Courts Affirm FINRA Award Via Virtual Naming of John Does In Customer Arbitration

June 5, 2019

Sometimes when you initiate litigation you don't know the names of all the parties that you want to sue.  In such cases, you will often see a caption list "John Doe, Respondent" or "John Does #1 - #3, Defendants." As the lawsuit makes its way through Discovery, those unknown names may become disclosed, and, accordingly, the Plaintiff or Claimant may move to amend the pleadings in order to identify the actual name of any John Doe.  Depending upon when such a motion is made, a whole host of due process issues may arise -- not the least of which is whether the last-minute amendment would constitute litigation by sandbag and violate a John Doe's due process rights. I've been through the FINRA desert on a horse with no name. It felt good to be out of the arbitration.

2016 FINRA Arbitration Award

In a FINRA Arbitration Statement of Claim filed in May 2013, public customer Claimants Heinemann and Phisuthikul asserted negligence/gross negligence; misrepresentations and material omissions; and control person liability and failure to supervise in connection with tenant-in-common investments. Claimants sought compensatory, punitive, and treble damages plus rescission, restitution, interest, costs, and fees. In the Matter of the Arbitration Between Marilyn Heinemann and Chakorn Phisuthikul, Claimants, v. Pacific West Securities, Inc., William M. Swayne III, Philip Anthony Pizelo, William M. Swayne II, and WMS Financial Planners, Inc. (FINRA Arbitration Decision 13-01600 / November 16, 2016) As noted in part in the FINRA Arbitration Decision:

During the evidentiary hearing, Claimants' counsel made a Motion to Amend the Statement of Claim to Conform to the Evidence pursuant to Rule 12309(b). Claimants identified the Newly Identified Respondents as the former "John Doe" respondents. The Panel determined to grant Claimants' motion. 

On July 20, 2016, the Panel issued the following Order: 

The Statement of Claim in this matter named but did not identify John Doe respondents. By identifying three such respondents at hearing - Anthony Pizelo, William Madison Swayne II and WMS Securities, Inc. - Claimant initiated and Respondent William Madison Swain [sic] III answered, de facto, a Rule 12309(c) Motion to Amend Pleadings to Add Parties. This Motion is granted with respect to these three individuals. 

On August 3, 2016, Claimants submitted their Statement of Claim to Conform to the Evidence and a letter in response to the Panel's Order dated July 20, 2016. In their letter, Claimants asserted that they were not adding "new parties" under Rule 12309(c) because the Newly Identified Respondents were previously named as "John Does"; had notice of the action; understood their involvement in the transaction; and had an opportunity to present their evidence. In their assertion, Claimants relied on the judicial doctrine of "virtual representation".

On August 11, 2016, Pizelo submitted a response opposing Claimants' letter and identification of the Newly Identified Respondents, citing due process concerns and a conflict of interest with Claimants' counsel. On August 12, 2016, Swayne III also submitted a response opposing Claimants' letter on the basis of due process concerns. On August 17, 2016, Claimants submitted a reply responding to Pizelo's conflict of interest allegation and reasserting satisfaction of due process. 

On August 24, 2016, Swayne II and WMS Securities, Inc. submitted an objection to Claimants' post-evidentiary oral Motion to Amend the Statement of Claim to Conform to the Evidence, on the basis that Swayne II and WMS Securities, Inc. were not parties to the arbitration, were never given proper notice of Claimants' motion, and did not have the opportunity to present a defense or participate in the hearing. On September 6, 2016, Claimants submitted a response to Swayne II and WMS Securities, Inc.'s objection stating that the matter had already been argued and decided by the Panel, and that notice and due process had been satisfied. On September 12, 2016, Swayne II and WMS Securities, Inc. submitted a reply in support of their objection on the basis that granting the motion would cause extreme prejudice to the Newly Identified Respondents. On September 13, 2016, Claimants' counsel submitted a sur-reply disputing the assertions in Swayne II and WMS Securities, Inc.'s objection. On September 13, 2016, Swayne II and WMS Securities, Inc.'s counsel submitted a request that Claimants' letter dated September 13, 2016 be disregarded on the basis that FINRA never gave authorization that a reply to a reply could be filed. 

By Order dated October 7, 2016, the FINRA Arbitration Panel confirmed the amendment of the Statement of Claim to name Anthony Pizelo, William Madison Swayne II and WMS Securities, Inc. as newly identified Respondents. The Panel noted that the added parties were required to submit to arbitration and would be bound by the determination of the issues. 

The FINRA Arbitration Panel found all Respondents jointly and severally liable to and ordered them to pay to Claimants $1,134,911,49 in compensatory damages and $65,000 in attorneys' fees.

2017 Washington Superior Court

Petitioners moved to vacate the FINRA Arbitration Award and Respondents moved to confirm same. Philip Anthony Pizelo, William M. Swayne II, William M. Swayne III, and WMS Financial Planners, Inc., Petitioners, v. Marilyn Heinemann and Chakorn Phisuthikul, Respondents (Order Confirming Arbitration Award and Denying Petitioners' Motion to Vacate, State of Washington Superior Court; No. 16-2-29984-9 SEA / September 6, 2017) In granting the Motion to Confirm and denying the Motion to Vacate the Superior Court preliminarily found that there was an agreement to arbitrate before FINRA the matter on appeal. In confirming the FINRA Award, the Superior Court explained in part that:

All parties knew what was going on at the FINRA hearings and that control persons were included. All of the Petitioners submitted their arguments to the panel and then to the director of FINRA. Petitioners could have requested that the Panel reopen the evidentiary hearing pursuant to FINRA Rule 12609, but did not. 

SIDE BAR: FINRA Rule 12609. Reopening the Record
The panel may reopen the record on its own initiative or upon motion of any party at any time before the award is rendered, unless prohibited by applicable law.

In finding that Petitioners to be "control persons," the Superior Court asserted that::

1. Petitioner Pizelo was former CEO of Pacific West Securities, Inc. ("Pac West") and actively represented Pac West during at least one, if not more, pre-hearing conferences. 

2. Petitioner Swayne III testified under oath at the Arbitration hearing that WMS Financial Planners, Inc. ("WMS") was a d/b/a of himself and that his father, Petitioner Swayne II, was CEO of WMS. Moreover, Petitioners Pizelo and Swayne II were licensed at the time of the underlying sale. 

2019 Washington Court of Appeals

On further appeal, the Washington Court of Appeals characterized in part Petitioners' arguments as contending that the FINRA Arbitration Panel:

exceeded its powers in granting Investors' motion to identify the "John Does" as Pizelo, Swayne II, and WMS. Specifically, Appellants contend the trial court erred in refusing to vacate the arbitration award because (1) the Panel violated due process protections and FINRA rules, (2) the Panel violated state and federal principles of "John Doe" pleading, and (3) there was no agreement to arbitrate before FINRA. 

Philip Anthony Pizelo, William M. Swayne II, William M. Swayne III, and WMS Financial Planners, Inc., Appellants, v. Marilyn Heinemann and Chakorn Phisuthikul, Respondents (Opinion, State of Washington Court of Appeals Division 1; No. 77448-4-1 / June 3, 2019)

In considering Appellants argument that the FINRA Arbitration Panel had acted in manifest disregard of the law when it amended the Statement of Claim to identify as "John Does" Pizelo, Swayne II, and WMS, the Court of Appeals disagreed and noted in pertinent parts that:

The Panel expressly determined that "upon evidence produced during the hearing," Pizelo, Swayne II, and WMS "had sufficient notice." The Panel was not required to explain its rationale for this decision, as the parties did not request an "explained decision" pursuant to FINRA Rule 12904(g). We note, however, that the record shows Pizelo was former CEO of PacWest, and that Swayne Ill testified under oath at the evidentiary hearing that WMS was a d/b/a of himself and that his father, Swayne II, was CEO of WMS. Upon learning this information at the hearing, Investors immediately moved to identify the "John Does" in their claim. Because the newly identified parties were not present at the evidentiary hearing, strict procedural compliance with FINRA Rules 12309(b) and 12503 was not possible. We cannot say this decision was irrational or made in manifest disregard of the law. Nor can we say the trial court erred in concluding "[a]ll parties knew what was going on at the FINRA hearings and that control persons were included." 

. . .

Appellants further contend that post-evidentiary amendments that add new parties in a lawsuit violate due process when liability is imposed without providing the new parties with an opportunity to be heard. However, the record shows that Appellants' post-hearing submissions to the Panel and FINRA raised in detail their concerns regarding due process, violation of FINRA Rules, conflict of interest, control person liability, and prejudice. The Panel's award expressly stated that the determination was made "[a]fter considering the pleadings, the testimony and evidence presented at the hearing, and the post hearing submissions." . . . 

Accordingly, the Court of Appeals affirmed the Superior Court's decision upholding the FINRA Arbitration Award.

Bill Singer's Comment:

Truly an intriguing case. To put it all in a nutshell: 

You don't know me; yes, I do; no, you don't because you only listed "John Doe"; but now I know who you are and I amended the caption; yeah, but it's too late; no, it isn't; yes, it is; no, it isn't because you were "virtually" named; "virtually" my ass; well, whatever, dude, because you're name is now listed as a Respondent; that's not due process because it's too late in the lawsuit; not according to three independent FINRA arbitrators; independent my ass, they're idiots; sounds like sour grapes to me and you damn sure better pay the Award; I ain't payin' jack and I'm moving to vacate; well, we'll move to confirm; yeah, well we'll see about; ditto!