Federal Court Troubled By FINRA Arbitration Chair's Non-Disclosure of Conflict

January 7, 2020

A former Credit Suisse employee filed a FINRA Arbitration Statement of Claim arguing that he was, in part, fraudulently induced into accepting his job because the firm did not inform him of its intention to eliminate the division where he was to work. Not only did Claimant lose the arbitration but Credit Suisse was awarded nearly $2 million in damages, largely in the form of a promissory note repayment. On appeal to a federal court, Claimant alleges that the FINRA Arbitration Chair had failed to disclose a conflict and that the Panel engaged in biased conduct. 

April 2019 FINRA Arbitration Decision

In a FINRA Statement of Claim filed in March 2017, and as amended, associated person Claimant Carlson asserted breach of contract, fraud by nondisclosure, and tortious interference with contract.
Claimant Carlson sought $2,220,422 in damages plus interest, costs, and fees.  In the Matter of the Arbitration Between Neal David Carlson, Claimant, v. Credit Suisse Securities (USA) LLC, Respondent (FINRA Arbitration Decision 17-00611, April 15, 2019) http://www.finra.org/sites/default/files/aao_documents/17-00611.pdf
The FINRA Arbitration Decision asserts in part that: 

[T]he causes of action related to Claimant's allegations that Respondent, with false representations and promises, fraudulently induced him into joining the firm's private wealth management division and entering into a promissory note ("the Note") as an employment incentive. Claimant alleges that Respondent failed to disclose it was in the process of eliminating the division and intended to direct employees to seek employment with other brokerage firms. Claimant alleges he suffered pecuniary losses as a result.

Respondent Credit Suisse generally denied the allegations, asserted various affirmative defenses; and filed a Counterclaim asserting breach of contract related to the Note, breach of contract related to compensation over-payment, and, in the alternative, unjust enrichment. Credit Suisse sought $1,816,652.19 in full repayment of the Note, $5,329.34 in alleged arrears; and $10,883.63 in allegedly overpaid compensation. The FINRA Arbitration Decision asserts in part that:

[T]he causes of action related to Respondent's allegations that pursuant to the Note, Claimant was obligated to immediately repay all outstanding balances on the Note if he left Respondent for any reason and has failed to repay such amounts after resigning to join another brokerage firm. 

The FINRA Panel of Arbitrators denied Claimant Carlson's claims. The Panel found Claimant Carlson liable to and ordered him to pay Credit Suisse $1,832,865.87 in compensatory damages plus interest. 

January 2020 SDTX Opinion/Order

Credit Suisse moved to confirm the FINRA Award in the United States District Court for the Southern District of Texas ("SDTX") and Carlson moved to vacate same. Credit Suisse Securities (USA) LLC, Petitioner, v. Neal David Carlson, Respondent (Opinion/Order, United States District Court for the Southern District of Texas, 19-CV-01470 / January 2, 2020).
http://brokeandbroker.com/PDF/CarlsonOpOrderSDTX200102.pdf In addition to the substantive issues pertaining to Credit Suisse's alleged misrepresentations that had purportedly induced Carslon to joint the firm's wealth management division, SDTX noted that following additional issue raised by the parties [Ed: second footnote omitted]:

The presiding chairperson in the FINRA arbitration was Brian James Tagtmeier. Id. Tagtmeier had represented to the parties that he had no professional relationships with any of the parties, counsel, or arbitrators, "no matter how remote."1 Dkt. 15; Dkt. 13-20 (oath of arbitrator). It appears that this was true at the time the arbitration was filed and Tagtmeier was selected in March of 2017. See Dkt. 14-2. However, the arbitration did not occur until March of 2019. See id. On December 17, 2018, Tagtmeier filed a notice of appearance in a case captioned Hestia Complete Home Services d/b/a Hestia Home Services v. Daniel Bonville and Christine Parisien. Dkt.3-4. Tagtmeier's appearance was on behalf of the plaintiff, Hestia Home Services. Id. The defendants, Bonville and Parisien, were represented by Courtney E. Palm of Hoover Slovacek, LLP. See id. On December 31, 2018, Carlson's team electronically filed a notice with the FINRA arbitration panel that they were changing firms and that Hoover Slovacek, LLP would now be representing Carlson. Dkt. 13-19 (Meyer Aff.). Three days later, on January 3, 2019, Tagtmeier filed a motion to reconsider in Hestia in which he requests that the court vacate an order granting summary judgment in Hoover Slovacek's client's favor. Dkt. 13-5. On February 27, 2019, Tagtmeier was listed as counsel for the plaintiff in an agreed motion for continuance (signed by another attorney) that was filed in Hestia, which represented his agreement with opposing counsel at Hoover Slovacek, and he also signed several orders to appear in the arbitration that had been requested by Hoover Slovacek attorneys. Dkts. 13-7, 13-8. When the arbitration began on March 4, 2019, Tagtmeier announced he had no new disclosures. Dkt. 13-19. The Hestia case was still ongoing. Id. 

Carlson argues that the court should vacate the arbitration award because Tagtmeier failed to disclose his ongoing representation of an adversary to an client of Carlson's counsel's firm, which Carlson contends is ground for vacatur under the Federal Arbitration Act ("FAA"). Dkt. 13. He additionally argues that some of Tagtmeier's evidentiary rulings are evidence of his partiality and that they are also independent grounds for vacatur. Id. 

CSS argues that the court should confirm the award, as the parties agreed to final and binding arbitration and Carlson cannot meet the heavy burden of satisfying the extraordinarily narrow statutory grounds necessary for vacatur. Dkt. 14. CSS asserts that Carlson's evidence of partiality is remote, uncertain, or speculative and fails to show clearly evident bias. Id. CSS further argues that none of Carlson's evidentiary arguments exhibits misconduct by Tagtmeier or the panel. Id. 

= = = = =

Footnote 1: The first item on the checklist Tagtmeier completed personal indicates that he did not have any "professional, social, or other relationships or interactions with counsel for any of the parties in this arbitration or their law firms." Dkt. 13-20 at 4 (emphasis added). 

at Pages 2 - 3 of the SDTX Opinion

Tagtmeier's Troubling Non-Disclosure and Appearance of Bias

In working its way through Carlson's various arguments, NDTX started with his assertion that FINRA Arbitrator Chair Tagtmeier's failure to disclose his adverse professional relationship (vis-a-vis the Hoover Slovacek, LLP law firm that was also representing Carlson in the FINRA arbitration) created the evident impression of bias. The adverse relationship did NOT exist in March 2017 when the Chair Tagtmeier was selected but arose in December 2018. The Court conceded that, Carslon had arguably shown that Tagtmeier's "'undisclosed and ongoing relationship with Carlson's counsel's new firm creates an appearance of bias;" however, in delving into the substance and impact of said bias, NDTX noted that:

[T]he court cannot conclude that a reasonable person would have to conclude that the arbitration panel was partial. While a reasonable person could conclude that Tagtmeier was partial and that he somehow influenced the other two arbitrators, a reasonable person could also conclude that the fact that his adversary in a lawsuit that Tagtmeier had recently been pulled into was at the same firm that Carlson's counsel had recently joined is inconsequential, and the fact that the award was unanimous from all three arbitrators supports the opposite conclusion. The adverse evidentiary rulings do provide some minimal additional support for Carlson's theory, but they are not clear cut errors that are sufficient to demonstrate bias. The court does find the nondisclosure troubling and believes that it presents an appearance of bias, but the standard for overturning an arbitral award for evident partiality is more stringent than appearance of bias, and Carlson does not meet his burden of a "concrete, not speculative impression of bias" . . .

at Pages 9 - 10 of the SDTX Opinion

Failure to Hear Evidence

Having touched upon the issue of Chair Tagtmeier's "adverse evidentiary rulings," as offering "some minimal" support for Carlson's claims of bias, NDTX considers the three separate categories of instances cited:

(1) Tagtmeier denied Carlson's motion to compel discovery of documents regarding CSS's plans to close, sell, or transfer the private banking business in the United States, which allowed damaging testimony to be presented with no opportunity for rebuttal or impeachment; (2) Tagtmeier refused to consider expert testimony regarding the promissory note actually being compensation and instead confined Carlson's experts to discussing tax treatment of the promissory note; and (3) Tagtmeier did not allow Carlson to question CSS's HRVP about CSS's alleged violation of the Sherman Antitrust Act and FINRA Rule 2010. . .

at Page 10 of the SDTX Opinion

Carlson argued that Chair Tagtmeier had "crippled" his fraudulent inducement claim by denying a request to compel the production of purportedly material evidence in the form of documentation demonstrating that Credit Suisse planned to close/sell/transfer its US-based banking business. In weighing Carlson's claims, NDTX noted that notwithstanding Tagtmeier's refusal to compel the requested production, in part,  a 2014 Reuters article was introduced that reported that "CSS had given the U.S.private wealth business eighteen months to turn around and spare the " 'death sentence.' " -- and, further, NDTX noted that Carlson questioned the Chief Executive Officer of Credit Suisse's private banking business. Ultimately, NDTX found that the Panel's refusal to compel the requested production did not deprive Carlson of a fair hearing.

As to Chair Tagtmeier's limits on the range of testimony from Carlson's experts, NDTX focused on the issues pertaining to Professor Kevin Yamamoto's proposed testimony on "how the promissory note and corresponding monthly bonus provision establish that no bona fide loan existed;" and Lance Stodghill's proposed testimony on taxable income. Ultimately, NDTX found that the Panel's "refusal to allow the two experts' testimony to go beyond the bounds of the tax treatment fo the funds Carlson received from the promissory note did not deprive Carlson of a fair hearing. These two experts had expertise in tax, not the securities industry. . ."

HRVP's Testimony

As to Tagtmeier's alleged refusal to permit Credit Suisse's unnamed Vice President of Human Resources (the "HRVP") to testify about a DOJ publication, and, by extension how said publication demonstrated the firm's alleged violation of FINRA Rule 2010's requirement for member firms"to observe high standards of commercial honor and just and equitable principles of trade." In rejecting his arguments, NDTX found that:

The court disagrees with Carlson's argument that Tagtmeier impeded the development of his case by not allowing him to question the HRVP about the document and not compelling discovery of the compensation data. In his closing arguments, Carlson's counsel noted that he did not plead the Sherman Antitrust Act but went on to assert that CSS gave Wells Fargo their entire book and that while the agreements may not be illegal, they may be subject to civil liabilities if they have an anticompetitive effect. Dkt. 14-15 (excerpts from closing) at 1349-50. Carlson made his arguments and the document was admitted into evidence for the arbitration panel to consider if it deemed it relevant. Of course, as CSS points out, it may not have even deemed it relevant since it was issued after the events at issue in this case. 

The court finds that failing to allow Carlson to question the HRVP about this document that she was not even familiar with and had not been disclosed prior to the hearing is not an instance of the arbitrator or the panel depriving Carlson of a fair hearing. . .

at Page 20 of the NDTX Opinion

SDTX denied Carlson's Motion to Vacate and confirmed Credit Suisse's Petition to Confirm the FINRA Arbitration Award.

Bill Singer's Comment

Somewhat grudgingly, the lawyer in me sort of gets most of NDTX's points. The Court is by no means enamored with Chair Tagtmeier's non-disclosure but seems to have concluded that it wasn't all that substantive an adverse relationship and that the mere "appearance" of bias did not translate into any meaningful acts of bias. Further, NDTX seems to have discerned a fine line between an unfair hearing and a just-about-but-not-quite-unfair hearing, and the Court opted for the latter finding.  However --- NDTX admonished in its Opinion that:

Here, Carlson arguably has shown that the undisclosed and ongoing relationship with Carlson's counsel's new firm creates an appearance of bias, . . ." 

As to that non-discosure, let's be fair with characterizing it. When Claimant Carlson filed his FINRA Arbitration Statement of Claim in July 2017, no conflict existed. On December 31, 2018, Carlson changed law firms and retained Hoover Slovacek, LLP, which had a pre-existing adverse relationship to Chair Tagtmeier's law firm vis-a-vis the Hestia litigation in which Tagtmeier was representing the Plaintiff and Hoover Slovacek the Defendants. Technically, Carlson created the conflict by substituting counsel.  And while Carlson blames Tagtmeier for not disclosing his conflict, the Claimant does not seem to hold his own law firm responsible for not discerning the existence of that very same adverse relationship. The availability of the "notice" of conflict was there for both law firms. Unfortunately for Tagtmeier, he had an obligation under FINRA's Code of Arbitration to disclose his conflict given his role as an arbitrator.

NDTX found that Carlson had shown that FINRA Chair Tagtmeier had not disclosed his adverse relationship, and, further, the Court characterized said undisclosed relationship as "ongoing," in contrast to something of ancient provenance. Not only does NDTX concede that Chair Tagtmeier's undisclosed relationship "creates an appearance of bias," but the Court found "the nondisclosure troubling . . ." Ultimately, NDTX found the instances of contested FINRA Arbitration Panel rulings "inconsequential" or "not clear cut errors." Accordingly, the Court found that the mere appearance of bias did not extend into the occurrence of bias. 

I respect the Court's explanations. 

I don't accept the Court's ultimate ruling.

As best I can explain my discomfort with the NDTX confirmation of the FINRA Award, it would be as if we came upon a brick wall, chiseled out and removed each brick, and then laid each and every separated brick upon the ground. Sure . . . we could now point to the individual bricks and argue that, separately, as they now appear on the ground before you, these bricks do not a wall make. Technically (legally) an astute observation by jurists doing their job. That much I accept and do not question. From the perspective of fair-play and due process, however, I would argue that you have, in fact, dissembled a wall into individual bricks.  

At the time the hearing was ongoing, Chair Tagtmeier had a disclosable conflict. After all, he was a lawyer representing a Plaintiff in civil court in a matter adverse to the law firm representing Carlson in the FINRA Arbitration. As previously noted, said conflict did not exist when the Statement of Claim was filed but arose when Claimant Carlson changed law firms. Although we can legitimately debate whether Tagtmeier's circumstance presented a serious issue warranting his removal, we can't debate that Respondent Carlson was entitled to the disclosure of the adverse relationship and was entitled to raise an objection (or not). By failing to disclose the adverse relationship from its creation in December 2018, Tagtmeier prevented the Respondent from demanding his recusal from the Panel that conducted the hearing. The creation of the conflicting representation was not Tagtmeier's fault, and, frankly, it may not have come to his attention given that lawyers don't always make such connections given the extent of their docket. As such, it may simply have been an legitimate oversight and Tagtmeier may well have conducted the hearing without any bias against Carlson. Also, let's not forget that Carlson's law firm was just as adverse to Tagtmeier as he was to them -- and it does not appear that Carlson's legal team was aware of the conflict during the conduct of the FINRA arbitration hearing.

The Chair of the FINRA Arbitration Panel had a conflict. It was a disclosable conflict. It was not disclosed. Period. The pile of perhaps, what-ifs, should-haves, could-haves, and maybes was once a formidable wall. That a federal court has removed each of those bricks and examined them separately does not alter their prior formation of a formidable wall. In my opinion (which is of no consequence), the Court should have remanded the case back to FINRA and ordered a new hearing with a new panel. 

Perhaps, Carlson will pursue yet another round of appeals. We'll have to wait and see.