Friday, November 30, 2012

Federal District Court Denies Questar's Motion to Vacate 3.25 Million Dollar Arbitration Award

On November 12, 2012, Senior Judge Thomas B. Russell of The United States District Court, WesternDistrict of Kentucky, issued a 60-page Opinion denying a Petition to Vacate and a Motion to Vacate filed by Questar Capital Corporation. Questar is a fully owned subsidiary of U.A. Allianz. Questar filed in federal court after a 3-arbitrator FINRA panel sitting in Louisville issued a $3.25 million Award to a client of St. Louis' Cosgrove Law Group, LLC. The client is a former independent contractor, broker-dealer agent, and investment advisor representative of Questar.

The Court spent the first 1/3 of its Opinion addressing the broker's contention that Questar had waived its right to file a Motion to Vacate by failing to comply with the 30-day post-Award deadline set forth in FINRA Rule 13904. The broker had filed a Motion to Dismiss Questar's Petition to Vacate because, while it was filed within 30 days of the Panel's Award, Questar subsequently filed a Motion to Vacate about 75 days after the Award. The Court denied the Motion to Dismiss, concluding that, despite conflicting legal precedent, Rule 13904 “did not establish a 30-day time limit for filing a Motion to Vacate.” (Opinion at 23). Specifically, Judge Russell concluded that it is sufficient if a movant files within the 90-day time limit set forth in Section 12 of the Federal Arbitration Act (FAA).

Approximately half-way through his meticulous Opinion, Judge Russell initiated his analysis of “the heart of this proceeding”--the merits of Questar's application for vacatur. He began by noting the limited grounds upon which an arbitration award may be vacated under the FAA, noting that the Sixth Circuit recognizes an extra non-FAA judicial basis-- “manifest disregard of the law” by the arbitrator. Finally, rather than proceeding to evaluate sequentially each and every specific claim set forth by Questar, the Court divided Questar's allegations and the Court's analysis into the four FAA grounds of vacatur, as well as the Sixth Circuit's manifest disregard basis.

As to FAA Section 10(a)(2)-- “evident partiality” --the Court concluded that Questar's challenge to the sufficiency of pre-hearing disclosures the Panel Chairman made was without merit. (Opinion at 29-39). The Court's detailed analysis in this regard notes, among other things, that “...a party cannot remain silent as to perceived or actual partiality or bias and then later object after the panel reaches an unfavorable decision.” (Opinion at 37).

Judge Russell proceeded on to address Questar's multi-layered contention that the Panel violated FAA Section 10(a)(3) in that it allegedly refused to hear evidence pertinent and material to the controversy. In this regard the Court noted that “the standard for judicial review of arbitration procedures is merely whether a party to arbitration has been denied a fundamentally fair proceeding.” (Opinion at 40). The Court observed that only two of Questar's myriad of claims fell within this category: 1) that despite allowing the broker to introduce evidence through the testimony of his former attorney, the Panel improperly allowed him to assert the attorney-client privilege on Questar's cross-examination, and 2) that the Panel improperly excluded testimony from the broker's former clients. (Opinion at 41-42).

As to the first, the Court concluded that the claim was factually without merit. As to the latter, the Court concluded that the Panel's provision of 10 subpoenas in response to Questar's request for 55 subpoenas in the middle of the five-months of hearing sessions was more than adequate, noting that “arbitrators are not required to hear all of the evidence tendered by the parties; they need only afford each party a fair opportunity to present their arguments and evidence.” (Opinion at 42-49).

As to FAA Section 10(1)(4), the Court evaluated Questar's general challenge to the sufficiency of the evidence to support Claimant’s claims for defamation, negligence or tortious interference. At the outset of this analysis, the Court noted:

“...the award is devoid of any rationale or explanation as to the factual basis for the Panel's decision, the particular theory or cause of action upon which the award is based, and/or how the Panel calculated the award figure. But, Importantly, this is precisely the outcome contracted for between the parties. Cf. United Steelworkers v. Enter. Wheel & Car Co., 363 U.S. 593, 598 (1960) (“Arbitrators have no obligation to the court to give reasons for an award.”); Dawahare v. Spencer, 210 F.3d 666, 669 (6th Cir. 2000) (“Arbitrators are not required to explain their decisions.”). As the Sixth Circuit has stressed, where the arbitral agreement imposes no duty of explanation on the arbitrator, “remand for the purpose of having the arbitrator clarify his reasoning would be inappropriate.” Id. at 977 n.9.

(Opinion at 50-51).

Aptly enough, Judge Russell stated: “The Court will not be lured into reviewing the merits of the Panel's decision.” (Opinion at 51). The Court proceeded to rebuke Questar's sufficiency challenge after a careful review of the appropriate controlling precedent and standard of review for Motions to Vacate. Judge Russell cited a fundamental tenet on this point:

“The Supreme Court and this Circuit have both admonished courts that “as long as the arbitrator is even arguably construing or applying the contract [to arbitrate] and acting within the scope of his authority, that a court is convinced he committed a serious error does not suffice to overturn his decision”; accordingly, “courts must refrain from reversing an arbitrator simply because the court disagrees with the result or believes the arbitrator made a serious legal or factual error.” Misco, 484 U.S. At 38; Salvay, 442 F.3d at 476.

(Opinion at 56).

Finally, the Court evaluated Questar's Motion to Vacate under the Sixth Circuit's “manifest disregard of the law” standard. This analysis bore no fruit for Questar either. Judge Russell cited Coffee Beanery, Ltd. v. WW L.L.C., 300 F.App'x 415 (6th Cir. 2008) for the proposition that vacatur is only appropriate under this standard if “the decision [flies] in the face of clearly established precedent.” Id. at 418. (Opinion at 57). The Court also made the insightful distinction between a manifest disregard of the law, and the manifest disregard of fact that Questar was essentially peddling. (Opinion at 58-59).

The attorneys at Cosgrove Law Group, LLC spent approximately five (5) months briefing the various post-Award issues in this matter. In doing so, they reviewed dozens upon dozens of FAA and vacatur opinions. Judge Russell's Opinion in this matter may be the most thorough and instructive. You would be remiss not to digest it and save it if you practice in this area.

Friday, November 2, 2012

FINRA Panel Awards Expungement in Unlikely Case

 A FINRA hearing Panel in Pittsburgh, Pennsylvania recently made an uncommon move when it expunged an arbitration from a broker’s CRD records despite finding the broker jointly liable to the customer. 

In Bordas v. Wells Fargo, FINRA ID # 11-00484, the Claimants, James and Linda Bordas filed an arbitration claim against Wells Fargo Advisors, LLC and Ernest Coffindaffer for unsuitability, unauthorized trading, forgery, misrepresentation, fraud, negligence, breach of fiduciary duty, violations of the Securities and Exchange Act of 1934 and Rule 10b-5, respondeat superior, failure to supervise, and breach of contract.  The causes of action relate to the alleged recommendation and purchase of municipal bonds and variable annuities against the Claimants’ express wishes. 

The Respondents asserted counterclaims for defamation per se, tortious interference with business relationships, and tortious interference with prospective business relationships. 

At the close of hearing, Claimants’ requested a total award of $10 million: $754,765.00 in lost capital; $707,200.00 in lost gain; and the balance in non-economic and punitive damages.  Respondents’ requested $2,000,000.00 in compensatory damages, plus attorneys’ fees of $381,561.60 and $65,564.63 in disbursements. 

The Panel found Wells Fargo and Coffindaffer jointly and severally liable to the Claimants in the amount of $97,250.00.  Since arbitration awards rarely discuss findings of fact, it is unclear which claim(s) the award relates to.  James Bordas was found liable to Coffindaffer for defamation in the amount of $1,000.00.  All other claims against Claimants were dismissed with prejudice. 

Despite finding Coffindaffer jointly and severally liable with Wells Fargo, the Panel made a specific finding of fact that Coffindaffer was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of customer funds.  Even though it is uncertain what claim(s) the award was based on, one can assume that Coffindaffer was probably not found liable for fraud or any claims involving an element of willful intent especially since the Panel found that Coffindaffer’s conduct was “not so egregarious as to warrant a permanent stigma on his CRD.”  

The Central Registration Depository (CRD) is a database used by FINRA and NASAA to store and maintain information on registered securities and broker firms.  CRDs contain qualification, employment, and disclosure histories of registered individuals and can be used like a background check on brokers.  FINRA also pulls information from CRDs for its BrokerCheck program, which provides background information on brokers and firms to investors. 

When a broker is named as a respondent in a customer-initiated arbitration, the claim and any alleged wrongdoing are required to be reported on the borker’s Form U4, which will eventually get recorded in the CRD system and become available to the public through BrokerCheck. Therefore, some information that can be disclosed on one’s CRD could be damaging to a broker’s reputation.   

Brokers may seek to expunge any reference to the allegations or involvement in the arbitration from the CRD system.  However, FINRA provides rules that arbitrators must follow before awarding expungement to a broker. 

FINRA Rule 2080 requires that a court of competent jurisdiction confirm an arbitration award granting expungement.  FINRA must be named as an additional party to these court proceedings.  In most cases, FINRA generally opposes the confirmation of an award to expunge.  However, upon request, FINRA may waive the requirement to be named as an additional party in these proceedings if the award directing expungement contains one of the following findings: (1) the claim, allegation or information is factually impossible or clearly erroneous; (2) the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or (3) the claim, allegation or information is false.

FINRA Rules 12805 and 13805 provide that in order to grant expungement, an arbitration panel must hold a recorded hearing session regarding the appropriateness of the expungement.  If the case involves a settlement, the panel must review the settlement documents and conditions of the settlement to determine whether concerns exist about the broker’s involvement in the alleged misconduct. The panel must also indicate which grounds exist under FINRA Rule 2080 to support expungement.  Finally, all hearing session fees must be assessed against the party requesting expungement for any hearings in which the sole topic is expungement. 

Therefore, although the panel awarded expungement, Coffindaffer will still have to obtain a confirmation of the expungement award by the courts.  While the Panel made a specific finding under FINRA Rule 2080, FINRA may still oppose the expungement since he was sheld jointly and severally liable to the customer.  The Panel’s finding that Coffindaffer’s conduct was “not so egregarious as to warrant a permanent stigma on his CRD” may not be enough.

If you are a broker named in a customer-initiated arbitration and would like to seek expungement of the allegations or involvement in the arbitration from your CRD, contact the experienced attorneys at Cosgrove Law Group, LLC.