An irreverent Wall Street Blog
by Bill Singer
by Bill Singer
Tardy Customer Warps FINRA Arbitration Space Time Continuum
October 6, 2014
A journey of a thousand miles starts with a single step, except, sometimes that first step is more of a stumble and you land face down in mud and since this isn't starting out well, you might as well go clean up and maybe start the journey tomorrow. After a few weeks go by, the weather hasn't been so great and you put off the journey for a few months, which turns into a year or so. Eventually, you start the journey again and take that single step but twist your ankle and figure, screw it, next week I'll just get the car and drive there. What's this all have to do with a public customer's complaints against a brokerage firm and some registered representatives? Ahhh . . . you're going to have to start your own journey of discovery below.
Case In Point
Public Customer Yarmak initially filed a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim in July 2011, but that pleading was not served on the parties. Thereafter, in October 2011, Claimant filed and served a Revised Statement of Claim asserting unauthorized withdrawals, lack of risk disclosure, churning, failure to provide the best execution price, breach of fiduciary duty, suitability, negligence, and failure to supervise in connection with what the FINRA Arbitration Decision characterizes as relating to "various securities and trading methodologies. Claimant sought $410,111.03 in compensatory damages and an additional $268,745.92 in what the Decision refers to as "backup claims." Claimant further sought punitive damages against Respondent Penson and interest/costs against Respondents Penson and Choicetrade. In the Matter of the FINRA Arbitration Between Sarah J. Yarmak, Claimant, vs. Choicetrade, Penson Financial Services, Inc., Neville Kekl Golvala, Robert Clay Mullin, Jr., and Ronald H. Buckner, Respondent (FINRA Arbitration 11-02883, September 16, 2014).
Respondents Penson, Mullin, Choicetrade, Golvala, and Buckner generally denied the allegations and asserted various affirmative defenses. Respondent Choicetrade counterclaimed and alleged breach of contract, and sought $348,885.62 in compensatory damages plus incidental damages, consequential damages, interest, costs, and attorneys' fees.
Six Of One, Half A Dozen Of Another
In February 2012, Respondents Choicetrade, Golvala, Buckner, Penson, and Mullin filed their respective Motion to Dismiss pursuant to FINRA Code of Arbitration Rule 12206, and Claimant objected.
FINRA Arbitration Rule 12206. Time Limits(a) Time Limitation on Submission of ClaimsNo claim shall be eligible for submission to arbitration under the Code where six years have elapsed from the occurrence or event giving rise to the claim. The panel will resolve any questions regarding the eligibility of a claim under this rule.(b) Dismissal under RuleDismissal of a claim under this rule does not prohibit a party from pursuing the claim in court. By filing a motion to dismiss a claim under this rule, the moving party agrees that if the panel dismisses a claim under this rule, the non-moving party may withdraw any remaining related claims without prejudice and may pursue all of the claims in court.(1) Motions under this rule must be made in writing, and must be filed separately from the answer, and only after the answer is filed.(2) Unless the parties agree or the panel determines otherwise, parties must serve motions under this rule at least 90 days before a scheduled hearing, and parties have 30 days to respond to the motion. Moving parties may reply to responses to motions. Any such reply must be made within 5 days of receipt of a response.(3) Motions under this rule will be decided by the full panel.(4) The panel may not grant a motion under this rule unless an in-person or telephonic prehearing conference on the motion is held or waived by the parties. Prehearing conferences to consider motions under this rule will be recorded as set forth in Rule 12606.(5) If the panel grants a motion under this rule (in whole or part), the decision must be unanimous, and must be accompanied by a written explanation.(6) If the panel denies a motion under this rule, a party may not re-file the denied motion, unless specifically permitted by panel order.(7) If the party moves to dismiss on multiple grounds including eligibility, the panel must decide eligibility first.• If the panel grants the motion to dismiss the case on eligibility grounds on all claims, it shall not rule on any other grounds for the motion to dismiss.• If the panel grants the motion to dismiss on eligibility grounds on some, but not all claims, and the party against whom the motion was granted elects to move the case to court, the panel shall not rule on any other ground for dismissal for 15 days from the date of service of the panel's decision to grant the motion to dismiss on eligibility grounds.• If a panel dismisses any claim on eligibility grounds, the panel must record the dismissal on eligibility grounds on the face of its order and any subsequent award the panel may issue.• If the panel denies the motion to dismiss on eligibility grounds, it shall rule on the other bases for the motion to dismiss the remaining claims in accordance with the procedures set forth in Rule 12504(a).(8) If the panel denies a motion under this rule, the panel must assess forum fees associated with hearings on the motion against the moving party.(9) If the panel deems frivolous a motion filed under this rule, the panel must also award reasonable costs and attorneys' fees to any party that opposed the motion.(10) The panel also may issue other sanctions under Rule 12212 if it determines that a party filed a motion under this rule in bad faith.(c) Effect of Rule on Time Limits for Filing Claim in CourtThe rule does not extend applicable statutes of limitations; nor shall the six-year time limit on the submission of claims apply to any claim that is directed to arbitration by a court of competent jurisdiction upon request of a member or associated person. However, when a claimant files a statement of claim in arbitration, any time limits for the filing of the claim in court will be tolled while FINRA retains jurisdiction of the claim.(d) Effect of Filing a Claim in Court on Time Limits for Filing in ArbitrationIf a party submits a claim to a court of competent jurisdiction, the six-year time limitation will not run while the court retains jurisdiction of the claim matter.
In May 2012, The panel ruled that it was reserving judgment on the Motions to Dismiss. On December 18, 2012, the Panel heard oral argument on Respondents' Motions to Dismiss.
It's Unanimous
By Order dated February 1, 2013, the Panel unanimously granted Respondent Choicetrade's Motion to Dismiss in accordance with FINRA Arbitration Rule 12206(a). Citing end-of-month account information supplied in discovery by the Claimant to the Respondents, the Panel concluded that the event on which the Claimant's claims were premised must have occurred during May/June 2005. Consequently, the Panel deemed the Statement of Claim as not having been filed within the requisite six-year eligibility period (by May/June 2011).
SIDE BAR: Sometime around January 11, 2013, Respondent Penson filed for bankruptcy and, accordingly, all claims against the firm were stayed. Consequently, the FINRA Arbitration Panel made no determination with respect to any claims against Respondent Penson. As such, any orders or rulings regarding Penson were withdrawn.
The Panel considered Claimant's Motion for Reconsideration and by Order dated March 28, 2013, decided to:
- uphold the dismissal of claims against Penson Financial Services, a Texas entity, and its employee Robert C. Mullin, Jr., based on a Texas law regarding Statute of Limitations, which purportedly provides for a shorter three-year filing deadline as opposed to FINRA's six-year limit;
- allow all claims against Respondents Choicetrade, Golvala and Buckner to proceed because Claimant successfully argued in her Motion for Reconsideration that her Statement of Claim filed with FINRA on July 15, 2011, fell within the six-years of eligibility; and
- allow Respondent Choicetrade's counterclaim to proceed.
THE GALILEAN And/Or LORENTZ TRANSFORMATION SIDE BAR: Ya wanna run that by me again? The Panel concluded that Claimant's claims occurred during May/June 2005, which by my math means that the eligibility period expired by May/June 2011. We have a Statement of Claim that was filed in July 2011, but we are informed that the pleading was not served. Moreover, the Decision asserts that it was not until October 2011, that a Revised Statement of Claim was served. As I see it, the six-year FINRA eligibility ran out either a month before the July 2011 Statement of Claim or about four months before the filing of the so-called Revised Statement of Claim. On what basis these arbitrators allowed the claims to proceed escapes me -- and, yes, there may well be a sensible explanation and a valid calculation of time but it is not set forth in the Decision. Of course, the arbitrators may well have been familiar with "Galilean Transformation" and offered us this living example; or, perhaps, they resorted to the "Lorentz Transformation."
The Decision
After all the motion practice, the bankruptcy consideration, and the calculation of lapsed time, the FINRA Arbitration Panel ultimately ruled to deny Claimant's claims and Motion for Sanctions.
The Panel granted Respondent Choicetrade's Counterclaim and found Claimant Yarmak liable and ordered her to pay to Choicetrade $348,885.62 in compensatory damages and $6,887.09 in attorneys' fees.
Bill Singer's Comment
If the July 15, 2011, Statement of Claim was never properly served on the Respondents, then how the hell did it become the date used to determine whether the six-year Eligibility Rule was satisfied?
The Decision references so-called "backup claims" by Claimant. What the hell is a backup claim? Might be nice to explain that bit of jargon.
Respondent Choicetrade's Counterclaim prevailed but the Decision never explains the substance of those claims. Accordingly, how the hell did the arbitrators calculate some $355,000 in damages and fees?
Respectfully, I am formally petitioning FINRA to require all of its arbitrators to watch this space-time continuum video so that the understand the limitations of space and time. Please contact FINRA and urge the regulator to adopt my proposal: