In a recent FINRA public customer arbitration against Merrill Lynch, the FINRA Arbitration Panel dismissed the claims as being filed too late. Spoiler Alert: The odds are 2:1 that you won't guess the twist in this story until you come upon it.
Case In Point
In a FINRA Arbitration Statement of Claim filed in February 2018 and as amended, public customer Claimant Gelbach asserted breaches of fiduciary duty and of contract; fraud; unsuitability; omission of facts; violations of the RICO statutes; violations
of state labor statutes; and violations of numerous FINRA Rules. The causes of action purportedly arose in connection with Claimant's investment in Merrill Lynch & Co., Inc. stock. Claimant sought compensatory and punitive damages, interest, costs, and fees. In the Matter of the Arbitration Between John Gelbach, Claimant, v. Merrill Lynch, Pierce, Fenner & Smith, Inc., Respondent (FINRA Arbitraiton Decision 18-00570)
In November 2018, Respondent Merrill Lynch filed a Motion to Dismiss pursuant to FINRA Rule 12206(a) (the "Eligibility Rule") asserting that the conduct underlying Claimant's claim had occurred no later than 2009, and, accordingly, more than six years had elapsed from the time of these events or occurrences
and the commencement of the arbitration. Claimant argued that his damages and Respondent's violations persisted through 2014, which fell within the six-year eligibility window when the Statement of Claim was filed in February 2018. In January 2019, Claimant responded that in part Respondent's eligibility motion was barred by FINRA Rule 12206(c) because the claims were directed
to FINRA arbitration by the Federal Court. In its reply, Respondent asserted in part that Claimant's claims were not directed to arbitration by any court and remained subject to FINRA's six-year Eligibility Rule.
SIDE BAR: FINRA Code of Arbitration Procedure for Customer Disputes Rule 12206: Time Limits
(a) Time Limitation on Submission of Claims. No claim shall be eligible for submission to arbitration under the Code where six years have elapsed from the occurrence or event giving rise to the claim. The panel will resolve any questions regarding the eligibility of a claim under this rule.
(b) Dismissal under Rule. Dismissal of a claim under this rule does not prohibit a party from pursuing the claim in court. By filing a motion to dismiss a claim under this rule, the moving party agrees that if the panel dismisses a claim under this rule, the non-moving party may withdraw any remaining related claims without prejudice and may pursue all of the claims in court.
(1) Motions under this rule must be made in writing, and must be filed separately from the answer, and only after the answer is filed.
(2) Unless the parties agree or the panel determines otherwise, parties must serve motions under this rule at least 90 days before a scheduled hearing, and parties have 30 days to respond to the motion. Moving parties may reply to responses to motions. Any such reply must be made within 5 days of receipt of a response.
(3) Motions under this rule will be decided by the full panel.
(4) The panel may not grant a motion under this rule unless an in-person or telephonic prehearing conference on the motion is held or waived by the parties. Prehearing conferences to consider motions under this rule will be recorded as set forth in Rule 12606.
(5) If the panel grants a motion under this rule (in whole or part), the decision must be unanimous, and must be accompanied by a written explanation.
(6) If the panel denies a motion under this rule, a party may not re-file the denied motion, unless specifically permitted by panel order.
(7) If the party moves to dismiss on multiple grounds including eligibility, the panel must decide eligibility first. If the panel grants the motion to dismiss the case on eligibility grounds on all claims, it shall not rule on any other grounds for the motion to dismiss. If the panel grants the motion to dismiss on eligibility grounds on some, but not all claims, and the party against whom the motion was granted elects to move the case to court, the panel shall not rule on any other ground for dismissal for 15 days from the date of service of the panel's decision to grant the motion to dismiss on eligibility grounds. If a panel dismisses any claim on eligibility grounds, the panel must record the dismissal on eligibility grounds on the face of its order and any subsequent award the panel may issue. If the panel denies the motion to dismiss on eligibility grounds, it shall rule on the other bases for the motion to dismiss the remaining claims in accordance with the procedures set forth in Rule 12504(a).
(8) If the panel denies a motion under this rule, the panel must assess forum fees associated with hearings on the motion against the moving party.
(9) If the panel deems frivolous a motion filed under this rule, the panel must also award reasonable costs and attorneys' fees to any party that opposed the motion.
(10) The panel also may issue other sanctions under Rule 12212 if it determines that a party filed a motion under this rule in bad faith.
(c) Effect of Rule on Time Limits for Filing Claim in Court. The rule does not extend applicable statutes of limitations; nor shall the six-year time limit on the submission of claims apply to any claim that is directed to arbitration by a court of competent jurisdiction upon request of a member or associated person. However, when a claimant files a statement of claim in arbitration, any time limits for the filing of the claim in court will be tolled while FINRA retains jurisdiction of the claim.
d) Effect of Filing a Claim in Court on Time Limits for Filing in Arbitration. If a party submits a claim to a court of competent jurisdiction, the six-year time limitation will not run while the court retains jurisdiction of the claim matter.
On April 30, 2019, the Panel granted Respondent's Motion
to Dismiss pursuant to Rule 12206(a) and the arbitrators offered this rationale:
We find that the occurrences and events giving rise to Claimant's claims occurred in
2009 or earlier, which is outside the six-year eligibility period under the Rule.
Claimant's assertions that he suffered continuing damages from those occurrences
and events do not suffice to make his claims eligible.
The Panel further finds that the Rule is not subject to equitable tolling. The facts of this
case would not support such an equitable remedy. Claimant is a sophisticated
investor and an experienced securities industry professional and worked for
Respondent for many years. Claimant was quite capable of assessing the regulatory
and other risks to the value of Respondent's stock after the dramatic events of the
2008 litigation involving subprime mortgages, the extensive publicity arising therefrom,
and the widespread litigation brought against Respondent on account of those events.
Claimant's assertion that Respondent committed a continuing breach of its duty to
him, by not acknowledging publicly its alleged wrongdoing, fails to state a valid claim
Respondent's Motion to Dismiss pursuant to Rule 12206 of the Code is granted by
the Panel without prejudice to any right the Claimant has to file in court; the
Claimant is not prohibited from pursuing his or her claims in a court pursuant to
Rule 12206(b) of the Code.
Before I tell you about the quirk in this case, see if you can detect it in this rendition of the published "AWARD" section of the FINRA Arbitration Decision:
After considering the pleadings, the testimony and evidence presented at the recorded
in person pre-hearing on Respondent's Motion to Dismiss, and the post-hearing
submissions, if any, the majority of the Panel has decided in full and final resolution of
the issues submitted for determination as follows:
1. Claimant's claims are dismissed pursuant to FINRA Rule 12206.
2. Any and all claims for relief not specifically addressed herein, including Claimant's
request for attorneys' fees, treble damages, and punitive damages, are denied.
Buried in the Award language is the surprise that only "the majority" of the Panel decided to dismiss Claimant's claims pursuant to FINRA Rule 12206. Eagerly, I searched for some Dissent. There was nothing beyond the disclosure that the Chairperson had submitted a "Dissenting Arbitrator Signature."
I mean, seriously? Are you kiddin' me?
Before evidentiary hearings, before the Claimant's case-in-chief was presented, the public customer's case was dismissed. In and of itself, not that big of a deal because sometimes the allegations don't add up to a winnable case and sometimes the claims are filed too late. Notwithstanding, when only two of three arbitrators dismiss a public customer's claims against one of FINRA's largest member firms, you'd sort of expect that the FINRA Arbitration Decision would explain the basis for the Dissent -- at a minimum, how about just what it was that the Dissent dissented about! It could be that the dissenting Chairperson concurred in the application of the Eligibility Rule and concurred in finding the claims were filed late, but he would have awarded some damages, costs, or fees (which the other arbitrators declined). It could be that the Chairperson thought the other two arbitrators were idiots, who had failed to understand the facts. Whatever the Chairperson thought, if this case is appealed by Claimant, I can't imagine that any court will be thrilled with the lack of comment from the Dissent.