The Gilligan's Island Iliad Odyssey of a FINRA Customer Arbitration

August 30, 2016

Sit down next to me on the bench. Grab that oar. Pull. Pull again. Keep pulling as we join the forces leaving Greece for Troy. I'm thinking that we should be back by the end of the week. No way this is going to take much longer than that to sack and pillage the pesky city and its annoying residents. Frankly, I'm looking to getting home in time to watch the Olympics on television but for the fact that there isn't any television, at least not yet, but there is that rather talkative fellow Homer who tends to make his rounds and I understand that he will be broadcasting some of the Olympic events. Hey, no slouching there, pull. 

And thus begins our voyage of a FINRA public customer arbitration through a federal district court and onto the shores of a federal circuit court. The Iliad? The Odyssey?Gilligan's Island? Hey, what can I tell you . . . sometimes things don't go as smoothly as you hope.

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in September 2010, public customer Claimants Judith and Kenneth Goldman asserted securities fraud, violation of Rule 10b-5, fraudulent misrepresentation, lack of supervision, lack of suitability, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, breach of contract, negligence, respondeat superior, and vicarious liability. Claimants sought compensatory and punitive damages, attorneys' fees and cost but the amounts were not set forth in the FINRA Arbitration Decision. In the Matter of the FINRA Arbitration Between Judith Goldman and Kenneth B. Goldman, Claimants, vs. Morgan Stanley Smith Barney, LLC, Citigroup Global Markets, inc., Merrill Lynch, Pierce, Fenner & Smith Inc. Barry J. Guariglia, William R. Meagher, and Carmeia Nocerino, Respondents (FINRA Arbitration 10-04386, October 2, 2014).

Respondents generally denied the allegations and requested the expungement of the matter from the Central Registration Depository records ("CRD") of Respondents Guariglia, Meagher, and Nocerino.

Falling By the Wayside

Claimants dismissed their claims against Respondent Meagher and Respondent Nocerino in November 2010.

In October 2011, Claimants settled their claims against Respondent Merrill Lynch. They also settled with Respondent Guarigilia but limited to his tenure at Merrill Lynch (but not including his tenure at Morgan Stanley Smith Barney ("MSSB")).

Motion to Dismiss

What remained for the FINRA Arbitration Panel to consider were Claimants' claims as against remaining Respondents MSSB, Citigroup Global Markets ("CGMI") and Guariglia (as to his non-Merill Lynch tenure). In March 2014, at the conclusion of Claimants' case-in-chief, Respondents MSSB, Citigroup and Guariglia filed a Motion to Dismiss, for Expungement and for Attorneys* Fees. By Order dated April 28, 2014, the Panel granted Respondents MSSB, Citigroup, and Guariglia's Motion to Dismiss but denied the Motion for Attorneys' Fees. The Motion for Expungement was denied with leave to re-submit per a separate hearing.  

In May 2014, Respondents MSSB, CGMI, and Guariglia moved to expunge his CRD. Although the Panel held an expungement hearing on behalf of Respondent Guariglia on September 3, 2014, Claimants did not participate. In September 2014, Respondents Meagher and Nocerino notified FINRA that they would not pursue expungement and the Panel did not consider that issue.

The FINRA Arbitrators Rule

The FINRA Arbitration Panel dismissed Claimants' claims against Respondents MSSB, CGMI, and Guariglia. Also, the Panel recommended the expungement of the matter from Respondent Guariglia's CRD.  In recommending Guariglia's expungement, the Panel noted that:

Claimants failed to produce evidence to support any count against Guariglia while he was employed by MSSB.

Having set the basis for its recommendation of expungement, the Panel then offers us a thoughtful and fairly extensive rationale:

Taking the Claimants' opposition first. Claimant asserted that the most egregious mistake was the Panel's failure to see the margin call ordered by Respondent Guariglia. Notwithstanding that Claimants failed to offer a scintilla of proof for such claim, the Panel questioned the Respondents further on this matter at the expungement hearing. We remain satisfied there was no margin call ordered.

Claimants also made many arguments regarding various frauds that were perpetrated on them. Yet, while the record is replete with arguments, there is no evidence or testimony of any kind of fraud committed by Respondents Guariglia or MSSB.

Finally, Claimants demanded an in-person hearing on the merits in their opposition to the expungement. Claimants asserted as part of the demand that Respondent Guariglia would be subject to cross examination "so that the merits of Respondents' motion. however predictable the outcome, can be preserved for the record." Claimants chose not to appear; therefore there is no cross examination for the record.

. . .

The Statement of Claim alleges there is fraud. There was no evidence to support this claim. The Statement of Claim alleges that the Claimants' investments were not suitable for them. Claimant Kenneth Goldman's own testimony disposed of this claim. Besides having a law degree, he had previously held a securities license and he had been managing his own accounts for many years. The Statement of Claim repeatedly refers to margin calls. The evidence shows there were no margin calls while Claimants maintained their accounts at Morgan Stanley Smith Barney. Therefore the Panel finds the initial claim was clearly erroneous.

The Claimants failed to prove that Respondent Guariglia was involved in a single sales practice violation. The Panel, though, remains concerned about the timeline surrounding the power of attorney for Claimant Judith Goldman after her account was moved to MSSB. However, the testimony of both Judith and Kenneth Goldman amply demonstrated that Kenneth Goldman made all ofthe decisions in his wife's account with her approval. There was no claim for unauthorized trades in the Judith Goldman account In addition there were no losses in Judith Goldman's account while at Morgan Stanley Smith Barney. Finally, there was no violation, forgery, theft or misappropriation by Barry Guariglia.  

Recap of FINRA Arbitration Decision

As with most FINRA customer arbitration Decisions, this one doesn't present a cogent fact pattern replete with dates and specific incidents; instead, readers are sort of forced to piece together the underlying events via inference and implication -- and to cull comments from the expungement rationale to plug back into what, frankly, should have been presented in a fairly cut-and-dry fashion under a "Statement of Facts" at the inception of the Decision. Unlike most customer Decisions, however, this one does do an excellent job setting forth the procedural aspect of this complicated proceeding and does offer an excellent rationale for the Panel's ultimate rulings. Notwithstanding the impediment of a clean statement of the underlying dispute, the arbitrators did a commendable job in memorializing their conclusions.

Not murky is the fact that all of Claimants's remaining claims were dismissed. As to allegations concerning a purported "margin call ordered by Respondent Guariglia," the Panel dismissively found that "Claimants failed to offer a scintilla of proof."  As to "various frauds" alleged by Claimants, the Panel noted the arguments but found "no evidence or testimony of any kind of fraud committed by Respondents Guariglia or MSSB." When you can't present a "scintilla of proof," that's not going to push the needle and persuade arbitrators.

The arbitrators seem to have given considerable weight to the fact that Claimant Kenneth Goldman had a law degree, had once been registered in the securities industry, and had managed his accounts for many years -- factors that I would concur should be weighed within the context of the apparent claims. Adding the Claimant's pedigree to what was viewed as a weak case, the dismissal seems inevitable.

To The Courthouse (Number 1)

On October 30, 2014, in the United States District Court for the Eastern District of Pennsylvania ("EDPA"), the Goldmans moved to vacate the arbitration award in favor of CGMI and Guariglia. Judith Goldman and Kenneth B. Goldman, Plaintiffs, v. Citigroup Global Markets, Inc., Barry Guariglia, FINRA, and Frederick Pieroni, Defendants (Memorandum, EDPA, 12-CV-04469, May 19, 2015). Defendants CGMI and Guariglia moved to dismiss based upon lack of subject matter jurisdiction. Finding no federal question was presented in the Motion to Vacate, EDPA dismissed.

Ohhhh . . . so that's what happened!

The "Background" section of EDPA's Memorandum finally provides us with some much-needed statement of facts:

In their motion to vacate the arbitration, Plaintiffs Judith and Kenneth Goldman allege that they began a financial advisory relationship with Defendant Barry Guariglia in the 1990s. See Refiled Mot. to Vacate ¶ 2 n.3, ECF No. 42. At the time, Guariglia worked for Merrill Lynch, Pierce, Fenner & Smith Inc. ("Merrill Lynch"). Id. In November 2008, Guariglia transferred from Merrill Lynch to CGMI. He convinced the Goldmans to transfer their accounts with him to CGMI. See id. ¶ 3 n.4 The Goldmans contend that this transfer allegedly triggered a "margin call" that liquidated their retirement savings. See id. They claim that Guariglia and CGMI knew or should have known that the transfer of the Goldmans' accounts would trigger a margin call, and knew or should have known that a margin call would harm the Goldmans' accounts. The Goldmans claim that CGMI and Guariglia had a duty to warn the Goldmans of these risks. See id. ¶¶ 3 n.4, 47-50.

Page 2 of the Memorandum

Deficient FINRA Arbitration Process

In addition to the underlying substantive issues noted above, the Memorandum provides details of the Goldman's allegations concerning perceived procedural irregularities:

[T]he Goldmans contend that the arbitration process involved numerous procedural deficiencies in violation of FINRA rules. For example, they claim the arbitration panel allowed CGMI and Guariglia to harass the Goldmans by demanding discovery of irrelevant materials. They also allege that the arbitration panel denied the Goldmans access to important discovery materials from CGMI and Guariglia. Refiled Mot. to Vacate ¶¶ 11(a)-(c), 12-15. They also contend that mediator Pieroni allowed CGMI to attend mediation sessions even though CGMI refused to negotiate with the Goldmans. CGMI's presence during mediation allegedly breached FINRA's confidentiality requirements. Id. ¶¶ 16-24. As a result, CGMI allegedly had access to information that proved beneficial to its defense at the arbitration hearing. The Goldmans also allege that the panel chair had an undisclosed relationship with mediator Pieroni. The Goldmans claim that this relationship was a breach of FINRA ethics rules. Id. ¶¶ 25-28.

In addition to these procedural defects, the Goldmans argue that the panel erred in determining that no margin call occurred. Id. ¶¶ 3 n.4, 45-46. The Goldmans assert that, taken together, these errors show that their arbitrators were "blatantly partial" and acted with manifest disregard of federal law. Id. ¶ 11(d), 46(a). Defendants CGMI and Guariglia move to dismiss, claiming that this Court has no jurisdiction to vacate the arbitration award. See Mot. to Dismiss, ECF No. 43.

Pages 3 - 4 of the Memorandum

SIDE BAR: As with many appeals by public customers in FINRA arbitrations (and consistent with their motions to vacate unpopular panel decisions), this case is no different in presenting unflattering pictures of the hardball tactics of litigation and the manner in which many aspects of mediation, settlement, and arbitration hearings are conducted. In Goldman we are asked to consider allegations of harassing discovery, an oft-told tale. On top of that is the somewhat unusual facts involving mediator Pieroni and his conduct of mediation sessions. The Goldmans assert that Pieroni's manner of handling mediation somehow provided CGMI with beneficial information. On top of that, the FINRA Arbitration Chair is charged with having some "undisclosed relationship" with Pieroni that breached FINRA's rules, whatever that might mean. Finally, as is often the case when moving to vacate, the core complaint is that the Panel simply got it wrong and by failing to see the purported "truth," the arbitrators must have been partial and manifestly disregarded the law.

Limited Review

As to the Goldmans's argument that subject matter jurisdiction existed because their arbitration claims raised issues of federal securities law, EDPA underscored that the Federal Arbitration Act only provides for "limited review of arbitration awards," and that a more wide-ranging review of the merits of the arbitration are disfavored. Simply citing the FAA does not confer federal subject matter jurisdiction on a disputed arbitration. Also, the "substance of the underlying arbitration is generally irrelevant to a district court's consideration of a motion to vacate." With that preamble, the Goldmans were clearly in for an uphill fight to persuade the Court.

SIDE BAR: An important issue -- and distinction -- to understand is that the Goldmans filed their Motion to Vacate pursuant to the provisions of the FAA; however, merely moving to vacate pursuant to the federal arbitration act does not, in and of itself, create the requisite federal question necessary to impose subject matter jurisdiction. What the EDPA is saying, in essence, is "okay, we know that you're here pursuant to the FAA but now show us some aspect of your case that gives us the right to consider your appeal." The Goldmans attempted to show that their case presented a federal question because their arbitration claims were based on federal securities laws; the arbitrators manifestly disregarded the federal securities/banking laws; and the arbitrators violated FINRA's rules (which are subject to federal regulation).

Federal Claims in the Arbitration

EDPA then proceeds to scrutinize the Goldman's motion to discern what, if any, federal issue the Plaintiffs raised. As to one of the recognized grounds for vacatur; namely, "manifest disregard of federal law,' EDPA agreed that in some circumstances (although not a settled issue in the 3rd Circuit) a court could properly consider the allegations raised by the Goldmans as raising a federal question. In disposing of this line, EDPA note, in part:

The Goldmans' allegations that the panel manifestly disregarded FINRA rules do not constitute a valid claim for manifest disregard of federal law. The Goldmans claim they were denied discovery by the arbitration panel. They also claim that the panel chair was that biased in part because of an undisclosed relationship with FINRA mediator Pieroni. Finally, they claim that CGMI had access to valuable information about the Goldmans' case through violations of FINRA confidentiality requirements. Even though the Goldmans claim that these allegations amount to manifest disregard of federal law, they are more appropriately viewed as issues in the arbitration process addressed by § 10 of the FAA. As discussed, these deficiencies in the arbitration process do not create subject matter jurisdiction. . .

Pages 8 - 9 of the Memorandum

In summing up its rationale for granting Defendants' Motion to Dismiss, EDPA states:
The Goldmans' motion to vacate does not meet the Supreme Court's standard because it does not raise actually disputed federal issues concerning the laws governing margin requirements and Rule 10b-5. Put simply, no party contests the existence, applicability, or construction of these statutes and regulations. Instead, the Goldmans argue that the panel erred in its factual determination that no margin call occurred. . .

Page 9 of the Memorandum

To The Courthouse (Number 2)

Having lost at FINRA's arbitration forum and having failed to obtain a vacatur of the arbitration from EDPA, the Goldmans appeal to the United States Court of Appeals for the Third Circuit ("3Cir"). Judith Goldman and Kenneth B. Goldman, Appellants, v. Citigroup Global Markets, Inc., FINRA, Frederick Pieroni, and Barry Guariglia, Appellees, (Opinion, 3Cir, 15-2345, August 22, 2016).

FINRA Mediation Issues

The 3Cir Opinion offers us a bit more intriguing detail about the mediation among the parties:

The FINRA proceedings began with mediation before a neutral named Ferdinand Pieroni, and the mediation succeeded in producing a settlement for the Goldmans with Merrill Lynch, but not with CGMI. The Goldmans now allege that CGMI refused to negotiate in good faith, left the mediation when the Goldmans so demanded, and then "snuck back in[] ... through a side door" to "spy" on the confidential negotiations between the Goldmans and Merrill Lynch. (Opening Br. at 9.) CGMI flatly denies those allegations, and mediator Pieroni filed a sworn affirmation before the FINRA arbitration panel declaring that CGMI did not refuse to mediate, was never asked to leave the mediation, and acted in good faith.  

Page 4 of the Opinion

Prior Courthouse Trips

The Opinion pulls the curtain back a bit more:

During the mediation and arbitration proceedings before FINRA, the Goldmans resorted to the District Court, claiming a breach of contract. More specifically, in a lengthy complaint, the Goldmans alleged that CGMI had not honored its promise to mediate, that "CGMI and its lawyers were allowed to spy on . . . confidential discussion[s] and negotiation[s]" (App. 47), and that the arbitration panel was conflicted and partial. Based on those allegations, the complaint alleged that CGMI, Guariglia, FINRA, and Pieroni "breached express and implied terms and conditions of the FINRA[] Arbitration and Mediation contracts" (App. 49), and acted "[i]n utter defiance of [FINRA mediation] rules" (App. 50). They immediately moved for a temporary restraining order and preliminary injunction to stay the arbitration and to have CGMI's law firm, Greenberg Traurig, barred from the case. The District Court denied the motion, holding that there was "no lawful basis" for relief and that the Goldmans had improperly asked the Court to intervene "as an emergency court of interlocutory appeals from arbitration orders." (App. 85.) After a different judge was assigned the case, the District Court denied a second motion for a temporary restraining order, then subsequently dismissed the case with instructions to re-file after the arbitration was concluded, if the Goldmans wished to challenge any resulting arbitration award. There was another false start in the summer of 2014, when the Goldmans filed a motion to vacate the arbitration award before it was actually finalized, and that motion too was dismissed.

Pages 5 - 6 of the Opinion

Three Theories

In setting the stage for its approach, 3Cir presents the three theories that it attributed to the Appellants' Motion to Vacate:

[T]hey present three theories for why their motion to vacate does so. First, they say that federal courts may "look through" a motion to vacate to the subject matter of the underlying arbitration, and that, because the underlying arbitration in this case involved federal securities law claims, the District Court had jurisdiction. Second, they contend that, because they alleged that the FINRA panel manifestly disregarded federal law, they have raised a federal question. Finally, they say that the FINRA procedures at issue here are so integrally related to federal law that disputes over those procedures raise federal questions. We consider each jurisdictional theory in turn, ultimately agreeing with the District Court that none satisfies the stringent Grable test for federal question jurisdiction in the absence of a federal cause of action.

Pages 13 - 14 of the Opinion

As to the Appellants invitation to 3Cir to "look through" their motion and consider the federal subject matter raised in the arbitration, the Court essentially says "thanks but not thanks":

We therefore hold that a district court may not look through a § 10 motion to vacate to the underlying subject matter of the arbitration in order to establish federal question jurisdiction. Instead, the traditional well-pleaded complaint rule applies so that the motion to vacate must, on its face, "necessarily raise a stated federal issue, actually disputed and substantial, which a federal forum may entertain without disturbing any congressionally approved balance of federal and state judicial responsibilities." Grable, 545 U.S. at 314.

Page 23 of the Opinion

Manifest Disregard

3Cir took cognizance of the Goldman's "manifest disregard" arguments and pointedly noted that:

The Goldmans do not meet that standard because the legal issues they raise are, at most, merely supportive of their principal complaint that partiality, corruption, and ineptitude infected the arbitration process. More broadly, the Goldmans fail to establish any of the four parts of the Grable test with their manifest disregard claim. The claim does not "necessarily raise a ... federal issue," nor is the federal issue in question "substantial," Grable, 545 U.S. at 314, because the margin regulations are invoked simply as evidence for the factual claim that a margin call occurred. That alone does not create a basis for federal subject-matter jurisdiction, because determining whether the arbitrator "fail[ed] to consider pertinent and material evidence" "plainly [does] not require resolution of a uniquely federal issue." Greenberg, 220 F.3d at 27 (internal quotation marks omitted). In reality, no question of federal law is "actually disputed" here. . . .

Page 27 of the Opinion

In dismissing the argument that FINRA is a '34 Act authorized self-regulatory organization and that factor somehow  imbues the issues on appeal with adequate federal subject matter jurisdiction, the Circuit explains:

[T]hat the allegedly misbehaving arbitration panel happened to be affiliated with a self-regulatory organization does not meaningfully distinguish this case from any other suit alleging arbitrator partiality in a securities dispute. Accordingly, we decline to recognize federal question jurisdiction over the flood of cases that would enter federal courts if the involvement of a self-regulatory organization were itself sufficient to support jurisdiction. See Grable, 545 U.S. at 318 (expressing concern with finding a substantial federal question in a state law claim when that "would have meant a tremendous number of cases" could enter federal court).

Page 31 of the Opinion


In the Matter of the FINRA Arbitration Between Judith Goldman and Kenneth B. Goldman, Claimants, vs. Morgan Stanley Smith Barney, LLC, Citigroup Global Markets, inc., Merrill Lynch, Pierce, Fenner & Smith Inc. Barry J. Guariglia, William R. Meagher, and Carmeia Nocerino, Respondents

Judith Goldman and Kenneth B. Goldman, Plaintiffs, v. Citigroup Global Markets, Inc., Barry Guariglia, FINRA, and Frederick Pieroni, Defendants (Memorandum, EDPA, 12-CV-04469, May 19, 2015)

Judith Goldman and Kenneth B. Goldman, Appellants, v. Citigroup Global Markets, Inc., FINRA, Frederick Pieroni, and Barry Guariglia, Appellees, (Opinion, 3Cir, 15-2345, August 22, 2016)