FINRA Faked Out By Move

November 14, 2016

Today's Blog presents a lawsuit that you may already have heard about: Move, Inc. Plaintiff/Appellant, v. Citigroup Global Markets, Inc., Defendant/Appellee (Opinion; 9 Cir.; 14-56650, 14-CV-04418 / November 4, 2016). Then again, what you "heard" about a case and what that case really involves are often two very different things. The underlying dispute in Move v. Citigroup involves yet another claim to recover losses sustained by a customer that purchased Auction Rate Securities, which were sold by Wall Street as "good as cash" but turned out to be anything but. What is more troubling about today's featured case, however, is the manner in which the Financial Industry Regulatory Authority conducted the mandatory arbitration.

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in September 2008, in connection with investments in Auction Rate Securities ("ARS"), Claimant Move, Inc. asserted breaches of fiduciary duty, contract, the contractual duty of good faith and fair dealing; violation of SEC Rule 10b5 and FINRA Rule 2310; violation of SEC Rule 15c1-2;  violation of the Investment Advisers Act, 15 U.S.C. §§ 80b-1 et seq.; and negligent misrepresentation. In addition to an order rescinding the investment agreement pursuant to which the disputed ARS purchases were made, Claimant Move sought compensatory and punitive damages, interest, costs, and fees. In the Matter of the FINRA Arbitration Between Move, Inc. Claimant, vs. Citigroup Global Markets, Inc., Respondent (FINRA Arbitration 08-03355, December 8, 2009).

Respondent Citigroup generally denied the allegations and asserted various defenses.

The FINRA Arbitration Panel denied Claimant's claims in their entirety.

SIDE BAR: The FINRA Arbitration Panel was composed of Non-Public Arbitrator Danile R. Brush; Public Arbitrator Arthur T. Berggren; and Public Arbitrator / Presiding Chairperson James H. Frank. FINRA charged the parties a $2,500 member surcharge; a $750 pre-hearing process fee; a $2,200 hearing process fee; a $1,000 adjournment fee; $6,000 for 6 pre-hearing sessions; and $20,000 for 20 hearing sessions.


Move, Inc. was not happy with the FINRA Arbitration Decision and filed a Motion to Vacate with the United States District Court for the Central District of California ("CDCA"). Things did not go well for Plaintiff Move at CDCA, which declined to vacate the FINRA award. Next, stop, Move, Inc. appealed to the United States Court of Appeals for the Ninth Circuit ("9Cir"), which reversed in part CDCA and remanded for an entry of judgment in favor of Plaintiff.  

Not So Frank Frank

I could offer you my patented snarky commentary of Move v. Citigroup but I'm not sure that you would believe me -- or, more to the point, you would raise an eyebrow and wonder if I am putting too much acerbic spin on my presentation and trying to sharpen my axe and make an overly sharp point. Consequently, let me stand back and allow the "BACKGROUND" section of the 9Cir's Opinion to speak for itself:

Move maintained an investment account with Citigroup Global Markets, Inc. (Citigroup). In connection with its investments, Move entered into a "Client Agreement" with Citigroup stating, in relevant part, that "all claims or controversies . . . shall be determined by arbitration before, and only before, any self-regulatory organization or exchange of which [Citigroup] is a member."

On September 16, 2008, Move commenced arbitration proceedings before a three-member FINRA panel, alleging that Citigroup mismanaged $131 million of Move's funds by investing in speculative auction rate securities. Before initiating the proceedings, FINRA required Move and Citigroup to sign a "Uniform Submission Agreement," which stated that the dispute was submitted to arbitration "in accordance with the Constitution, By-Laws, Rules, Regulations, and/or Code of Arbitration Procedure of [FINRA]." FINRA's Code of Arbitration Procedure for Customer Disputes, found in FINRA Rules 12000-12905, includes Rule 12401(c), which required Move's claims to be arbitrated by a panel of three arbitrators.

Pursuant to Rule 12403, FINRA provided the parties with a list of thirty proposed arbitrators and their employment histories, including ten proposed arbitrators from FINRA's chairperson roster. Because the dispute involved a complex securities issue, it was important to Move that the person selected as chairperson be an experienced attorney. Move ranked "James H. Frank" first who, according to the FINRA Arbitrator Disclosure Report (ADR), received a law degree from Southwestern University in 1975 and was licensed to practice law in California, New York, and Florida. Pursuant to FINRA rules and regulations, arbitrators must affirm that their ADR is accurate and up to date. FINRA also informs arbitrators that a failure to disclose material information in the arbitrator profile may result in permanent disqualification.

Mr. Frank subsequently served as the chairperson of the panel along with Arthur T. Berggren, a licensed attorney, and Daniel R. Brush, a Certified Public Accountant and Certified Financial Planner. On December 8, 2009, after conducting six pre-hearing conferences and twenty hearing sessions, the FINRA panel issued a unanimous award denying Move's claims.

Over four years later, on March 26, 2014, Move learned from an article in The AmLaw Litigation Daily that Mr. Frank had lied about being a licensed attorney. It is now undisputed that Mr. Frank, who is "James Hamilton Hardy Frank," was impersonating retired California attorney "James Hamilton Frank." FINRA later confirmed that Mr. Frank lied about his qualifications in his ADR and subsequently removed him from all cases and from its roster.

Move filed a complaint on June 9, 2014, and a motion to vacate the arbitration award on June 17, 2014. Move argued that vacatur was warranted under 9 U.S.C. § 10(a)(3) and (4) of the FAA because of Mr. Frank's misrepresentations. Although 9 U.S.C. § 12 provides that notice of a motion to vacate an arbitration award must be served within three months after the award is delivered, Move argued the deadline should be equitably tolled. Citigroup moved to dismiss, arguing that equitable tolling is unavailable under the FAA and that, even if it were, Move failed to demonstrate tolling was justified. Citigroup further argued that, even if the limitations period were tolled, vacatur was unjustified on the merits.

The district court denied Move's motion to vacate and granted Citigroup's motion to dismiss. Noting that equitable tolling under the FAA presented an "unsettled question of law" in this circuit, the court ruled that equitable tolling is available, but that Move failed to demonstrate an adequate ground for vacatur under the FAA. Specifically, the court explained that (1) Mr. Frank's misbehavior did not prejudice Move's rights to a fundamentally fair hearing as required by § 10(a)(3); and (2) the panel did not exceed its powers in violation of § 10(a)(4) because Mr. Frank's deceit, if cognizable at all under that section, did not violate Move's contractual rights under its Client Agreement with Citigroup. Move timely appealed.

Pages 4 -6 of the Opinion

Fair Is Fair?

Let me make sure that you fully appreciate what a federal district court concluded after hearing Move Inc.'s Motion to Vacate the FINRA Arbitration Decision. CDCA somehow framed Arbitrator Frank's deceit and deception as "misbehavior" (a euphemism if ever there was one). Confronted with the arbitrator's "misbehavior," CDCA found that such "did not prejudice Move's rights to a fundamentally fair hearing." Adding judicial insult to judicial injury, CDCA interpreted the letter of the law as barring Move's 2014 Motion to Vacate because it was not "timely filed" within the Federal Arbitration Act's ("FAA's") three-month requirement, notwithstanding that the customer only first learned about Arbitrator Frank's fraud in 2014. Indeed, Justice is blind. 

Reopening a Closed Window

In considering Move's appeal, 9Cir also found that the Motion to Vacate was not timely filed within the FAA's three-month window; however, notwithstanding that the motion was filed over four years after that statutory window closed, 9Cir boldly went where CDCA did not and invoked the Doctrine of Equitable Tolling. Further, 9Cir found that the misconduct by Frank was so prejudicial to the right to a fair hearing as to mandate a reversal and remand. In pertinent part, the 9Cir offered this rationale:

Citigroup argues that there is no evidence that Mr. Frank influenced other members of the panel or that the outcome of the arbitration was affected by his participation. But there is simply no way to determine whether that was the case. Cf. Stivers v. Pierce, 71 F.3d 732, 747 (9th Cir. 1995) ("Particularly on a small board, . . . it is difficult if not impossible to measure the impact that one member's views have on the process of collective deliberation. Each member contributes not only his vote but also his voice to the deliberative process.") (citation omitted). In any event, Mr. Frank's participation was itself prejudicial to Move. Under FINRA rules and regulations, such deceit would have permanently disqualified Mr. Frank from serving as a FINRA arbitrator. Indeed, once Mr. Frank's lies were revealed, FINRA immediately removed him from its roster. However, because Mr. Frank's fraudulent conduct was revealed only after the arbitration panel issued its award in favor of Citigroup, the parties received a hearing chaired by an imposter. Because Move and Citigroup agreed to arbitrate their multi-million dollar dispute before a panel of three qualified arbitrators as provided by FINRA's rules and regulations, the parties' rights to such a proceeding were prejudiced by the inclusion of an arbitrator as chairperson who should have been disqualified from arbitrating the dispute in the first place.

Page 13 of the 9Cir Opinion

Bill Singer's Comment Blog readers know that I am an out-spoken and ardent opponent of Wall Street's bankrupt system of mandatory arbitration. Moreover, for those of you who think that Move v. Citigroup present a truly unique issue of arbitrator misconduct, consider this excerpt from "Federal Court Slams FINRA For Unqualified Lawyer Arbitrator" ( Blog, August 7, 2013):

As It Turns Out . . .

In fact, the Court explains that Timban was indicted by a Grand Jury in Burlington County, NJ for unauthorized practice of law and was the subject of two complaints filed with the Attorney Discipline Board for the State of Michigan in April and July 2012 -one of which involved allegations that he had knowingly written a check against insufficient funds in a probate matter. The Court asserts that Timban pled no contest and was suspended from the practice of law in Michigan for 176 days as of November 20, 2012.

As the Court notes with a tinge of astonishment:

Apparently, Mr. Timban failed to disclose any of this information to either FINRA or the parties involved in this action and it was only discovered after the arbitration hearings in this matter concluded and the award issued."

At Page 20 of the Court's Memorandum

Seriously guys?

The Court doesn't quite understand FINRA's action or inaction in response to Timban's March 22, 2012 disclosure. For one thing, the Court found no evidence in the record showing that FINRA's Director of Dispute Resolution took any action to remove Timban from the case.  Also a tad odd, neither the Claimant nor any Respondent requested the arbitrator's removal following his disclosure.  Consider this scathing commentary from the Court that is spread out in all its glory as Footnote 7 :

This Court finds it remarkable that neither of these parties nor, more particularly, FINRA saw fit to conduct any investigation or due diligence into Mr. Timban's qualifications after he revealed that he was the subject of a complaint by the State of New Jersey for unauthorized legal practice. Given that the parties were required by the terms of the subscription agreement to submit any disputes which arose thereunder to arbitration under the auspices of, inter alia, FINRA, and given that FINRA bills itself as the largest independent securities regulator in the country, one would expect that public confidence in the integrity of the arbitral process would be of paramount importance.  Indeed FINRA's June 21, 2013 announcement that it will now conduct annual background checks on its arbitrators and additional review before appointment seems, to this Court, to be an important step in the right direction, albeit "too little too late" in this cases . . .

Imperfectly Executed

Summing up the facts before it, the Court held that:

Here, in failing to provide these parties with three qualified arbitrators, FINRA failed to provide what the parties agreed to in the Subscription Agreement  We therefore conclude that vacatur of the award in this case is proper . . . then arbitrators here so imperfectly executed their powers that a mutual, final and definite award was not made.

At Page 21 of the Court's Memorandum

Accordingly, the Court denied the motion to confirm, and granted the motion to vacate and remanded the case back to FINRA.