November 26, 2019
The poet e. e. cummings famously asked what if a much of a which of a wind gives the truth to summer's lie; bloodies with dizzying leaves the sun and yanks immortal stars awry? The poet's dark question prompts us to muse about the wind that blows as so much hot air through a FINRA Arbitration Decision and a federal court's review. In the end, all is awry. We are left bloodied and dizzy for the experience.
2019 FINRA Arbitration Decision
In a FINRA Arbitration Statement of Claim filed in October 2017 and as amended, Claimant Lawlor asserted fraud; concealment; breach of fiduciary duty, by failing to disclose known risks to account holdings, failing to provide prudent financial advice regarding concentrated positions, and failing to provide financial risk management advice; violation of the Racketeer Influenced and Corrupt Organization Act ("RICO"); and violating
numerous FINRA rules (among which were suitability, supervision, and the know your customer
rules). The FINRA Arbitration Decision characterizes Claimant Lawlor's case as relating to "securities, including stock and options, he earned through employment at Respondent." Claimant sought over $4 million in compensatory damages, punitive damages, treble damages under RICO, interest, costs, and fees. In the Matter of the Arbitration Between George Lawlor, Claimant, v. Merrill Lynch, Pierce, Fenner & Smith, Inc., Respondent (FINRA Arbitration Decision 17-02860 / March 25, 2019)
Respondent Merrill Lynch generally denied the allegations and asserted various affirmative defenses. Respondent filed a Motion to Dismiss citing FINRA Rule 12206.
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.
The FINRA Arbitration Panel granted Respondent Merrill Lynch's Motion to Dismiss pursuant to FINRA Rule 12206: Time Limits based upon a finding that more than six years had elapsed from any underlying event. In pertinent part, the arbitrators' Award states:
1. Claimant's claims are dismissed in their entirety pursuant to Rule 12206 of the Code.
2. 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.
3. Any and all claims for relief not specifically addressed herein are dismissed.
2019 EDNY Decision
Not set forth in the FINRA Arbitration Decision is the swirl of federal litigation around Lawlor, Merrill Lynch, and other similarly situated former employees. As set forth in part in George Lawlor, Petitioner, v. Merrill Lynch, Pierce, Fenner & Smith, Inc., Respondent (Memorandum Decision and Order, United States District Court for the Eastern District of New York, 19-CV-4145)
[A]bout two weeks after petitioner filed his claim with FINRA, Merrill sued petitioner (and
several other similarly situated former employees) in the Southern District of New York to
challenge the arbitrability of their claims. See Merrill Lynch, Pierce, Fenner & Smith
Incorporated v. Hemel et al., No. 17-cv-08689 (S.D.N.Y.). The Southern District denied
Merrill's motion for a preliminary injunction to enjoin the arbitrations, and Merrill thereupon
voluntarily dismissed the Southern District action.
Meanwhile, in parallel cases brought within the Third and Eleventh Circuits, Merrill
reached a partial settlement agreement with other former employees. That settlement allowed all
similarly situated employee-claimants to pursue costs and fees incurred in federal court actions brought by Merrill to enjoin arbitration. Merrill could still object to and defend against these
claims on the merits, but could not assert waiver arguments, i.e., that the claimants had waived
the claims by not pressing them in the district court. It is undisputed that this settlement
agreement applied to our petitioner, who, soon after its execution, filed an amended statement of
claim with FINRA. The amended statement added claims for attorneys' fees and costs incurred
in the Southern District action, and punitive damages for Merrill's having brought that action.
Merrill then filed a motion with the arbitration panel to dismiss petitioner's claims
pursuant to FINRA Rule 12206, a rule barring claims "where six years have elapsed from the
occurrence or event giving rise to the claim." The panel held a hearing on the motion during
which the parties presented evidence regarding both the original claims and also the claims
added as a result of the Southern District action. As to the latter, petitioner submitted
PowerPoint slides entitled "Merrill Lynch's Frivolous Tactics to Stop Lawlor and Related
FINRA Cases," "Lawlor Claims Filed in 2017 Are Within Six Year Eligibility Period" (points 8,
9, and 10), "Written Agreement," "George Lawlor's Damages" (point 5), and "Respondent
Improperly Seeks Relief with ‘Unclean Hands.'" Each of these slides addressed, in whole or in
part, petitioner's claims for attorneys' fees, costs, and punitive damages arising out of the
Southern District action.
Petitioner also submitted as evidence three prior arbitral awards in related cases, all of
which discussed, in part, claims against Merrill for pursuing allegedly frivolous federal court
litigation. Notably, each of these awards was made in the context of ruling on FINRA Rule
In Merrill's post-hearing reply in support of the motion, it acknowledged that the panel
retained authority over petitioner's claims for attorneys' fees even if the time-barred claims were dismissed. Yet when the FINRA arbitration panel dismissed petitioner's original claims under
Rule 12206, it also dismissed "[a]ny and all claims for relief not specifically addressed herein[,]"
implicitly including the claims for attorneys' fees, costs, and punitive damages related to the
Southern District action. . .
Pages 2 - 3 of the EDNY Decision
SIDE BAR: Let's put all that in somewhat simpler terms. About two weeks after Lawlor filed his FINRA Arbitration case against Merrill Lynch, the firm sued him and other employees in SDNY as part of a tactic to challenge the arbitrability of the employees' claims. SDNY denied Merrill Lynch's Motion for a Preliminary Injunction, which may have prompted the FINRA member firm to voluntarily dismiss the SDNY cases. Meanwhile, Merrill Lynch was reaching settlements of similar employee disputes that were pending before the 3rd and 11th Circuits that provided said employees with the right "to pursue costs and fees incurred in federal court actions brought by Merrill to enjoin arbitration." The EDNY Decision clearly states that it is "undisputed that this settlement agreement applied" to Claimant Lawlor, who amended his FINRA Statement of Claim to include SDNY-related attorneys' fees and costs, and punitive damages for Merrill's having brought that action.
Against that background, Merrill moved to dismiss Lawlor's claims pending before the FINRA Arbitration Panel citing the Six Year Eligibility Rule. The FINRA arbitrators purportedly heard evidence about Lawlor's underlying claims against Merrill and those that arise via the SDNY lawsuit and attendant settlement. In disimissing Lawlor's claims as not falling within the six-year horizon, the Panel also "implicitly" dismissed his claims for SDNY-related attorneys' fees, costs, and punitive damages.
Petitioner Lawlor moved to modify or vacate the FINRA Arbitration Award based upon his contention that the FINRA Arbitration Panel had wrongly dismissed his claims, and, pointedly, that the Panel did so "without providing a written explanation." In considering the lack of a written explanation, EDNY states in part that [Ed: footnote omitted]:
Furthermore, just because a matter is submitted does not mean that an arbitrator is
required to write an opinion in support of its decision, let alone for every aspect of that decision.
See Halligan, 148 F.3d at 204 ("We want to make clear that we are not holding that arbitrators
should write opinions in every case or even in most cases."). And where an arbitrator does write
an opinion, a "mere ambiguity in the opinion accompanying an award, which permits the
inference that the arbitrator may have exceeded his authority, is not a reason for refusing to
enforce the award." United Steelworkers of Am. v. Enterprise Wheel & Car Corp., 363 U.S.
593, 598 (1960).
Nevertheless, FINRA Rule 12206(b)(5) provides that "[i]f 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." Additionally, if the parties jointly request, at least 20 days before the first
scheduled hearing date, that their arbitrators provide an "explained decision," the arbitrators shall provide "a fact-based award stating the general reasons for the arbitrators' decision." See FINRA Notice 09-16. Such an "explained decision" should address all the claims asserted by the parties. . .
Pages 3 - 4 of the EDNY Decision
In declining to vacate the FINRA Decision, EDNY found that the arbitrators had not exceeded their powers by denying an award of attorneys' fees because Petitioner Lawlor's amended FINRA Arbitration Statement of Claim included a claim for such fees and attendant damages arising from the federal court litigation. As such, the Court found that "there can be no doubt that this was controversy to be determined by arbitration under the agreement . . ." at Page 5 of the EDNY Decision. EDNY reiterates this conclusion, in part:
It is therefore clear that the issue of attorneys' fees and damages incurred in federal court litigation was submitted to the panel. To permit petitioner another opportunity to argue these claims after he had so clearly and substantively addressed them would be to vitiate the deference to arbitral awards required in this Circuit. . .
Page 6 of the EDNY Decision
Bill Singer's Comment
In dismissing Lawlor's Petition, EDNY infers that the FINRA arbitrators fully and fairly considered Lawlor's SDNY-related claims for attorneys fees, costs, and punitive damages notwithstanding that there's nothing in the FINRA Arbitration Decision affirming that process. EDNY justifies its finding and the Panel's conduct, in part, by noting at page 4 of the EDNY Decision that:
[W]here an arbitrator does write
an opinion, a "mere ambiguity in the opinion accompanying an award, which permits the
inference that the arbitrator may have exceeded his authority, is not a reason for refusing to
enforce the award." . . .
A mere ambiguity? As in the total absence of any reference to any aspect of the SDNY-related claims and the lack of any rationale? Although EDNY is correct that a "mere ambiguity" in a FINRA Award and the lack of an explained decision may still justify dismissing a party's claims, at best, the Court is merely playing a guessing game with Lawlor's specific case. In addition to citing a predilection for deferring to the discretion of arbitrators to render their decision, EDNY offers this somewhat dubious rendition of the arbitration process:
[O]ne of the main
benefits of arbitration is its embrace of efficient and practical decision-making, which often
eschews procedural silos and ridged [sic] court rules. . . The panel was entitled to address more than one
issue in its decision. Therefore, without evidence that the arbitrators did not intend to efficiently
dispose of all matters up for arbitration in its singular "Award," petitioner has failed to meet his
burden of showing that the award should be modified. . .
At Page 7 of the EDNY Decision
For those arguing their cases before the federal bench, there are ample rules of procedure and a panoply of due process protections. Amazingly, EDNY deprecates those very constitutional protections when the Court pejoratively dismisses them as mere "procedural silos and ridged [sic] court rules." Perhaps Freud would characterize the Court's misspelling of "rigid" as "ridged" as an telling slip? Sadly, EDNY does not seem to appreciate the troubling inconsistency in its own pronouncements:
At Page 8 of the EDNY Decision
There were thus alternative bases upon which the panel could have dismissed the
additional claims. It may have thought the claim for frivolous litigation unacceptable when it
also found that petitioner's original FINRA claims were filed more than six years after they
accrued (unclean hands). Or perhaps it concluded that the Southern District action, although
ultimately withdrawn, lacked sufficient bad faith to warrant an award. Both of these arguments,
among others, were either raised or implied in the parties' submissions and presentations, and
thus constituted fair game for the panel.
If the Panel was aware of "alternative bases" pertaining to Lawlor's case, the arbitrators "could have dismissed" his SDNY-related claims because, in part, the Panel, "may have thought" that said claims were filed too late?
EDNY has a curious sense of what's "fair game." Perhaps sensing that it had ventured out onto thin ice, the Court concludes its Decision, in part, with this:
At Page 9 of the EDNY Decision
The foregoing is not to deny that the FINRA panel may have given petitioner's claim for
attorneys' fees somewhat shorter shrift than would be ideal. But it is beyond this Court's
discretion to hold that the panel's award should be modified just because it might have decided
the matter differently. . .
After its troubling assertion about bad silos, "ridged" rules, and the pre-emptive power of arbitrators' discretion, EDNY grudgingly admits that the FINRA Arbitration Panel "may have given petitioner's claim for attorneys' fees somewhat shorter shrift than would be ideal." I'd like to think that in the absence of any rationale from the arbitrators and with a gnawing concern of short shrift, that a federal court would think due process compelled a remand or the matter back to the FINRA arbitration panel for reconsideration with the court's request for the preparation of a written rationale. Alas, not this time. Not this case. Not this wind.
What If A Much of a Which of a Wind Gives the Truth to a FINRA Arbitration Lie? (BrokeAndBroker.com Blog)
Manhattan U.S. Attorney Announces Charges Against Austin Man For Computer Hacking And Fraud Scheme To Steal Unreleased Music From Music Industry Professionals (DOJ Release)
SEC Consolidates Second Tranche of FINRA Appeals Over Ineligible Expungements. In the Matter of the Consolidated Arbitration Applications for Review of Action Taken by FINRA (SEC Order Consolidating Appeals)
Pro Se Plaintiff's Case Dismissed Against FINRA and former CEO/Chair Ketchum. Sam Balabon, Spot Quote Holdings, Incorporated, Plaintiffs/Appellants, v. Richard Ketchum, Erin Vocke, Financial Industry Regulatory Authority, Incorporated, Defendants/Appellees (Opinion, 5Cir.)
FINRA Arbitration Panel Awards Damages to Charles Schwab for Dishonored Check in Customer's Account. In the Matter of the Arbitration Between Charles Schwab & Co., Inc, Claimant'Counter-Respondent, v. Terence Daniels, Respondent/Counter-Claimant (FINRA Arbitration Decision)
SEC Charges Man for Defrauding Elderly Investors (SEC Release)
Founder Of Purported Snack And Pet Food Companies Sentenced To 7 Years In Prison For Defrauding Investors Of More Than $2.9 Million / Defendant also Sentenced for Aggravated Identity Theft, Money Laundering, a Firearm Offense, and a Narcotics Offense (DOJ Release)
Former Executives and Employees of Health Technology Company Outcome Health Charged in $1 Billion Fraud Scheme (DOJ Release)
SEC Charges Former Top Executives of Healthcare Advertising Company With $487 Million Fraud (SEC Release)
SEC Charges Unregistered Broker Who Sold Woodbridge Securities to Retail Investors (SEC Release)
Alleged Fraudster Sentenced to 2 Years in Parallel Criminal Case (SEC Release)
SEC Proposes to Modernize Regulation of the Use of Derivatives by Registered Funds and Business Development Companies (SEC Release)