Thursday, December 31, 2015

SEC Victory in Protection of Whistleblowers

SEC Victory in Protection of Whistleblowers

A federal court of appeals ruled in early September that the 2010 Dodd-Frank financial reform law protected corporate whistleblowers who voice concerns to their company about possible wrongdoing prior to alerting securities regulators. The decision comes as a defeat for those who argue protection should not be granted if the individual does not first approach the government with their concerns.[i]

The Dodd-Frank Wall Street Reform and Consumer Protection Act, better known as Dodd-Frank, is an outgrowth of the 2008 Great Recession. It is a law intended to protect consumers and prevent a reoccurrence of abusive lending practices that brought about the collapse of major financial institutions.[ii]

Recognizing the feasibility of retaliation faced by those who bring attention to possible wrong-doing, Dodd-Frank created, “significant new whistleblower incentives and protections, including the creation of SEC and CFTF (Commodities Futures Trading Commission) whistleblower programs, expansion of current whistleblower protections under the Sarbanes-Oxley Act of 2002, and a new whistleblower cause of action for employees performing tasks related to consumer financial products or services.”[iii]

Judge Jon Newman, author of the federal appeals court opinion, suggested that, “expanding the protections would chiefly benefit auditors and attorneys who are barred from reporting alleged wrongdoing to the SEC until they have brought it to their employer’s attention.”[iv] Food for thought.

[i] Whistleblowers, SEC Are Winning in Ruling (2015, September 11) The Wall Street Journal, p. B4.
[ii] Dodd-Frank Act: CNBC Explains (2012, May 11) [electronic format] Retrieved from
[iii] Whistleblower Claims Under the Dodd-Frank Wall Street Reform and Consumer Protection Act: The New Landscape (n.d) New York State Bar Association [electronic format] Retrieved from
[iv] Whistleblowers, SEC Are Winning in Ruling (2015, September 11) The Wall Street Journal, p. B4.

Tuesday, December 22, 2015

How to Terminate, Discredit, and Interfere with a Financial Adviser: the U-5

I did not design the method I am about to share with you. Nor do I condone it. But I have observed its employment repeatedly during my legal representation of financial advisers. And although some of the players on the field participate unwittingly, there is always a motivating participant. So, this is how it often works:
  1. A FINRA broker-dealer needs a sacrificial lamb (or two) to satisfy a regulator, or a manager or large producer has an ax to grind, or a large producer is seeking to leave with a substantial piece of the broker-dealer's overall assets, or Compliance is too lazy to ferret out a false accusation against a financial adviser.
  2. The motivating participant employs Compliance to (unwittingly?) establish an alternative pre-textual basis for termination. Sometimes it is a sales or management practice that has been accepted or overlooked for years.
  3. The motivating participant and Compliance employ Legal and Registration, under cover of the attorney-client privilege, to approve and issue a sufficiently disabling Form U-5 disclosure1. Extra damage can be done by simply checking any of the “yes” boxes under U-5 question 7. This can be too-easily justified by expanding the scope of the term “industry standards” in question 7E. 7E will trigger a public disclosure and regulatory investigation.
  4. Delay #1: The broker-dealer has 30 days after the termination to file the Form U-5. It can also update it at any time should updates be necessary.
  5. Delay #2: State regulators will refuse to register the financial adviser until they can investigate the basis for the U-5 disclosure. They may take weeks or months to inquire of the financial adviser and broker-dealer, giving the unmotivated broker-dealer 30-60 days to respond to their request for information. Often times this lengthy response time is used by the broker-dealer to craft a letter that is misleading and refers to the financial adviser in the worst possible light. A copy is not sent to the financial adviser.
  6. Delay #3: FINRA will likely demand documents and explanations as well from all of the parties.
  7. During the pendancy of #'s 3, 4, and 5, the broker-dealer may aggressively enforce non-solicitation or non-compete provisions. The successor financial adviser will call the departing financial adviser's book and, among several tactics, claim that he/she does not have contact information for the departed financial adviser. He or she may also encourage the client to view any disclosures on BrokerCheck and to stay with the current broker-dealer2.
  8. Finally, a promissory note balance may be used to exert extra financial pressure or silence from the financial adviser.

This is the basic anatomy of a tortious scheme to interfere with a financial adviser's business relationships. If you are currently or about to be a part of this game, either as a victim or hesitant participant, I urge you to contact me3 immediately.

1Most U-5 disclosures, however, are free of defamatory content or tortious intent. In other words, most broker-dealers satisfy their obligation to ensure a full, fair, and accurate reporting.
2This is a critical footnote. One or more of the players may simply be mean-spirited or incompetent. While this person may be the motivating player, he or she is usually manipulated and used by the motivator. The ultimate financial adviser victim—typically our client—frequently has a character defect (like all of us) that is exaggerated and exploited.

3David Cosgrove has handled U-5 matters involving MetLife Securities, US Bancorp Investments, Questar, US Allianz, Edward Jones, Raymond James, Morgan Stanley, ING Financial partners, and others.    

Friday, December 18, 2015

A Wrinkle in the Arbitration of Broker Promissory Notes

Little did Laura Facsina know that when she joined Morgan Stanley (MS) in 2009 as a financial adviser (FA) she would battle, not only the wirehouse for gender discrimination, but MS’s right to arbitrate the matter.

After bringing suit in court against MS, Ms. Facsina received a forgivable loan settlement of $280,000. But, a FINRA panel subsequently ordered that she repay a $419,000 promissory note, which was upheld in district court. The panel’s ruling is now before the 6th Circuit U.S. Court of Appeals, where Facsina is claiming there is a crucial jurisdictional issue negating FINRA’s determination.

According to the suit, it was not Morgan Stanley Smith Barney (MSSB) that owned the note, but rather its non-FINRA member subsidiary Morgan Stanley Smith Barney FA Notes Holdings. As such, Facsina argues, FINRA had no standing to entertain the arbitration, as only members may compel use of the forum by associated persons and clients.

“Moreover, Facsina’s settlement states that unless approved by all parties, no portion of the agreement – including the promissory note – is assignable. Facsina never gave consent for the note to be assigned to MSSB FA Notes Holding.”[i] This, she claims, is just one example of an on-going deceptive practice in which the true holders of promissory notes have been hidden, with significant consequences for hundreds of brokers.

Citing the research of a former MS employee turned whistleblower, website Think Advisor in its article “Ex-Morgan Advisor, in Unusual Move, Takes FINRA Arb Case to Federal Court,” found that between June 2009 and August 2015, of the 382 cases against advisors, only 12 were won by (ex-)employees and 330 by the company. Of those, MSSB FA Notes Holdings were believed to hold 160 of the notes.

These promissory notes are the overwhelming majority issue heard by FINRA’s arbitration panels. Notably, the panels also serve as the basis counterclaims in defamation and tortious interference claims brought by FAs. Food for thought…

[i] Ex-Morgan Advisor, in Unusual Move, Takes FINRA Arb Case to Federal Court (2015 November 24). Retrieved from

Sunday, November 8, 2015

Food for Thought

Food for Thought:  To be updated periodically with quotes, excerpts, and tidbits!

An article on U-5 Defamation:

“The Supreme Court in an Interdependent World”
(The Wall Street Journal, 9.15.15; A7)

The Supreme Court Goes Global:
“Legal problems – human rights violations, threats to national security, computer hacking, environmental degradation, corporate fraud, copy-right infringement – surface beyond our borders and may become potential threats to us at home...the frequent presence of foreign-related issues in the court's cases has little or nothing to do with the current political debate about whether American courts, including the Supreme Court, should refer in their opinions to decisions of foreign courts. Judicial reference to foreign law and practices do not reflect the ideologies of justices – rather they reflect a world in which cross-boundary travel, marriage, commerce, crime, security needs and environmental impacts have become prevalent.”

- Supreme Court Justice Stephen Breyer

Change is the law of life. And those who look only to the past or present are certain to miss the future.
- John F. Kennedy


A Texas attorney was sentenced to 35 months in prison and the surrender of his law license for misleading investors with artificially inflated stock prices of a sham company advertised to be on the verge of launch.

Martin Cantu and his partner Jason Wynn allegedly engaged in a $3 million conspiracy, netting about $550,000 and $2.5 million, respectively. Cantu still faces an $800,000 penalty from the U.S. Securities and Exchange Commission. [i]

Cantu pled guilty to conspiracy, but was also found guilty of securities fraud for his role in the unregistered stock offering of a web-based company that was never in a position to fulfill its promises to investors. After selling 10 million shares for one penny each, Cantu received 300,000 shares at no cost, just prior to a publicity campaign that included advertising in the USA Today newspaper.[ii]

Three million mailers were also distributed touting the company’s imminent launch, with promises of near limitless returns on the investment. In addition to the increased demand resulting from this publicity, the co-conspirators utilized brokerage accounts to buy shares and create the illusion of demand, while maintaining an inflated higher share price.[iii]

After accepting a plea deal, Wynn was sentenced to five years of probation and $425,000 in restitution. This does not include the $11 million SEC penalty he faces.[iv] Generally speaking, attorneys should never get personally involved with unregistered offerings.

[i] Orzeck, K. (2015, December 15) Texas Atty Gets 3 Yrs. For Duping Investors in $3M Web Scam [electronic format]. Retrieved from
[ii] Ibid.
[iii] Ibid.
[iv] Ibid.

Wednesday, July 8, 2015

Feds Take Aim at Investment Advisers

The SEC and DOJ brought a slew of cases against IAR's and RIA's in the first half of 2015. At least six cases were filed just last month alone. Here is a brief summary of a sampling of those cases.

On January 21, 2015, the SEC filed fraud charges and an asset freeze against a Fort Lauderdale, Florida-based investment advisory firm, its manager, and three related funds in a scheme that raised more than $17 million. The SEC’s complaint filed in federal court in the Southern District of Florida charged Elm Tree Investment Advisors LLC, its founder and manager, Frederic Elm, and Elm Tree Investment Fund LP, Elm Tree “e”Conomy Fund LP, and Elm Tree Motion Opportunity LP. According to the complaint, Elm, formerly known as Frederic Elmaleh, his unregistered investment advisory firm, and the three funds misled investors and used most of the money raised to make Ponzi-like payments to the investors. The complaint alleges that Elm used the funds to buy a $1.75 million home, luxury automobiles, and jewelry, and to cover daily living expenses.

On March 6, 2015, an investment adviser was hit with felony charges alleging that he defrauded clients of more than $1 million while running his own investment firm in Chicago. Philip E. Moriarty II is accused of six counts of wire fraud related to allegations that he defrauded investors of at least $1.1 million while he was the CEO of First Street Capital Partners in Chicago from 2008 to 2010. He’s accused of convincing four investors that they were investing in his businesses through the use of fraudulent documentation, and then spending the funds on personal expenses, including payments to a golf, hunting and fishing club, and $23,000 to a boarding school in New Hampshire.

Late that month, the SEC filed fraud charges against an investment adviser and her New York-based firms accusing them of hiding the poor performance of loan assets in three collateralized loan obligation (CLO) funds they managed. The SEC’s Enforcement Division alleged that Lynn Tilton and her Patriarch Partners firms breached their fiduciary duties and defrauded clients by failing to value assets using the methodology described to investors in offering documents for the CLO funds. Tilton and her firms allegedly have avoided significantly reduced management fees because the valuation methodology described in fund documents would have given investors greater fund management control and earlier principal repayments if collateral loans weren’t performing to a particular standard.

In April, 2015, a former JPMorgan Chase investment adviser was arrested on charges he stole $20 million from customers and spent the funds on unprofitable trading and other personal expenses. Michael Oppenheim allegedly took money from at least seven bank clients in a fraud scheme he operated from March 2011 to March 2015. Oppenheim worked as a JPMorgan investment adviser. He advised approximately 500 clients who collectively kept roughly $89 million in assets under his management, according to a criminal complaint filed by Manhattan federal prosecutors.

Later in April, a former Merrill Lynch and Smith Barney investment adviser already serving a federal prison term for investment fraud pleaded guilty to additional fraud charges in connection with a nearly two-decade-long scheme to defraud clients of hundreds of thousands of dollars. Jane E. O’Brien of Needham, MA, pleaded guilty to three counts of mail fraud, two counts of wire fraud, and two counts of investment adviser fraud. As alleged in the indictment, between 1995 and 2013, O’Brien defrauded several clients for whom she provided investment advisory services. As part of the scheme, O’Brien misappropriated funds entrusted to her through a variety of means, including persuading clients to withdraw money from their bank and brokerage accounts to invest. After gaining control of her clients’ money, however, O’Brien made no such investments. Instead, she used the misappropriated client funds for a variety of improper purposes, including paying personal expenses, paying purported investment returns, or repaying personal loans to other clients. Finally, in order to perpetuate her fraud and conceal it from her clients, O’Brien made false statements and misrepresentations to clients, including by making lulling payments to clients and otherwise providing them with false assurances of their financial security.

On May 15, 2015, Bryan Binkholder of St. Louis was sentenced to 108 months in prison on multiple fraud charges involving his financial planning and investment strategy businesses. In addition to the prison sentence, he was also ordered to pay $3,655,980 in restitution to the victims. According to court documents, Binkholder labeled himself “The Financial Coach” and provided investment and financial planning advice to the public through his affiliated websites and an investment related talk-radio show that aired on local radio stations. In 2008, he developed a real estate investment he termed “hard money lending.” Using his platform as an investment advisor and financial talk show host, Binkholder solicited his clients and others to invest in the hard money lending program. As part of his sales pitch he represented that he had relationships with developers who were not able to secure financing from traditional banks. As part of the hard money lending program, Binkholder told investors that they would invest money with him, and he would act as a bank and provide short term loans to these developers at a high rate of interest which would be shared with the investor. Instead of exclusively making hard money loans as promised, he took in millions of dollars of investor money, made only a small number of hard money loans and caused investors to lose more than $3,000,000.

On May 21, 2015, The Securities and Exchange Commission filed fraud charges against an Atlanta-based investment advisory firm and two executives accused of selling unsuitable investments to pension funds for the city’s police and firefighters and other employees. The SEC’s Enforcement Division alleged that Gray Financial Group, its founder and president Laurence O. Gray, and its co-CEO Robert C. Hubbard IV breached their fiduciary duty by steering these public pension fund clients to invest in an alternative investment fund offered by the firm despite knowing the investments did not comply with state law. Georgia law allows most public pension funds in the state to purchase alternative investment funds, but the investments are subject to certain restrictions that Gray Financial Group’s fund allegedly failed to meet. The SEC alleged that Gray Financial Group collected more than $1.7 million in fees from the pension fund clients as a result of the improper investments.

On June 3, 2015, the SEC filed two cases against purported investment advisers who falsified their credentials. In one case, the SEC charged that Todd M. Schoenberger of Delaware solicited at least a dozen people to invest in promissory notes issued by LandColt Capital, an unregistered advisory firm. According to the SEC, he said the notes would be repaid from management fees. Just a few days later, a Chicago investment adviser was arrested on federal charges that he defrauded his clients of at least $1 million, some of which he allegedly gambled away at local casinos. Alan Gold was charged in a criminal complaint that was unsealed following his arrest.

On June 11, 2015, the United States Attorney for the Western District of Wisconsin announced the unsealing of a 21-count indictment charging Pamela Hass with wire fraud and money laundering. The indictment also contains a forfeiture allegation seeking $460,831.27 in criminal proceeds. The indictment alleges that Hass engaged in a wire fraud scheme to defraud investors by promising returns from an investment in internet pop-up ads. According to the indictment, Hass falsely told investors they would obtain a return of anywhere from five to 20 times their original investment, and that if the investment failed, she would personally guarantee the return of the original investment plus 7 percent interest.

Also last month, The Securities and Exchange Commission announced fraud charges against a Washington D.C.-based investment advisory firm’s former president accused of stealing client funds. The firm and its chief compliance officer separately agreed to settle charges that they were responsible for compliance failures and other violations. SFX Financial Advisory Management Enterprises is wholly-owned by Live Nation Entertainment and specializes in providing advisory and financial management services to current and former professional athletes. The SEC alleged that SFX’s former president Brian J. Ourand misused his discretionary authority and control over the accounts of several clients to steal approximately $670,000 over a five-year period by writing checks to himself and initiating wires from client accounts for his own benefit.

Just a day later, Kenneth Graves, a former investment adviser representative in Corpus Christi whose license to sell securities was revoked last year by the Texas Securities Commissioner, was indicted on fraud charges related to the sale of investment contracts and excessive fees for his firm’s services. The indictment alleges that Graves defrauded six clients of his firm, Warren Financial Services LLC, through the sale of $420,720 in investment contracts. The indictment alleges that in a separate fraud in 2013 and 2014, Graves misapplied $128,918 in fees he had collected from clients of Warren Financial.

Finally, on June 17, 2015, the SEC announced fraud charges against a Massachusetts-based investment advisory firm and its owner for funneling more than $17 million in client assets into four financially troubled Canadian penny stock companies in which the owner had an undisclosed financial interest. The SEC alleged that clients at Interinvest Corporation may have lost as much as $12 million of their $17 million investment based on the recent trading history of shares in the penny stock companies, some of which were purportedly in the business of exploring for gold or other minerals. Interinvest’s owner and president Hans Black served on the board of directors of these companies, which have collectively paid an entity he controls approximately $1.7 million. Black’s involvement with these companies and his receipt of payments from them created a conflict of interest that he and Interinvest failed to disclose to their advisory clients.

On a final note--Investors and accountants should take the time to read Brian Carroll's article regarding investment advisory fraud in the Journal of Accounting.

In addition to founding the Investment Adviser Rep Syndicate, David Cosgrove, a former regulator and prosecutor, is the founding Member and Manager of Cosgrove Law Group, LLC. The law firm represents both investors and investment advisers across the nation. In doing so, the firm's members have a unique strategic advantage and insight when it comes to litigation or conflict resolution in the financial services and investment arena. 

Wednesday, July 1, 2015

Wells Fargo Takes One on the Chin

A St. Louis County jury recently awarded over $70 million to the beneficiary of two trusts against Wells Fargo (WF).

WF and its predecessors had served as the corporate trustee of one trust, and the custodian of the other. This firm previously prosecuted an arbitration against a WF predecessor on behalf of a trustee. The client prevailed, but not for $77 million! (Her damages were much lower!)

A review of the case facts set forth in Missouri Lawyer's Weekly's May 18th publication suggests that the case was anything but a slam dunk for the plaintiff. So—kudos to Jim, Megan, and Paul!

My law partner, Dan Conlisk, has over 25 years of fiduciary litigation experience to compliment my financial services industry practice. He too was amazed at the result.

The primary protagonist in the underlying drama was the plaintiff's own son, Doug Morris. WF's defense, in part, was that Mr. Morris, rather than WF ran the trusts. Further, WF argued that the elderly woman at plaintiff's table “said yes to everything her attorneys now complain about.” Notably, Mr. Morris wasn't suppose to be running the two trusts and there were 11 women on the jury.

At the end of the trial, the plaintiff prevailed almost entirely on her breach of fiduciary duty and Uniform Fiduciaries Law claims. The jury assessed 98% of the blame to WF. Food for thought if you are a trust beneficiary or “mere custodian.”  

Wednesday, March 11, 2015

The Arbitration System

The premise that underlies the justification for the loss of rights in arbitration is simple: both parties knowingly agreed to binding arbitration. This presumption is based upon the presumptions that 1) signators read contracts before signing, 2) they have the time and knowledge to understand the implications of the arbitration provision, and 3) they have a viable ability to opt-out of agreeing to the provision. Arbitration's entire legitimacy is based upon these fairly specious presumptions. And there has been much written about these presumptions and whether or not binding arbitration is actually the product of an informed voluntary decision by both parties. See “Whimsy Little Contracts' with Unexpected Consequences: An Emperical Analyss of Consumer Understanding of Arbitration Agreements,” Jeff Sovern, Elayne Greenberg, Paul Kirgis, and Yuxiang Liu, St. John's Legal Studies Research Paper No. 14-0009, October 29, 2014 and “Arbitration Clauses Trap Consumers with Fine Print,” Jeff Sovern,, December 2, 2014.

The position of the “Whimsy Little Contracts'...” study is that no one would voluntarily agree to have substantial rights resolved in a quasi-judicial system so blatantly contaminated by bias. Take a look at these charts and decide for yourself if the system is fair and free of improper influence:

Finally, there is another false assumption that bolsters the presumption favoring arbitration: it is more efficient than the courts: Cheaper and quicker! Unfortunately, I could rattle off twenty examples demonstrating just how bogus this presumption is when presented as a general truth. I recently received an arbitration award from JAMS 7 years after the claim was filed. I just paid AAA over $20,000 before the Panel has ever convened, and the Respondent is burying us in discovery. If I was in Federal Court, I would have a scheduling order protecting my client for approximately $200 in filing fees.

In sum, both the courts and the legislature need to take a hard and honest look at the jurisprudential legitimacy of binding arbitration. Food for thought.

Tuesday, February 10, 2015

Did the Eastern District Just Void Financial Adviser Independent Contractor Arbitration Clauses?

I think they may have done just that, at least in Missouri.  Us kids who work with or in the financial services industry know that brokers like Edward Jones frequently run to court when a broker leaves them.  They seek a TRO, ostensibly to prevent the broker from misusing confidential information or violating a non-complete agreement.  Fair enough. 

Now, ask yourself – When is the last time the financial adviser went to court to seek some kind of equitable relief?  Almost never, in part because the circumstances that would invite equitable relief for the adviser himself are much narrower.

According to the typical Investment Adviser Account Agreement between the financial adviser and the broker-dealer, both parties are required to resolve their disputes in a FINRA Arbitration.  Would that arbitration clause be binding in the Eastern District?  Or does it lack the requisite mutuality, since, in effect, only the broker-dealer can avail itself of the state and federal courts?

Last month, in the case of Jimenez v. Cintas Corp., No. ED 1011015 (2014), the Court of Appeals affirmed the trial court’s refusal to grant arbitration of Ms. Jimenez’ employment discrimination claim.  The Court’s affirmation rested upon its own conclusion that the parties’ “Employment Agreement” contained a binding arbitration clause that excluded claims for declaratory judgment or injunctive relief concerning the employees covenants only.  The covenants include confidentiality and competition obligations.  Id. at 3.[1]  Therefore, the agreement to arbitrate lacked uniformity.  As such, the employer’s “promise to arbitrate [was] devoid of mutuality of obligation.  Accordingly, [employer’s] professed promise to arbitrate [was] not valid consideration and does not support a determination that the parties formed a valid agreement.”  Id. at 14.

The Court of Appeals observed initially that the contract at issue was “bilateral”, and that valid consideration for a bilateral contract “rests solely on whether the parties promises to each other are mutually binding.”  Since, in effect, the employer could still side-step arbitration in non-compete matters, the promises to arbitrate were not equally binding.  Id. At 9.  More specifically, citing Frye v. Speedway Chevrolet Cadillac, 321 S.W.3d 429 (Mo. App. W.D. 2010), the Court stated: 

“A contract that purports to exchange mutual promises will be construed as lacking legal consideration if one party retains the right to unilaterally divest itself of an obligation to perform the promise initially made.”

The following analysis should bring a chill to the broker-dealer’s in-house counsel, or counsel for any party that blindly succeeds in divesting itself of a contractual obligation to perform a mutual promise, whether it be arbitration, confidentiality, or competition: 

Section 8 of the Agreement requires that Cintas and Jimenez arbitrate any unresolved “claims for damages, as well as reasonable costs and attorney’s fees, caused by [the other]’s violation of any provision of this Agreement or any law, regulation or public policy.”  However, it expressly exempts from arbitration:  “workers’ compensation claims, unemployment benefits claims, clams for a declaratory judgment or injunctive relief concerning any provision of Section 4 and claims not lawfully subject to arbitration. . . .” 

(Emphasis added). 

Defendants argue that the above terms in Section 8 plainly require both parties to arbitrate their disputes, with several exceptions, and these terms should be construed as “mutual in all relevant respects.”  On its face, we agree that the language in Section 8 plainly states that both parties must arbitrate all of their claims except:  workers’ compensation claims, unemployment benefits claims, claims not lawfully subject to arbitration, and “claims for a declaratory judgment or injunctive relief concerning any provision of Section 4 . . . .”

Jimenez, however, correctly points to additional language in Section 4, providing that only the: 

Employer[,] may apply to any court of competent jurisdiction for a temporary restraining order, preliminary injunction or other injunctive relief to enforce Employee’s compliance with the obligations, acknowledgments and covenants in this Section 4.  Employer may also include as part of such injunction action any claims for injunctive relief under any applicable law arising from the same facts or circumstances as any threatened or actual violations of Employee’s obligations, acknowledgments and covenants in this Section 4. 

The effect of the language in Section 4, Jimenez asserts, is that Cintas alone is exempted from arbitrating alleged violations of the Non-Compete Provisions.

Defendants reply that the plain terms of Section 8 do not specify which party may seek judicial relief for alleged violations of the Non-Compete Provisions of Section 4, and so we should construe Section 8 to mean that both parties are exempt from arbitrating alleged violations of the Non-Compete Provisions of Section 4.  But this interpretation would render meaningless the express language of Section 4, which provides that Cintas alone may apply “for a temporary restraining order, preliminary injunction or other injunctive relief to enforce [Jimenez]’s compliance with the obligations, acknowledgements and covenants in this Section 4.” 

We construe a contract as a whole so as not to render any terms meaningless.  See Chochorowski v. Home Depot U.S.A., 404 S.W.3d 220, 229 (Mo. banc 2013).  Furthermore, when construing the language of a contract, specific terms and provisions are given preference over general terms.  See General American Life Ins. Co. v. Barrett, 847 S.W.2d 125, 133 (Mo. App. W.D. 1993).  We, therefore, cannot ignore the specific language of Section 4.

We agree with Jimenez that Cintas alone is exempted from arbitrating disputes concerning Section 4’s Non-Compete Provisions, while Jimenez is bound to arbitrate those same claims.  We also agree that this exception allows Cintas to refrain from arbitrating those claims it is most likely to bring against Jimenez.  [Footnote excluded].  At the same time, Jimenez is bound to arbitrate all of those claims legally arbitrable.  [Footnote excluded].  Thus, the Agreement allows Cintas to seek redress through the court system for those claims it is most likely to have against Jimenez, while binding Jimenez to arbitrate all legally arbitrable claims she may have against Cintas. 

Equally critical to resolution of this issue is that the plain language of Section 4 allows Cintas to file “any claims for injunctive relief under any applicable law arising from the same facts or circumstances as any threatened or actual violation of Employee’s obligations . . . in this Section 4.”  (Emphasis added).  This expansive clause arguably renders illusory Cintas' promise to arbitrate, by permitting Cintas to seek redress in the courts based upon its bare allegation that such claims are tied to Section 4’s Non-Compete Provisions.  Cintas may litigate at its discretion, while Jimenez is bound to arbitrate all of her legally arbitrable claims. 

Where the practical effect of an arbitration agreement binds only one of the parties to arbitration, it lacks mutuality of promise and is devoid of consideration. 

Id. At 11-13.  Food for thought when evaluating the enforceability of an arbitration clause in Missouri.

[1] Notably, the trial court rested its conclusion upon lack of consideration, as well as unconsciousability.

Wednesday, January 7, 2015

Arbitration's Cancer – The Systemic Bias Created by the Co-existence of Paid Arbitrators, Arbitrator Strikes, and Award Histories

It has been said: “because bias is so subtle, it's extremely effective.” So it should come as no surprise that one of the cornerstones of the rules of judicial ethics is that bias is to be avoided or ferreted out.  Bias should be no more acceptable in an arbitration forum than it would be in a federal court.  But it seems to be just that, as a confluence of procedures in our private arbitration forums produce an "extremely effective" systemic bias. 

These facts are known to any reasonably informed arbitrator:

1)      The FINRA Member, or private party that inserted AAA or JAMS in to its commercial contract, has a procedural right to strike and rank potential arbitrators, without cause or explanation.
2)      The FINRA Member or private party will have access to the details and magnitude of the arbitrator's prior compensatory, punitive, cost and fee awards.
3)      A federal court has never vacated an arbitration award on the grounds that the compensatory award to the investor or broker wasn't big enough, or because the panel failed to award punitive damages, costs, or fees. 
4)      JAMS, FINRA, and AAA can, and have, removed an arbitrator from their roster without explanation after the arbitrator chaired over the issuance of a substantive award.

In order to combat this bias, arbitrators must first be able to identify and somehow neutralize the bias these indisputable facts generate.  But since they are subconsciously biased, neutralizing this bias is a very tall order. It is certainly an unrealistic expectation. FINRA, JAMS, and AAA arbitrators are human. And even though most, no doubt, are individuals of high integrity and intelligence, they want to serve as arbitrators, and they are compensated to do so.  Many of them are full-time arbitrators, at least partially dependent upon that compensation. 

In order to eradicate the insidious bias created by the system in favor of (statistically undeniable) depressed compensatory awards and rejected punitive, cost and fee claims, the system must be changed.  Until it is, the federal courts' rather convenient strict adherence to a purported congressional policy (lobby) in favor of arbitration will be perverted by a money-bias--the same bias the judiciary espouses to be intolerable and inconsistent within its own jurisprudence.       

How do you remove this “extremely effective” bias pressing upon compensated private arbitrators?  The solution is “simple, but not easy:”

1)      Drastically reduce or eliminate arbitrator compensation, and/or
2)      Eliminate the granting of strikes and rankings to FINRA Members and to volume-consumers of other private arbitration services (e.g. Fisher Investments).

Until arbitrators are wholly ambivalent to what FINRA Members and arbitration consumers[1] with strikes think about their past Awards, arbitrators will suffer from a subtle but highly potent bias against claimants.

[1]FINRA itself as well as the owners of for-profit arbitration services like JAMS and AAA could still, however, influence arbitrators.  For example, an arbitrator chairman that issued a multi-million dollar award to one of my clients was subsequently relieved of his duties by FINRA.  Probably just a coincidence, but... Do we need lifetime appointments for arbitrators?  Or minimum terms?