Federal Court Confirms FINRA Arbitration Award But With More Words And Explanations

During a pre-hearing conference held on March 21, 2016, the parties stipulated to stay the case due to the pending class action suit against Mutual Securities in Federal Court. On May 30, 2019, FINRA ODR issued correspondence to the parties, attempting to determine the status of the arbitration case. On June 14, 2019, Claimants filed a Request to Lift the Stay. That same day, Mutual Securities provided a notice of nonopposition to lifting the stay. On June 24, 2019, Claimants submitted an Order from the Federal Court dismissing the case against Mutual Securities. On July 1, 2019, Claimants submitted a letter, advising of Claimants' settlement with and dismissal of Mutual Securities.

The parties stipulated to a stay of proceedings in March 2016 pending related litigation in federal court; specifically, a class action suit Petitioner brought against MSI. (Dkt. No. 1-1 at 4.) In June 2019 Petitioner notified the FINRA arbitration panel ("the Panel") that the district court dismissed the case against MSI, and the arbitration was reactivated on June 26, 2019. (Dkt. Nos. 1-1 at 4; 10 at 7; Dkt. No. 10-1, Ex. 3 at 108.) Petitioner then submitted a letter to the Panel advising it that Petitioner had settled with MSI and was dismissing her claims against MSI. (Dkt. No. 1-1 at 4.) 

The Panel held an "Initial Prehearing Conference" with the parties on July 26, 2019, during which it set the arbitration hearing dates for November 12-13, 2019. (Dkt. No. 10-1, Ex. 4 at 111, 113.) The Panel set September 6, 2019 as the "[l]ast day to serve discovery requests" and November 8, 2019 as the deadline to respond to discovery requests. (Id. at 114 ("The parties have agreed that responses to discovery requests are due 11/08/2019").) Further, the parties' prehearing briefs and witness lists were both due by November 1, 2019. (Id. at 116.) 

On September 12, 2019, Respondents moved pursuant to the FINRA arbitration rules ("FINRA Rules") to postpone the hearing because the discovery response deadline of November 8 provided "only two business days before the scheduled hearing" in which to review the responses. Thus, Respondents asserted that the deadline was impractical because: (1) the deadline "prevents the parties from complying with FINRA Rule 12514, requiring that the parties exchange proposed exhibits at least 20-days before the first scheduled hearing session"; (2) the deadline prevents the parties from complying with FINRA Rule 12503, which requires that motions to compel discovery "be made at least 20 days before a scheduled hearing" and provides a briefing schedule for such motions; and (3) the propounding party would not know until November 8, 2019 whether "documents requested in discovery may be appropriately subpoenaed from a non-party" because the opposing party objected to the requested discovery. (Dkt. No. 10-1, Ex. 5 at 119-22.) Respondents requested to postpone the hearing to give the parties "an appropriate amount of time to execute discovery and respond accordingly," allow "a discovery dispute hearing if necessary," and enable the parties to "adequately prepare the case for hearing." (Id. at 121.) Petitioner opposed the motion on the grounds that Respondents argued only "that they may need more time to complete discovery, but fail to identify anything they need that they don't already have," and that Respondents failed to meet and confer in good faith to resolve the issue. (Dkt. No. 13-2, Ex. B at 2-6.) The Panel denied Respondents' motion to postpone without comment on October 5, 2019. (Dkt. No. 10-1, Ex. 6 at 125-26.) 

The parties served their discovery responses by the November 8, 2019 deadline. Petitioner "objected to every discovery request and did not provide any responding documents." (Dkt. Nos. 10 at 8 & 10-1, Ex. 9 at 178-85 (Petitioner's "Response to Request for Documents and Information").) Respondents did not file a motion to compel. (See Dkt. No. 10 at 17-18.) 

The arbitration commenced as scheduled on November 12-13, 2019. At the conclusion of the hearing, the Panel asked both parties to provide additional evidence. First, the Panel asked Petitioner to provide "third party statements confirming that the stocks that Respondents had purchased into the Accounts had been liquidated." (Dkt. No. 12 at 13-14.) Petitioner provided the requested documents on November 18, 2019. (Dkt. Nos. 12 at 14 & 13-3, Ex. C at 2.) The Panel also "orally asked Respondents to see if non-party MSI would voluntarily produce certain documents. Respondents provided all responsive documents provided by MSI to the [P]anel on November 26, 2019." (Dkt. No. 10 at 9; see also Dkt. No. 13-4, Ex. D.) On December 3, 2019, the Panel again requested additional information before rendering its decision; specifically, certain information sought by Respondents in their request for production. (See Dkt. No. 10-1, Ex. 10 at 188.) Petitioner responded to the Panel's request and provided responsive documents on December 13, 2019. (Dkt. No. 10-1, Ex. 11 at 190-94.) 

The Panel issued a unanimous award in Petitioner's favor on January 13, 2020, finding Respondents jointly and severally liable and awarding Petitioner $773,527.13 in compensatory damages. (Dkt. No. 10-1, Ex. 12 at 198.) The award states, in pertinent part, that the Panel "consider[ed] the pleadings, the testimony and evidence presented at the hearing, and the posthearing submissions" in rendering its decision. (Id.) Under the FINRA Rules, "[u]nless the applicable law directs otherwise, all awards rendered under the Code are final and are not subject to review or appeal." (Dkt. No. 10-1, Ex. 1 at 91 (FINRA Code of Arbitration Procedure for Customer Disputes, Rule 12904).)

(1) where the award was procured by corruption, fraud, or undue means; 

(2) where there was evident partiality or corruption in the arbitrators, or either of them; 

(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or 

(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made. 

(1) the Panel failed to postpone the hearing despite Respondents' showing of good cause; and (2) the Panel failed to allow Respondents "time to conduct adequate discovery." (Dkt. No. 10 at 10, 15.) The gravamen of Respondents' motion is that the Panel acted contrary to the FINRA Rules and in doing so failed to afford Respondents a fundamentally fair hearing. . . .

Here, the Panel denied Respondents' motion to postpone without comment; however, that is of no moment because "arbitrators are not required to state the reasons for their decisions." See A.G. Edwards & Sons, Inc. v. McCollough, 967 F.2d 1401, 1403 (9th Cir. 1992). The record demonstrates at least two reasonable bases for the Panel's decision to deny Respondents' request. First, Respondents' expressly agreed to the discovery deadlines set at the July 26, 2019 scheduling hearing, (see Dkt. No. 10-1, Ex. 4 at 114 (noting "[t]he parties have agreed that responses to discovery requests are due 11/08/2019")), and there is no indication that Respondents disagreed with any of the other dates set at the July 2019 hearing, including the November 12-13 arbitration hearing dates. Presumably Respondents were aware of the FINRA Rules at the July 2019 hearing and if they had concerns about the discovery deadlines they could have raised them at that time. They did not do so; instead, they agreed to the schedule. That the Panel did not postpone the hearing based on concerns Respondents raised roughly 7 weeks later and 2 months before the arbitration hearing based on their "recent review of the case, anticipated discovery, and previously exchanged discovery requests prior to the stay being issued," does not evince misconduct. This is especially true given that Respondents' motion did not specify an actual discovery dispute but asserted only "that there is a high probability that the parties will experience some dispute over discovery." (Dkt. No. 10-1, Ex. 5 at 120.) 

Second, Petitioner opposed the request to postpone the hearing. Petitioner's opposition asserted that Respondents failed to "dentify anything they need [discovery-wise] that they don't already have," and that Respondents failed to meet and confer in good faith as required under the FINRA Rules. (Dkt. No. 13-2, Ex. B at 2-6.) Either of those grounds constitutes a reasonable basis to deny Respondents' request to postpone. 

Finally, and as explained below, Respondents fail to show that the discovery deadlines resulted in a hearing that was not fundamentally fair.

Here, Respondents fail to show that they were not afforded an "adequate opportunity to present [their] evidence and arguments," or "complete [their] presentation of proof prior to the arbitration decision."d See U.S Life, 591 F.3d at 1175 (emphasis added). Respondents do not argue that they raised any evidentiary issues with the Panel during the hearing, and following the hearing the Panel requested and received additional evidence from both parties, including documents from Petitioner that were sought by Respondents' discovery request. Respondents' reply briefing asserts that the post-hearing submissions do not cure the prejudice that resulted from being unable to compel discovery from Petitioner prior to the hearing because after the posthearing submissions "[t]here was no time allotted for the parties to review the new evidence, no hearing to conduct new testimony, and no invitation for post-hearing briefs." (Dkt. No. 15 at 8.) However, under the FINRA Rules, Respondents could have requested those things but did not do so. (See Dkt. No. 10-1, Ex. 1 at 75 (FINRA Rule 12609 ("The panel may reopen the record on its own initiative or upon motion of any party at any time before the award is rendered, unless prohibited by applicable law.").) Thus, Respondents at least had the opportunity to present further argument and evidence after the hearing. The Panel's failure to reopen the record on its own initiative and absent any notice from Respondents that they could not effectively argue their defense during the hearing does not evince misconduct.

• Millier
• Bock Evans
• FINRA
• Arbitration
• Stay
• Class Action
• NDCA
• Motion to Vacate
• Motion to Confirm
• FAA
• Postponement
• BrokeAndBroker
• Bill Singer