FINRA Humiliated In Federal Court Arbitration Appeal

March 26, 2018

In its self-regulatory-organization capacity, the Financial Industry Regulatory Authority is nothing but meticulous about insisting that its member firms and their associated persons follow its rules. At times, FINRA is uncompromising when it insists that a rule says what it says and you are charged with understanding the proscriptions and following the provision without fail. No ifs. No buts. Just do what you're supposed to do and don't do what you're not. Otherwise, stop your whining and pay the fine and do the time. When the screw turns and FINRA is itself on the end of the hook and dangling in a water filled with predators, well, what can I say -- let's just sit back, open another can of beer, put on some suntan lotion, and wait for that ever so gentle and pleasing tug on the line. Who's got the tartar sauce?

The FINRA Arbitration

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in May 2017 and as amended thereafter, Claimant SDDCO asserted breach of contract related to obligation under a Placement Agreement; fraudulent inducement and misrepresentation, and unjust enrichment. In its Post-Hearing Submission, Claimant sought $200,000 plus $34,540 in past-due interest under the Placement Agreement; $110,785 in legal fees, and punitive damages.In the Matter of the FINRA Arbitration Between SDDCO Brokerage Advisors LLC, Claimant, vs., First Capital Real Estate Investments, Respondent (FINRA Arbitration 17-01140, February 6, 2018).

Non-Member Respondent

As set forth in the FINRA Arbitration Decision:

Respondent First Capital Real Estate Investments is not a FINRA member, but agreed to submit to arbitration pursuant to the Code of Arbitration Procedure ("Code"), and pursuant to the terms of the parties' Placement Agreement. First Capital Real Estate Investments filed with FINRA Office of Dispute Resolution a properly executed Submission Agreement and, having answered the claim, appeared and testified at the hearing, is bound by the determination of the Panel on all issues submitted.

Respondent First Capital generally denied the allegations and asserted various affirmative defenses.
As set forth in the FINRA Arbitration Decision:

This case was decided by a majority-public panel

Discovery Sanctions

In December 2017, Claimant SDDCO filed a Motion for Sanctions, which Respondent First Capital opposed. As set forth in the FINRA Arbitration Decision, the FINRA Arbitration Panel:

granted Claimant's Motion for Sanctions based on Respondent's failure to comply with the Panel's Discovery Order. Respondent was ordered to pay, as sanctions, Claimant's attorneys' fees in the amount of $3,500.00. Respondent paid the above stated amount on January 18, 2018.


The FINRA Arbitration Panel found Respondent First Capital liable and ordered it to pay to Claimant SDDCO $200,000 in compensatory damages plus interest until paid in full; $88,,859.20 in attorneys' fees; and $1,000 reimbursement for filing fees.

The FINRA Arbitration Decision discloses the following Panel composition:

  • Sandra D. Parker, Public Arbitrator, Presiding Chairperson;
  • Keely D. Parr, Public Arbitrator, and
  • Tychelle Dephroneicia McLaurin, Non-Public Arbitrator
SDNY Notice to Vacate

Respondent First Capital was unhappy with the FINRA Arbitration Decision and on March 6, 2018, petitioned the United States District Court for the Southern District of New York ("SDNY") to vacate the award. First Capital Real Estate Investments, LLC, a California Limited Liability Company, Petitioner, v. SDDCO Brokerage Advisors, LLC, Financial Industry Regulatory Authority, Respondent (Notice of Verified Petition to Vacate Arbitration Award, SDNY, 18-CV-2013 / March 6, 2018).

Verified Petition

As set forth in the First Capital Real Estate Investments, LLC, a California Limited Liability Company, Petitioner, v. SDDCO Brokerage Advisors, LLC, Financial Industry Regulatory Authority , Respondent (Verified Petition to Vacate Arbitration Award, SDNY, 18-CV-2013 / March 6, 2018),, Petitioner First Capital cited three reasons to vacate the FINRA Arbitration Award:

  1. the arbitrators exceed their authority under the Placement Agreement and breached the FINRA Rules of Procedure by applying intra-industry rules;
  2. the panel was not appointed in accordance with FINRA procedure; and
  3. the arbitrators exceeded their authority under both the Placement Agreement and breached FINRA Rules of Procedure by failing to follow FINRA Rule 13503.

A Matter of Lists and Choices

Petitioner First Capital asserted that the parties were served with a list of arbitrators and that the case proceeded as a three-arbitrator intra-industry case, which purportedly required the parties to select a Public Arbitrator, and Non-Public Arbitrator, and a Public Arbitrator to serve as Chair. Petitioner further asserted that the original FINRA Arbitration Panel consisted of Christopher Zitzmann as Non-Public Arbitrator; Sandra Parker as Public Arbitrator and Keely Parr as Public Arbitrator and Chair.

Around January 10, 2018, Zitzmann withdrew and was replaced by Non-Public Arbitrator Tychelle Dephroneicia McLaurin. Thereafter, the Case proceeded with arbitrators Parker, Parr, and McLaurin.

Petitioner alleged that:

34. In the instant case, FINRA failed to administer the FINRA Arbitration according to its own rules by applying the Rule 13000 series to improper parties as Petitioner was neither a Member or an Associated Person.

35. FINRA failed to administer the FINRA Arbitration according to its own rules by classifying Arbitrator Parker improperly.

36. FINRA failed to administer the FINRA Arbitration according to its own rules by the arbitrators exhibiting Manifest Disregard of the Law to the prejudice of the Petitioner in violation of filing a Motion under FINRA Rule 13503 without evidencing a good faith effort "to resolve the dispute before filing the Motion."

37. FINRA failed to administer the FINRNA Arbitration according to its own rules by handing down a Sanction during the hearing in violation of FINRA Rule 13503.

Barton Letter to SDNY

By letter dated March 22, 2016, (the "Barton Letter"), counsel for SDDCO informed the Court that in pertinent part:

Yesterday opposing counsel and I received an email from Leslie Leutwiler, Associate Director of Neutral Management, FINRA Office of Dispute Resolution, with a letter attached regarding Sandra Parker, one of the three arbitrators on the panel in the underlying arbitration that issued the award that is at issue before the Court.  

Petitioner claims that Ms. Parker was not qualified to be a public arbitrator because her law firm's website indicates that she represents clients in FINRA arbitrations; Respondent opposed Petitioner's claim for a myriad of reasons as contained in its Memorandum of Law. The letter from FINRA disclosed, however, that Ms. Parker was not qualified to be a public arbitrator under FINRA's rules not for the reason put forth by Petitioner but because Ms. Parker was once associated with a broker-dealer (over 20 years ago) and, thus, should have been classified as a non-public arbitrator.

While this does not change most of the reasons that we opposed Petitioner's claim, such as waiver and actual notice, we assume that the Court would like both parties to address this newly discovered evidence.

I would, therefore, ask for the Court to provide us with an Order as to a date certain when you would like Petitioner to address this new evidence and for Respondent to respond, accordingly. I would note that Petitioner has not yet responded to Respondent's Answer and Cross-Motion to Confirm Arbitration Award that was filed with the Court on March 15, 2018, should that affect how the Court wishes to set such a schedule.

FINRA March 21, 2018 Letter to the Parties

The March 21, 2018, letter (see attached to Barton Letter) from FINRA to the parties' legal counsel states in pertinent part:

We are in receipt of Respondent's petition to vacate the arbitration award in the above captioned matter. One of the allegations in Respondent's petition is that FINRA misclassified Chairperson Sandra Parker as a public arbitrator. In response, FINRA reviewed Chairperson Parker's classification. We have determined that Chairperson Parker's classification should have been changed to non-public when the arbitrator definitions changed in 2015, albeit for a different reason than what is alleged in the petition.

FINRA rules provide that individuals who have been associated with a broker-dealer at any time may not serve as public arbitrators. FINRA rules further provide that an otherwise qualified arbitrator who is disqualified from service as a public arbitrator will be classified as non-public.

From 1987 until 1996, Chairperson Parker was employed at Metropolitan Life Insurance Company. During that time Metropolitan Life Insurance Company was registered as a broker-dealer. Therefore, Chairperson Parker must be re-classified as a non-public arbitrator.

We apologize for the error in Chairperson Parker's classification . . .