Insult Added to Injury in Puerto Rico Bond Dispute

April 16, 2021

A public customer filed a FINRA arbitration claim citing nearly $6 million in losses in Puerto Rico municipal bonds. The Claimant took his place on a proverbial long, long line that winds around several blocks. After 20 FINRA hearing sessions, the arbitrators denied all the claims, which set the stage for a federal court appeal. Adding insult to injury, the Court wasn't all that impressed with Claimant's arguments or the manner in which some were presented. 

2018 FINRA Arbitration Award

In September 2015, public customer Claimant Manuel G. Diaz filed a FINRA Arbitration Statement of Claim alleging  violation of federal securities acts; fault; fraud; deceit; recklessness; and negligence in connection with his purchase of Puerto Rico municipal bonds and the attendant use of margin in connection with a line of credit loan in his account. Claimant Diaz sought at least $5,818,315 in compensatory damages, interest, fees, and costs. Respondent Popular Securities generally denied the allegations and asserted various affirmative defenses. After 20 hearing sessions, the FINRA Arbitration Panel denied Claimant's claims. In the Matter of the Arbitration Between Manuel G. Diaz, Claimant, v. Popular Securities, LLC, Respondent (FINRA Arbitration Award 15-02445 / October 24, 2018)

2019 Petition to Vacate in DPR

On January 22, 2019, Diaz filed a Petition to Vacate the Arbitration Award, and, thereafter, filed an Amended Petition with the United States District Court for the District of Puerto Rico ("DPR") Petitioner Diaz argued that the FINRA Arbitration Award had been procured by the Respondent "by fraud on the Panel, and that the arbitrators failed to disclose certain material facts incurring, thus, in evident partiality and misbehavior." Manuel G. Diaz, Petitioner, v. Popular Securities, LLC, Respondent (Opinion, United States District Court for the District of Puerto Rico, 19-CV-01065 / April 12, 2021)

An Attempt to Decipher

From the start, things did not go well for Claimant Diaz, as evident in this blistering passage:

From what the Court can decipher from Petitioner's convoluted brief, Petitioner posits that Respondent "knowingly and recklessly made [several] false arguments to the Panel" to procure the arbitration award. 2 Docket No. 12 at 30. Petitioner alleges that Respondent lied about the following legal contentions: (1) the securities-related claims were time-barred by the Puerto Rico Uniform Securities Act ("PRUSA") or the federal Securities Exchange Act's ("SEA") two year statute of limitations; (2) the state law claims were not actionable because Petitioner did not provide a contract or identify a contractual provision that Respondent allegedly breached; and (3) the tort and contract fraud claims were also subject to PRUSA or SEA's statute of limitations. Id. at 16-19, 30-31. 

Petitioner supports his "fraud on the Panel" theory by citing three excerpts from the arbitration hearing's transcripts in which the Panel asked questions regarding the applicable statute of limitations. Id. at 17-19. In doing so, what Petitioner really intends is for this Court to determine that the legal theories invoked by Respondent in the arbitration were meritless. Not only is this beyond the Court's ordinary arbitration review capacity, but Petitioner has also failed to show that Respondent engaged in any form of fraud altogether. Dialysis Access Ctr., LLC v. RMS Lifeline, Inc., 932 F.3d 1, 9 (2019) (cleaned up) ("[L]imited review applies [e]ven where [a factual or legal] error is painfully clear, [because] courts are not authorized to reconsider the merits of arbitration awards.").

First, the record is devoid of clear and convincing evidence illustrating how Respondent committed fraud or used undue means when arguing that Petitioner's claims were untimely under PRUSA and SEA. The transcript excerpts cited by Petitioner simply show that Respondent posed this legal theory before the Panel, and that the arbitrators asked several questions to better understand the statute of limitations' issue. Docket No. 12 at 17-19. Furthermore, Respondent reasonably presented its arguments by citing both persuasive and binding case law in its prehearing briefs. Docket No. 12-10 at 1-3. And regardless of whether Respondent's legal theories were correct, the Court is in no position to conclude that Respondent engaged in fraud simply because it zealously argued its case based on relevant jurisprudence. PaineWebber Grp., Inc. v. Zinsmeyer Trs. P'ship, 187 F.3d 988, 991 (8th Cir. 1999) ("Undue means does not include sloppy or overzealous lawyering.") (cleaned up); see also Dialysis Access Ctr., LLC, 932 F.3d at 9 ("[C]ourts are not authorized to reconsider the merits of arbitration awards.") (cleaned up). The fact that Petitioner does not agree with Respondent's legal theories is not a basis for vacatur. See P.R. Ports Auth. v. Misener Marine Const., Inc., 233 F. Supp. 2d 266, 268 (D.P.R. 2002). 

= = = = =

Footnote 2: The Court notes that Petitioner's brief is filled with unsupported and generalized assertions, devoid of specific evidence to support the "fraud on the panel" claim and lacking specific connection between the legal claims and the factual backdrop it recounts. See Zannino, 895 F.2d at 17 ("[I] issues adverted to in a perfunctory manner, unaccompanied by some effort at developed argumentation, are deemed waived."). Nonetheless, even if all arguments had been properly briefed, Petitioner still fails to prove procurement by fraud. 

at Pages 5 - 6 of the DPR Opinion

I'd say that it goes downhill from there but, frankly, Petitioner Diaz's appeal seems to have started in the bottom of a deep ravine. Let's just say that Petitioner seems to have dug a hole from which he never truly emerged. As such, DPR found that the FINRA arbitrators had rendered their Award on the merits, and, accordingly, any references to purported misrepresentations by Respondent were immaterial because such misrepresentations (to the extent that they even occurred) were not the basis upon which the arbitrators ruled. What Petitioner depicted as fraudulent misrepresentations appeared to the Court to constitute zealous advocacy. Worse, the Court offered an unflattering view of Petitioner's advocacy: "Petitioner's brief is filled with unsupported and generalized assertions, devoid of specific evidence to support the "fraud on the panel" claim and lacking specific connection between the legal claims and the factual backdrop it recounts. "

Did You Hear the One About the Missouri Circuit Judge?

A somewhat intriguing basis for Petitioner Diaz's appeal was noted when Petitioner alleged that:

one of the arbitrators, A.J. Seier ("Mr. Seier"), failed to disclose he resigned from his position as circuit judge for the state of Missouri in 1993 after allegations that he made false claims to obtain monetary reimbursement for travel receipts totaling $1,200.00, and that this omission demonstrates dishonesty and bias as to this arbitration. Docket No. 12 at 34- 35. Similarly, Petitioner alleges that another arbitrator, Clarence B. Johnson ("Mr. Johnson"), failed to disclose that he filed for bankruptcy, which Petitioner argues shows Mr. Johnson's "inability to manage his own assets;" and that his company, Johnson Wealth Management Inc., formerly served as financial advisor for Wells Fargo Advisors LLC, which created a "material conflict of interest" as to this arbitration. Id. at 35, 37.

at Pages 8 - 9 of the DPR Opinion

SIDE BAR: Yet again, questions are raised about FINRA's role in policing its roster of arbitrators or ensuring the most current, robust disclosures are presented to litigants. This is an issue that I have noted with some frequency over the years and has drawn the ire of courts. See, for example: "Federal Court Troubled By FINRA Arbitration Chair's Non-Disclosure Of Conflict" ( Blog / January 7, 2020) 

When confronted with allegations about Arbitrators Seier and Johnson's alleged non-disclosures, DPR questions the nature of Petitioner Diaz's detective work:

[A]t the very least, "Petitioner should have conducted due diligence in ranking and striking potential arbitrators." Docket No. 13 at 17. The circumstances surrounding Mr. Seier's resignation as circuit judge were made public as far back as December 2015 and, on April 2017, Mr. Seier amended his arbitration disclosures to make reference to the news article that talked about his resignation. Docket No. 12-14 at 2. Had Petitioner engaged in adequate due diligence, through a simple Google Search or by carefully reading the amended disclosures, he would have learned of this issue and he should have raised it during the arbitration proceedings. Instead, Petitioner was notified of the selection of the members of the Panel as early as February 2016 and he still accepted the Panel's composition on more than one occasion. Docket Nos. 13-4; 13-5; 13-6; 13-7. 

The same applies for Mr. Johnson, whose initial disclosures did mention (1) his past association with Johnson Wealth Management Group, Inc., a company that publicly acknowledges providing services to Wells Fargo Advisors LLC, who in turn made transactions with Petitioner in 2001; and (2) the fact that he filed for bankruptcy, which is not only irrelevant to this case, but is also a matter of public knowledge that could have been easily discovered and verified. Docket No. 12-20 at 1-2. The previous findings alone would lead to dismissal of Petitioner's Section 10(a)(2) evident partiality claim. 3

= = = = =

Footnote 3: To make matters worse, Petitioner falls short of excusing his failure to raise partiality by insufficiently alleging that he only learned of Mr. Johnson's omission after the hearings took place, and that if Mr. Seier had disclosed his bankruptcy in his profile, he "would have stricken him in the arbitrator section process." Docket No. 12 at 34. Not only does this fail to explain why it took him so long to learn this information, but it ignores his duty to perform due diligence. Moreover, said allegations are woefully insufficient for an evident partiality claim considering that the record shows that the information was available prior to the arbitration. Ameriprise Fin. Servs., Inc., 325 F. Supp. 3d at 225; see also Lagstein v. Certain Underwriters at Lloyd's, London, 607 F.3d 634, 646 (9th Cir. 2010) (declining "to create a rule that encourages losing parties to challenge arbitration awards on the basis of pre-existing, publicly available background information on the arbitrators that has nothing to do with the parties to the arbitration.").

at Pages 9 - 10 of the DPR Opinion

In disposing of the disclosure arguments, DPR concludes that [Ed: footnotes omitted]:

Here, nothing in the record shows that Mr. Seier's failure to disclose his resignation as a circuit judge demonstrates personal connection or bias towards any of the Parties. Ameriprise Fin. Servs., Inc., 325 F. Supp. 3d at 226. Moreover, neither Mr. Seier's resignation more than 20 years prior to the arbitration nor the substance of the allegations that led to his resignation are of relevance to the case at bar or "materially relate" to any of the Parties. See, e.g., Lagstein v. Certain Underwriters at Lloyd's, London, 607 F.3d 634, 646-47 (9th Cir. 2010) (finding that "evidence of alleged corruption at some time in the past does not relate to this case or the parties to it, nor does it raise a reasonable impression of corruption in the present case.") (quotation marks omitted). The same conclusion applies to Mr. Johnson's alleged failure to disclose his bankruptcy or that his company formerly served as financial advisor for Wells Fargo Advisors LLC. These are merely "general allegations," which fail to show that Mr. Johnson had any personal connection with the case at bar-for example, whether he was directly involved with certain asset purchase transactions between Respondent and Wells Fargo Advisors LLC in 2011-, much less how or why Mr. Johnson was materially biased in favor of Petitioner. Ameriprise Fin. Servs.,Inc., 325 F. Supp. 3d at 226 ("general allegations" were deemed insufficient to establish personal connection).

at Pages 10 -11 of the DPR Opinion

As to the balance of Petitioner's arguments, DPR brands those asserting alleged arbitrator misbehavior as a "rehash" of the partiality charges. Further, the Court admonishes that even an arbitrator's "imperfect disclosure" would not automatically provide proof of prejudice or preclude a fair hearing.  

Accordingly, DPR denied the Petition to Vacate the FINRA Arbitration Award and confirmed the Award.

Bill Singer's Comment

DPR found that some aspects of the conduct of Petitioner Diaz's arbitration were less than diligent and some aspects of his federal appeal seemed less than compelling. Okay, fine, it was a rocky road to the arbitration hearings and another rocky road up the courthouse steps. Got it.

On the other hand, DPR should also have found that FINRA was not overly diligent in policing its roster of arbitrators. In fairness to Diaz, the issues of FINRA arbitrators' non-disclosures or untimely disclosures crop up with troubling regularity. In many cases, FINRA is justified in excusing some of the non-disclosures as the byproduct of subterfuge by members of its arbitration roster -- as such, the forum itself is victimized as well as its litigants. Regardless of where to point the finger, I don't agree with DPR's somewhat strident position, which seems to place the full burden of due diligence upon the shoulders of litigants before FINRA's arbitration forum. As I see it, that Court's viewpoint downplays the obligation of FINRA to police its roster of arbitrators and pursue its own due diligence to ensure the integrity of its forum. Given the nature of the questioned disclosures in Diaz, I'm not sure why the Court didn't chastise FINRA for failing to take action to better police its roster and/or make certain that various facts were brought to the attention of the parties. 

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