Who's Zooming Whom in FINRA Arbitration and Federal Court?

June 29, 2021

Way back in pre-Covid 2017, a disgruntled Schwab customer filed a FINRA Arbitration Statement of Claim complaining about the release of his records to the IRS. Then the dispute wound up in federal court. Then back in arbitration -- sort of. Then back in federal court. Four year after the hostilities began, we're in 2021, and we got Zoom arbitrations, but the customer doesn't want to argue his case via Zoom. He says that's not what he bargained for way back when things started. Now, we got Zoom regulatory hearings. We got Zoom court proceedings. So -- who's zooming whom?

2017 FINRA Arbitration 

As set forth in the Syllabus to the SEC Opinion in In the Matter of the Application of Constantine Gus Cristo for Review of Action Taken by FINRA (SEC Opinion; '34 Act Rel. No. 86018; Admin. Proc. File No. 3-18539 / June 3, 2019) (the "2019 SEC Opinion")

In September 2017, Constantine Gus Cristo sued Charles Schwab & Co., Inc., a FINRA member firm, and certain of its affiliates (collectively, "Schwab") in federal district court. Cristo alleged that Schwab violated federal law by releasing financial records to the Internal Revenue Service ("IRS") beyond those requested in an administrative summons. The court granted Schwab's motion to compel Cristo to arbitrate his claims before FINRA. 

Cristo requested that FINRA declare his claims ineligible for arbitration. But FINRA explained that its rules reserved that determination for an arbitration panel to make based on a developed record. Cristo also submitted a complaint about Schwab to FINRA's Investor Complaint Center. The complaint restated the allegations made in Cristo's federal lawsuit. FINRA investigated Cristo's complaint and closed the matter. 

Cristo then filed an application for review of FINRA's actions under Section 19(d) of the Securities Exchange Act of 1934. Because Cristo does not challenge any action that we have jurisdiction to review under Section 19(d), we dismiss his appeal for lack of jurisdiction.

2017 SDCA Complaint

On November 6, 2017, Cristo, representing himself pro se, filed a First Amended Complaint ("FAC") in the United States District Court for the Southern District of California ("SDCA") based in part upon the underlying IRS-related issues noted above in the 2019 SEC Opinion. In response to the Defendants' Motion to Compel Arbitration, SDCA stayed the case and directed the filing of a joint status report, which was never submitted; however, on a separate basis, the parties advised the Court that FINRA arbitration had not yet been commenced. Constantine Gus Cristo, Plaintiff, v. The Charles Schwab Corporation, Schwab Holdings, Charles Schwab & Co., Inc., Charles Schwab Bank, and Charles Schwab Investment Management, Inc, Defendants (Order Denying Ex Parte Motion for TRO and Preliminary Injunction, United States District Court for the Southern District of California, 17-CV-1843 / June 25, 2021) (the "2021 SDCA Order")

On September 12, 2019, SDCA directed the parties to initiate within 30 days a FINRA arbitration, which Cristo did "under protest." 

2019 SDCA Complaint

On October 2, 2019, Cristo filed another Complaint in SDCA:

against the U.S. Securities and Exchange Commission ("SEC"), Financial Industry Regulatory Authority ("FINRA"), Jay Clayton, in his official capacity as Chairman of the SEC, William Barr, in his official capacity as the United States Attorney General, and Robert W. Cook, in his official capacity as President and Chief Executive Officer of FINRA. (Case No. 18cv1910-GPC(MDD), Dkt. No. 1.) In the complaint, Plaintiff alleged improper FINRA investigation of his Investor Complaint, improper SEC review of FINRA's investigation as well as inconsistent statements/advisements by FINRA and the SEC concerning his attempts to obtain a ruling of ineligibility for arbitration and seeking to return the arbitrable issues back to this Court. (Id.) On May 26, 2020, and June 17, 2020, the Court granted all Defendants' motion to dismiss for lack of subject matter jurisdiction. (Id., Dkt. Nos. 29, 35.) In the May 26, 2020 order, the Court noted that Plaintiff was attempting to undermine the Court's prior order compelling arbitration and explained that "[o]nce the arbitration panel issues its decision, Plaintiff may seek to vacate or confirm the arbitration award." (Id., Dkt. No. 29 at 19.3 )

at Pages 2 - 3 of the 2021 SDCA Order

2021 Cristo Files for TRO -- the Zooming begins

Notwithstanding SDCA's order compelling arbitration, on June 21, 2021, Cristo filed an ex parte application for a temporary restraining order ("TRO") enjoining FINRA's June 28 - 20, 2021 Zoom evidentiary arbitration hearing. Cristo offered the following arguments in support of his TRO:

[F]irst, he argues that he did not agree to participate in any virtual Zoom hearing and due to his lack of experience and unfamiliarity in using the Zoom platform, he will be at an extreme disadvantage against an attorney who has experience in the Zoom medium. (Id. at 9.) Second, he seeks to enjoin FINRA's evidentiary hearing because of numerous rulings that favor Schwab Defendants demonstrating collusion and bias against him. (See id. at 16-79.) In the conclusion, he also asks, "[i]f permitted, Plaintiff moves [the] Court to reverse the FINRA Panel's denial of Plaintiff's Motion to Dismiss, and remand this case back to this Court." (Id. at 81.) Schwab Defendants oppose arguing that, under Ninth Circuit precedent, courts should not intervene in pending arbitration. 

at Page 3 of the 2021 SDCA Order

Going to Extremes

In adjudicating Cristo's Motion, SDCA notes that the United States Court of Appeals for the Ninth Circuit ("9Cir") held that judicial review prior to the rendition of a final arbitration award should be indulged, if at all, only in the most extreme cases. Holding Cristo's Motion to the "extreme cases" standard, SDCA found in part that:

Here, Plaintiff seeks an extraordinary relief of a temporary restraining order enjoining a pending arbitration. However, Plaintiff does not present evidence, arguments or legal authority demonstrating an extreme case that warrants the Court's intervention in a pending arbitration. At most, Plaintiff disagrees with a number of procedural decisions concerning the arbitration which is not subject to judicial scrutiny during the arbitration. See Lagstein v. Certain Underwriters at Lloyd's, London, 607 F.3d 634, 643 (9th Cir. 2010) ("In the absence of an express agreement to the contrary, procedural questions are submitted to the arbitrator, either explicitly or implicitly, along with the merits of the dispute.") 

For example, Plaintiff argues that he never agreed to a Zoom hearing and it would be prejudicial since he is not familiar with the platform. Yet, the transcript of the prehearing conference recording of March 26, 2021 shows Plaintiff was aware and agreed to the evidentiary hearing on June 28-30, 2021, presumably by Zoom. (Dkt. No. 42-4, Garrett Decl., Ex. H.) Plaintiff had sought a postponement of the evidentiary hearing with the Director of FINRA Dispute Resolution but his request for postponement was denied on June 22, 2021 with the right to re-raise the issue with the arbitration panel for final decision. (Id., Ex. J.) Further, Plaintiff agreed to be bound by FINRA's rules and procedures relating to the arbitration. (Dkt. No. 42-2, Garrett Decl., Ex. A.) FINRA Rule 12213(a)4 gives FINRA the authority to determine the hearing location. See Legaspy v. Fin. Indus. Regulatory Auth., Inc., Case No. 20 C 4700, 2020 WL 4696818, at *2 (N.D. Ill. Aug. 13, 2020) (denying TRO to enjoin a scheduled remote Zoom hearing). 

In addition, Plaintiff disagrees with a number of procedural rulings concerning scheduling, discovery and eligibility without demonstrating a legal or factual basis of an "extreme case[]" for the Court to intervene in a pending arbitration. (See Dkt. No. 40 at 16-63.) Further, Plaintiff's general claim without specific facts of bias by the arbitrator or collusion between the arbitrator and Schwab Defendants, (see id. at 63-77), are also insufficient reasons for the Court to intervene. See In re Sussex, 781 F.3d at 1073. Accordingly, the Court DENIES Plaintiff's motion for temporary restraining order and preliminary injunction. Moreover, even if the Court were to consider the TRO, Plaintiff has failed to satisfy the elements to support it.

at Pages 5 - 6 of the 2021 SDCA Order


Additionally, SDCA noted that it cannot enjoin FINRA, which is not a party to the litigation. Further, SDCa found that Cristo failed to demonstrate "a likelihood of success on the merits because the relief he seeks has nothing to do with the claims in his complaint." at Page 7 of the 2021 SDCA Order.  

Accordingly, SDCA denied Cristo's motion for a TRO/injunction and stayed his federal lawsuit pending final resolution of the FINRA Arbitration.