Merrill Lynch Asks Court To Rule That Sleeping FINRA Arbitrator Engaged In Misconduct

March 23, 2012

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in December 2009, Claimants asserted causes of action including unsuitability, fraud, failure to supervise, and negligence in connection with transactions relating to the Merrill Lynch Phil Scott Team Income Portfolio. As a result of what is characterized in the FINRA Decision as "Respondent's reprehensible, egregious and fraudulent conduct relating to Claimants' investments," Claimants requested $1.7 million in compensatory damages plus interest, punitive damages, and other relief. In the Matter of the FINRA Arbitration Between John J. Baker, Natalie N. Baker, and Harriet B. Baker, Claimants vs. Merrill Lynch,Pierce, Fenner & Smith, Incorporated, Respondent, (FINRA Arbitration 09-06762, June 23, 2011)

Respondent Merrill Lynch generally denied the allegations and asserted various affirmative defenses.

Untimely Discovery Compliance

At the hearing. Claimants made a Motion for Sanctions, Respondent objected, but the FINRA Arbitration Panel granted the motion.  It appears that, in part, the Panel deemed Respondent Merrill Lynch to have undertaken "untimely compliance with the Panel's orders to compel the production of documents."

SIDE BAR: FINRA Arbitration Panels finally seem to be awakening to the gamesmanship of foot-dragging during discovery. See, FINRA Arbitration Respondent Hit With Punitive Damages and Discovery Sanctions ("Street Sweeper" June 29, 2011)


The FINRA Arbitration Panel found Respondent Merrill Lynch liable and ordered it to pay to the Claimants $880,000 in compensatory damages.  Respondent was also ordered to pay $34,800 in hearing fees.

SIDE BAR: According to Claimants' law firm, Lax & Neville LLP:

[T]he Merrill Lynch Phil Scott Team recommended that 100% of Claimants' assets be invested in the Merrill Lynch Phil Scott Team Income Portfolio, which consisted of 100% equities. In doing so, the Merrill Lynch Phil Scott Team ignored the Claimants' individual risk tolerances and investment objectives. Even more egregious is the fact that the Merrill Lynch Phil Scott Team recommended that a 90 year old widow in very poor health invest in the 100% equities Merrill Lynch Phil Scott Team Income Portfolio. . .


Pursuant to the arbitration Claimants' Motion to Confirm the arbitration award in New York Supreme Court, Respondent Merrill Lynch cross-moved to vacate. Baker v Merrill Lynch, Pierce, Fenner & Smith, Inc. (Supreme Court, NY Co., 2012 NY Slip Op 30596(U), March 9, 2012).

Respondent Merrill Lynch argued that under the Federal Arbitration Act and New York law, the FINRA arbitration panel had engaged in prejudicial misconduct by refusing to hear evidence pertinent and material to the controversy. Among several arguments Respondent made in this regard, it complained that the FINRA Arbitration Panel ruled that all evidence following petitioners' filing of theirStatement of Claim on December 1, 2009, was irrelevant.  Respondent Merrill Lynch had wanted to submit evidence related to Claimants' later investment activities, which presumably would have demonstrated Claimants' appetite for more risky investments.

Now, we come to one of my all-time favorite paragraphs in a Court Decision on whether to confirm or vacate a FINRA arbitration:

Respondent also asserts that the arbitrators - one arbitrator, in particular -repeatedly fell asleep during the hearing over the parties' objections. Respondent argues that habitual sleeping during the hearing amounts to arbitrator misconduct and requires that the Award be vacated.

At page 4 of the Court Decision

I mean, wow, you just don't see that accusation everyday. Of course, Claimants ("petitioner" in the quote below) would have none of this nocturnal adjudication stuff:

They also dispute respondent's characterization of the Panel as "habitually" falling asleep during the proceedings. Rather, petitioners assert that the Panel was alert, asked numerous questions, and thoroughly reviewed the evidence. Additionally, they maintain that when petitioners moved to recuse from the Panel one of the arbitrators - the one who had been falling  asleep - due to bias in favor of respondent as perceived by petitioners, respondent opposed petitioners' motion even after several hearing sessions of the arbitrator's purported sleeping. . .

At page 4 of the Court Decision.

Ultimately, the Court confirmed the Arbitration Award and held that Respondent Merrill Lynch had failed to convincingly demonstrate arbitrator misconduct in regard to either any improper rulings or in terms of proving that one of the arbitrators repeatedly dozed off to the extent that such alleged activity rose to the level of arbitrator misconduct.

I wonder if all over Wall Street the major firms are now preparing to videotape FINRA arbitration proceedings to catch an arbitrator if he or she fails to stay awake during hours of riveting testimony about exotic financial instruments, suitability, and private placements.  Perhaps the law departments of Goldman Sachs, Morgan Stanley Smith Barney, JP Morgan, Wells Fargo, will petition FINRA to provide free No-Doz or bottomless cups of Starbuck's coffee to all arbitrators.