A recent FINRA arbitration just doesn't seem to add up. It started in 2019 with an arbitration Complaint. The case then moved into federal court in 2020 as the litigants battled over whether the dispute belonged in court or arbitration. In 2020, the dispute is returned to FINRA, where the case is argued via ZOOM teleconferences. In 2021, the Panel issues a sledgehammer of an award, which will likely surpass $20 million in damages, interest, fees, and costs. Notably, there was a finding that JP Morgan Securities and one of the individual respondents had engaged in elder abuse. And then you look to see if the arbitrators exercised their prerogative to refer the case to FINRA-the-regulator. And you look. And look. But no such referral. $20-plus million. Elder abuse. And, yet, no referral to FINRA regulatory investigation? What more does it take. Just what am I missing here?
July 2019 FINRA Complaint
As the curtain rises on Act II of our drama, the battle rages on after Beverly Schottenstein filed in July 2019 a FINRA Arbitration Complaint against Avi Schottenstein, Evan Schottenstein, and JP Morgan Securities. In a FINRA Arbitration Statement of Claim filed in 2019, Claimant asserted constructive fraud/abuse of fiduciary duty; fraudulent misrepresentations and omissions; and violation of Chapter 415, Fla. Statutes. Beverley B. Schottenstein, individually and as Co-Trustee Under the Beverly B. Schottenstein Revocable Trust U/A/D April 5, 2011, as Amended, Claimant v. JP Morgan Securities, LLC; Evan A. Schottenstein; and Avi E.Schottenstein, Jointly and Severally, Respondents (FINRA Arbitration Award, Case No. 19-02053).
As set forth in part in the FINRA Arbitration Award:
[T]he causes of action relate to the allegedly unauthorized purchase and/or sale of various securities in Claimants' account, including, but not limited to, multiple auto-callable structured notes and various other securities for which Respondent JPM was a market maker, including Apple stock, as well as initial public offerings (IPOs) and follow-on offerings (FPOs).
Given the plethora of Schottensteins (and intending no disrespect), I'm going to start referring to them each by just their first name.
Beverley alleged that Avi and Evan, who were both financial advisors at JP Morgan, made unauthorized purchases of securities in her account and, without her consent, enrolled her in the electronic delivery of her account statements/communications. For those transgressions, Beverly sought over $10 million in damages from Avi, Evan, and JP Morgan.
2020: A Federal Case
In the United States District Court for the Southern District of Florida ("SDFL"), Avi and Evan filed a Petition to Enforce FINRA Arbitration Subpoenas pursuant to Section 7 of the Federal Arbitration Act (the "FAA"). The threshold issue for the Court is whether it has subject matter jurisdiction (as set forth in 28 U.S.C. Section 1332) based upon the fact that the parties to the underlying FINRA arbitration are citizens from different states and the matter in controversy exceeds $75,000. Avi Schottenstein and Evan Schottenstein, Petitioners, v. Wells Fargo Bank, N.A. and Alexis Schottenstein, Respondents (Order Denying Petition, 20-MC-81924 / December 17, 2020)
http://brokeandbroker.com/PDF/SchottensteinSDFLOrder201218.pdf) (the "SDFL Order"). By way of some additional color, Avi and Evan allege that:
[B]everley's granddaughter, Alexis Schottenstein ("Alexis"), has stoked the controversy based on her dissatisfaction with her treatment in Beverley's estate plan. [DE 1, p. 3]. Petitioners in this federal action believe that Alexis helped develop Beverley's claims against JP Morgan and themselves. Id. Beverley worked at Wells Fargo from 2009-2013 in its Largo, Florida bank branch. Id. Wells Fargo terminated Alexis in 2013 allegedly due to numerous customers' complaints that Alexis enrolled their respective Wells Fargo accounts in online statement delivery without the customers' knowledge and/or authorization. Id. So Petitioners in this federal action issued the subpoenas to Alexis Schottenstein and Wells Fargo requiring them to appear at the Arbitration, testify and produce documents.
Beverley (the Claimant in the pending Arbitration) did not oppose Petitioners' Motion for the Alexis Schottenstein Trial Subpoena, but Alexis did object. [DE 20, p. 4]. On or about September 15, 2020, a majority of the Arbitration Panel signed the trial subpoena directed to Alexis. Id. On or about October 8, 2020, Petitioners provided the executed trial subpoena to Alexis Schottenstein's Florida counsel, and counsel advised Petitioners that Alexis would not comply with the Subpoena. Id.
On or about June 24, 2020, Petitioners filed a Motion for Subpoena for the Production of Documents from Wells Fargo Pursuant to the FINRA Code of Arbitration Procedure. [DE 20, p. 5]. Beverley opposed the Motion, but the Arbitration Chairperson deemed the documents Petitioners sought from Wells Fargo to be relevant to Petitioners' defenses, and the Arbitration Chairperson executed a Subpoena for Production to Wells Fargo. Id. On or about July 29, 2020, Petitioners served Wells Fargo with the Wells Fargo Subpoena through its registered agent in Florida. Id. Shortly thereafter, Wells Fargo filed its objections. Id. Petitioners later requested that the Arbitration Panel execute a trial subpoena directed to the records custodian of Wells Fargo. Id. On or about September 23, 2020, the Arbitration Chairperson overruled the Wells Fargo Objections, and a majority of the Arbitration Panel executed a trial subpoena for the testimony and production of documents from the Wells Fargo records custodian. Id. On or about October 8, 2020, Petitioners provided the executed Wells Fargo Trial Subpoena to Wells Fargo's counsel. Id. at p. 6. Wells Fargo's counsel advised Petitioners that Wells Fargo would not comply with the Subpoena. Id.
at Pages 2 - 3 of the SDFL Order
SIDE BAR: By way of recap:
Alexis is Beverley's granddaughter
Beverley worked at Wells Fargo from 2009-2013
Wells Fargo terminated Alexis in 2013
Avi and Evan Schottenstein issued subpoenas to Alexis and Wells Fargo requiring their appearance at the FINRA arbitration and their production of documents
Beverley did not oppose the subpoenas
Alexis opposed the subpoena
Wells Fargo refused to comply with its subpoena
By a 2:1 vote, the FINRA arbitrators directed Alexis and Wells Fargo to comply with the subpoenas
A Matter of Diversity
Okay, so, sure, Avi and Evan got into the federal courthouse via their Petition to force compliance with the FINRA arbitration subpoenas; however, SDFL then had to determine whether it had jurisdiction -- which would be determined in this case by Section 1332, which states in pertinent part that:
(a)The district courts shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs, and is between --
(1) citizens of different States;. . .
Unfortunately for Avi and Evan, the threshold "diversity" requirement would prove their undoing and (additionally, the amount in controversy did not seem to rise above the $75,000 minimum):
Here, Petitioners have conceded that there is not complete diversity of the parties in this subpoena enforcement proceeding because Respondent Alexis Schottenstein and Petitioners Avi and Evan Schottenstein are all citizens of New York. Thus, there is not complete diversity of parties in this federal subpoena enforcement proceeding. Moreover, Petitioners seemingly conceded at the hearing that the amount in controversy in this subpoena enforcement proceeding does not exceed $75,000; at the very least, Petitioners have made no effort to establish the value of the amount in controversy in this federal court proceeding. Instead, Petitioners argue that the relevant inquiry for determination of diversity jurisdiction is the amount in controversy and the state citizenship of the parties in the pending Arbitration, rather than in this federal court subpoena enforcement proceeding. That is, Petitioners argue that this Court should ignore the diversity problems which exist in this federal subpoena enforcement proceeding and instead look through to the Arbitration and determine diversity jurisdiction based on the parties and amount in controversy in the Arbitration.
The Court rejects Petitioners' argument that the Court should ignore the lack of diversity jurisdiction in this subpoena enforcement proceeding and instead look to the Arbitration to determine diversity jurisdiction. Petitioners suggest that this is a "gray area." [DE 24, p. 2]. However, it is clear that the Arbitration is not before this Court; only the subpoena enforcement action is before this Court. There is an abundance of case law that holds that the relevant inquiry is not whether the parties to the underlying arbitration are diverse, but rather whether the parties to the federal court action are diverse. This case law also holds that courts should determine whether the amount in controversy in the federal court action, and not in the underlying arbitration, exceeds $75,000. . . .
at Pages 6 - 7 of the FLSD Order
As it turns out, Alexis, Avi, and Evan are all New York State citizens. That ain't diversity for jurisdictional purposes in federal court. Understandably, Avi and Evan argued that Alexis is not a party to the FINRA arbitration and, as such, diversity does exist among the parties in the arbitration. The court was not persuaded. The parties in the arbitration are not the parties before the court -- and the issues in the arbitration are not the issues before the court via the subpoena enforcement action.
What we got here is a classic "if my aunt were a man, she'd be my uncle" argument. If the parties in the FINRA arbitration were the parties before SDFL, then there would be diversity jurisdiction for purposes of the federal rules. But the parties in the FINRA arbitration include Beverley but do not include Alexis, and in the SDFL matter, Beverley is a not named party but Alexis is. Put another way: If a tree falls in a FINRA Arbitration but one arbitrator clapped with only one hand, what would a federal judge hear if he wasn't there?
In the end, SDFL looked at what was before it and does not see diversity; and, as such, the Court declined to find subject matter jurisdiction upon which it could act. Accordingly, SDFL denied Petitioners' request to enforce the two FINRA arbitration subpoenas. Which sends Avi and Evan back out the courthouse doors, down its stairs, into an Uber, and back to the FINRA arbitration, where the Panel will now need to figure out what, if anything, it can do about the subpoenas served upon but not honored by Alexis and Wells Fargo (both non-parties to the FINRA arbitration). Oh, and remember that of the three FINRA arbitrators, only two voted to enforce the subpoenas.
2020: ZOOMing Through FINRA Arbitration Hearings
By way of recap, in a FINRA Arbitration Statement of Claim filed in 2019, Claimant asserted constructive fraud/abuse of fiduciary duty; fraudulent misrepresentations and omissions; and violation of Chapter 415, Fla. Statutes. For those transgressions, Beverly sought over $10 million in damages from Avi, Evan, and JP Morgan. Respondents generally denied the allegations and asserted various affirmative defenses. Beverley B. Schottenstein, individually and as Co-Trustee Under the Beverly B. Schottenstein Revocable Trust U/A/D April 5, 2011, as Amended, Claimant v. JP Morgan Securities, LLC; Evan A. Schottenstein; and Avi E. Schottenstein, Jointly and Severally, Respondents (FINRA Arbitration Award, Case No. 19-02053 / February 5, 2021).
After having conducted 43 Zoom Video Conferenced hearing sessions in October, November, December 2020, and concluding on January 28, 2021 (the FINRA arbitrators over-ruled Respondents' objections to the videoconferencing), the Panel found the following liability as against Respondents JP Morgan ("JPM"), Evan A. Schottenstein ("EAS") and Avi E. Schottenstein ("AES"):
JPM, EAS, and AES: constructive fraud/abuse of fiduciary duty and fraudulent misrepresentations and omissions;
JPM and EAS: elder abuse
Accordingly, the Panel ordered the Respondents to pay to Claimants:
JPM: $4,708,550 compensatory damages plus interest; rescission of the Coatue investment with payment of $4,291,450 to Claimants plus interest; $172,620.50 in costs; and one-half of Claimants' attorneys' fees as will be determined by a court of competent jurisdiction.
EAS: $9 million compensatory damages plus interest; $172,620.50 in costs; and one-half of Claimants' attorneys' fees as will be determined by a court of competent jurisdiction.
AES: $602,251 compensatory damages plus interest.
Bill Singer's Comment
Here's the one thing that I do not understand and, frankly, am quite troubled by. FINRA has this rule on its books:
FINRA Code of Arbitration Procedure for Customer Disputes / Rule 12104: Effect of Arbitration on FINRA Regulatory Activities; Arbitrator Referral During or at Conclusion of Case
. . .
(e) At the conclusion of an arbitration, any arbitrator may refer to FINRA for investigation any matter or conduct that has come to the arbitrator's attention during and in connection with the arbitration, either from the record of the proceeding or from material or communications related to the arbitration, which the arbitrator has reason to believe may constitute a violation of the rules of FINRA, the federal securities laws, or other applicable rules or laws.
An independent panel of three FINRA Arbitrators awarded about $20 million to a public customer, AND the arbitrators made a specific finding that Respondents JPM and Evan Schottenstein had engaged in "elder abuse" -- that's a direct quote from the FINRA Arbitration Award. So, tell me, just what the hell am I missing here? Just what the hell kind of facts do FINRA arbitrators need in order to "refer to FINRA for investigation" conduct that came to the arbitrators' attention during the arbitration? I mean, for godsakes, if Rule 12104 doesn't get triggered by the facts in Schottenstein, then what's the point of even having such a rule?