A Perplexing $137,000 Award In $6 Million FINRA Arbitration

January 9, 2014

Okay, so maybe it's me and, frankly, it's often just me. I'm a peculiar guy with a far too active imagination and an unquenchable thirst for information and explanations. Given those personality quirks of mine, I found the Financial Industry Regulatory Authority ("FINRA") arbitration discussed in today's BrokeAndBroker Blog to be interesting for three reasons:
  1. there's the whole issue of whether Respondent Pan Interactive Brokers refused to execute a trade;
  2. there's the even more intriguing question of whether the Respondent erroneously liquidated calls instead of puts; and,
  3. finally, how could you not be intrigued when the demanded damages in a FINRA arbitration is over six million dollars?
A Multi-Million Dollar Refused Execution And Wrongful Liquidation Case

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in April 2011 and as amended thereafter, Claimant Principle Capital Partner alleged causes of action including breach of contract and negligence in connection with Respondent Pan Interactive Brokers' purported wrongful refusal to execute certain trades and wrongful liquidation of option calls instead of option puts. Claimant ultimately sought $6.4 million in compensatory damages plus punitive damages and attorneys' fees. In the Matter of the FINRA Arbitration Between Principle Capital Partners, L.P. n/k/a MRM Capital Partners, L.P., Claimant, vs.Pan Interactive Brokers LLC. Respondent (FINRA Arbitration 11-01626, December 20, 2013).

$137,000 Worth of Negligence

With great anticipation, I awaited the FINRA Arbitration Panel's presentation of the underlying facts and its rationale for whatever award it would render. Sadly, instead of a comprehensive ruling replete with context and content, this is what we got:

1. Respondent is liable for negligence and shall pay to Claimant compensatory damages in the sum of $137,000.00.
2. Any and all claims for relief not specifically addressed herein, including Claimant's requests for punitive damages and attorneys' fees, are denied.

Seriously?  "Liable for negligence?" Negligence involving what? And how the hell did the FINRA Arbitration Panel find negligence but, thereafter, issue only a $137,000 award versus a six-plus million dollar demand? Which is not to suggest that the Panel came up with the wrong dollar award, but it is to suggest that given the gaping chasm between the $6.4 million in claimed damages and the $137,000 award, it might have been nice, to say the least, if the Panel offered a modicum of explanation to us.

FINRA's Failed Quality Control

This FINRA Arbitration Decision is a disservice to the industry and investing public because it adjudicates what appears to be a fairly interesting dispute but offers no rationale for the Panel's finding of liability and no explanation for the manner in which the award was computed.  Yes, I know, the parties may request a more expansive, so-called "reasoned" decision; and, yes, I also know that FINRA arbitrations are "private" alternative dispute resolutions, which are entitled to some degree of confidentiality not afforded in the courts. Counterbalancing those considerations, however, is the fact that FINRA is a self-regulatory organization and has taken on the responsibility of publishing customer and industry arbitration decisions -- and the onus that comes with such a commitment is that the published content must be coherent within the four corners of each published page. To simply pronounce "guilty" or "not guilty" with no further, adequate explanation as to what was in dispute and why a Panel ruled as it did is not fulfilling the regulator's mandate.

One might be inclined to blame a particular FINRA Arbitration Panel for the short shrift demonstrated in many of the organization's decisions, but given the numbers of such hide-and-seek Awards, the end product seems to have the imprimatur of an officially sanctioned policy that exalts minimalism. Consequently, I have to point the finger at FINRA itself for not imposing more quality control on the published content of its Arbitration decisions. 

Did You Hear The One About . . .

All of which reminds me of that fascinating criminal case involving two naked men who entered a locked closet with no entrance or exit save for the one door. Absolutely nothing was in the closet when the naked men entered. After the closet door was closed, a gunshot was heard coming from the closet. When the door was opened, one man was found dead of a single bullet to the head. No gun was found in the closet or on either individual. The police arrested the survivor, who was charged with murder. The prosecution sought the death penalty. At trial, the defendant testified and the jury found him not guilty. Surprisingly, the judge threw out the jury's verdict and found the defendant guilty of negligence and sentenced him to 30 days in prison. On appeal, the defendant was exonerated based upon dramatic, new evidence.

Okay, so now do you get my point?