Customer Lays $10 Million Egg in Charles Schwab Arbitration

July 7, 2016

Today's Blog discusses an interesting FINRA arbitration pitting an unhappy corporate customer against the all-powerful Charles Schwab & Co., Inc. How unhappy is the customer? Howsabout to the tune of a $10 million claim. All of which begs the questions as to just what constitutes chicken feed and how big an egg can a dissolved corporation lay during one FINRA arbitration. 

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in January 2015, Claimant Inc.Claimant sought $10 million in compensatory damages and asserted the following causes of action: 

collection error, account errors and changes, failure to supervise, margin calls, negligence, incorrect transfer, failure to execute, defamation, closure of unrelated accounts, unauthorized close-outs, and failure to execute transfers in a timely manner.

In the Matter of the FINRA Arbitration Between Inc., Claimant, vs. Charles Schwab & Co., Inc., Respondent (FINRA Arbitration 15-00260, June 17, 2016).

Respondent Charels Schwab & Co. generally denied the allegations and asserted various affirmative defenses. Additionally, Schwab counterclaimed on the basis of breach of contract and sought $12,486.87 in compensatory damages plus 7% interest from October 28, 2014 and costs.

SIDE BAR:  Note that somewhat prodigious list of causes of action alleged by Claimant Clearly, the customer was really upset about a number of perceived failures.

$10 million in compensatory damages ain't chicken feed (although, frankly, I have no idea what the going-rate for chicken feed is these days but hopefully it ain't $10 million. If, on the other hand, $10 million is the going-rate for chicken feed, please substitute some other form of feed that is minimally priced so as to make my point valid). 

Going Through the Motions

After you've been doing this stuff long enough, and, sadly, I've been doing this for some three decades, you develop radar that alerts you to what will likely be a messy and contentious bit of litigation. My radar screen lit up with lots of blips. 

In April and May of 2016, the FINRA Arbitration Panel was presented with Respondent Schwab's Motion for Sanctions, to which Claimant objected. The Panel denied the motion. 

In keeping with the one-upmanship nature of truly pissy arbitrations, again in May 2016, Respondent Schwab filed another motion, this one to dismiss for Claimant's alleged failure to comply with the Panel's Discovery Order. Again Claimant objected. Again, the Panel denied the motion. 

Not to sit idly by, in May 2016, Claimant filed its own Motion to Dismiss aimed at Respondent's Counterclaim and asserting that Respondent had failed to provide discovery. Not surprisingly, Respondent objected. What is a bit surprising is the outcome, or at least the explanation provided in the FINRA Arbitration Decision:

The Panel did not decide Claimant's Motion because Respondent withdrew its Counterclaim at the hearing after Respondent's Motion to Dismiss was granted by the Panel.

SIDE BAR: Hello again. It's me again: Bill Singer, legendary Wall Street lawyer and chicken afficionado. How are you? Okay, look, at first, it was easy to understand that the Panel did NOT decide Claimant's Motion to Dismiss because Respondent had withdrawn its Counterclaim. Why did Respondent withdraw its Counterclaim? Apparently because the FINRA Arbitration Panel granted Respondent's Motion to Dismiss at the hearing. Ummmm, what Motion to Dismiss?  We were already told that that the Panel had denied the May 2016 Respondent's Motion to Dismiss?

Why did the chicken cross the road? To get to the other side of this arbitration.

You know, if we would all learn to be patient and sort of read things to the end before jumping to conclusions, sometimes our questions obtain answers. Turns out that after Claimant presented its case-in-chief at the FINRA Arbitration hearing, Respondent Schwab made a Motion to Dismiss, which Claimant opposed. Ahhhh. . . there's that pesky, missing Motion to Dismiss that I made such a big to-do about in the above "SIDE BAR."

SIDE BAR: Never mind the above SIDE BAR except for that cute joke about the chicken crossing the road.

Layin' A Big Egg

Here's how the entire post-case-in-chief-Motion-to-Dismiss was adjudicated, as explained in the FINRA Arbitration Decision:

After due deliberation, the Panel granted Respondent's Motion to Dismiss on the grounds that the Georgia Secretary of State administratively dissolved the corporation (i.e. Claimant) on February 17, 2016. Under Georgia law (statutory and case law), a dissolved corporation can only carry on business necessary in furtherance of winding down the business. It cannot maintain a lawsuit or other similar claim.

Bill Singer's Comment

So much for a $10 million compensatory claim. In the end, or coming out of the end, laid one big dud of an egg. 

In all seriousness, this is a very instructive case. Not every Claimant is eligible to file a claim. Among the first things that a lawyer will do when asked to represent a Respondent or Defendant being sued by a corporate or other entity is to check state records and confirm that the entity is in good standing and eligible to undertake the legal action at issue.