3Cir Says Never Is Better Than Late In FINRA Arbitration Appeal

February 4, 2021

In a recent FINRA Arbitration, an associated person Claimant sued his former firm and lost. On appeal to the federal courts, Claimant argued that two of the three FINRA arbitrators were wrongly characterized as "Public Arbitrators," and they should not have been allowed to sit (or remain) on his hearing panel. Frankly, it looks like the facts are on Claimant's side. Ahh . . . but so much for appearances. In the end, it all comes down to a question of timing. Better late than never? Not this time.

2019 FINRA Arbitration

In a FINRA Arbitration Statement of Claim filed in January 2017 and as amended, associated person Claimant Weber asserted defamation and intentional interference with prospective contractual relations attendant to a termination comment disclosed on his Uniform Termination Notice for Securities Industry Registration (the "Form U5"). Ultimately, Claimant Weber sought $34,000 in compensatory damages, additional compensatory damages between $251,213 to $1,680,148, and punitive damages between five and nine times compensatory damages. Respondent PNC Investments generally denied the allegations and asserted various affirmative defenses. In the Matter of the Arbitration Between Dominik A. Weber, Claimant, v. PNC Bank and PNC Investments, Respondents (FINRA Arbitration Award 17-00158 / March 18, 2019). 

Because Respondent PNC Bank is not a member/associated person of FINRA and did not voluntarily submit to the arbitration, the FINRA Arbitration Panel made no determination as to the company. 

The FINRA Arbitration Panel is characterized in the FINRA Arbitration Award as comprising:
  • Gregory Hunter Matthew, Chair and Public Arbitrator
  • William Francis Ryan, Public Arbitrator
  • Peter Vincent Marcoline, Jr., Non-Public Arbitrator
The FINRA Arbitration Award states that:

On or about February 13, 2019, FINRA Office of Dispute Resolution notified the parties that Arbitrator Ryan was reclassified from public to non-public. The notice further indicated this reclassification would apply only to the arbitrator's future case appointments and does not affect the arbitrator's classification in this case. 

The FINRA Arbitration Panel denied Claimant Weber's claims and requested expungement.

2019 Weber Motion to Vacate 

On June 14, 2019, Weber filed in the United States District Court for the Western District of Pennsylvania ("WDPA") a Motion to Vacate the FINRA Arbitration Award
Dominik Weber, Plaintiff, v. PNC Investments LLC, Defendant (Motion to Vacate, WDPA, 19-CV-00704 / June 14, 2019). As set forth in the Motion under "Introduction":

14. Pursuant to FINRA Rules, Plaintiff was contractually entitled to a FINRA arbitration consisting of two public arbitrators (one being the chairman) and one non-public (industry insider) arbitrator. Instead, without his consent, Plaintiff was provided with an arbitration panel that was composed 100% of non-public arbitrators due to misrepresentations and inaccurate disclosures by two of the arbitrators. Resultantly, justice demands that the arbitration award be vacate due to significant procedural irregularities, as well as a complete deprivation of Plaintiff's due process rights in violation of Pennsylvania's Constitution.

2020 WDPA Opinion: A Rejection of Late Breaking Ideas Regardless of Their Wisdom

In lieu of dragging this out, consider this a spoiler-alert via the Syllabus to the WDPA's Opinion
Dominik Weber, Plaintiff, v. PNC Investments LLC, Defendant (Opinion, WDPA, 19-CV-00704 / February 5, 2020) (the "WDPA Opinion")
http://brokeandbroker.com/PDF/WeberOpWDPA200205.pdf :

Justice Felix Frankfurter once wrote: "Wisdom too often never comes, and so one ought not to reject it merely because it comes late." Henslee v. Union Planters Nat 'l Bank & Tr. Co., 335 U.S. 595, 600 (1949) (Frankfurter, J., dissenting). The problem for Plaintiff Dominik Weber is that sometimes the Court is bound to reject late breaking ideas regardless of their wisdom. Weber brought a claim in arbitration against PNC Investments, LLC. He lost that claim, and now asks this Court to overturn the arbitration award because two (2) of the three (3) arbitrators who presided in his case should have been excluded based on the terms of Weber's contract with PNC Investments. For PNC Investments, this is the first its [sic] hearing of Weber's concerns. That is because Weber never raised the issue during his arbitration, despite having the opportunity to do so. Under binding Third Circuit precedent, Weber waived the right to object now. And Weber's second ground for vacatur -- that PNC Investments is a state actor bound by the Pennsylvania Constitution's Due Process Clause -- lacks merit. For these reasons, and those that follow, Weber's Motion to Vacate (ECF No. 1), is DENIED, and PNC Investments' Cross-Motion to Confirm (ECF No. 18), is GRANTED.

Lies or Improper Sales Practices?

As to the underlying facts that prompted Weber's arbitration claims, WDPA offers this summary:

Weber signed the Form U4 in May 2016. (ECF No. 18-1.) What happened in the following months is a matter of substantial disagreement between the Parties. Weber claims that shortly before he was to sit for his Series 66 exam, he complained to his supervisor about what he considered to be improper sales practices occurring at PNC Bank. According to Weber, he became the target of hostility and conspiracy for raising the complaint. (ECF No. 1, at ,¶¶36-125.) PNC Investments, on the other hand, claims that throughout the late summer and early fall of 2016, Weber lied to his supervisors on several occasions about varying topics. His repeated lies, PNC Investments says, led the company to open a human resources investigation into Weber. (ECF No. 18, at ¶ ¶ 5 - 11.) Both Weber and PNC Investments do agree on what followed: PNC Bank fired Weber in early October 2016. (ECF No. 1, at ¶68; ECF No. 18, at ¶11.)

Page 3 of the WDPA Opinion

Subject Matter Jurisdiction and Arbitrators' Classification

WDPA discerned that there were two threshold elements to Weber's appeal:

[F]irst, the Parties' motions and answers at oral argument left the Court concerned that it may not have subject matter jurisdiction to hear this case. Second, it became clear that the Court needed to know whether FINRA Rules even provided a way for Weber to object the arbitrators' classification -- since whether Weber waived his right to object to Mathews and Ryan's classification appeared to be dispositive to the resolution of these matters. . . .

Page 7 of the WDPA Opinion

After a lengthy and diligent analysis, WDPA resolved the thorny subject matter jurisdiction by finding that:

[W]eber is a citizen of Pennsylvania and PNC Investments is a citizen of Delaware. Those two (2) facts - - coupled with the Court's determination that Weber's Motion to Vacate pleads an amount in controversy over $75,000, exclusive of costs and interest - - leads the Court to conclude that it has subject matter jurisdiction . . .

Page 15 of the WDPA Opinion

Colorable Right to Two Public Arbitrators (eyebrow-raising as it may be)

Initially, the Court's analysis of the arbitrators' classification goes in Weber's favor [Ed: footnotes omitted]:

Based on the briefing and oral argument, it appears to the Court that Weber had a more than colorable right to a panel with two (2) public arbitrators. And it is far from clear that Weber actually received the benefit of his bargain. PNC Investments' first argument, that this Court must defer to FINRA' s classification, no matter how eyebrow-raising, is unpersuasive. . . .

Page 17 of the WDPA Opinion

After the Buzzer

Unfortunately for Weber, that was his high-water mark on the issue, and from thereon, it's all downhill:

It is a principal of our legal system that parties should flag issues sooner rather than later. Applying waiver principles may sometimes seem harsh, but the preference for timely objections rests on sound logic -- it gives the tribunal a chance to correct errors early in the process. The alternative is to wait until late in the game, or even after the final buzzer sounds, to raise a game-changing issue that could have and should have been dealt with far earlier in the process. The same logic applies in the context of arbitration. . . .

Page 17 of the WDPA Opinion

Arbitrator Matthews

In addressing Weber's assertions about Arbitrator Matthews' conduct, WDPA characterizes the gist of the issue as asserting that Matthews wrongly answered "NO" in response to a question about whether he had ever been associated with a broker dealer and whether he had ever been employed by a Securities and Exchange Act entity. The "NO" answer placed Matthews on the Public Arbitrator roll, whereas a "YES" answer would have placed him on a Non-Public Arbitrator roll. In support of his contentions, Weber stated that:

First, Weber claims that Mathews "worked for a broker dealer (Wachovia) for ten years." (ECF No. 1, at ¶159.) Second, he claims Mathews "worked at the SEC," which Weber argues is an entity organized under the Securities and Exchange Act of 1934. (Id.) Third, and finally, Weber claims that Mathews represented a group of plaintiffs in Ponzi scheme-related litigation. (Id. at ¶ 160.) In Weber's estimation, each of these facts provides an independent basis for this Court to conclude that FINRA should have classified Mathews as a non-public arbitrator. 

Page 20 of the WDPA Opinion

In parsing through each of the above-cited three claims by Weber, the Court offers these rejections: 

[W]eber's counsel knew all three (3) supposedly incriminating facts about Mathews when he told the Panel he knew of no reason why it could not proceed. Mathews disclosed his work experience with Wachovia Bank and the SEC in his arbitrator disclosure report that FINRA sent to Weber in April 2017. (ECF No. 18-7, at 2.) And FINRA informed Weber of Mathews's legal work in the Ponzi scheme case in January 2019, weeks before the hearing. (ECF No. 18-8, at 9.) So it is difficult to see how Weber can now claim that he had no reason to know of these purported bases to challenge Mathews' s classification as the public chairperson. 

In the face of PNC Investments' waiver arguments, Weber tries shifting the goalposts. In his reply brief, Weber moves away from his initial argument that Mathews entirely failed to disclose his experience with Wachovia, the SEC, and the Ponzi scheme case, to instead arguing that those disclosures did not raise any alarm warranting further investigation. (ECF No. 25, at 3- 9.) After this about-face, Weber points to information gleaned from Mathews's law firm website profile, and argues that the website does not match up with Mathews's FINRA disclosures. (Id. at 7; ECF No. 1-36.) But the Third Circuit's opinion in Athena Venture could not be clearer: parties cannot wait until after they lose to look up their arbitrators on the Internet. Athena Venture, 803 F.3d at 150. Yet that is exactly what happened here.

Weber implores the Court to be pragmatic. How could his counsel be expected to investigate all of the potential arbitrators on the FINRA selection list? After all, that would take considerable time and effort. (ECF No. 25, at 5 & n.3.) Weber has two (2) things working against his seemingly pragmatic argument. First is our Court of Appeals' binding precedent in Athena Venture. Second is the fact that roughly a year and a half passed between Mathews being selected for the Panel and the beginning of the hearing. During that time, Weber knew Mathews would be one (1) of the three (3) people hearing his claim. And he should have known that he would be required to affirm the Panel's ability to proceed at the hearing, so his incentive to investigate the arbitrators remained real. FINRA Rules 13410 and 13411 provided a means for Weber to seek Mathews's removal and replacement based on the information known to him before the hearing. But Weber failed to exercise that mechanism. As a result, the Court concludes that Weber waived his right to object to Mathews's status.

Pages 21 - 22 of the WDPA Opinion

Arbitrator Ryan

Having resolved the contentions about Arbitrator Matthew's classification, WDPA tackles the somewhat more challenging assertion that Arbitrator Ryan's:

post-hearing, pre-award reclassification as a non-public arbitrator for all future arbitrations also meant Ryan could not serve as a public arbitrator in Weber's dispute with PNC Investments. (ECF No. 1, at , ¶¶165-72.) At first glance, Weber's argument makes sense: if FINRA needed to reclassify Ryan as a non-public arbitrator for all new arbitrations, how could Ryan serve as a public arbitrator during Weber's ongoing arbitration? The problem is that Weber did not voice these concerns during the arbitration-that is, before the award came down. Instead, like his objections to Mathews's classification, he waited until he lost and raised the issue for the first time in this Court. 

Weber's argument as to Ryan differs from his argument about Mathews in one (1) important way: Weber did not learn of Ryan's supposedly disqualifying reclassification until after the Panel heard the case. So the fact that Weber did not raise an objection about Ryan's reclassification when the hearing began cannot be held against him. Yet, despite FINRA's late-in-the-game reclassification, Weber still could and should have objected to Ryan's participation. FINRA reclassified Ryan on February 13, 2019. But the Panel did not issue its award until March 18, 2019. So there was ample time for Weber to consider Ryan's reclassification and make a reasoned objection. 

Page 22 of the WDPA Opinion

In a somewhat testy commentary, the Court admonishes that:

Weber's argument misses the point. The fact that FINRA reclassified Ryan as a non-public arbitrator for future proceedings was itself a pretty big new piece of information. And Weber could have used that fact to seek Ryan's removal under FINRA Rule 13410(b). Weber argues that even if he had sought Ryan's removal, the Director simply would have denied his request. (Id. at 6.) Of course, there is no guarantee Weber's objection would have worked. But Athena Venture does not stand for the proposition that parties must win their objections during arbitration in order to preserve the issue. Instead, our Court of Appeals simply requires that parties fairly raise the issue in the first instance. See Athena Venture, 803 F.3d at 147-150. Weber failed to do so here. 

FINRA's post-hearing reclassification of Ryan should have "set off sirens" for Weber. Id. at 144. The reclassification represented a potentially significant change to Weber's panel, and FINRA's complete failure to explain its reasoning should have reasonably caused Weber concern about Ryan's ability to hear his claim. In the Court's estimation, FINRA's rather startling notice -- "non-public later, but still public now" -- provides exactly the set of facts that the Athena Venture Court had in mind when it adopted the "constructive knowledge" waiver standard. It, too, was a blaring "siren." There is simply no reason why Weber should have stayed silent in the face of FINRA's notice. The time to object was then, not now. 

In the end, Weber knew that FINRA reclassified Ryan from public to non-public for over
a month before the Panel issued its award against him. All that time, FINRA Rule 13410(b) provided Weber a means to seek Ryan's removal. Yet Weber stayed silent-only now voicing his objection to Ryan's participation after he lost in arbitration. Our Court of Appeals in Athena Venture required parties to raise issues in arbitration about the arbitration process if they later intended to litigate those issues in federal court. Weber failed to heed that directive, and the Court concludes that he waived his right to seek vacatur under 9 U.S.C. § 10(a). 

Pages 24 - 25 of the WDPA Opinion

2021 3Cir Opinion

Weber appealed the WDPA Opinion to the United States Court of Appeals for the Third Circuit ("3Cir"). Dominik Weber, Appellant, v. PNC Investments (Opinion, 3Cir, No. 20-1873 / February 3, 2021) (the "2021 3Cir Opinion")
Unfortunately, for Weber, the 3Cir was as unsympathetic to the issues he raised on appeal than the lower court: "For essentially the reasons well explained by the District Court, Weber's bid fails, since his misclassification claim comes too late and his state constitutional claim lacks merit." at Page 2 of the 2021 3Cir Opinion.

Woulda, Coulda, Shoulda

As to Weber's appellate arguments about Arbitrator Matthews, the 3Cir was unmoved:

Weber both could have and should have looked into Mathews's background before the hearing and arbitration decision, not after. He does not suggest that he discovered this supposedly new information through anything other than a simple background check, and though this is something he says he should not have been expected to do before the award, our precedent says otherwise.

at Page 9 of the 2021 3Cir Opinion

Ignorance Ain't Always Bliss

As to Weber's appellate arguments about Arbitrator Ryan, the 3Cir was, again, unmoved:

His argument misses the mark. Weber was told that, as a matter of FINRA policy, Ryan would be reclassified for future arbitrations. At the same time, he was told to contact the case administrator with any questions. He ignored that offer. A reasonably diligent inquiry would have, at the very least, involved responding to the reclassification note to request information on Ryan's status change and then perhaps objecting to Ryan's continued service on his panel, if there was a valid basis to object. We do not know why Ryan was reclassified, and evidently neither does Weber, so even if the claim were not waived, we would not assume error by FINRA based on Weber's speculation. See Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 85 (2002) (delegating certain questions of arbitrability to the NASD because it possesses expertise). 

Whether or not Weber's interpretation of Rule 13410(b) is sound, the fact remains that he was given a procedure to investigate and declined to do so. Consequently, he has waived his claim. 

at Page 9 of the 2021 3Cir Opinion

FINRA the State Actor

Weber's final argument attempting to cast FINRA in the role of a state actor fares no better than his prior efforts. Weber argued that:

it is the database of U4 and U5 Forms maintained by FINRA that is effectively a state actor, and PNCI's filing of Weber's U5 Form constitutes state action. (See Reply Br. at 22 ("[W]hat is being challenged is the maintenance of the . . . database itself, and the constitutionally impermissible blackening of a person's reputation without any process at all[.]").) The argument is still unavailing. 

Undertaking an action that loosely parallels actions that the state can undertake, such as maintaining a database of employees in the finance field and noting reasons for termination, does not convert private action into state action. . . .

at Page 13 of the 2021 3Cir Opinion

WDPA Confirmed

Having denied Weber's arguments, 3Cir affirmed WDPA's orders confirming the arbitration award and denying reconsideration of its Opinion. 

Bill Singer's Comment

I commend both WDPA and 3Cir for their patient, exhaustive, and concise presentations of their analysis and rationale. Ultimately, the courts enunciate a fairly simple principle that Weber's appellate arguments amount to "too little, too late." 

Sure -- I get it. It's now or never. No second bites of the apple. Speak up or shut up. Please feel free to add whatever homespun words of wisdom you wish. As such, if we're just going by the "time is of the essence" aspect of Weber's and his lawyer's conduct, like I said, the courts have fully explained their rationales and from a legal perspective, the analysis and findings hold water. Notwithstanding, all the admirable jurisprudence and folksiness, I detest the outcome of Weber's appeals and will never concede that justice was done. All of which reminds me of Justice Oliver Wendell Holmes Jr.'s trenchant observation that "This is court of law, young man, not a court of justice."

Time and time again, we have seen FINRA fail to properly police its rolls of arbitrators. And time and time again, there just doesn't seem to be any consequence for FINRA despite the unfairness that seems thrust upon unknowing litigants.

In the end, who the hell knows. Maybe with two replaced arbitrators Weber would have won. Or not. Like I said, who knows. On the other hand, FINRA is more than ready and happy to charge litigants all sorts of fees for the conduct of an arbitration. It would be nice if FINRA made more of an effort to follow -- to enforce -- its own arbitration rules. Once, twice, even a few times, this dubious misclassification of an arbitrator is an understandable hiccup that may happen regardless of any organization's best intentions and efforts. But with FINRA, these miscues are more than a one-off happenstance. See, for example:

UPDATE: Federal Appeals Court Reverses Goldman Sachs Arbitration
(BrokeAndBroker.com Blog / October 2, 2015) (the "Athena Venture" case)

THE FINRA ARBITRATION DECISION: In the Matter of the FINRA Arbitration Between Athena Venture Partners, L.P. , Claimant, and Goldman, Sachs And Co., Eric W. Gettleman, and Scott T. Sheffer, Respondents (FINRA Arbitration 09-04771, March 13, 2013)

THE EDPA ORDER: Goldman, Sachs & Co et al. v. Athena Venture Partners, L.P.   (EDPA, 13-MC-130, August 1, 2013)

THE 3CIR OPINION: Goldman, Sachs & Co., Scott T. Sheffer, and Eric W. Gettleman, Appellants v. Athena Venture Partners, L.P. (Opinion, 3Cir.,No. 13-September 29, 2015)

FINRA Humiliated In Federal Court Arbitration Appeal (BrokeAndBroker.com Blog / March 26, 2018)
Also see

Federal Court Questions Basis of AppealFirst Capital Real Estate Investments, LLC, a California limited liability company, Petitioner-Appellant, v. SDDCO Brokerage Advisors, LLC. Respondent-Appellee, and Financial Industry Regulatory Authority, Inc., Respondent (Order, United States Court of Appeals for the Second Circuit, 19-CV-671)
2Cir's Summary Order of Affirmation in First Capital v. SDDCO (December 19, 2020)

FINRA Public Arbitrator Conflict Heads For Supreme Court (BrokeAndBroker.com Blog / April 29, 2014)
NOTEPetition denied by Supreme Court on May 19 2014

3Cir Says Never Is Better Than Late In FINRA Arbitration Appeal (BrokeAndBroker.com Blog)

New York Hedge Fund Founder Pleads Guilty To Bankruptcy Fraud In Connection With Neiman Marcus Bankruptcy (DOJ Release)

SEC Obtains Final Judgment Against Former Portfolio Manager for Insider Trading (SEC Release)

Man Admits Operating Lottery Scam that Defrauded Connecticut Victim of Nearly $1.2 Million (DOJ Release)

Two More People Charged in Connection with Multi-State Scheme to Defraud Financial Institutions of Millions of Dollars (DOJ Release)

FINRA Censures and Fines HSBC Securities Over Fingerprinting and Screening
In the Matter of HSBC Securities (USA) Inc., Respondent (FINRA AWC)

FINRA Expungement Proves That No Good Deed Goes Unpunished
In the Matter of the Arbitration Between Jason Todd Skolnick, Claimant, v. Purshe Kaplan Sterling Investments, Respondent (FINRA Arbitration Award)