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Federal Courts Consider Disturbing FINRA Customer Arbitration Decision
April 17, 2020
BrokeAndBroker.com Blog readers are well aware of my long-standing complaint that FINRA's arbitration forum seems designed to further the interests of its large member firms -- particularly when a given FINRA Arbitration Decision intentionally fails to provide sufficient content and context so as to render it intelligible. Further, FINRA's arbitration rules do not require by default a reasoned decision, and that idiocy perpetuates inexplicable awards and presents appellate courts with a guessing game. In today's featured FINRA Arbitration, we have two federal courts considering the plight of public customers who claimed to have been victimized by fraud; however, as the courts note: The arbitration panel did not make any findings of fact or conclusions of law in its order. Worse, the courts concede that the Panel's final damages award is "disturbing."
Bien and Wellman v. Mid Atlantic Capital Corporation
In a FINRA Arbitration Statement of Claim filed in February 2015 and as amended, public customer Claimants Beverly Bien and David H. Wellman asserted breach of fiduciary duty, negligence, negligent misrepresentation, omissions, violation of Colorado's Securities Act, common law fraud, breach of contract, restitution, and negligent supervision. The causes of action arose in connection with Claimants' investments in Sonoma Ridge Partners and KBS real estate investment trusts ("REIT"), and securities in Contango Oil and Gas, Inc., iShares Silver and Market Vectors Gold Miners. Claimants sought $300,000 in compensatory damages, punitive damages, interest, fees, and costs. In the Matter of the Arbitration Between Beverly Bien and David H. Wellman, Claimants, v. Mid Atlantic Capital Corporation, Respondent (FINRA 15-00333 / December 13, 2016). Respondent Mid Atlantic generally denied the allegations and asserted various affirmative defenses. The FINRA Arbitration, in pertinent part, rendered the following Award:
1. Respondent is liable for and shall pay to Claimant Beverly Bien an initial investment loss in the amount of $240,321.00.
2. Respondent is liable for and shall pay to Claimant Beverly Bien compensatory damages in the amount of $437,286.00.
3. Respondent is liable for and shall pay to Claimant Beverly Bien interest at the rate of 8% per annum beginning February 6, 2015 until the total amount of $677,607.00 (total of paragraphs 1 and 2 above) is paid in full.
4. Respondent is liable for and shall pay to Claimants an initial investment loss in the amount of $52,090.00, plus interest at the rate of 8% per annum beginning February 6, 2015 until the amount of $52,090.00 is paid in full.
5. Respondent is liable for and shall pay to Claimant David H. Wellman compensatory damages in the amount of $47,397.00, plus interest at the rate of 8% per annum beginning February 6, 2015 until the amount of $47,397.00 is paid in full.
6. Respondent is liable for and shall pay to Claimants attorneys' fees in the amount of $118,560.00, pursuant to U.S. Offshore, Inc. v. Seabulk Offshore,Ltd., 753 F. Supp. 86, 92 (S.D.N.Y. 1990), Marshall Co., Inc. v. Duke, 114 F.3d 188 (11th Cir. 1997).
7. Respondent is liable for and shall pay to Claimants costs in the amount of $26,812.82.
8. Claimants must reassign ownership of all Sonoma Ridge Partners and KBS REIT investments to Respondent.9. Respondent's request for attorneys' fees is denied.
10. Any and all claims for relief not specifically addressed herein, including punitivedamages, are denied.
Motion to Vacate
Mid Atlantic filed in the United States District Court for the District of Colorado ('DCO")a Motion to Vacate, or, in the alternative, a Motion to Modify or Correct the Arbitration Award.
Mid Atlantic Capital Corporation, Petitioner, v. Beverly Bien and David H. Wellman, Respondents (Motion to Vacate/ to Modify or Correct Arbitration Award, DCO. 17-CV-00122 / January 12, 2017) https://www.finra.org/sites/default/files/aao_documents/15-0333%28Motion%20to%20Vacate%29.pdf
As set forth in part in its Motion, Petitioner Mid Atlantic alleged:
As set forth in part in its Motion, Petitioner Mid Atlantic alleged:
8. MACC seeks vacatur of the Award under 9 U.S.C. § 10(a)(2), 10(a)(3) and 10(a)(4) because the Panel (a) grossly exceeded its powers and manifestly disregarded the law by entering an Award in an arbitration on claims that were clearly ineligible under the FINRA Code Rule 12206's six-year eligibility rule and time-barred by shorter applicable statutes of limitation; and (b) improperly and grossly exceeded its powers, demonstrated evident partiality and misconduct, and/or imperfectly executed its powers by awarding Respondents more than double the amount of damages they requested (not including the additional award of interest, fees and costs), and by otherwise engaging in misconduct by, inter alia, conducting the Arbitration in a manner that demonstrated evident partiality against MACC, including by refusing to permit MACC to offer material evidence and repeatedly ruling in favor of Respondents and against MACC on evidentiary and other matters material to the substance of the claims and defenses at issue.9. In the alternative, to the extent the Award is not vacated for the foregoing reasons and as explained more fully below, MACC requests that the Award be modified pursuant to U.S.C. § 11(a) to correct the Panel's unsupported decision to render an award that effectively returns Respondents' principal twice and contains other clear computational errors.
DCO Order Denying Motion to Vacate/Modify and Granting Cross-Motion to Confirm
Bien and Wellman filed a cross-motion to confirm the FINRA Arbitration Award, and DCO adjudicated that Cross Motion and Mid Atlantic's Motion. Mid Atlantic Capital Corporation, Petitioner/Cross-Defendant, v. Beverly Bien and David H. Wellman, Respondents/Cross-Claimants(Order Denying Motion to Vacate/Modify and Granting Cross-Motion to Confirm, DCO, 17-CV-00122 / March 28, 2018) https://www.finra.org/sites/default/files/aao_documents/15-00333%281%29.pdf In reviewing the subject FINRA Arbitration Decision, DCO notes in part that:
The arbitration panel did not make any findings of fact or conclusions of law in its order denying MACC's preliminary motion to dismiss, or in its final written award decision. The panel had no obligation to do so, but this Court can only infer the reasoning resulting in the panel's decisions.
At Page 6 of the DCO Order
Finding itself burdened by a Decision in which there is no expression of any findings of fact or conclusions of law, DCO begins its consideration of the final damages Award with this admonition:
At Page 9 of the DCO OrderThe final damages award is disturbing. The arbitration panel awarded Respondents both net out-of-pocket losses (what the panel called "initial investment loss[es]") and market adjusted damages (what the panel called "compensatory damages"), thereby double-counting Respondents' lost investment. MACC contends that the arbitration panel exceeded its powers by awarding damages in excess of what Respondents requested, because Respondents presented net out-of-pocket losses and market-adjusted damages as alternative damages measures and argued to the panel that net out-of-pocket losses should not be used to determine damages. . . .
In finding that the FINRA Arbitration Panel did not disregard the law, DCO offers this fairly tepid rationale, which, frankly, comes off more half-hearted than persuasive:
At Page 10 of the DCO Order[T]he issue of damages was unquestionably submitted to the panel to decide, and both net out-of-pocket losses and market-adjusted damages are described in the FINRA Office of Dispute Resolution Arbitrator's Guide as types of compensatory damages that a panel may consider. [Doc. 15-3 at 65-66.] The panel did not fashion some type of remedy outside the scope of the parties' arbitration agreement. What appears is that the panel made a mistake of fact or law by awarding both measures of damages. Such mistakes are beyond this Court's review. As such, the Court does not find that the arbitration panel exceeded its powers with respect to the damages award. Nor does the record reflect that the panel knew and explicitly disregarded the governing damages law, and therefore the Court finds no manifest disregard of the law.
Given that DCO seemingly finds that the FINRA Arbitration Panel "made a mistake of fact or law" in its double-dip Award, it is somewhat jarring when the Court declines to modify the award and, in essence, rejects the motion to vacate and modify. From that uneasy perch, DCO fashions a position in which it declines to deem the double-dip as a "mathematical error," and, from that shaky pedestal, the Court then finds that it:
does not have authority to modify the amount of the award. Even assuming such authority, simply subtracting the "initial investment loss[es]" awarded by the panel from the total damages amount as MACC suggests would disregard the panel's requirement that Respondents reassign ownership of their investments back to MACC, in effect reducing the value of the award by the present value of those investments. That was not contemplated or accounted for in any of the damages calculations that Respondents' expert presented at the hearing. Any correction of the panel's damages award would require some hearing to determine that value and account for the reassignment requirement.
At Pages 10 - 11 of the DCO Order
As to the FINRA Arbitration Panel's award of 8% per annum pre- and post-Award interest, DCO let that too stand based upon its finding that:
[W]ith respect to the interest award, while the FINRA Code provides that an award "shall bear interest from the date of the award," the panel had discretion to award interest from an earlier date. . . .
At Page 11 of the DCO Order
In rendering its various Orders, DCO rules in pertinent part that:
Respondents have not yet assigned the subject securities back to MACC as the award requires. No final judgment can be entered until that matter is resolved. Upon the foregoing, it is ORDERED thatPetitioner's Amended Motion to Vacate or in the Alternative, to Modify or Correct Arbitration Award [Doc. 10] is DENIED;Respondents' Cross-Motion to Confirm FINRA Arbitration Award [Doc. 14] is GRANTED; the final arbitration award executed on December 12, 2016 [Doc. 14-1] is CONFIRMED . . .
At Pages 11 - 12 of the DCO
10Cir Opinion
Mid Atlantic, Bien, and Wellman all appealed DCO's Orders to the United States Court of Appeals for the Tenth Circuit ("10Cir").
Mid Atlantic Capital Corporation, Petitioner/Cross Defendant/Appellant/Cross-Appellee,v. Beverly Bien and David H. Wellman,Respondents/Cross Claimants/Appellees/Cross-Appellants
(Opinion, 10Cir,18-1195 and 18-1200/ April 14, 2020)
Mid Atlantic Capital Corporation, Petitioner/Cross Defendant/Appellant/Cross-Appellee,v. Beverly Bien and David H. Wellman,Respondents/Cross Claimants/Appellees/Cross-Appellants
(Opinion, 10Cir,18-1195 and 18-1200/ April 14, 2020)
http://brokeandbroker.com/PDF/MidAtlCapOp10Cir200414.pdf In framing the appeals before it, 10Cir offered this:
[M]id Atlantic's appeal presents one question for our review: Did the district court err by holding that it lacked authority to modify the arbitration award to correct an alleged evident material miscalculation of figures because that miscalculation does not appear on the face of the arbitration award? In their cross-appeal, Ms. Bien and Mr. Wellman raise three questions. Did the district court err by (1) granting post-award interest on damages, but not on attorney's fees and other costs; (2) awarding postjudgment interest at the federal rate; and (3) ordering Ms. Bien and Mr. Wellman to reassign to Mid Atlantic any post-award distributions from their ownership interests in Sonoma Ridge Partners and KBS (as well as interest thereon).
At Page 9 of 10Cir Opinion
In tackling the prerogatives of DCO, the 10Cir enunciates its threshold position:
Whether § 11(a) permits courts to go beyond the face of the arbitration award in looking for an evident material miscalculation of figures is a question of first impression in this circuit. We answer that question in the negative: that is, we conclude that § 11(a) embodies a face-of-the-award limitation. In reaching that conclusion, first and foremost, we draw inferences from the text and context of the FAA. Our independent reading of this text and context is reinforced by our recognition of the narrow and deferential standard of review applicable in the arbitration context. We close our analysis of this matter by recognizing, moreover, that the persuasive authority of our sister circuits has reached a similar conclusion.
At Page 13 of 10Cir Opinion
FINRA's Mid Atlantic Arbitration Decision presented two federal courts with NO meaningful rationale for the arbitrators' findings and awards. As the federal courts noted: The arbitration panel did not make any findings of fact or conclusions of law in its order; and, worse, the courts found that the Arbitration Panel's final damages award is disturbing. Notwithstanding, the federal courts claim impotency when it comes to the FINRA Arbitration Panel's mistakes: What appears is that the panel made a mistake of fact or law by awarding both measures of damages. Such mistakes are beyond this Court's review. All of which prompts us to drop down into the Alice-In-Wonderland rabbit hole, where we come upon this puzzling commentary from a federal circuit:
What's more in dispelling Mid Atlantic's misguided notion that the statute functions in an arbitrary manner -- under a face-of-the-award approach -- it is important to keep in mind that "arbitration is a matter of contract." Henry Schein, 139 S. Ct. at 529. If Mid Atlantic wished to avoid the supposedly random chance that the arbitration panel would not show its work, it could have contracted for a fully explained award. See Am. Express, 570 U.S. at 233 (noting that parties can contract to specify the arbitrator and the rules for arbitration); United Steelworkers v. Enter. Wheel & Car Corp., 363 U.S. 593, 598 (1960) ("Arbitrators have no obligation to the court to give their reasons for an award."). But Mid Atlantic did not do so. In fact, the current contracts lead us to the opposite conclusion. Most obviously, Mid Atlantic's contracts with Ms. Bien and Mr. Wellman specify, "[t]he arbitrators do not have to explain the reason(s) for their award." Aplt.'s App., Vol. III, at 737. We thus cannot (and would not attempt to) rewrite the parties' contracts just because Mid Atlantic is now dissatisfied with the fruits of its bargain. After all, "by agreeing to arbitrate," Mid Atlantic traded "procedures and opportunity for review of the courtroom for the simplicity, informality, and expedition of arbitration." Gilmer, 500 U.S. at 31 (quoting Mitsubishi, 473 U.S. at 628). Stated otherwise, that Mid Atlantic is displeased with the level of informality with which the arbitration panel resolved the dispute is not cause to undo the bargain it struck with Ms. Bien and Mr. Wellman. Cf. Beumer Corp. v. ProEnergy Servs., LLC, 899 F.3d 564, 566 (8th Cir. 2018) ("The parties bargained for the arbitrator's decision; if the arbitrator got it wrong, then that was part of the bargain.").In sum, we conclude that § 11(a) allows courts to correct only those evident material miscalculations that appear on the face of the award. The provision's text compels that conclusion, when it is read in the context of the FAA's purposes, history, and structure. And this conclusion is bolstered by the narrow and deferential standard of review applicable in the arbitration context.
At Pages 25 - 26 of the 10Cir Opinion
Another intriguing issue in the appeal before 10Cir is Bien and Wellman's complaint that DCO erred when it ordered them to reassign to Mid Atlantic and post-Award distributions from their Sonoma Ridge partners and KBS holdings. In rejecting that basis for appeal, 10Cir finds that:
"Ownership" of the investments, then, entailed the right to receive distributions and to share in the liquidated assets. Thus, the arbitration award that ordered Ms. Bien and Mr. Wellman in December 2016 to reassign ownership of their investments in Sonoma Ridge Partners and KBS to Mid Atlantic also should be read as having effectively ordered them to reassign to Mid Atlantic (in addition to any actual common stock) their rights to future distributions from those investments. And it is undisputed that-irrespective of the reason-Ms. Bien and Mr. Wellman did not act on the arbitration panel's order: that is, they did not reassign their ownership interests in the Sonoma Ridge Partners and KBS investments to Mid Atlantic before the district court entered its amended final judgment in April 2018. It is further uncontested that at the time the court entered its amended final judgment, essentially all that was left of the ownership interests of Ms. Bien and Mr. Wellman in Sonoma Ridge Partners and KBS was their distributions following liquidation.Therefore, when the district court ordered Ms. Bien and Mr. Wellman to reassign their distributions from Sonoma Ridge Partners and KBS (as well as interest thereon) to Mid Atlantic, it was actually enforcing the terms of the arbitration award-which required reassignment of their ownership interests in those investment vehicles-instead of straying from those terms. Stated otherwise, when the district court entered its amended final judgment in April 2018, it ensured that Mid Atlantic received all of the ownership interests-which included the right to future distributions-that Ms. Bien and Mr. Wellman had in their Sonoma Ridge Partners and KBS common stock, just as the arbitration panel contemplated. Accordingly, we reject the last contention of error of Ms. Bien and Mr. Wellman.
At Pages 63 - 65 of the 10Cir Opinion
Bill Singer's Comment
At the end of its 67-page Opinion, the 10Cir affirms the amended final judgment of DCO. I'm just going to leave it at that. There's nothing related to the arbitration or the appellate proceedings that should make anyone feel that justice was served -- or, worse, that anyone cared as much.