FINRA Says It Had No Part In Deciding Schwab Customer Arbitration -- Seriously?

December 27, 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. In 2021, four years after the hostilities began and in the middle of Covid, things moved on to Zoom hearings, but the customer didn't want to argue his case via Zoom. He said that's not what he bargained for way back when things started. As kids used to say like it or lump it, and, accordingly, the parties proceeded to Zoom hearings and Zoom court proceedings. 

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.

November 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 "June 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 June 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 June 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) 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 June 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 June 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. 

August 2021 FINRA Arbitration Award

And now for a bit of time travel -- in his FINRA Arbitration Statement of Claim filed in September 2019, public customer Claimant Cristo asserted violation of his Fourth Amendment rights and violation of the United States Constitution's Due Process Clause. Further, Cristo asserted that a FINRA Arbitration Panel was not authorized to rule on a Right to Financial Privacy Act ("RFPA") violation. The FINRA Arbitration Award characterized Claimant Cristo's claims as relating to "Schwab producing Claimant's financial documents in response to a summons from the Internal Revenue Service ("IRS")." at Page 2 In the Matter of the Arbitration Between Constantine Gus Cristo, Claimant, v. Charles Schwab & Co., Inc,, Charles Schwab Bank, Charles Schwab Corporation, Charles Schwab Investment Management Incl., and Schwab Holdings, Respondents (FINRA Arbitration Award 19-02822 / August 6, 2021)

Claimant Cristo sought $1 million in compensatory damages, $1.5 million in punitive damages, and a declaration that his case in ineligible for FINRA arbitration in order to allow his prosecution of his claims in a federal district court. Respondents generally denied the allegations and asserted affirmative defenses. In announcing their adjudication of Cristo's case in August 2021, the FINRA Arbitrators state in part that:


During the evidentiary hearing on June 28, 2021, the Panel noted that Claimant refused at all times to accept the Panel's composition, but could provide no evidence of conflict of interest for any of the panelists.

After considering the pleadings, the testimony and evidence presented at the hearing, the Panel has decided in full and final resolution of the issues submitted for determination as follows:

1. Claimant's claims are denied in their entirety.
2. Any and all claims for relief not specifically addressed herein, including any requests for punitive damages, are denied.

Adding insult to injury, the FINRA Arbitration Panel also charged Claimant Cristo with all hearing sessions fees, which totaled $5,600 for three Pre-Hearing Sessions and one Hearing Session; however, the Panel waived the previously deferred $2,000 FINRA Claimant filing fee.

December 2021 SDCA Order

Following the FINRA Arbitration Award, Defendants filed in SDCA a Motion to Confirm the FINRA Arbitration Award and Plaintiff Cristo filed a Motion to Vacate. 
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 Granting Defendants' Motion to Confirm Arbitration Award and Denying Plaintiff's Motion to Vacate Arbitration Award, United States District Court for the Southern District of California, 17-CV-1843 / December 21, 2021) (the "December 2021 SDCA Order")

The Four Grounds

In its December 2021 Order, SDCA notes that under the Federal Arbitration Act ("FAA") there are four grounds upon which a court may vacate an arbitration award:

(1) where the award was procured by corruption, fraud, or undue means; 
(2) where there was evident partiality or corruption in the arbitrators, or either of them; 
(3) 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.

9 U.S.C. §§ 10(a)(1)-(4). 

at Page 4 of the December 2021 SDCA Order

Not unexpectedly, pro se Plaintiff Cristo cited all four grounds above as the basis for his Motion to Vacate. 

A. Section 10(a)(1) -Award was Procured by Corruption, Fraud or Undue Means

Perhaps no issue is more central to Cristo's anger with Respondents' conduct than:

[D]efendants' disclosure of Plaintiff's financial records to the IRS in response to an IRS summons that occurred in 2006. (See Dkt. No. 8, FAC.) Plaintiff did not learn of the alleged improper disclosures until 2016. (Id.) Because the event giving rise to Plaintiff's claims occurred more than six years ago, Plaintiff insists his claims are ineligible for arbitration under Rule 12206(a). 

When Plaintiff learned about Defendants' disclosure of his financial records to the IRS, he reached out to FINRA, and on October 20, 2016, a FINRA Principal Investigator informed Plaintiff that his claims against Schwab based on the IRS summons issued in 2006 were ineligible for FINRA arbitration pursuant to Rule 12206(a) and directed him to a court of competent jurisdiction. (Dkt. No. 57-3, App'x A3 , at pp. A-1 to A-2.) Therefore, Plaintiff filed the complaint in this case. (Dkt. No. 1, Compl.) Defendants then moved to compel arbitration which the Court granted and the matter was returned to FINRA. (Dkt. No. 57-3, App'x A at pp. A-2 to A-3.)

at Pages 8 - 9  of the December 2021 SDCA Order 

You know, it's tough not to appreciate Cristo's anger because it truly seems like FINRA sort of sent him on a wild goose chase. After all, in 2016 an FINRA Investigator (that's an employee in FINRA's regulatory organization -- in contradistinction to its arbitration forum) told Cristo that his claims were "ineligible for FINRA arbitration . . . and directed him to a court . . ."  Whatever happened to FINRA's oft-voiced admonition that it never, ever gives "legal advice?" Similarly, if FINRA's employee closed the door to its arbitration forum and sent Cristo to the courthouse, how the hell did the court then wind up sending the whole shebang back to FINRA arbitration? One can only imagine (and appreciate, and respect) the depths of Cristo's fury with FINRA and its runaround. As Cristo apparently put things:

Based on this history, Plaintiff claims that FINRA entrapped him because even though the panel ruled that his claims were eligible for arbitration, the FINRA investigator initially determined that his claims were not eligible and directed him to file his claims in a court of competent jurisdiction. (Dkt. No. 57-3, App'x A at pp. A-2 to A3.) He also alleges Defendants were complicit because even though they knew his claims were ineligible, they still moved to compel arbitration without informing the Court of the eligibility issue. (Id.) Additionally, Plaintiff argues that the panel failed to comply with the Court's order compelling arbitration by failing to first, as a threshold issue, determine whether the claims are eligible under Rule 12206(a). (Dkt. No. 57-1 at 25; Dkt. No. 57-3, App'x A at pp. A64 to A67.) Instead, the panel waited two years and merely adopted Defendants' argument that the claims were eligible under Rule 12206(c), not Rule 12206(a); therefore, he maintains that the panel has not yet ruled on eligibility under Rule 12206(a). (Dkt. No. 57-3, App'x A at pp. A-65 to A-66.) 

at Page 10  of the December 2021 SDCA Order

Although Plaintiff Cristo argued that there were eight reasons demonstrating that the FINRA Arbitration Award had been procured by corruption, fraud, or undue means, SDCA determined that:

[P]laintiff has not demonstrated that the arbitration award was procured by fraud, undue means or corruption as contemplated by governed law and merely challenges the procedural and substantive rulings of the arbitration panel. Specifically, all issues were known to Plaintiff and raised during the arbitration, and he is simply re-litigating issues raised before the arbitrators. Under the FAA, the Court is barred from conducting a plenary review of the arbitrators' decision. . . .

at Pages 7 - 8  of the December 2021 SDCA Order 

If you haven't felt Cristo's pain at this point in the proceedings, let me try and offer some stinging perspective. A FINRA regulatory investigator purportedly told Cristo that his claims against the various Schwab parties were ineligible for FINRA arbitration and directed his grievances to a court. Notwithstanding, the FINRA regulatory employee's conclusion, SDCA sends Cristo and the Schwab parties back to FINRA arbitration, where, go figure, an arbitration is conducted despite the FINRA investigator's determination that Cristo's claims were ineligible for arbitration. All of which leads to this mind-boggling explanation:

[L]astly, because the panel determined that Plaintiff's claims were eligible for arbitration, it could not grant Plaintiff's motion to dismiss based on eligibility, even if it was unopposed. 

Plaintiff's argument relies on the idea that a FINRA representative's advice to him binds FINRA and Defendants as to preclude them from seeking arbitration or avoiding the six-year time limit provided in FINRA Rule 12206. Plaintiff does not offer any case to support this proposition and the Court has not found any authority in support of this argument. As such, Defendants were entitled to raise FINRA Rule 12206(c) before the arbitration panel and the arbitrator's decision to rely upon it does not evidence corruption, fraud, or undue means. 

The Court recognizes Plaintiff's dissatisfaction with the panel's eligibility rulings; however, the Court may not second-guess the panel's interpretation of FINRA Rule 12206(a), even if erroneous.. . .

at Page 11 of the December 2021 SDCA Order

Umm . . . what?  As in WTF?? 

A FINRA investigator tells Cristo that his claims are ineligible for arbitration, but a federal court sends his case back to the FINRA arbitration forum, where a FINRA Arbitration Panel finds his case is eligible for arbitration, and based upon that eligibility, the Panel denies Cristo's Motion to Dismiss because the arbitrators won't dismiss a case before them despite the fact that a FINRA regulatory employee told Cristo that his case was ineligible for arbitration, and, in the end, the arbitrators deem Cristo's case ineligible for arbitration because it's more than six-years old. Seriously???

Yeah, that's one helluva a mess. Worse, we're left to wonder just how a FINRA Arbitration Panel gets to decide, in the first place, whether an ineligible claim (according to FINRA's regulatory employee who voiced that determination without any arbitration hearing or formal guidance from an arbitrator) is ineligible for arbitration because it's too old, even though it would have supposedly still been ineligible if it was brought on a timely basisAnd while you puzzlin' over all of that, just keep in mind that SDCA denied Cristo's motion to vacate the FINRA Arbitration Award because he failed to demonstrate for each of his eight cited reasons, that the FINRA Arbitration Award was procured by fraud, corruption, or undue means.

B. Section 10(a)(2) - Evident Partiality or Corruption in the Arbitrators

In arguing that he had been victimized by partiality/corruption, Cristo argued in part that:

[1)] in 2019, FINRA "staff" treated Plaintiff more harshly than Defendants due to deficiencies in their respective pleadings, (Dkt. No. 57-1 at 23-24; Dkt. No. 57-3, App'x A at pp. A-50 to A52); 2) on November 19, 2020, FINRA "staff" showed favoritism towards Defendants by informing them that Plaintiff had filed a separate federal court lawsuit attempting to enjoin the pending arbitration, (Dkt. No. 57-1 at 24; Dkt. No. 57-3, App'x A at pp. A-53 to A-55); 3) FINRA's procedure in appointing the original panel, its failure to respond to his objection to each of the arbitrators proposed by FINRA because they cannot rule on constitutional issues and the panel's selection solely from Defendants' ranking list show evident partiality in favor of Defendants, . . .

at Pages 19 - 20 of the December 2021 SDCA Order

In rejecting Cristo's allegations of partiality/corruption by the arbitrators, SDCS concluded that:

Here, Plaintiff appears to raise an actual bias claim. As noted by Defendants, the first three allegations do not concern any actual bias by an arbitrator but conduct by FINRA administrative staff; therefore, they cannot support a vacatur under section 10(a)(b) which requires bias in the arbitrators that affects the award. The last issue again raises eligibility of his claims which the Court has already concluded is not subject to vacatur. Moreover, Plaintiff has failed to provide specific facts demonstrating any improper motive by any of the arbitrators on the panel. Accordingly, Plaintiff provides no basis for vacating the award under § 10(a)(2). 

at Page 21 of the December 2021 SDCA Order

C. Section 10(a)(3) - Arbitrators Guilty of Misconduct by Refusing to Postpone the Hearing or Refusing to Hear Evidence Material to the Controversy or Other Misbehavior Which Prejudices Rights of a Party

As I have often quipped in various articles, if you pile enough bricks together you eventually get a wall -- in that regard, I'm pretty much persuaded that there were more than enough bricks stacked top each other based upon some dubious advice from FINRA's regulatory arm and more than a few instances of disconcerting conduct by FINRA arbitration staff and some oddly hostile actions by the arbitrators. In my opinion, a disinterested third-party might experience discomfort and could be persuaded by Cristo's finger pointing at FINRA and its emanations. My opinion here is meaningless, and SDCA was not so discomforted by FINRA's conduct. I accept the court's finding but I'm not quite sure that I'm persuaded by its explanations. Notably, consider this bit of "yes but" :

Next, Plaintiff argues that the panel assessed 100% of the pre-hearing conference costs to him because he refused to accept the panel. (Dkt. No. 57-3, App'x A at pp. A-86 to A-87.) Defendants argue that the panel has discretion to assess fees and does not have to provide reasons. (Dkt. No. 58 at 23.) 

Without providing reasons, the panel assessed all pre-hearing conference costs against Plaintiff. (Dkt. No. 51-4, Garrett Decl., Ex. I at 343.) The panel does not have to provide reasons for its decisions and courts must presume it addressed it properly. See A.G. Edwards, 967 F.2d at 1403. Plaintiff appears to disagree with the fairness of the panel's decision to impose pre-hearing conference fees solely on him, yet Plaintiff does not explain why the panel's assessment of fees constitutes misbehavior. See 9 U.S.C. § 10(a)(3). Therefore, Plaintiff has not demonstrated reasons sufficient to vacate the assessment of pre-hearing conference fees imposed on him. 

at Page 23 of the December 2021 SDCA Order

So lemme see if I got his: The FINRA Arbitration Panel does not have to provide reasons for its decisions, courts will "presume" that fairness is extant in FINRA arbitrations, and the fact that a FINRA regulator told a public customer, who is forced to arbitrate his disputes against FINRA member firms, that his disputes were not eligible for arbitration when, in fact, a FINRA Arbitration Panel exercised jurisdiction over those disputes and deemed them ineligible for arbitration despite having to deem them eligible for arbitration in order to be deemed ineligible, none of that actually matters in a court of law because . . . because what exactly?

D. Section 10(a)(4) - Arbitrators Exceeded their Powers

Suffice it to say that SDCA largely reiterated much of its findings above and for the umpteenth time, found that Cristo had failed to carry his burden of proof per the FINRA arbitrators exceeding their powers. Notwithstanding the Court's fatigue, it's hard to not come away somewhat aghast upon reading this:

On the sixth claim, Plaintiff argues that Chair Rosen7 admitted he was not a constitutional lawyer, yet ruled it was authorized to rule that the claim was eligible for FINRA arbitration. (Dkt. No. 57-1 at 29; Dkt. No. 57-3, App'x A at A-129 to A-131.) He claims that the "panel ruled on a question of constitutionality during the prehearing conference, while openly admitting it is not qualified to rule on constitutional issues." (Dkt. No. 57-3, App'x A at A-129.) It is not clear what Plaintiff is alleging and how a ruling on eligibility involves a question of constitutional law. Therefore, the Court concludes Plaintiff's sixth issue is without merit.
= = =
Footnote 7: In his reply, Plaintiff, for the first time, argues that Chair Rosen's diminished intellectual capacity either due to "dementia, gross negligence of crippling incompetence" caused him to be incompetent to arbitrate the dispute. (Dkt. No. 59 at 6, 7.) The Court declines to consider Plaintiff's new argument raised for the first time in reply. See Zamani v. Carnes, 491 F.3d 990, 997 (9th Cir. 2007) (citing Koerner v. Grigas, 328 F.3d 1039, 1048 (9th Cir. 2003)).

at Pages 26 - 27 of the December 2021 SDCA Order

Accordingly, SDCA granted Defendants Motion to Confirm the FINRA Arbitration Award and denied Plaintiff's Motion to Vacate the FINRA Arbitration Award. 


Finally, but by no means "last but not least," I feel invited by the facts in Cristo to reiterate my often voiced complaint (bordering on derision) with this inappropriate preamble that is inserted without consent into each and every FINRA Arbitration Award, as set forth in Cristo:

Awards are rendered by independent arbitrators who are chosen by the parties to issue final, binding decisions. FINRA makes available an arbitration forum-pursuant to rules approved by the SEC-but has no part in deciding the award.

Is Cristo done -- will there be further appeals? Will there be a lawsuit against FINRA citing its investigator's advice? Who knows. Of course, should FINRA find itself in court as a named Defendant contra to Cristo, I'm wondering whether there could be fertile ground, somewhere, for raising the Doctrine of Invited Error or the Doctrine of Judicial Estoppel.