May 16, 2013
FINRA arbitration Decisions tend to be unanimous, but, with increasing frequency, we are seeing decisions by two of three arbitrators -- and there has been an increasing number of written dissents published. Although it would be preferable for rulings to be unanimous, this trend towards split decisions is encouraging because it shows independence among FINRA arbitrators and certainly offers some assurance that panelists are taking their responsibilities seriously. In this recent multi-million-dollar dispute involving Goldman Sachs, we have yet another example of a two-to-one decision with a thoughtful dissent.
The $2.6 Million Question
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in May 2011, Claimant Landow asserted unauthorized trading, unsuitability, misrepresentation, and failure to supervise in connection with his investment in the Goldman Sachs Special Opportunities Fund 2006 (the "Fund"). At the arbitration hearing, Claimant sought rescission of the Fund valued at $2,302,633 and $39,000 in expert witness fees. In the Matter of the FINRA Arbitration Between Tracy Landow, Claimant, vs. Goldman Sachs & Co. and John D. Blondel, Jr.,Respondents (FINRA Arbitration 11-02043, May 9, 2013 )
Respondents Goldman Sachs and Blondel, Jr. generally denied the allegations and asserted various affirmative defenses. Respondent Blondel requested the expungement of the arbitration from his Central Registration Depository records ("CRD").
The FINRA Arbitration Panel found that:
[T]he Special Opportunities Fund subscription agreement (Respondent's Exhibit 49), an essential step in this transaction, is defective and invalid, and rescission is granted. It is noted that, if the majority of the Panel did not determine that the Special Opportunities Fund subscription agreement was defective and invalid, the majority of the Panel would have held that this very complex instrument is unsuitable for Claimant, who is not a sophisticated investor, and that expungement would not have been granted. The majority of the Panel has decided in full and final resolution of the issues submitted for determination as follows:
1. Goldman Sachs is liable for and shall pay to Claimant compensatory damages in the amount of $1,608.908.00.
2. Goldman Sachs is liable for and shall pay to Claimant interest at the rate of 9% per annum from October 1, 2006 to April 1. 2013.
3. Goldman Sachs is liable for and shall pay to Claimant expert witness fees in the amount of $39,000.00.
4. Claimant's interest in the Goldman Sachs Special Opportunities Fund 2006 shall revert to Goldman Sachs. Claimant shall transfer her interest in the Goldman Sachs Special Opportunities Fund 2006 to Goldman Sachs within 30 days from the date of the award. . .
Separately, the FINRA arbitrators recommended the expungement of the arbitration from Respondent Blondel's CRD. In explaining its rationale, the Panel stated that:
[B]londel did not supervise execution of the defective agreement and is not responsible for the Special Opportunity Fund and the transactions that followed.
The arbitrator who concurred in part and dissented in part offered the following statement:
I respectively [SIC] dissent from part of the determination made by the Panel. Based on the evidence submitted at the hearing and the testimony of the parties and experts, I find the Special Opportunity Fund was a suitable investment. I find Respondents' case to be more persuasive, finding for both Blondel and Goldman Sachs that the Special Opportunity Fund should not be rewound. The Panel has chosen to base their determination case [SIC] on the contents of Respondents' document #49, which appears to my colleagues as flawed, rather than the suitability elements of the case. While this document may be of concern, I believe it is de minimis in regard to the totality of the whole case and consequently their determination appears to be incorrect. I concur with the decision to grant expungement of Blondel's CRD records. However, under Rule 2060 I would select "The claim, allegation, or information is false".
Bill Singer's Comment
Wow -- that's quite a slam for an arbitration panel (even if only a majority) to deem a subscription agreement as "defective and invalid." To make matters even worse for Respondents, the panel then adds a second shot that even if two of the arbitrators hadn't found the agreement defective and invalid, then, in the alternative, two of the arbitrators would have alternatively found the investment as "unsuitable." Talk about caught between a rock and a hard place! The one saving grace for Goldman Sachs is that the Dissent found the investment suitable and would have found for the respondents -- except, you know, it ends as two against one on that point.
Notwithstanding ruling against Goldman Sachs, the arbitrators made the effort to parse the facts and concluded that Respondent Blondel had no responsibility for drafting the criticized agreement and recommended the expungement of the matter from his CRD. A Solomonic ruling if ever there was one.