UBS Employee Padussis Wins Best Left Unsaid Arbitration

September 25, 2017

Today's featured intra-industry FINRA arbitration involves this one guy, who's the Claimant, suing this other guy, who's the Respondent, and the Respondent wants the arbitration stayed because UBS is appealing something involving the Claimant but the FINRA arbitration goes ahead and the Claimant fellow wins a whopping award against the Respondent fellow. There must have been a lot of bad blood between the two parties because the Claimant wanted the Respondent to be ordered to attend a business ethics course.


By the way, did you watch that sporting event on Sunday in which that one team was losing against that other team and, wow, what a stunning comeback at the end of the game!

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in March 2015, associated person Claimant Padussis asserted breach of contract; unjust enrichment; interference with prospective economic relationships; and intentional infliction of emotional distress. In addition to interest, fees, and costs, Claimant sought $3 million in compensatory damages and $1 million in punitive damages. The FINRA Arbitration Decision states that Claimant sought orders that associated person Respondent Horn:

return Claimant's book of business; order Respondent to attend a three credit university business ethics course; order Respondent to account for the identity of the accounts and all commission earnings or other remuneration from those accounts . . .

In the Matter of the FINRA Arbitration Between Gary T. Padussis, Claimant, vs. Richard Dale Horn, Respondent (FINRA Arbitration 15-00543, September 13, 2017).

Respondent Horn generally denied the allegations and asserted various affirmative defenses.

4th Circuit Appeal

The FINRA Arbitration Decision asserts that in  October 2016, Respondent Horn moved to stay the FINRA arbitration pending:

By correspondence dated October 7, 2016, Respondent filed a Motion to Stay this
arbitration proceeding pending a final decision of the 4th Circuit Court of Appeals on the issues on appeal in that court in UBS Financial Services, Inc. vs. Padussis, 4th Cir.
Record No. 15-2148 and FINRA Case No. 13-01661. At the hearing on November 2,
2016 the parties agreed to stay the arbitration. The case was reactivated in January
2017.

What was at issue in UBS v. Padussis?
Dunno because there's no explanation in the FINRA Arbitration Decision.

What does UBS v. Padussis have to do with Padussis v. Horn?
Dunno because there's no explanation in the FINRA Arbitration Decision.

What's with that "FINRA Case No. 13-01661"?
Dunno because there's no explanation in the FINRA Arbitration Decision.

What does it mean that the Padussis v. Horn FINRA Arbitration was "reactivated"?
Dunno because there's no explanation in the FINRA Arbitration Decision.

Who is Respondent Horn as he relates to Claimant Padussis?
Dunno because there's no explanation in the FINRA Arbitration Decision.

Motion to Dismiss

In March 2017, Respondent Horn moved to dismiss the arbitration pursuant to FINRA Rule 13504(a)(6) (res judicata), to which Claimant objected. The FINRA Hearing Panel denied the motion without prejudice. After Claimant's case-in-chief, Respondent again moved to dismiss, and the Panel again denied the motion.

SIDE BAR: FINRA Code of Arbitration Procedure for Industry Disputes Rule 13504: Motions to Dismiss

(a) Motions to Dismiss Prior to Conclusion of Case in Chief
. . . .
(6) The panel cannot act upon a motion to dismiss a party or claim under paragraph
(a) of this rule, unless the panel determines that:
(A) the non-moving party previously released the claim(s) in dispute by a signed settlement agreement and/or written release;
(B) the moving party was not associated with the account(s), security(ies), or conduct at issue; or
(C) The non-moving party previously brought a claim regarding the same dispute against the same party that was fully and finally adjudicated on the merits and memorialized in an order, judgment, award, or decision.

By stipulation, the parties agreed that the FINRA Arbitration Panel shall not  award attorneys' fees or interest but may award costs as it deems appropriate.

Award

The FINRA Arbitration Panel found Respondent Horn liable and ordered him to pay to Claimant Padussis $495,000.00 in compensatory damages.

Bill Singer's Comment

It would have been nice to have had some content and context concerning the UBS Financial Services, Inc. vs. Padussis case referenced in the FINRA Arbitration Decision. I mean, for godsakes, if you're going to mention a pending appeal in federal court, how about you provide some sense of what it's about or why it was considered material enough by the Respondent to request a stay. At least include a lousy footnote explaining the relevance (if any) of a cited pending federal appeal involving one of the two parties in the live FINRA arbitration. Apparently, Respondent Horn thought the pending federal appeal was relevant enough that he requested a stay of his FINRA arbitration with Claimant Padussis. Similarly, the citations to UBS v. Padussis includes a reference to an unexplained FINRA case number (the citation does not disclose whether it's a regulatory case or an arbitration). They say that some things are better left unsaid but that's just not the case with this FINRA intra-industry arbitration.


Fourth Circuit Appeal

As set forth in pertinent part in  the "Syllabus" of UBS Financial Servise, Inc., Petitioner/Appellant, v. Gary T. Padussis, Respondent/Appellee (Opinion, United States Court of Appeals, Fourth Circuit, No. 15-2148 / November 22, 2016):

Appellant UBS Financial Services ("UBSFS") challenges an arbitration award that, in practical effect, granted Gary Padussis over $900,000 in compensatory damages. The district court refused to disturb the award, and we now affirm its judgment. Any other result would open arbitration proceedings to a host of challenges over the very type of subsidiary questions that Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002), indicated should be left to the discretion of the arbitral body.

Gee . . . who knew? Claimant Padussis apparently won some $900,000 in a FINRA arbitration against UBS. Hmmm . . . UBS? What the hell does UBS have to do with Padussis and/or Horn? There's no reference to UBS in Padussis v. Horn other than the citation to the pending federal appeal. Why did Respondent Horn think that the pending UBS federal appeal required a stay of his FINRA arbitration? 

If you think that I'm overstating the magnitude of the uncertainty about the interplay of the Padussis v. Horn FINRA arbitration with the UBS v. Padussis federal appeal, go ahead and read the FINRA Arbitration Decision yourself and see if you can discern any content and/or context as to the nature of the underlying issues in that appeal.

A Little Bit of Background

Not explained in the FINRA Arbitration Decision but set forth in the Fourth Circuit Opinion is the following background:

Gary Padussis worked for UBSFS as a financial advisor from 2009 through 2013. When he joined UBSFS, Padussis brought with him a team of three financial advisors as well as an established business clientele. As part of his initial compensation, UBSFS lent Padussis over $2.7 million. Padussis signed a promissory note, which provided that any remaining balance would immediately come due if Padussis ended his employment with UBSFS. Padussis also executed a Letter of Understanding describing his compensation and a Financial Advisor Team Agreement governing the operations of his team. All the agreements provided that any dispute would be subject to arbitration before the Financial Industry Regulatory Authority ("FINRA").

Padussis resigned from UBSFS in 2013, complaining that UBSFS had ruined his team of financial advisors and cost him valuable clients. Upon his resignation, Padussis owed UBSFS the remaining balance on the promissory note, nearly $1.6 million. When he failed to pay that amount, UBSFS initiated arbitration on June 3, 2013. Padussis responded with counterclaims on July 31, 2013, alleging that UBSFS's interference with his team was both tortious and a breach of contractual duties.

The Fourth Circuit Opinion offers this further background about the source of UBS's federal appeal of the FINRA arbitration with Padusiss:

On October 27, 2014, the panel issued its final decision. The panel awarded UBSFS $1,683,262 and awarded Padussis $932,887. The decision denied "[a]ny and all relief not specifically addressed." J.A. 24. Pursuant to the FINRA Code, the decision did not explain the panel's reasoning.

UBSFS was altogether displeased with this outcome. Padussis insisted that due to a statutory lien and the prospect of bankruptcy, he would be financially unable to pay the balance of the note, which left UBSFS in the position of owing him over $900,000 for the damage he claimed it had done to his business. UBSFS then filed this action to vacate the arbitral award. It argued that the arbitrators were not selected in accordance with the parties' agreement because UBSFS had not provided its preferences to FINRA. In the alternative, UBSFS sought to have the district court offset the awards, citing Padussis's admission that he was unlikely to be able to pay his portion of the judgment. The district court confirmed the arbitration award in its entirety and declined to impose an offset. UBSFS now appeals.

Offset

T
he Fourth Circuit Opinion addressed the interesting legal issue of "offset" as raised by UBS:

UBSFS next asks this court to impose an offset on the arbitration award. As discussed above, the arbitration panel here found that (1) Padussis owed UBSFS $1.68 million on the promissory note (which Padussis contends he would be unable to pay) and that (2) UBSFS was liable to Padussis for $932,000 based on his various employment claims. Offsetting the damages granted to Padussis from the $1.68 million would result in a net award to UBSFS of about $750,000, entirely cancelling out Padussis's award and freeing UBSFS of the need to cut a check. This court has previously recognized that "an offset of arbitration awards might constitute a modification of the award in some circumstances." Nat'l Risk Underwriters, Inc. v. Occidental Fire & Cas. Co. of N.C., 931 F.2d 1015, 1017 (4th Cir. 1991). While such circumstances did not exist in that case, they do exist here. This arbitration award expressly denied "[a]ny and all relief not specifically addressed" by the award, and the award did not mention an offset. J.A. 24. Thus, applying an offset to this award would be a modification of the award.

Although FINRA's arbitration rules now provide for a presumption of offset for awards rendered after October 24, 2016, such was not the rule during the time of the UBS v. Padussis arbitration. See, FINRA Arbitration Rule 12904: Awards

SIDE BAR: Arbitration Award Offsets / SEC Approves Amendments to the Codes of Arbitration Procedure Regarding Award Offsets / Effective Date: October 24, 2016  (FINRA Regulatory Notice 16-36, September 2016).

Sometimes arbitrators order opposing parties in a case to pay each other monetary damages. Prior to the amendments, FINRA Rules 12904 and 13904 were silent as to award offsets. Accordingly, when arbitrators order opposing parties in a case to make payments to each other, but do not specify whether the party that owes the higher amount must pay the net difference, the lack of clarity has resulted in parties asking arbitrators to revise an award after a case has closed or in post-award litigation. For example, arbitrators may award damages to a firm because an associated person failed to pay money owed on a promissory note and award a lesser amount to the associated person on a counterclaim. If the arbitrators do not specify that the awards should be offset against each other, the firm may be required to pay the counterclaim even if the associated person refuses or is unable to pay the larger amount. The offset issue could also arise in customer cases, such as those involving margin account disputes.

To address the lack of clarity in the rules regarding award offsets, FINRA amended Rules 12904(j) and 13904(j) to provide that, absent specification to the contrary, when arbitrators order opposing parties to make payments to one another, the monetary awards shall offset, and the party assessed the larger amount shall pay the net difference. The amendments streamline the payment of arbitration awards and mitigate the risk of failure to pay by an opposing party that may arise when multiple parties in a dispute are found to owe nonequivalent awards simultaneously.

The Fourth Circuit was not sympathetic to UBS's offset argument and admonished the firm that it should have raised the issue with the FINRA arbitrators:

UBSFS contends that an offset "would not change the arbitrators' valuation decision" but would provide a "simple, fair" result, which must have been the intent of the arbitrators. Appellant's Reply Br. at 25-26. An offset, though, changes the practical effect of the award. In a similar situation, a FINRA arbitration panel heard arguments for and against an offset and declined to provide one. UBS Fin. Servs., Inc. v. Mann, No. 14-10621, 2014 WL 1746249, at *3 (E.D. Mich. Apr. 30, 2014). We cannot know what the arbitration panel in this case would have ruled if UBSFS had asked it to provide an offset. That decision, though, was for the arbitration panel, and UBSFS should have asked the panel to make it. For whatever reason, it did not do so, and the question is simply not one for the courts to answer.

UBSFS also argues that regardless of the arbitrators' actual intent, we should recognize a presumption favoring an offset. However, imposing such a presumption would place a judicial gloss on the arbitration award. Such a gloss is inappropriate here, where the award expressly limits itself to the relief specifically addressed and was rendered pursuant to a detailed set of rules. As the Seventh Circuit has noted, the "arbitrator's failure to mention offsets in his ruling means that no offset was granted." Int'l Union of Operating Eng'rs, Local No. 841 v. Murphy Co., 82 F.3d 185, 190 (7th Cir. 1996).2

V.

When all is said and done, UBSFS plainly agreed to a process and then declined to abide by the result of that process. It agreed to arbitration; the dispute was within the scope of that agreement; and the rules by which the arbitration would proceed were openly declared and followed. The arbitration here spanned eighteen hearing sessions over nine separate days. We can find no basis for overturning the arbitral decision. The district court's denial of UBSFS's motion to vacate the award is therefore

Missing In Action

None of the information that I have provided about the FINRA arbitration between UBS and Padussis or the Fourth Circuit appeal by UBS is set forth in the FINRA Arbitration Decision. For those of you who don't feel that the FINRA Arbitration Decision in Padussis v. Horn needed to include such a reference, okay, I will respect your position but we will continue to profoundly disagree on this issue. Finally, to those of you who espouse the position that Padussis v. Horn satisfies the minimal needs of content and context and that I'm just being a pain in the ass with my critique, answer one and only one question for me -- and, please, click on the link below for the Padussis v. Horn FINRA Arbitration. Who the hell is Respondent Horn, where did he work, and what exactly, if anything, did he do to Padussis. Now, no, you don't get to infer or imply. I want you to cite for me only language in FINRA's Arbitration Decision. What's that? Speak up! I can't hear you -- you're mumbling  or is that grumbling?

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