1172 (10th Cir. 2006).

Vacating an Arbitration Award on Non-Statutory Grounds 

Courts have limited authority to vacate an arbitration award for non-statutory reasons.  An arbitration award may be set aside on public policy grounds if: (1) the award creates an explicit conflict with other laws and legal precedents as opposed to general considerations of supposed public interests; and (2) the violation of such public policy is clearly shown. United Paperworkers Int’l Union, AFL–CIO v. Misco, Inc., 484 U.S. 29, 43 (1987).

Ohlfs argued that the FINRA arbitration award in favor of his employer clearly violated USERRA’s well-defined public policy of protecting members of the armed forces from employment discrimination because the award absolved the employer of any wrongdoing without determining the merits of Ohlfs’s claims.  The court determined that this argument was an attempt to attack the arbitration award on the basis of the arbitration panel’s failure to issue a reasoned decision.  FINRA Rule 1304(g) provides for an “explained decision” that sets forth the general reasons for the arbitration award.

However, such a decision is provided only in the event that the parties jointly request such a decision twenty days prior to the first scheduled hearing.  FINRA Rule 13514(d).  An explained decision was not required in this case under FINRA’s rules because the parties did not jointly request such a decision.  Therefore, Ohlfs failed to carry his burden of proof on the matter.

Vacating an Arbitration Award Based on Disregard of the Law

In order to vacate an arbitration award based on the arbitrators’ manifest disregard of the law, “the record [must] show the arbitrator[s] knew the law and explicitly disregarded it.” Dominion Video Satellite, Inc. v. Echostar Satellite, L.L.C., 430 F.3d 1269, 1275 (10th Cir. 2005).  The court determined that, in the absence of an explanation for the award, Ohlfs cannot demonstrate that the panel manifestly disregarded the law under USERRA based on the fact that it found for Charles Schwab on his claims. The award itself provided no basis to find an “explicit” disregard of the law. Charles Schwab presented substantial evidence in its defense during the arbitration, and the court cannot second guess the panel’s factual findings.

The court denied Ohlfs’s motion for vacatur and entered judgment in favor of Charles Schwab as set forth in the FINRA arbitration award dated August 9, 2011.

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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.

Federal Appellate Court Affirms Lower Court Ruling Not to Vacate FINRA Award

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Javier Aviles v. Charles Schwab & Co., Inc., 435 Fed.Appx. 824 (11th Cir. 2011) (per curiam)

In a case before the United States Court of Appeals, Eleventh Circuit, Javier Aviles (“Aviles”) appealed a decision by the United States District Court for the Southern District of Florida that confirmed a Financial Industry Regulatory Authority (“FINRA”) arbitration award of $1.4 million in favor of Charles Schwab & Co., Inc. (“Charles Schwab”).   The appellate court affirmed the district court ruling.

Case Background

In 2007, Aviles left his employment with Charles Schwab to join Banc of America Investment Services, Inc. (“BAI”).  Later that year, Charles Schwab came to believe that Aviles was improperly soliciting its clients.  Schwab filed a Statement of Claims with FINRA against both Aviles and BAI, alleging multiple claims arising from Aviles’s resignation from Charles Schwab and his subsequent employment with BAI

These claims included: breach of contract, misappropriation and misuse of trade secrets, breach of duty of loyalty, breach of fiduciary duty, tortious interference with contractual and business relations and unfair competition.  BAI was later dismissed from the arbitration proceedings.  In April 2009, the arbitration panel entered an award finding Aviles liable to Charles Schwab for $1.4 million.

The Court’s Decision

Aviles filed a timely motion to vacate the arbitration award in state court, and Charles Schwab removed to federal court.  After removal, Aviles filed a motion to amend in order to add a new claim of arbitrator bias.  The district court found that the grounds for vacating the award set out in the original motion were without merit.  Additionally, the district court found that the amended motion was not filed in a timely manner and did not relate back to the original motion.  Finally, the district court found that the claim of arbitrator bias contained in the proposed amended motion also failed to warrant vacatur of the arbitration award.

Appellate courts do not use a different legal standard to review arbitration related judicial decisions:  district court findings of fact are reviewed for clear error and district court legal conclusions are reviewed de novo.  The Federal Arbitration Act (“FAA”), 9 U.S.C. § 10(a), provides limited statutory grounds for vacating an arbitration award, including where arbitrators refused to hear evidence pertinent and material to the controversy, or where there was “evident partiality” or corruption in the arbitrator.

Seeking Vacatur by Challenging an Evidentiary Decision

When a party seeks vacatur by challenging an evidentiary decision of the arbitration panel, he must show that the arbitrator’s refusal to hear pertinent and material evidence prejudiced the rights of the parties to the arbitration’s proceedings.  Rosensweig v. Morgan Stanley & Co., 494 F.3d 1328, 1333 (11th Cir. 2007).

Aviles argued that the arbitrators refused to hear evidence material to the controversy because the arbitration panel excluded unsworn declarations completed by former Charles Schwab clients who had followed Aviles to BAI.  Aviles asserted that these were material to the controversy because they demonstrated that the clients decided to transfer their accounts to BAI because it was in their personal best interest to maintain the relationship with Aviles.

The chair of the arbitration panel stated that he would not allow documents that were not sworn or authenticated; however, he would sign subpoenas to allow Aviles to present this evidence in an acceptable manner and would also permit telephonic testimony if someone was out-of-town or otherwise unable to attend the hearings.

The appellate court determined that the exclusion of the unsworn declarations did not prejudice Aviles’s right to present all evidence pertinent and material to the controversy.  The chair of the arbitration panel offered Aviles alternate avenues to submit this evidence, and Aviles decided not to avail himself of those options.  Therefore, the district court did not err in its ruling that the arbitration award could not be vacated on the grounds that arbitrators refused to hear evidence.

Seeking Vacatur by Challenging Impartiality

When a party seeks vacatur by challenging the impartiality of the arbitration panel, he must show that the alleged partiality is “direct, definite and capable of demonstration rather than remote, uncertain and speculative.” Gianelli Money Purchase Plan & Trust v. ADM Investor Servs., 146 F.3d 1309, 1312 (11th Cir. 1998).

Aviles presented an affidavit from a FINRA arbitrator not serving on his panel indicating that the chair of the arbitration panel made statements illustrating a clear bias against him.  Specifically, the affidavit alleges that the chair stated that when a court enters a preliminary injunction or a temporary restraining order against a financial advisor prior to arbitration, the arbitrator’s only remaining task is to quantify and award damages.  Aviles had been served with a preliminary injunction prior to the arbitration proceedings.

The court found that the statements in the affidavit did not indicate that the chair of the arbitration panel was biased against Aviles. According to the court, the affidavit at most illustrated that the chair of the arbitration panel had an incorrect understanding of a legal issue, which is not enough to demonstrate bias or hostility toward a party.  Therefore, the district court did not err in its ruling that the arbitration award could not be vacated on grounds of arbitrator bias.

Because the district court did not err in ruling that there were insufficient grounds to vacate the arbitration award on the basis of refusal to hear evidence and arbitrator bias, the appellate court affirmed the district court ruling denying Aviles’s motion to vacate the arbitration award.

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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.

Federal Court Narrows the Definition of “Customer” to Limit Compelled Arbitration Under the FINRA Code of Arbitration Procedure for Customer Disputes

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Herschel and Mona Zarecor, et al, v. Morgan Keegan & Company, Inc., 2011 WL 5508860 (E.D. Ark. Nov. 10, 2011)

In a case before the United States District Court for the Eastern District of Arkansas, Herschel and Mona Zarecor (“the Zarecors”) filed a petition to confirm a Financial Industry Regulatory Authority (“FINRA”) arbitration award entered in their favor in October 2010.  Morgan Keegan & Company, Inc., (“Morgan Keegan”) filed a counterclaim to vacate the award.  The court granted Morgan Keegan’s motion for vacatur.  In a later action before the same court, the Zarecors filed a motion for reconsideration.  The court denied the motion for reconsideration.

Case Background

In this case, the underlying dispute is based on a Statement of Claims that the Zarecors filed with FINRA to institute an arbitration proceeding against Morgan Keegan.  The Zarecors alleged that Morgan Keegan violated state laws by failing to disclose risks associated with the Regions Morgan Keegan funds (“RMK Funds”) that the Zarecors purchased for their individual retirement accounts.  The Zarecors alleged that the prospectus and written sales materials for the RMK funds represented these funds as traditional income or bond funds, when these funds were invested instead in risky structured financial products and derivatives.  Over ninety-percent of the Zarecors original investment in the RMK funds was lost.

The Arguments

In their Statement of Claims, the Zarecors asserted that FINRA had jurisdiction to arbitrate the dispute in absence of a written arbitration agreement because Morgan Keegan was a FINRA member and the Zarecors were public customers.  Pursuant to FINRA Rule 12200, a member firm must arbitrate a dispute if:  (a) arbitration is required by written agreement or requested by the customer; (b) the dispute is between a FINRA member or associated person of a FINRA member and its customer; and (c) the dispute arises in connection with the business activities of the member or the associated person.

Morgan Keegan alleged that the Zarecors did not qualify as their customers because the Zarecors never sought advice from or held accounts with Morgan Keegan; the Zarecors purchased the RMK funds from competitor brokerage firms, held accounts at competitor brokerage firms and had no direct dealings with Morgan Keegan. Morgan Keegan also filed a motion to dismiss under FINRA Rule 12504(a)(6)(B), which the arbitration panel denied after hearing oral arguments from the parties.  After three days of arbitration hearings, the FINRA arbitration panel issued an award finding Morgan Keegan liable to the Zarecors for $541,000 in compensatory damages.  In November 2010, the Zarecors commenced an action to confirm the award and Morgan Keegan filed a counterclaim to vacate the award.

Grounds for Vacating Arbitration

The Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 9-11, provides statutory grounds for judicial review to confirm, vacate or modify an arbitration award.  Where there has been an arbitration agreement between the parties, judicial review is severely limited and the arbitration decision may be vacated on very narrowly defined statutory grounds.  See 9 U.S.C. § 10(a).

Morgan Keegan asked the court to vacate the arbitration award on two grounds:  (1) there was no such arbitration agreement between the parties; and (2) the underlying dispute is not subject to mandatory arbitration under FINRA Rule 12200 because the Zarecors were not customers entitled to request arbitration.  The Zarecors countered that, because Morgan Keegan had not sought to enjoin the arbitration proceedings and had participated in the arbitration hearings, they claimed that the firm had waived its right to contest whether the underlying dispute could be submitted for arbitration.

Morgan Keegan may Contest Arbitrability

A party opposed to arbitration has several alternatives to preserve the issue for judicial review:  (1) object to the arbitrator’s authority, refuse to argue the arbitrability issue, and proceed to the merits of the agreement; (2) seek declaratory or injunctive relief from a court prior to commencement of arbitration; (3) notify the arbitrators of a refusal to arbitrate altogether; or (4) file a timely motion to vacate in district court. See International Broth. of Elec. Workers, Local Union No. 545 v. Hope Elec. Corp., 380 F.3d 1084, 1101–02 (8th Cir. 2004).

The court determined that Morgan Keegan did not waive its right to contest arbitrability by failing to enjoin the arbitration proceedings; its motion to dismiss, its objections to the arbitration panel’s jurisdiction during the hearings and its timely motion to vacate the award supported the court’s finding that Morgan Keegan sufficiently preserved its right to contest that the underlying dispute was not subject to FINRA arbitration.

Definition of “Customer”

FINRA Rule 12100(i) provides the following definition of a “customer” to be used throughout the FINRA Code of Arbitration Procedure for Customer Disputes: “A customer shall not include a broker or dealer.”  The district court was concerned that the definition of a “customer” under this rule not be construed too narrowly, nor be interpreted in a manner that would ignore the reasonable expectations of FINRA members.

For the purposes of compelling a member firm to arbitrate a dispute, precedent within the Eighth Circuit limits the definition of a “customer” to “one involved in a business relationship with [a FINRA] member that is related directly to investment or brokerage related services.” Fleet Boston Robertson Stephens, Inc. v. Innovex, Inc., 264 F.3d 770, 772 (8th Cir. 2001).   This narrower definition excludes individuals who receive only financial advice, not investment or brokerage services, from the FINRA member.  Id.

Zarecors not Qualified as Customers

In the instant case, it is undisputed that the Zarecors purchased the RMK Funds from competitor brokers and did not have a direct transactional relationship with Morgan Keegan; however, the Zarecors asserted that they qualified as customers of Morgan Keegan based on phone conversations with Morgan Keegan representatives regarding the funds, including their liquidity and exposure to the sub-prime market.

Courts have found a customer relationship based on interactions between an investor and a FINRA member’s representative only where there is conduct on the part of the representative that indicates the existence of a business or investment relationship, such as soliciting a purchase, taking money from an investor, or facilitating investment transactions. See Oppenheimer & Co., Inc. v. Neidhardt, 56 F.3d 352 (2d Cir. 1995).  The Zarecors’ interaction with Morgan Keegan did not satisfy this standard.  Therefore, the district court determined that there were no connections or customer relations between the parties that would justify compelling arbitration under FINRA Rule 12200.

Because the district court found that the requirements for compelling arbitration under FINRA Rule 12200 were not satisfied, the court denied the Zarecors’ motion for judgment confirming the arbitration award and granted Morgan Keegan’s counterclaim to vacate the award.

Motion for Reconsideration Denied

In November 2011, the Zarecors filed a motion for reconsideration pursuant to Rule 59(e) of the Rules of Federal Civil Procedure, which permits a district court to correct its own mistakes in the time period immediately following entry of judgment.  Rule 59(e) cannot be used to introduce new evidence, tender new legal theories or raise arguments that could have been offered prior to entry of judgment.  In their motion for reconsideration, the Zarecors contended that the court overlooked the material fact that Morgan Keegan signed an agreement to submit to arbitration and that this submission agreement had been part of the record.

Although the submission agreement was part of the record, the Zarecors failed to reference it or discuss its relevance in briefs filed prior to judgment.  The court’s failure to notice the submission agreement, therefore, did not amount to manifest error of law or fact.  The Zarecors additionally contended that Morgan Keegan submitted the issue of arbitrability to the arbitration panel for decision.  The court considered this argument to be a new legal theory, contradictory to the Zarecors’ previous argument that Morgan Keegan had waived its right to object to arbitrability by failing to contest the issue before the arbitration panel. Therefore, the district court rejected both contentions as sufficient bases for reconsideration under Rule 59(e).

The district court determined that that the Zarecors were not entitled to relief under Rule 59(e) and, therefore, denied their motion for reconsideration.  The court’s previous order and judgment to vacate the FINRA arbitration award were undisturbed.

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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.

Federal Court Does Not Vacate FINRA Arbitration Award Denying ERISA Claims

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Stephen P. Finkelstein v. UBS Global Asset Management (US) Inc. and UBS Securities LLC,2011 WL 3586437 (S.D.N.Y. Aug 9, 2011)

In a case before the Southern District of  New York, Stephen P. Finkelstein (“Finkelstein”) filed a petition to vacate part of a Financial Industry Regulatory Authority (“FINRA”) Arbitration Award dated October 20, 2010, pursuant to the Federal Arbitration Act (“FAA”), 9 U.S.C. § 10. UBS Global Asset Management (US), Inc., and UBS Securities LLC, (collectively “UBS”) filed a cross-motion to confirm the arbitration award pursuant to the FAA, 9 U.S.C. § 9.  The court denied Finkelstein’s motion to vacate and granted UBS’s motion to confirm the arbitration award in their favor.

Case Background

The underlying dispute is based on UBS’s denial of Finkelstein’s claim for a special payment under the UBS severance pay plan, which is governed by the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1132.  Finkelstein began his employment with UBS in 2002.  In April 2006, he was internally transferred to a hedge fund as a portfolio manager responsible for a variety of subprime securities.  Within a year of his transfer, the hedge fund suspended his trading authority due to losses of over $300 million in his positions.  A few months later, UBS closed the hedge fund based on its overall losses; hedge fund employees were either offered new jobs or terminated.  Finkelstein was terminated without cause in August 2007.

The UBS separation program contained a provision offering a special payment to employees who were terminated on or after October 1, but before the date on which bonuses are usually paid.  As part of the closure of the hedge fund, UBS adopted a supplemental program that amended the special payment provision to provide eligible employees with a special payment at the discretion of the hedge fund’s management, even though these employees were not terminated on or after October 1.

The written eligibility requirements of the supplemental program specified dates of employment and involuntary termination; the hedge fund’s management exercised its discretion to define the formula for calculating the amount of the special payment and to exclude employees who were responsible for substantial losses at the time of the hedge fund’s closure.  Therefore, despite having satisfied the written eligibility requirements of supplemental program, Finkelstein was offered a separation package that did not include a special payment.

Finkelstein’s Claims

Pursuant to the separation program’s grievance procedures, Finkelstein submitted a claim for benefits demanding a special payment that was equivalent to 25-percent of his 2006 bonus, which was in accordance with the formula determined by the hedge fund management.  Although he acknowledged the losses on his 2007 trading book, Finkelstein attempted to explain that greater than half the losing positions were purchased by his partner without his consent and that the remainder of the losses could be recovered over time.

The severance committee denied Finkelstein’s claim, stating that the hedge fund’s management had appropriately exercised its discretion in denying him a special payment.  Finkelstein requested a review of the severance committee’s denial of his claim, and was again denied his demand for a special payment.

In December 2008, Finkelstein filed a Statement of Claim with FINRA seeking an award of the special payment.  FINRA appointed a panel of three arbitrators to hear the matter and, in October 2010, entered an award in favor of UBS without any explanation or rationale.

Finkelstein filed a petition in federal district court to vacate the arbitration award on the following three grounds: (a) the arbitration panel decision was in “manifest disregard” of ERISA, 29 U.S.C. § 1145; (b) the arbitration award was procured through the fraudulent concealment of material information by UBS; and (c) the arbitrators refused to hear evidence pertinent and material to the controversy.

Basis of Manifest Disregard

Vacating an arbitration award on the basis of manifest disregard of the law requires the challenging party to demonstrate that the arbitrators clearly defied the law either by rejecting precedent or pronouncing a decision that strains credulity. See Stolt–Nielsen SA v. AnimalFeeds Int’l Corp., 548 F.3d 85, 92–93 (2d Cir.2008),reversed on other grounds, 130 S.Ct. 1758 (2010).

However, even if the arbitrators do not explain the reasons for their decision, the court will uphold the arbitration award “if a justifiable ground for the decision can be inferred from the record.” Id.at 97. In his petition, Finkelstein contended that the FINRA arbitration panel manifestly disregarded ERISA, 29 U.S.C. § 1145, on four different grounds.  The most significant basis for his contention was that the arbitration panel should have rejected UBS’s unwritten, oral modification of the ERISA severance pay plan to exclude employees responsible for substantial losses from special payment eligibility.  Both the ERISA statute, 29 U.S.C § 1102(a)(1), and case law within the Second Circuit require that all amendments to employee benefit plans be in writing.

Court’s Ruling on Manifest Disregard

However, the written documents of the hedge fund supplemental program expressly conferred the hedge fund management with certain discretionary powers; therefore, the court determined that it was not erroneous for the arbitration panel to conclude that the unwritten rule excluding employees who incurred substantially losses was a permissible exercise of this discretionary authority, rather than an oral modification of the supplemental program.  Because the ERISA provision on oral modifications cited by Finkelstein was inapplicable, the arbitration panel had colorable justification to conclude that it was not violated.

Consequently, the court determined that Finkelstein failed to demonstrate manifest disregard of ERISA on these grounds. The court also found that each of the remaining challenged panel determinations was supported by a colorable justification.  Therefore, the court concluded that the arbitration award could not be vacated for manifest disregard of the ERISA statute.

Court’s Ruling on Fraud

Vacating an arbitration award on the basis of fraud under the FAA, 9 U.S.C. § 10(a)(1), requires the challenging party to produce clear and convincing evidence that there was fraud that could not have been discovered during the arbitration process and that such fraud is materially related to the award.Chimera Capital, L.P. v. Nisselson (In re MarketXT Holdings, Corp.),428 B.R. 579, 590 (S.D.N.Y. 2010) (citingA.G. Edwards & Sons, Inc. v. McCollough.967 F.2d 1401, 1404 (9th Cir. 1992) (per curiam).   Finkelstein alleged that UBS concealed material information relevant to the dispute.

However, the court determined that UBS could not have fraudulently concealed information that they had no obligation to disclose, and also determined that UBS did voluntarily disclose the challenged information in an accurate manner.  Therefore, the court concluded that the arbitration award could not be vacated on the basis of fraud under the FAA.

Court Ruling on Refusing to Hear Evidence

Vacating an arbitration award on the basis of refusing to hear evidence pertinent to the dispute, 9 U.S.C. § 10(a)(3), has been interpreted by courts to mean that an arbitration award will not be opened to evidentiary review except “where fundamental fairness is violated.” Tempo Shain Corp. v. Bertek, Inc.,120 F.3d 16, 20 (2d Cir.1997) (quotingBell Aerospace Co. Div. of Textron v. Local 516,500 F.2d 921, 923 (1974)).

The arbitration panel denied Finkelstein’s request for production of evidence concerning the value of any parallel investments held by the UBS Investment Bank.  He contended this evidence was highly relevant because it would have negated UBS’s assertion that his trading activities sustained substantial losses.  It was within the arbitration panel’s broad discretion to determine that the requested materials would have been irrelevant and/or unduly burdensome for UBS to produce.

The court determined that the arbitration panel’s refusal to compel UBS to produce this evidence did not deny Finkelstein a “fundamentally fair” hearing because the scope of inquiry afforded him was sufficient to provide him with a reasonable opportunity to be heard and to enable the arbitration panel to make an informed decision.  Therefore, the court concluded that the arbitration award could not be vacated on the basis of refusing to hear evidence.

The court denied Finkelstein’s petition to vacate the FINRA arbitration award, and entered judgment to confirm the arbitration award in UBS’s favor.

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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.

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

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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.

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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.

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

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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 JMaya@Mayalaw.com.