FINRA Arbitrators Can't Explain

June 28, 2017

To most Wall Street observers, today's Blog's featured FINRA arbitration is a ho-hum, garden-variety dispute between an employer and employee. What often makes the Blog an edgy read, however, is the quirky viewpoint of its publisher Bill Singer, Esq. And Bill is in all his edgy glory today as he savages a mandatory intra-industry dispute. By way of a teaser, the former employee Claimant sought between $48,000 and $606,658; and the former employer Respondent filed a Counter-Claim seeking $72,083.52. How and why the panel of arbitrators awarded $8,000 to the Claimant is a mystery. Speaking of how and why, who said "I Can't Explain?" Yeah, that's right. What is? Not what, Who.

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in October 2015 and amended thereafter, associated person Claimant Clay alleged tortious interference; defamation; violation of the Illinois Deceptive Trade Practices Act; commercial disparagement; fraud in the inducement; unjust enrichment; expungement; and release of held funds. In the Matter of the FINRA Arbitration Between Todd Clay, Claimant/Counter-Respondent, vs. Chapin Davis, Inc., Respondent/ Counter-Claimant (FINRA Arbitration #15-02609 June 23, 2017).

In pertinent part, Claimant asserted that he was a joint owner of an investment account at Chapin Davis, and that one week after his termination, Respondent traded the account and wrongfully retains his assets. Ultimately, Claimant sought between $48.000 and $606,658 in damages but the FINRA Arbitration Decision fails to specify the bases for such a range.


Respondent Chapin Davis generally denies the allegations, asserted various affirmative defense, and filed a Counter-Claim asserting breach of an employment agreement. Pointedly, the Counter-Claim asserts that at the time when Clay had accepted Chapin Davis's offer of employment, he failed to disclose that he had sold the right to serve as broker for a large portion of assets he represented were assets under his management. Counter-Claimant Chapin Davis sought $72,083.52 in damages. Clay generally denied the allegations and asserted various affirmative defenses.


The FINRA Arbitration Panel of two Public and one Non-Public arbitrators rendered the following award:

1. Respondent is liable for and shall pay to Claimant the sum of $8,000.00 in compensatory damages.

2. Respondent shall release to Claimant the funds in his joint account.

3. Respondent's Counterclaim is denied.

4. Other than forum fees, which are specified below, the parties shall each bear their own costs and expenses incurred in this matter.

5. Any and all claims for relief not specifically addressed herein, including punitive damages and attorneys fees, are denied.

Bill Singer's Comment

This is the crap that FINRA releases to the public in the form of an arbitration decision? Seriously?

FINRA arbitration is a "private" means of alternative dispute resolution ("ADR") and, as such, the parties have every right to insist upon the confidentiality of certain facts. Notwithstanding such a tacit understanding, a mandatory arbitration forum, which FINRA's ADR forum is for both industry participants and public customers, must acknowledge something of an obligation to provide sufficient content and context in its decisions so as to provide intelligible guidance to those essentially trapped within the system.  The adequacy of FINRA's arbitration decisions is most critical when the parties appeal to the courts in order to obtain confirmation or vacatur of an award. A less critical but important consideration is that a given forum's decisions provide important guidance to future litigants about how particular facts are weighed and the nature of monetary and non-monetary awards. Although veteran arbitration lawyers know that there is no precedential value from one arbitration award to another that does not negate the importance of presenting sufficient content and context.  

In "Explained Arbitration Decisions / SEC Approves Amendments to Require Arbitrators to Provide an Explained Decision at Parties' Joint Request" (FINRA Regulatory Notice 09-16 / March 2009), we learn the following in pertinent part [Ed: Footnotes omitted; highlighting provided]:

Background & Discussion

FINRA is amending its Customer Code and Industry Code to require arbitrators to provide an explained decision at the parties' joint request. The absence of explanations in awards has been a common complaint of non-prevailing parties in FINRA's arbitration forum, especially customers and associated persons. The amendments are intended to address this complaint and increase investor confidence in the fairness of the arbitration process.

An explained decision is a fact-based award stating the general reasons for the arbitrators' decision. It does not need to include legal authorities and/or damage calculations. Normally, the arbitrators will be resolving the entire matter; thus, the explained decision will address all the claims asserted by the parties. However, the parties may request that an explained decision address only certain claims.

Parties will be required to submit any joint request for an explained decision no later than 20 days prior to the first scheduled hearing date.

The chairperson of the arbitration panel will write the explained decision and will receive an additional honorarium of $400. Once the decision is drafted, the other arbitrators will participate in completing the decision as provided in Rules 12904(a) and 13904(a). As with all other awards, the arbitrators will continue to be permitted to concur, concur in part, dissent or dissent in part. The panel may allocate the cost of the honorarium to one party, or may allocate it between or among all parties. Arbitrators will continue to be permitted to decide, on their own, to write an explained decision. If the panel or a member of the panel decides to write an explained decision in the absence of a joint request, FINRA will not pay an additional honorarium to any panel member.

Parties will not be able to require explained decisions in simplified arbitrations that are resolved without a hearing or in default proceedings. Explained decisions are not appropriate in either of these situations because of the abbreviated nature of the proceedings.

The amendments become effective on April 13, 2009, and will apply to all arbitration cases in which an initial prehearing conference has not been held, or waived by the parties, by the effective date.

If, in fact, all parties to a FINRA arbitration desire a given level of non-disclosure of facts and rationale, then so be it. I'm a free-market advocate and all for whatever is a bargain among equal parties (as long as it's legal). That being said, a given FINRA Arbitration Decision should at least disclose that the extent to which the facts and rationale in the decision are presented comport with the desire of all parties. I would not take issue with any minimalist content/context accompanied by such a disclosure.

FINRA's response to complaints about "the absence of explanations in its awards," strikes me as little more than a cynical, cosmetic remedy. An explained decision requires the submission of a request from all parties. That's nonsense since many arbitrations involve issues that FINRA member firms particularly desire to keep confidential, which was the main driving force behind mandatory intra-industry and public customer arbitration. Apparently, FINRA sees nothing inappropriate in charging extra for an "explained decision," which means that the default byproduct of its arbitrations is an "unexplained decision." Wow, now there's an aspirational goal! What a lovely plaque FINRA must present to its veteran arbitrators: For 10 Years of Exemplary Service as an Arbitrator Rendering Unexplained Decisions.

To exacerbate matters, FINRA has cynically embedded a $400 so-called "honorarium" as the price of obtaining what should be provided as the default decision and should always be provided at no extra cost. The problem with that honorarium is that it imposes a further financial burden on parties seeking an explained decision and may well prevent/retard the sua sponte action of the FINRA Arbitration Panel to voluntarily provide a rationale for its Award. If you're going to try and tell me that it's "only" $400 and not that big a deal, great, let FINRA pay the fee out of its own pocket since it's no big deal.

Imagine how unseemly it would be if you filed a civil suit in court and the judge charged you $400 to render a written decision? Keep in mind that FINRA charges all sorts of filing fees, hearing fees, and forum fees in addition to this $400 honorarium, which is typically a payment to a professional for services that are generally not charged for by that individual. Sort of like a mandatory 20% gratuity at a fancy restaurant. I never quite understand why I must pay a minimum gratuity -- particularly after I have given lackluster service. "Must" and "gratuity" seem mutually exclusive. Similarly, I sure as hell don't like having to pay an honorarium for something that should be included in the overall forum costs. To be fair to FINRA, at one time China used to charge the families of executed prisoners for the cost of the bullet, so there is some precedent for charging parties for a written explanation of an arbitration decision (he says with dripping sarcasm . . . step back so you don't get burned).

To better understand my ire, let's start with a fairly simple fact in Clay v. Chapin Davis: There is a "joint account" at issue. Umm . . . a joint account involving Clay and ????  To me, that's an annoying omission. Was it a joint account with Chapin Davis? Was it a joint account with another individual? At least state whether the other party was the employer-firm or some third-party. Another issue: Was there any allegation that Chapin Davis was not authorized to trade the joint account, or that it was not authorized to trade after Clay's termination? Again, an inexplicable omission of fact from the FINRA Arbitration Decision.

Clay alleged that Chapin Davis wrongfully retained his "assets" after his termination. What exactly were those assets and their value? Was it one-half of the value of the joint account or the entire account's value? Were there any accrued /unaccrued losses that the firm argued needed to be netted against the "assets" before closing out the joint account? Was the firm's cited post-termination trading liquidating-only in nature and/or did the subsequent trades result in net loss or net profit to the joint account?

How the hell do you seek damages running the expansive range from $48,000 to $606,658? We're talking about nearly 13 times difference from one end of the damages spectrum to the other. At least offer some context for Claimant's dramatically differing damages claims.

If a FINRA arbitration decision is going to present an allegation that a firm hired an individual based upon a purported representation as to AUMs under that candidate's control, I think that it's necessary to indicate at what point (days, weeks, or months) into the employment the firm purportedly discovered that the employee had sold the right to serve as broker for a large portion of assets. Similarly, provide some guidance via dollars or percentages as to what constituted a "large" portion of the AUMs.

Chapin Davis sought $72,083.52 in damages. Funny thing about "damages," they're usually sought because someone did or didn't do something. Would have been nice to know just what the requested damages were supposed to address.

The FINRA arbitration decision asserts that Chapin Davis alleged that Clay had breached an employment agreement. That's a nice allegation but for the fact that there is no recitation as to what provision of the agreement was breached and the underlying facts.

Notwithstanding dueling demands for awards running from $48,000 to $606,658, on the one hand, and $72,083.52, on the other, the Panel awarded $8,000.  That's sort of like walking into an ice cream store and the sign says they sell only chocolate, vanilla, and strawberry but you see a customer walking out with a double scoop of pistachio. I mean for godsakes, how or why did three arbitrators award $8,000 in this case -- and, no, I'm not really interested in your opinion or speculation; I should be able to glean that tidbit from the Decision.