Courts Rebuke FINRA and Public Customer Over Arbitration of Settled Dispute

December 20, 2019

Imagine that you win an $11 million award in a FINRA arbitration against a humongous firm like Citigroup. Life's good, right? The angels are singing happily in heaven, no? Then, you wake up one day, and it's all gone. Well, not "all" gone. You're left with $800,000. Not that $800,000 is garbage but, you know, it's not like $11 million. How the hell did that happen? Ah . . . now that's today's featured case.

July 30, 2013 FINRA Arbitration Decision

In a FINRA Arbitration Statement of Claim filed in August 2010 and as amended, public customer Claimant Fiorilla asserted:

breach of fiduciary duty, negligence and gross negligence, failure to supervise and control, breach of contract, and violations of federal and state securities laws, NYSE and NASD conduct rules. The causes of action relate to Royal Bank of Scotland (RBS) stock. 

In the Amended Statement of Claim. Claimant asserted the following causes of action: breach of fiduciary duty, negligence and gross negligence, failure to supervise and control. breach of contract, negligent retention of Respondent Mulcahy, and violations of federal and state securities laws, NYSE and NASD conduct rules.  

At the close of the hearing, Claimant Fiorilla sought $15,292,869 in compensatory damages. Respondents Citigroup and Mulcahy generally denied the allegations and asserted various affirmative defense. In the Matter of the Arbitration Between John Leopoldo Fiorilla, Claimant, v. Citigroup Global Markets, Inc. and Edward James Mulcahy, Respondents (FINRA Arbitration Decision 10-03615 / July 30, 2013)

The FINRA Arbitration Panel found Respondent Citigroup liable and ordered it to pay to Claimant Fiorilla $10,750,000 plus interest in compensatory damages and $600 in reimbursed filing fees. Further, the Panel found Respondent Mulcahy liable and ordered him to pay to Claimant Fiorilla $250,000 plus interest in compensatory damages.

Wow!!! That's one helluva a victory!

Except . . .

Sit down -- this is gonna take some time to explain.

January 2014: NYS Supreme Court

Citigroup and Mulcahy filed a Motion to Vacate the FINRA Arbitration Award in the Supreme Court of the State of New York, County of New York ("NYS Sup") on the basis of arbitral bias and manifest disregard of the law. Citigroup Global Markets, Inc. and Edward James Mulcahy, Jr.., Petitioners/Respondents, v. John Leopold Fiorilla as Trustee FBO John Leopoldo Fiorilla Trust u/a/d 06-25-2003, Respondent/Appellant (Order, New York State Supreme Court, 653017/2013 / January 3, 2014)

Petitioners Citigroup and Mulcahy alleged in part that one of the FINRA arbitrators had failed to disclose a prior dispute with one of the Petitioners, and that another FINRA arbitrator failed to disclose a prior lawsuit accusing her of intentional wrongdoing. Okay, sure, that's a fairly common tactic in these arbitration appeals -- blame the arbitrators for misconduct. In Citigroup's variation on that theme, the firm pursued the "failure to disclose" line of attack, which, as you can imagine, the courts tend to shoot down. Except this case ain't one of those typical, garden variety ones. Nuthin' here is plain vanilla or routine. As stated in NYS Sup Order,:

In light of the fact that this matter was in fact settled and that all parties so advised the panel and FINRA in writing, (which a Florida tribunal had found as fact in a proceeding these respondents commenced) there is no need to delve into the troubling allegations of misconduct by the arbitrators. This award must be vacated. 

The respondents may not succeed by arguing that public policy favors deference to arbitral awards. There can be no legitimate public interest in respecting arbitrations of disputes that have already been settled - the argument turns public policy on it s head. 

Just in case you didn't catch that, we start off with the fact that a FINRA Arbitration Panel awarded Fiorilla about $11 million in damages. 

Next, Citigroup and Mulcahy move to vacate that FINRA Award citing non-disclosures by two of the three FINRA Arbitrators. 

In deliberating over the Motion to Vacate, the NYS Sup finds that the matter had settled before the FINRA Arbitration Panel has issued its Awards! 

Imagine that. First you settle. Then you litigate. Fire. Aim. Ready.

Moreover, the NYS Sup asserts that notice of the settlement was conveyed in writing to both FINRA (the arbitration forum) and to the three FINRA Arbitrators; and, further, that some "Florida tribunal" had, in fact, found that such written notice was made. Having found that the matter settled before the FINRA Award was rendered, the NYS Sup doesn't give a crap about the allegations of arbitrator misconduct and cuts to the chase: This award must be vacated.

Not merely content to wave a wand to make Fiorilla's $11 million FINRA Award disappear, the NYS Sup pronounces this stinging rebuke:

[H]ad the Panel abided by FINRA Rules, as FINRA did, and acknowledged that this matter had been settled , the parties could have avoided this needless litigation. 

The respondents' refusal to abide by the settlement, particularly in light of prior Florida litigation, has resulted in a frivolous waste of counsel's time and efforts , as well  as a waste of the scarce resources available to New York's Unified Court System. 

Needless litigation. Waste of scarce resources. Oh boy, the Court is clearly not amused. 

Given what we know at this point -- which is only what's set forth in the 2013 FINRA Arbitration Decision and the 2014 NYS Sup Order -- I'm not quite sure how FINRA-the-regulator "abided" by FINRA Rules in acknowledging the prior settlement but the FINRA Arbitration Panel did not so abide. I mean, geez, how the hell does a FINRA Arbitration Panel go rogue and conduct a plenary hearing after FINRA is notified of a settlement? If it did happen, it sure as hell doesn't speak well of FINRA's role in running an arbitration forum. 

October 2, 2014: NYS Appellate Division

In Citibank, N.A. v. Fiorilla (Opinion, New York State Supreme Court, Appellate Division / October 2, 2014), the New York State Supreme Court/Appellate Division ("AppDiv") dismissed Appellant Fiorilla's appeal and sustained the NYS Sup's award of damages to Citibank. As found in part in the AppDiv's Opinion:

Defendant John Fiorilla does not dispute that he signed a promissory note with plaintiff Citibank and failed to make payments on the note upon plaintiff's demand. Rather, he claims that the note is subject to rescission on the ground that he was fraudulently induced into executing it based on misrepresentations made by Citibank and its affiliates, Citigroup Financial Products, Inc. and Citigroup Global Markets, Inc., that the note would be secured by the value of an investment he made on behalf of his trust in a fund called UBP Selectinvest ARV LP (UBP Investment or UBP Position). Fiorilla further claims that he decided to invest in the UBP Position based on misrepresentations made by the Citibank entities that the investment was low risk. However, any allegation of reasonable reliance on the alleged misrepresentations concerning the riskiness and volatility of the UBP Investment was contradicted by the detailed representations and warranties in the UBP "Confirmation" and subsequent Amendment Agreement, both signed by Fiorilla on behalf of the trust, disclaiming reliance on any oral or written representations concerning the investment and any guarantees made concerning the fund's performance (see Citibank v Plapinger, 66 NY2d 90, 94-95 [1985]; Danann Realty Corp. v Harris, 5 NY2d 317 [1959]; Champion Mtge. Co. v Elmore, 5 AD3d 140 [1st Dept 2004]). We note that, contrary to his assertion, Fiorilla is a highly sophisticated individual who has a law degree and has managed and co-founded various firms in the finance industry (see Shea v Hambros PLC, 244 AD2d 39, 47 [1st Dept 1998]).

Now that's an interesting bit of additional information: Fiorilla is a highly sophisticated individual who has a law degree and has managed and co-founded various firms in the finance industry.

April 9, 2015: NYS Appellate Division

In the Matter of Citigroup Global Markets, Inc. v. Fiorilla (Memorandum New York State Supreme Court, Appellate Division / April 9, 2015), the Court affirmed the May 12, 2014, entry by the NYS Sup of the vacatur of the FINRA Arbitration Award and the Court awarded Respondent Fiorilla $800,000 based upon a finding of prior settlement. In granting the vacatur and making its Award, the AppDiv found in part that:

[T]he arbitrators manifestly disregarded the law by failing to enforce the settlement that respondent and petitioner Citigroup Global Markets, Inc. entered into on April 29, 2012. Notably, petitioners provided the relevant law regarding the enforcement of settlement agreements (see Kowalchuk v Stroup, 61 AD3d 118 [1st Dept 2009]) in their motions to enforce the agreement, but the arbitrators ignored the law and denied the motions without explanation (see Wien & Malkin LLP v Helmsley-Spear, Inc., 6 NY3d 471, 481 [2006], cert dismissed 548 US 940 [2006]). "Although arbitrators have no obligation to explain their awards, when a reviewing court is inclined to hold that an arbitration panel manifestly disregarded the law, the failure of the arbitrators to explain the award can be taken into account" (Matter of Spear, Leeds & Kellogg v Bullseye Sec., 291 AD2d 255, 256 [1st Dept 2002] [internal quotation marks omitted]).

Ouch!  Not only did App Div find that the "arbitrators manifestly disregarded the law by failing to enforce the settlement," but, adding insult to injury, the arbitrators did so "without explanation." Yet another in a long line of judicial complaints about FINRA's dubious policy of un-explained decisions as the forum's default protocol.

October 20, 2015 NYS Court of Appeals

In the Matter of Citigroup Global Markets, Inc. v. Fiorilla (New York State Court of Appeals / October 20, 2014), the Court of Appeals denied further motions.

June 29, 2017: NYS Appellate Division

In the Matter of Citigroup Global Markets, Inc. v. Fiorilla  (Opinion, New York State Supreme Court, Appellate Division / June 29, 2017), the AppDiv affirmed the NYS Sup's November 14, 2016, November 25, 2016, and January 18, 2017, denials of Respondent Fiorilla's various motions to vacate/enjoin. Of particular note is that the lower court had vacated an "order of a French court that recognized the vacated award. . ." Now, mind you, I thought that the word "French" was a typo for "FINRA" until I read further into the AppDiv's Opinion, which in part states:

[A]lthough this action has no connection to France, respondent commenced an ex parte proceeding in that country to enforce the vacated award, and, on or about March 30, 2016, without notification to petitioners, the French court recognized the vacated award under French law and issued writs for the seizure of property belonging to petitioner Citigroup Global Markets, Inc.'s overseas affiliates and counterparties. It is undisputed that respondent did not inform the French court that the award had been vacated by a New York court.

Yeah, I know, I didn't go into chapter and verse about a few intervening court cases. Sorry but in addition to all this fabulous writing, I do have a law practice and a life. Just be thankful this is all provided to you for free. 

So . . . pickin' up where we left off . . . Fiorilla got a French court to issue writs based upon the FINRA Arbitration Award but, gee, go figure, he "did not inform the French court that the award had been vacated by a New York court." Nice. It almost worked but the operative word here is "almost."

October 24. 2017: NYS Court of Appeals

In the Matter of Citigroup Global Markets, Inc. v. Fiorilla (New York State Court of Appeals / October 24, 2017), the Court of Appeals denied further motions. 

August 1, 2018: NYS Supreme Court

Citigroup and Mulcahy moved for attorneys' fees and $20,000 in sanctions against Fiorilla. The NYS Sup ordered $213,832.50 in sanctions, which would be set-off by Fiorilla's $80,000 judgment. Additionally, the Court ordered $20,000 payable to the Lawyer's Fund for Client Protection. Citigroup Global Markets, Inc. and Edward James Mulcahy, Jr.., Petitioners, v. John Leopold Fiorilla as Trustee FBO John Leopoldo Fiorilla Trust u/a/d 06-25-2003, Respondent (Order, New York State Supreme Court, 653017/2013 / August 9, 2018). In a blistering attack, NYS Sup offers this narrative in part:

Throughout this litigation, Fiorilla has pursued a relentless campaign to circumvent this Court's final judgment by attempting to re-litigate already decided matters. He has prolonged this litigation and compelled CGMI to expend significant resources, both in New York and in France. Both the French proceedings and the OSC were frivolous and completely without merit. Thus, the record establishes that Fiorilla's outrageous conduct merits the imposition of sanctions, and an award of reasonable attorneys fees. 

Fiorilla's frivolous conduct included making inaccurate and incomplete factual assertions in the French proceedings. To obtain ex parte recognition of the Award in France, Fiorilla submitted a copy of the Award, and omitted the critical fact that this Court had already vacated the Award and entered a final judgment, which was affirmed on appeal. Fiorilla even used the already vacated Award to attempt to seize CGMI's assets in France. 

Fiorilla's subsequent OSC to vacate the Award was also frivolous. This is not a simply a circumstance where an argument failed to persuade the Court (see Gelobter v Fox, 90 AD3d 829, 832 [2nd Dept 2011]). Rather, Fiorilla and his counsel rehashed arguments in duplicative proceedings that had already been deemed to lack legal merit by this Court and on appeal. Fiorilla cited no new arguments or evidence in support that warranted reconsideration. Mr. Fiorilla. persisted in this conduct despite repeated warnings by this Court and the First Department (see Tr 10/11/16 11:20-21, 24:24; Citigroup Global Markets, Inc., 151 AD3d at 666. 

The Court wholly rejects Fiorilla's assertion that his conduct was not in bad faith. Fiorilla's opposition to the motion largely ignores the factual record and repeated admonishments, both by this Court and by the First Department pertaining to his conduct. 

Whoa -- frivolous and without merit and rehashed arguments in duplicative proceedings. Clearly, the folks in the black robes are pissed.

December 13, 2019: NYS Appellate Division

Where the hell are you goin? Sit down! We're not down yet. Not by a long shot. 

In re: Citigroup Global Markets, Inc. and Edward James Mulcahy, Jr.., Petitioners/Respondents, v. John Leopold Fiorilla as Trustee FBO John Leopoldo Fiorilla Trust u/a/d 06-25-2003, Respondent/Appellant (Decision and Order, New York State Supreme Court, Appellate Division / December 13, 2019), sheds a tad more light on the infamous settlement:

In 2010, Fiorilla commenced a FINRA arbitration against petitioners. In April 2012, with express authorization from Fiorilla, his attorney, Toskes, settled with petitioners in exchange for $800,000. The parties confirmed the settlement in writing with FINRA. Fiorilla changed his mind and directed Toskes to proceed to arbitration. Toskes refused and Fiorilla fired him. Successor counsel for Fiorilla persuaded FINRA that the parties had not settled. 

Fiorilla filed a disciplinary complaint against Toskes with the Florida Bar, alleging that Toskes had lied about the FINRA settlement. The Florida Bar dismissed the complaint, finding, in effect, that Toskes had acted truthfully and ethically in settling the matter. Citigroup notified FINRA of the Florida Bar ruling, but FINRA still refused to enforce the settlement. The matter proceeded to arbitration, ending with an $11 million award in Fiorilla's favor.

Ahhh, so that's a missing piece to this puzzle. In April 2012, Fiorilla had entered into a binding settlement for $800,000. Further, FINRA the arbitration forum was "notified [about] the Florida Bar ruling, but FINRA still refused to enforce the settlement." If that's the case, then we really need to re-visit that 2014 NYS Sup language about how FINRA abided by its rules but not the Panel. That doesn't quite seem to fit the facts. I'm not sure why FINRA didn't blow the whistle before the hearings got underway. In any event, the 2019 App Div Order offers further context:

[I]n May 2014, Supreme Court, finding that Fiorilla had in fact settled his claim against petitioners for $800,000, rendered judgment vacating the award and awarding Fiorilla $800,000. In April 2015, this Court unanimously affirmed, finding that the arbitral panel had manifestly disregarded the law in failing to enforce the settlement. In so holding, this Court found unavailing Fiorilla's arguments that the arbitrators, and not the courts, were the sole adjudicators of whether the parties had settled, and that Citigroup's attorney had misled Supreme Court into thinking that a Florida court, rather than the Florida Bar, had found that the parties had settled the FINRA arbitration . . . 

As if the entire NYS court system had not gone far enough in expressing its displeasure with Fiorilla's tactics, the 2019 App Div Order takes yet another shot:

[I]nstead, the most that can be said on the existing paper record is that the signing of the order to show cause signified the court's agreement that, if everything in the papers were accurate, it would be possible to grant Fiorilla the relief he sought. Indeed, the frivolousness of the papers is not apparent on their face. To the contrary, their frivolousness becomes evident only when taken in context, and only with a knowledge of the history of the parties' dispute. . .

Finally, the App Div altered NYS Sup's sanctions as follows:

As noted, Supreme Court imposed sanctions of $20,000 on Fiorella, and directed him to pay them to the Lawyers' Fund. We modify to delete the provision for payment to the Lawyers' Fund and substitute therefor a provision directing that the $20,000 be deposited with the Clerk of the Supreme Court, New York County, for transmittal to the State Commissioner of Taxation and Finance" (Martinez v New York City Tr. Auth., 218 AD2d 643, 643 [2d Dept 1995]; see 22 NYCRR § 130-1.3).

We note that Supreme Court's award of $20,000 in sanctions exceeds the $10,000 maximum "for any single occurrence of frivolous conduct" (22 NYCRR § 130-1.2). On our independent review of the record, we find that an award of sanctions of $10,000 is appropriate for each of the two discrete instances of frivolous conduct presented; that is, for the Citigroup II application and the French enforcement proceedings. With that finding, we exercise our discretion to modify the award to an aggregate total of $20,000 (see David Z. Inc. v Timur on 5th Ave., 7 AD3d 257, 257-258 [1st Dept 2004]).

I'm done. I mean, really, this case has exhausted me. Somewhere, someone is the champion of this mess. You're welcome to figure it out. After all, Fiorilla did win $800,000 via settlement. On the other hand, there are all those stinging sanctions imposed by the courts. 

Citibank, N.A. v Fiorilla 11/22/2011 App Div, 1st Dept 

Citibank, N.A. v Fiorilla 10/02/2014 App Div, 1st Dept 121 AD3d 435 

Citibank, N.A. v Fiorilla - John Leopoldo Fiorilla Trust 04/14/2015 App Div, 1st Dept  2015 NYSlipOp 69967(U)

Citigroup Global Markets Inc. et al. v John Leopoldo Fiorilla etc. 08/20/2019 App Div, 1st Dept 

Citigroup Global Mkts., Inc. v Fiorilla 08/01/2018 Other Courts 

In re Citigroup Global Mkts., Inc. v Fiorilla 06/25/2015 App Div, 1st Dept 

Matter of Citigroup Global Mkts., Inc. v Fiorilla 04/09/2015 App Div, 1st Dept 127 AD3d 491 

Matter of Citigroup Global Mkts., Inc. v Fiorilla 06/29/2017 App Div, 1st Dept 151 AD3d 665 

Matter of Citigroup Global Mkts., Inc. v Fiorilla 12/19/2019 App Div, 1st Dept 

Matter of Citigroup Global Mkts., Inc. v John Leopoldo Fiorilla, etc.10/20/2015 Court of Appeals 

Matter of Citigroup Global Mkts., Inc. v John Leopoldo Fiorilla, etc.10/24/2017 Court of Appeals 

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