Sympathy For The Bankruptcy Devil In A FINRA Arbitration

May 8, 2015

Today's Blog takes us to a FINRA arbitration involving a trust, allegations of unsuitability, and a bit of a dust-up among the arbitrators as to whether the disclosure of a trustee's bankruptcy involved a ploy to gain undue sympathy. One arbitrator argued that the bankruptcy revelation was so prejudicial that it prevented the panel from reaching a fair decision. The majority of the arbitrators, however, echoed Mick Jagger's observation that, hey, it's just the nature of my game. Alas, the Devil is always in the details.

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in June 2013 and as amended thereafter, Claimants asserted causes of action against Respondent RBC Capital. Markets including breaches of fiduciary duty, negligence.  There is no specific recitation in the FINRA Arbitration Decision as to any causes of action asserted by Claimants against Respondent Interactive Brokers, LLC. As set forth in the Decision:

Claimants alleged that they are the sole beneficiaries of the Parker Family Trust (the "Trust") and the trustee of the Trust was Robert W. Dillard ("Dillard" or "trustee"). Claimants alleged that the Trust expressly prohibited a trustee from engaging in speculation with Trust funds, and that Dillard pursued a patently unsuitable speculative trading strategy that decimated the Trust's corpus. Claimants alleged that RBC had a copy of the Trust and was aware that Dillard's investment strategy exceeded his authority as trustee. Claimant also alleged that Interactive Brokers approved and assisted Dillard's reckless trading and failed to stop him when it had a duty to protect the Claimants' interests as the listed owners of the Trust account

As against Respondent RBC, Claimants sought $500,000.00 in compensatory damages, punitive damages, interest, costs, attorneys' fees, and $213,000 in disgorgement.

As against Respondent Interactive Brokers, Claimants sought $1,681,175.53 in compensatory damages (subsequently reduced to $1,366,796.94), punitive damages, interest, costs, attorneys' fees, and $44,807 in disgorgement.

In the Matter of the FINRA Arbitration Between Brian L. Parker and Jessica P. Valentine, Individually and as Trustees of the Parker Family Trust Case Number, Claimants, vs. Interactive Brokers, LLC and RBC Capital Markets, LLC, Respondent (FINRA Arbitration 13-01876, April 28, 2015).

Respondents RBC and Interactive Brokers generally denied the allegations and asserted various affirmative defenses. Respondent RBC requested the expungement of the Central Registration Depository records ("CRD") of an unnamed party.

SIDE BAR: So . . . we got the trust beneficiaries alleging that Dillard, a Trustee who was not named as a party in the FINRA Arbitration, was prohibited from speculating but, notwithstanding, he speculated. The result of his alleged speculation was not merely losses but the alleged decimation of the Trust's corpus -- if you don't know what a corpus is and are unfamiliar with how bad a "decimation" is, just assume that a lot of money was lost.  

Claimants were trying to hold Respondent RBC liable based on the theory that the firm had a copy of the Trust and should have known that Dillard's trading exceeded his authorized conduct. Similarly, the Claimants tried to hold Respondent Interactive Brokers liable for failing to stop Dillard's trading. Based solely upon the damages sought, it appears that RBC was purportedly liable for about 1/3 to 1/4 of the overall losses at issue.

A When In Rome SIDE BAR:When the Roman Legions had shown cowardice in battle or one of their ranks engaged in extremely dishonorable conduct, one in every ten soldiers of a Cohort (composed of six Centuries of 80 soldiers, or 480 men) would be picked to step forward (hence the deci-mation) and then executed by the other nine.

RBC Settles Out

Around February 2, 2015, FINRA was notified that the Claimants had reached a settlement with Respondent RBC and that the claims against the firm were dismissed with prejudice. In light of the settlement, the requested expungement was not pursued and, accordingly, not adjudicated by the Panel. We are not told as to the amount paid via that settlement. In any event, the arbitration proceeded to a hearing against Respondent Interactive Brokers.


The FINRA Arbitration Decision notes the following occurrence:

At the hearing. Claimants' counsel alleged that the trustee, who Claimants were suing in Texas State Court, had declared bankruptcy the previous day and that the case was stayed pending bankruptcy.


The FINRA Arbitration Panel by a vote of 2:1 found Respondent Interactive Brokers, LLC, liable and ordered the firm to pay to Claimants $725,779.59 in compensatory damages and $483,853.06 in attorneys' fees pursuant to the Texas state law.

The Dissenting Arbitrator published the following:

Because this Award is unsupported by the law or the facts of the case, I must dissent.

Claimants cannot meet their burden of proof, as a matter of law, for any of the three counts of their Second Amended Statement of Claim. A fair review of the Record also establishes that Interactive Broker's affirmative defense as a "protected person" dealing with the Trustee under the Texas Securities Act §114.081 and §114.086 is established as a matter of law.

I am also seriously concerned that improper means were used to sway my fellow panelists. Specifically, near the close of the Final Hearing in this matter, and in an apparent attempt to evoke sympathy, Claimants announced that they had just learned that the Trustee had "declared bankruptcy the previous day" and that the State Court case, which was due to be called for trial the week following the Final Hearing in this arbitration, "was stayed pending bankruptcy." This announcement of the Trustee's bankruptcy filing improperly influenced the panel and prejudiced Respondent Interactive Brokers. There is no other reasonable conclusion given that the Record does not support the Award.

Bill Singer's Comment

An interesting wrinkle in this arbitration is that all three arbitrators came from the so-called "Public" pool and there was no sitting "Industry" arbitrator on the panel. Moreover, the Dissenting Arbitrator was the presiding Chair of the hearing.

If Respondent Interactive Brokers moves to vacate this award, the Dissenting Arbitrator has certainly opened the door for that appeal.  I applaud the Dissent's explanation because it helps keep the system more open and balanced, which is good for both industry and public investor parties.

If an appeal is based upon the legal standard of "manifest disregard for the law," then the Respondent will likely cite the Dissenting Arbitrator's admonition that the decision is "unsupported by the law." As to another basis for appeal, an alleged bias or prejudice by an arbitrator, the Dissent also provides fodder in his assertion that the majority was "improperly influenced" by the inflammatory disclosure of the trustee's bankruptcy.

Whether or not a Court will find that the majority manifestly disregarded the law or were wrongly influenced by the disclosure of the bankruptcy remains to be seen. What the Dissent views as an "apparent attempt to evoke sympathy," however, is not sufficient in and of itself, in my opinion, to upend the majority's Decision. Much of what lawyers do in prosecuting or defending an arbitration case is intended to evoke sympathy. A more profitable avenue on appeal will likely be the "protected person" issue noted in the DissentNotwithstanding, given the limited disclosure of the proceedings provided in the Decision, there may well be some circumstances reflected in the record (which we are unaware of) that will support an appeal.