March 30, 2020
There are those who defend FINRA's system of mandatory public and intra-industry arbitration. I am not one of those. It's time for FINRA to divest itself from anything and everything to do with public and intra-industry arbitration, and to refer the docket to an impartial, non-industry-influenced forum. A recent case involving elderly public customers demonstrates the moral and ethical quicksand upon which FINRA's reputation rests and continues to sink.
2015 DMA Lawsuit
In 2015, husband and wife Giovanni and Mariantonia Lanza were 91-year-old former professors, who had filed a lawsuit seeking over $400,000 in damages in the United States District Court for the District of Massachusetts ("DMA") against Ameriprise Financial Services, Inc. and their former stockbroker Richard Ewing. The Lanzas alleged that in 2006, Ewing had fraudulently persuaded them to transfer their Merrill Lynch accounts to H & R Block (which Ameriprise subsequently acquired), and, thereafter, Ewing had allegedly:
- failed to administer their accounts in line with their stated goals,
- carelessly managed their accounts,
- was nonresponsive to their concerns, and
- lied about the investments he made on their behalf and the performance of their investment portfolio.
Upon being notified by Ameriprise and Ewing of the existence of a purportedly enforceable Arbitration Agreement, the Lanzas consented to the dismissal of their federal case and submitted to the jurisdiction of the Financial Industry Regulatory Authority's ("FINRA's") Office of Dispute Resolution. In December 2015, the parties entered into a $52,500 settlement agreement.
2016 FINRA Arbitration Claim
In a FINRA Arbitration Statement of Claim filed in June 2016, public customer Claimants Giovanni and Mariantonia Lanza asserted negligence, breach of contract, gross negligence, fraud, violations of federal and state securities laws, breach of fiduciary duty, failure to supervise, breach of settlement agreement, and tortious interference. At the close of the hearing, the Claimants sought $108,030.53 in damages. In the Matter of the Arbitration Between Giovanni Lanza and Mariantonia Lanza, Claimants, v. Ameriprise Financial Services, Inc. and Richard Ewing, Respondents (FINRA Arbitration Decision 16-02084) https://www.finra.org/sites/default/files/aao_documents/16-02084.pdf
Respondents Ameriprise and Ewing generally denied the allegations and asserted various affirmative defenses.
Notably, before the commencement of the FINRA hearings, the Lanzas had requested that the FINRA arbitrators write a FINRA Rule 12904(g) "explained decision." The Rule requires that said explained decision is required only if "all parties jointly request," and Respondent Ameriprise declined that option. Accordingly, the FINRA arbitrators proceeded to hearings after declining to pen a so-called "reasoned" decision.
As set forth in the FINRA Arbitration Decision:
On May 22, 2017, the Panel heard oral arguments on Respondent Ewing's Motion to Enforce Settlement Agreement. On May 22, 2017, the Panel granted Respondent Ewing's Motion to Enforce Settlement Agreement and he was therefore removed as a Respondent in this matter.
At the conclusion of Claimants' case-in-chief, Respondent Ameriprise made a Motion to Dismiss and Claimants opposed the motion. The Panel reserved decision on the Motion to Dismiss. The Panel heard the testimony of Respondent Ameriprise's witnesses and viewed documents offered into evidence by Respondent Ameriprise. At the conclusion of all the testimony, each party made their closing statements summarizing the evidence that they had offered. Respondent Ameriprise then renewed the Motion to Dismiss. After due deliberation, the Panel concluded that Claimants had failed to sustain their burden of proving any of the various claims asserted in the Statement of Claim. The Panel took particular note of the Claimants' failure to establish any damages by any competent or credible evidence.
The FINRA Arbitration Panel dismissed Claimants' claims. The Lanzas paid $1,700 in FINRA filing fees and agreed to pay over $10,000 in arbitration charges (half of the total).
As you may note from the above quote from the FINRA Arbitration Decision, the arbitrators granted Respondent Ewing's Motion and enforced a settlement agreement -- thereby removing him as a Respondent in the FINRA arbitration. Exactly what settlement agreement was enforced, what were its terms, and what had happened to the parties' obligation thereunder is not explained in the FINRA Arbitration Decision. As to the remaining Respondent Ameriprise, apparently the arbitrators found that the Lanzas had failed to prove their case. What proof had the Claimants offered, how was it refuted, what did the proof assert? Again, that's not explained in the FINRA Arbitration Decision. Then again, since all parties had failed to jointly request an explained decision, apparently FINRA the arbitration forum and the three arbitrators are satisfied that whatever was set forth in the Decision suffices. Take it of leave, in essence.
2018 DMA Opinion
The Lanzas next step was to file a Complaint in DMA against FINRA for breach of contract based upon the arbitrators purportedly summary dismissal of their claims. The Lanzas sought an Order compelling FINRA to refer the matter back to the arbitrators with instructions to write an explained decision -- and the Plaintiffs also sought $200,000 in damages against FINRA. In response, FINRA filed a Motion to Dismiss. Giovanni Lanza and Mariantonia Lanza, Plaintiffs, v. Financial Industry Regulatory Authority, Defendant (Opinion, United States District Court for the District of Massachusetts, 18-10859) https://www.leagle.com/decision/infdco20180926c53
Side Bar: We learn from the DMA Opinion what had prompted the Lanzas' 2016 FINRA Arbitration Statement of Claim after the case had apparently been settled:
[I]n December 2015, they attended mediation in Concord, New Hampshire and entered into a settlement agreement for $52,500.
III. Contested Arbitration
Shortly thereafter, Ewing refused to comply with the settlement agreement. Plaintiffs therefore filed a new statement of claim against Ewing and Ameriprise for arbitration with FINRA in June 2016, alleging similar claims based on the same misconduct. . . .
In its Motion papers, FINRA argued that the Lanzas' Complaint should be dismissed because of the forum's arbitral immunity when it performs administrative tasks related to arbitration. In granting FINRA's Motion to Dismiss, DMA found, in part, that:
In addressing Plaintiffs's allegations about breaches of contract and of the implied covenant of good faith and fair dealing, DMA acknowledges that the Lanzas had argued that they:
[H]ere, the challenge to the failure to provide sufficient reasons for an arbitration award, rather than a failure to issue any award at all, appears to be well within FINRA's arbitral immunity.
had a reasonable expectation that the arbitrators would provide a reasoned decision that would permit them to challenge the dismissal of their claims in federal court.
Notwithstanding Plaintiffs's expectations, DMA notes that:
[P]laintiffs are seeking to add a new obligation that is nowhere to be found in the contract and in fact expressly contradicts its terms. The implied covenant cannot be invoked to create this new obligation. And, given the express language in the FINRA rules about explained decisions, Plaintiffs' expectation that the arbitrators would produce a reasoned decision, even if bona fide, was not reasonable and is not protected by the implied covenant.
2020 1Cir Opinion
Imagine how the Lanzas must have reacted to DMA's rationale. If all parties to a FINRA arbitration do not join in a request for a "reasoned" decision, then it is unreasonable for any party to expect that an issued FINRA Arbitration Decision would be, well, you know, "reasoned." Does such an issued Decision have to be "cogent"? Does such an issued Decision have to offer a rationale replete with sufficient content and/or context so as to make it intelligible? According to the federal court, that's likely a "NO" in response to all such questions.
http://brokeandbroker.com/PDF/Lanza1CirOp200324.pdf As noted in the 1Cir's Opinion, the Lanzas raised two arguments on appeal to the Circuit Court:
In considering the doctrine of arbitral immunity, 1Cir offers this thoughtful analysis:
[F]irst, they assail the district court's conclusion that arbitral immunity shields FINRA from suit. Second, they quarrel with the court's conclusion that their complaint fails to state a plausible claim for breach of the implied covenant of good faith and fair dealing.
Although the protective carapace created by the doctrine of arbitral immunity is sturdy, it is not impervious to all incursions. For example, arbitral immunity does not extend to actions taken in the absence of any colorable claim of jurisdiction. Cf. Nystedt, 700 F.3d at 31. So, too, we doubt that such immunity would afford shelter to an arbitrator who, say, decided a matter after accepting a bribe. Cf. 9 U.S.C. § 10 (providing that court may vacate arbitral award procured by fraud, corruption, partiality, or other misconduct on arbitrator's part). More to the point, arbitral immunity is an awkward fit in situations - like this one - in which it is alleged that arbitrators (or an entity that stands in the shoes of arbitrators) have broken a contractual promise. Cf. Caudle v. Am. Arbitration Ass'n, 230 F.3d 920, 922 (7th Cir. 2000) (suggesting that issue may be whether arbitrators and organizing bodies are real parties in interest, not whether immunity applies). Here, however, we need not pursue the limits of the doctrine of arbitral immunity because the district court has identified an alternative basis for dismissing the underlying action - a basis that, by itself, suffices to resolve this appeal.
As to that alternative basis for dismissal, 1Cir hangs its hat on the hook. Pointedly, the Circuit Court finds that:
In the case at hand, the Lanzas concede - as they must - that FINRA Code Rule 12904(g)(1) requires an arbitrator to render an explained decision only upon the joint request of all parties. Attempting to avoid the obvious implications of this rule, the Lanzas pivot to Rule 12904(f). The latter rule provides that an arbitration award "may contain a rationale underlying the award." This rule, the Lanzas say, engendered a reasonable expectation that the arbitrators would exercise their discretion to issue an explained decision. Elsewise, they would be unable to understand the basis for (and, by extension, appeal) the award.5
We conclude that these allegations are insufficient to state a plausible claim that FINRA breached the implied covenant. Rule 12904(f) must be read as part of the FINRA rules as a whole, not in some sort of splendid isolation. And at any rate, the word "may" is permissive, not mandatory. To cinch the matter, any expectation that the arbitrators would issue an explained decision upon the Lanzas' unilateral request was unreasonable in light of the express provisions of the FINRA Code. Although Rule 12904(f) affords arbitrators discretion to issue an explained decision at the request of a single party, Rule 12904(g)(1) makes it abundantly clear that they are required to do so if - and only if - an explained decision is requested by all parties.
Refined to bare essence, the Lanzas' argument is essentially an attempt to rewrite the FINRA rules and add a new contractual obligation: the duty to issue an explained decision upon the unilateral request of a single party. . . .
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Footnote 5: The Lanzas' argument that the arbitrators' failure to render a reasoned decision resulted in a "complete loss of [their] statutory appellate rights" is incorrect. Nothing in either the Federal Arbitration Act or Massachusetts law prevents the Lanzas from seeking judicial review of FINRA's arbitration award notwithstanding the absence of an explained decision. See Federal Arbitration Act, 9 U.S.C. §§ 1-16; Uniform Arbitration Act for Commercial Disputes, Mass. Gen. Laws ch. 251, §§ 1-19.
Bill Singer's Comment:
As I have long argued and will take this opportunity to launch into yet another jeremiad, FINRA's system of mandatory customer and intra-industry arbitration is a disgrace. Wall Street's self-regulatory-organization has created its arbitration forum and promulgated its rules to accommodate its large member firms to the detriment of the industry's hundreds of thousands of associated men and women, and to the detriment of the industry's millions of customers.
Regrettably, I am forced to concede that as a lawyer, I understand the legal bases for the courts' dismissal of the Lanzas' appeals. Boiled down to its repugnant essence, the courts' rationale is that the Lanzas entered into FINRA arbitration subject to the forum's rules -- among which was a policy that an "explained decision" is only required in response to a request joined into by all parties. Okay, I get it, since Ameriprise didn't join in on the request, the Lanzas were on notice that the arbitrators could just issue crapola and that's it.
The default -- and let me stress that: the DEFAULT -- for FINRA arbitration is that the arbitration panel does NOT have to issue an explained decision. Frankly, the more you repeat and contemplate that nonsense, the more inane and unfair it seems. Wall Street's forced system of alternative dispute resolution is not required to explain its rulings or rationale unless all parties to a given arbitration join in such a request. Have you ever heard of a system more designed to sweep rubbish under a rug and to wash an industry's dirty laundry out of the prying eyes of the public? As to those who argue that arbitration is a creature of private contract and public customers have every right to seek the confidentiality of their investments from public scrutiny -- I am in full agreement. In response to that argument, I would much prefer that FINRA's default protocol required the issuance of an explained decision UNLESS a Claimant public customer (or in an intra-industry arbitration by an associated person) moves to the contrary; or upon a motion by all parties for an unexplained decision. My approach would fully protect the public customer and associated person but would not promote obfuscation that seems solely designed to protect the industry