Pro Se Public Customer Alleges FINRA Arbitrators' Misconduct in Schwab Case

August 25, 2020

Another day. Another FINRA Arbitration Award comes under court scrutiny. We have an exchange between an expert for Claimant Charles Schwab and an arbitrator. In retrospect, not such a big deal. In retrospect, however, the exchange injected an issue into the bona fides of the arbitration. Then we have a shared ride to the airport between an arbitrator and one of Claimant's expert witnesses. In retrospect, that's a bigger deal. In retrospect, you have to shake your head and ask what everyone was thinking (or not). Then there's the other issue about the third arbitrator needing to participate from home via telephone. In retrospect, omigod, what the hell is going on here? No wonder the public customer Respondent wanted a mulligan.

2019 FINRA Arbitration Award

In a FINRA Arbitration Statement of Claim filed in April 2018, FINRA member firm Charles Schwab asserted that customer Respondent Sanduski had breached the terms of his Schwab One Acccount by failing to pay the unsecured debit balance in the account. Claimant Schwab sought the debit balance of  $418,518.14 plus interest, fees, and expenses. Pro se Resondent Sanduski generally denied the allegations and asserted various affirmative defenses.In the Matter of the Arbitration Between Charles Schwab & Co. Inc., Claimant, v. Thomas J. Sanduski, Respondent (FINRA Arbitration Award 18-01513 / May 9, 2019)

The FINRA Arbitration Award states in part that:

At the evidentiary hearing held on March 27, 2019, the parties agreed that Arbitrator Roger A. Geddes ("Arbitrator Geddes") could participate telephonically in the evidentiary hearing to be held on the following day. 

On March 28, 2019, during the course of the second day of the evidentiary hearing, Respondent requested a postponement to retain counsel and because Arbitrator Geddes was not physically present in the hearing room. Claimant objected to Respondent's request because the parties had agreed to Arbitrator Geddes participating telephonically the day before. The Chairperson denied Respondent's request for postponement. The Chairperson found that Respondent had sufficient time to retain counsel prior to the evidentiary hearing since his former counsel withdrew from representing him on January 15, 2019. 

The FINRA Arbitration Panel found Respondent Sanduski liable and ordered him to pay to Claimant Schwab $18,518.14. The FINRA Arbitration Award contains this disclosure:


Below, Chairperson Larry Edmonson ("Chairperson Edmonson") and Arbitrator Sheila Grinell ("Arbitrator Grinell") provide their individual comments on two interactions between Claimant's expert witnesses, Messrs. R and H, and Arbitrator Grinell following the conclusion of the evidentiary hearing. Arbitrator Geddes did not wish to include any comments in the Award.

Chairperson Edmonson 

At the conclusion of the evidentiary hearing, Mr. R, openly in the hearing room, stated to Arbitrator Grinell that he would "see her next week." Arbitrator Grinell advised the panelists that she was appointed to hear another matter the following week. Mr. R, who maintains FINRA licenses 3, 4, 7, 8, 14, 24, 63 and 65, knows of the importance of due care and independence in arbitration, and so should Arbitrator Grinell. This statement made by Mr. R, prior to the deliberation of the Panel's award and in the hearing room with all concerned parties, compromises the Panel's independence in the eyes of opposing parties. 

Arbitrator Grinell 

Regarding Mr. R: As Chairperson Edmonson noted, Mr. R looked at me and said "see you next week" as he left the room after argument in the case had concluded. It took me a second to realize what he meant-that he was aware of another hearing in which I am also serving as arbitrator. I did not reply to Mr. R, but did explain my understanding of the comment to the other panelists. 

Regarding Mr. H: At the end of the hearing on March 28, after the Panel had deliberated and the majority had come to a conclusion, Chairperson Edmonson said he would proceed to write the order and return the recorder and exhibits to FINRA. He required nothing more from his co-panelists. From my point of view, the case was over. 

I stepped out of the hotel to call an Uber to go to the airport and found that Mr. H was also going to the airport in an Uber. In the hopes of making an earlier flight, I asked to share his ride but warned that I would not permit any talk about the case. Mr. H and I shared the ride and did not discuss the case. 

This shared trip to the airport had no bearing on my decision in the case, which had already been made in the presence of the other two arbitrators. Nor did Mr. R's spontaneous comment, to which I did not reply, have any bearing on the case. I fulfilled my duties as an arbitrator faithfully and fairly. 

On the fifth and final page of the FINRA Arbitration Award following the "Concurring Arbitrators' Signature" is this additional disclosure:

Dissenting Arbitrator's Signature

Chairperson Edmonson dissents with the decision and would award Claimant $209,259,07 in compensatory damages for the unsecured debit balance. Claimant did not mitigate its losses As Respondent did on February 5, 2018, nor did Claimant contact Respondent to do so but merely monitored the Brokerage Account without any contact with Respondent. It is quite possible that the losses could have been mitigated with customer and broker support - - which Claimant did not offer or provide.

2019 DNEV Petition to Vacate

On August 2, 2020, Sanduski filed a Petition to Vacate Arbitration Award in the United States District Court for the District of Nevada ("DNEV"). In the Matter Between Thomas J. Sanduski, Petitioner, v. Charles Schwab & Co., Inc, Respondent (Petition to Vacate, DNEV, 19-CV-01340), The Petition cites alleged:

arbitrator misconduct to 1) not postpone the hearing so Mr. Sanduski could seek to retain counsel as was his right under Canon IV C of the Code of Ethics, 2) not postpone the hearing until all three arbitrators were physically present per FINRA rules for cases involving claims over $100,000, and 3) for evidence of arbitrator partiality in the form of Ms. Grinell's ex parte communications with not just one, but both of Schwab's witnesses, . . .

at Page 7 of the Petition

The Non-Postponement

As related in the Petition, about 90 minutes into the the first of two scheduled evidentiary hearings in the FINRA arbitration, Arbitrator Geddes informed the Chair of a family emergency, which would prevent his attendance at the next day's hearing. The Chair proposed to the parties an immediate adjournment; a continuance with only the Chair and the third arbitrator Grinell; or a continuance with all three arbitrators with Geddes attending via telephone for day two. After consideration, the parties advised that they would continue with all three arbitrators and Grinell attending by phone. After consulting further with a lawyer, at the start of the second day of hearings, Sanduski expressed his desire to adjourn and to retain legal counsel, to which Schwab objected.

The Petition alleges that Chair Edmonson denied Sanduski's requests for an adjournment and noted that Sanduski had previously been represented by counsel, who had withdrawn on January 19, 2019. The Petition alleges in part that:

14. The hearing continued on day two for approximately six hours with arbitrator Mr. Geddes listening in via telephone. Several written items were introduced on day two which Mr. Geddes was not able to visual follow during their presentation. The nature of Mr. Geddes family emergency was not disclosed. The fairness of the hearing for Mr. Sanduski was compromised by the lack of Mr. Geddes physical presence at the hearing as required per FINRA rules for cases involving more than $100,000 in claims. If for example, he had had a sick child and Mr. Geddes needed to check on the child, there would be no way of knowing if Mr. Geddes was fully engaged at all times during the proceedings on day two. 

15. The hearing concluded on day two. As the parties were leaving, Jim Reilly who had been an outside expert witness for Schwab said "See you next week." to arbitrator Ms. Grinell. (see Exhibit A) In the Award letter posted May 9, 2019, Chairman Edmonson strongly rebuked this exchange when he wrote that it "compromises the independence of the panel in the eyes of opposing parties." Mr. Sanduski later found out that Ms. Grinell served on an arbitration panel the following week in Schwab vs. Jay Hu FINRA case No. 18-01469 (see Exhibit E) in which Mr. Reilly again testified as an expert witness for Schwab and for which Ms. Grinell again awarded a judgment in favor of Schwab. 

16. Mr. Sanduski was planning to submit a post-hearing brief but three days after the hearing on April 1, 2019, Mr. Sanduski received notice that arbitrator Ms. Grinell had had ex parte communications with Schwab witness and employee Jeff Hanson who is Schwab's managing director of margin services. (see Exhibit F) Ms. Grinell requested to share an Uber ride to the airport with Mr. Hanson and engaged him in conversation in clear violation of FINRA rule 12211 (h). The FINRA Arbitrator's Guide provides even more detail on this matter as quoted here from page 55: Avoiding Ex Parte Communications Unless operating under the Direct Communication Rule, FINRA Rule 12211 provides that no party, or anyone acting on behalf of a party, may communicate with any arbitrator outside of a scheduled hearing or conference regarding an arbitration unless all parties or their representatives are present. Communications include an exchange about the arbitration case, as well as an exchange of pleasantries or casual comments. 

17. Ms. Grinell in her disclosure on the matter said that the three arbitrators had decided the case shortly after the conclusion of day two and in her mind the case was closed. However, the FINRA Arbitrator's Guide warns on page 79 to avoid ex parte communications even after the hearing has closed: PART ELEVEN: AFTER THE CASE CLOSES Avoiding Party Contact Communications with the parties should be scrupulously avoided even after the proceedings are concluded. If a party contacts an arbitrator after the hearing closes, the arbitrator should notify FINRA staff immediately. A party should not directly contact arbitrators under any circumstances. Arbitrators should contact FINRA staff immediately if questioned about a case, asked to testify, asked to sign an affidavit, or threatened with a lawsuit by a party. 

18. Upon reading Ms. Grinell's post-hearing disclosure that the case had already been decided shortly after the end of closing arguments on March 28, 2019, Mr. Sanduski did not file a post-hearing brief feeling it would now be a waste of time. 

19. Mr. Hanson, like Mr. Reilly, was also a witness the following week for Schwab in Schwab vs. Jay Hu. Ms. Grinell's Ex Parte interaction with Mr. Hanson was disclosed prior to this hearing, (see Exhibit G), but it brings into question partiality concerns regarding arbitrator Ms. Grinell.

at Pages 5 - 7 of the Petition

DNEV 2020 Order Confirming Arbitration Award

Upon review, DNEV found that  Sanduski failed to prove that 

(1) the cited contacts demonstrated actual bias or prejudicial non-disclosure sufficient to justify vacatur under the Federal Arbitration Act ("FAA") 9 U.S.C. § 10(a)(2); and
(2) panel's rejection of his mid-hearing postponement request was arbitrary or showed manifest disregard of the law, as required under §§ 10(a)(3) and 10(a)(4).

Accordingly, DNEV confirmed the FINRA Arbitration Award and denied Sanduski's Petition to Vacate. Thomas J. Sanduski, Plaintiff, v. Charles Schwab & Co., Inc, Defendant (Order Confirming Arbitration Award, DNEV, 19-CV-01340 / August 20, 2020)

SIDE BAR:  9 U.S. Code Section 10: Same; vacation; ground; rehearing:

(a) In any of the following cases the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration-
where the award was procured by corruption, fraud, or undue means;
where there was evident partiality or corruption in the arbitrators, or either of them;
where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or
(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made. . . .
Arbitrator Partiality or Corruption

DNEV found that the interaction between Arbitrator Grinnell and Schwab's expert was an "attenuated," "insubstantial," and "trivial" communication between the individuals, which falls short of demonstrating "partiality." Pointedly, the Court offers this observation [Ed: footnotes omitted]:

Even if the communications between Grinnell and Charles Schwab's experts were improper, Sanduski has also failed to demonstrate that "any prejudice resulted from the [] contacts." While perhaps inappropriate, the majority of Grinnell's interactions with Charles Schwab's witnesses took place after she'd made her decision and determined that she would not be involved in writing the order. As she put it, "[f]rom my point of view, the case was over." And Charles Schwab's expert's acknowledgment that he would appear before Grinnell in a separate hearing is hardly the "sinister or inherently one-sided" contact that could prejudice an award or infect a decision with bias. In fact, Sanduski provides no evidence whatsoever that these communications affected Grinnell's decision or caused him "any disadvantage."40 So, I reject this as a ground for vacating the award.

at Pages 7 - 8 of the DNEV Order Confirming

Arbitrator Misconduct

In analyzing whether Sanduski was prejudiced by Geddes' virtual attendance at the hearing, Judge Dorsey pointedly found that "[I]'m not persuaded that Geddes's telephonic presence did anything more than deny Sanduski a "perfect" hearing as opposed to a "fair" one, which is insufficient grounds for vacatur in the Ninth Circuit. . . ." at Page 9 of the DNEV Order Confirming. Going further, Judge Dorsey notes that [Ed: footnotes omitted]:

In fact, this panel's decision to continue with the semi-virtual hearing is not only reasonable, but it does not appear to meaningfully deviate from FINRA Rule 12401, which makes no mention of whether a panel hearing requires the arbitrators to be physically present. Sanduski had a three-person panel, which is what the rule requires. Permitting Geddes to participate via telephone is likely a procedural alteration, which would not be grounds for vacatur. Accordingly, I find that the panel's denial of Sanduski's postponement request was not misconduct under § 10(a)(3).

at Page 10 - 11 of the DNEV Order Confirming

Bill Singer's Comment

My initial impression of this case was that Sanduski had made out a pretty strong argument for vacatur. After reading through the DNEV Order and then re-reading the Award and Petition, I changed my mind. Hey, it happens -- first impressions don't always hold.

The interaction between the expert "R" and Arbitrator Grinnel was not instigated by Grinnel and did not present any troubling remarks out of the arbitrator's mouth. Regardless, Schwab's expert should have exercised discretion and avoided any exchange with Grinnel. That being said, if the expert has simply wished Grinnel a "Happy Easter" on the way out (Easter having fallen on April 21, 2019), I'm not sure that the exchange would have involved a scenario any better or worse than "see you next week."  I have served as a member of numerous arbitration panels and also as Chair. Notably, I expect that veteran, expert witnesses would know better than to engage in gratuitous banter with arbitrators during an arbitration. I note that arbitrator Grinnell did not initiate the exchange with expert "R," and it does not appear that she voiced any response. Of greater import for me was that the exchange was not ex-parte, as all parties and counsel appear to have been present. If there is a fault, it would seem to be with expert "R," as Chair Edmonson noted in the FINRA Arbitration Award:

[T]his statement made by Mr. R, prior to the deliberation of the Panel's award and in the hearing room with all concerned parties, compromises the Panel's independence in the eyes of opposing parties. 

As to arbitrator Grinnel's conduct with expert "H," I am less forgiving or sympathetic. Simply stated, in my opinion, Grinnel did not belong in the same Uber car as expert "H." Moreover, although the hearings may have been "over," I do not share Grinnel's conclusion that "the case was over." Moreover, the guiding principle of arbitrators' conduct is not merely to be above reproach but to also be above suspicion -- much like Caesar's wife. Unlike the incident with expert "R," it appears that arbitrator Grinnel instigated to communication with expert "H" as noted by her own narrative:

I stepped out of the hotel to call an Uber to go to the airport and found that Mr. H was also going to the airport in an Uber. In the hopes of making an earlier flight, I asked to share his ride but warned that I would not permit any talk about the case. Mr. H and I shared the ride and did not discuss the case. 

Although I accept Grinnel's assertion that the Uber ride "had no bearing on my decision in the case, which had already been made in the presence of the other two arbitrators," that's all somewhat beside the point. The ride doesn't look right. The ride opens the door to inferences.

As to the issue of Sanduski's consent to arbitrator Geddes' telephonic participation and then the reconsideration of that previous consent, upon further reflection, Sanduski's complaints come off as "buyer's remorse." At first, Sanduski had a lawyer. As the case progressed, Sanduski apparently could no longer afford a lawyer. The lawyer withdrew. Those facts are not anyone's fault. Lawyers are expensive. Perhaps Sanduski could not afford counsel -- let's keep in mind that he was being sued by Schwab for over $400,000 in unsecured debits. Sanduski may well have taken a bath in the market and was left unable to afford a lawyer. Even giving Sanduski the full benefit of financial extremis, that doesn't grant him the right to make a decision and then, after everyone relies upon his decision, to demand a mulligan -- you had your swing, that counted, you're not getting another free shot at the ball. Almost every game has a rule about the point in time when you lose the right to change an action. In chess, once you take your finger off the piece, it's deemed moved. Once the croupier announces "No more bets," what's down is down and what's still in your hand doesn't wind up on the felt as a legit bet. When they ask you on Let's Make a Deal which door you want, you can't change your mind after they open the curtain. To that extent, Sanduski was offered a choice. He made it. Others relied to their detriment on his decision. That piece was moved. That bet was placed.

If I were Sanduski at day one of the arbitration and arbitrator Geddes had asked to participate from home via telephone, I would have objected to high, holy, Hell. Sanduski didn't sue Schwab. Schwab sued him. On top of that Sanduski doesn't have a lawyer; he's representing himself. Given those circumstances, Sanduski was faced with losing a case and having an award rendered against him in the amount of several hundreds of thousands of dollars. In such a high stakes game, he's entitled to have all three arbitrators sitting at a table in the same room listening to all the live testimony. He's got every right to insist that he wants to see the looks on their faces and how they react to various testimony. FINRA's Code of Arbitration grants him those rights. Sanduski waived his rights and opted to go along with two arbitrators live and in the flesh but one at home on the phone. It was only after everyone showed up for the second day that Sanduski had buyer's remorse and wanted a do-over.

The Panel of Arbitrators could have acquiesced to Sanduski's change of heart.  In hindsight, it might have made more sense to adjourn until all three arbitrators were able to sit in the flesh at the next available date. Perhaps the Chair could have unloaded on Sanduski for jerking everyone around and then grudgingly ordered the hearing adjourned. Perhaps the Panel could have imposed a monetary sanction as the cost of that adjournment. Whatever could have happened in an alternate universe didn't. Was justice done? Not really -- but not everything in arbitration or a court is about justice. Sometimes it's just messy. In the end, it seems like the right Award was rendered and confirmed. 

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