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Citigroup Wins Stale FINRA Customer Suitability Arbitration
January 4, 2017
Time and tide wait for no man. When it comes to arbitrating a dispute at the Financial Industry Regulatory Authority, said time and tide have a shelf life of six years. As demonstrated by a recent public customer arbitration against Citigroup Global Markets, Inc., one more trite expression also comes into play: He who hesitates is lost.
Case In Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in May 2016, Claimants asserted common law fraud; breach of fiduciary duty; negligent failure to supervise; and negligence in connection with an alleged over-concentration of assets in unspecified equities. Claimants sought between $500,000 and $1 million in compensatory damages plus interest, costs, expenses and disbursements, including expert witness fees. In the Matter of the FINRA Arbitration Between James C. Stewart, Individually and on behalf of His IRA and as Trustee of The James C. Stewart Rev Liv Trust U/A/D 09/22/86, and as Trustee of the F. Stewart Rev Liv Trust U/A/D 01/23/91, Claimants, vs. Citigroup Global Markets, Inc., Respondents (FINRA Arbitration 16-01301, December 27, 2016).
Respondent Citigroup generally denied the allegations and asserted various affirmative defenses.
Motion to Dismiss
Respondent Citigroup filed a Motion to Dismiss asserting, in pertinent part, that Claimants's claims were ineligible pursuant to six-year standard set forth in Rule 12206 of the FINRA Code of Arbitration Procedure. Respondent asserted that Claimants'
- purchase and sale of the investments at issue; and
- November 2008 closing of the affected accounts
In opposition to Respondent's Motion to Dismiss, Claimants asserted that the events at issue took place within the prior six years and that, notwithstanding, FINRA Rule 12206 provides for equitable tolling at the discretion of a FINRA Arbitration Panel. Claimants argued that any occurrence or event triggering the six-year eligibility need not be measured solely from the date of the initial purchase of the investment; and, further, that the Rule did not impose a particular "set, bright-line event" that would be dispositive of eligibility. Finally, in citing the basis for the Panel to toll the imposition of any six-year eligibility period, Claimants asserted that Respondent had "failed to satisfy its duty to warn Claimants of the fact that their financial advisor was terminated which resulted in continuing fraud."
SIDE BAR: FINRA CODE OF ARBITRATION PROCEDURE FOR CUSTOMER DISPUTES Rule 12206: Time Limits(a) Time Limitation on Submission of ClaimsNo claim shall be eligible for submission to arbitration under the Code where six years have elapsed from the occurrence or event giving rise to the claim. The panel will resolve any questions regarding the eligibility of a claim under this rule.(b) Dismissal under Rule
Dismissal of a claim under this rule does not prohibit a party from pursuing the claim in court. By filing a motion to dismiss a claim under this rule, the moving party agrees that if the panel dismisses a claim under this rule, the non-moving party may withdraw any remaining related claims without prejudice and may pursue all of the claims in court.(1) Motions under this rule must be made in writing, and must be filed separately from the answer, and only after the answer is filed.(2) Unless the parties agree or the panel determines otherwise, parties must serve motions under this rule at least 90 days before a scheduled hearing, and parties have 30 days to respond to the motion. Moving parties may reply to responses to motions. Any such reply must be made within 5 days of receipt of a response.(3) Motions under this rule will be decided by the full panel.(4) The panel may not grant a motion under this rule unless an in-person or telephonic prehearing conference on the motion is held or waived by the parties. Prehearing conferences to consider motions under this rule will be recorded as set forth in Rule 12606.(5) If the panel grants a motion under this rule (in whole or part), the decision must be unanimous, and must be accompanied by a written explanation.(6) If the panel denies a motion under this rule, a party may not re-file the denied motion, unless specifically permitted by panel order.(7) If the party moves to dismiss on multiple grounds including eligibility, the panel must decide eligibility first.
- If the panel grants the motion to dismiss the case on eligibility grounds on all claims, it shall not rule on any other grounds for the motion to dismiss.
- If the panel grants the motion to dismiss on eligibility grounds on some, but not all claims, and the party against whom the motion was granted elects to move the case to court, the panel shall not rule on any other ground for dismissal for 15 days from the date of service of the panel's decision to grant the motion to dismiss on eligibility grounds.
- If a panel dismisses any claim on eligibility grounds, the panel must record the dismissal on eligibility grounds on the face of its order and any subsequent award the panel may issue.
- If the panel denies the motion to dismiss on eligibility grounds, it shall rule on the other bases for the motion to dismiss the remaining claims in accordance with the procedures set forth in Rule 12504(a).
(8) If the panel denies a motion under this rule, the panel must assess forum fees associated with hearings on the motion against the moving party.(9) If the panel deems frivolous a motion filed under this rule, the panel must also award reasonable costs and attorneys' fees to any party that opposed the motion.(10) The panel also may issue other sanctions under Rule 12212 if it determines that a party filed a motion under this rule in bad faith.
(c) Effect of Rule on Time Limits for Filing Claim in CourtThe rule does not extend applicable statutes of limitations; nor shall the six-year time limit on the submission of claims apply to any claim that is directed to arbitration by a court of competent jurisdiction upon request of a member or associated person. However, when a claimant files a statement of claim in arbitration, any time limits for the filing of the claim in court will be tolled while FINRA retains jurisdiction of the claim.(d) Effect of Filing a Claim in Court on Time Limits for Filing in ArbitrationIf a party submits a claim to a court of competent jurisdiction, the six-year time limitation will not run while the court retains jurisdiction of the claim matter.
Following a December 8, 2016, pre-hearing conference on the Motion to Dismiss, the FINRA Arbitration Panel granted the motion and offered this rationale in the FINRA Arbitration Decision:
[T]he claims set forth in Claimants' Statement of Claim amount to no more than a claim of unsuitability, which occurred at the time of purchase, more than six years ago. The Panel did not find that there was any action or inaction by either Claimants' financial advisor or Respondent following the purchase that would constitute an event or occurrence to bring this case within the six-year eligibility of FINRA Rule 12206. Therefore, Claimants' claims are dismissed.Respondent's Motion to Dismiss pursuant to Rule 12206 is granted by the Panel without prejudice to any right Claimants have to file in court; Claimants are not prohibited from pursuing their claims in a court pursuant to Rule 12206(b) of the Code.
Bill Singer's Comment
Time and tide wait for no man.
In Stewart v. Citigroup we are confronted with the seemingly mortal blow of Claimants having closed their accounts in November 2008, a date about 6 1/2 years before the May 2016 filing of the FINRA Arbitration Statement of Claim. Although it is possible to imagine a case where arbitrators might fudge the imposition of the start of the six-year countdown under Rule 12206, it's sort of tough to get around the finality of the endpoint date on which the subject account(s) is closed.
There may be factors favoring the tolling of an eligibility rule because of ongoing fraud, but prevailing with such a petition may prove daunting when the guts of your case was "suitability" and the subject securities were sold and the subject brokerage account was closed more than six years before a claim was filed. At some point, a reasonable investor either knows or should know or should be on notice that a given investment or investments were unsuitable. It would seem that after such questioned investments have been sold and the brokerage account at issue closed that it should not take over six years to discern that the investor was defrauded. I am NOT saying that an argument for tolling can never be successfully made given the preceding set of facts, but I am saying that a very compelling set of facts is necessary. For the Stewart v. Citigroup arbitrators, Claimants failed to carry their burden of showing that tolling was appropriate.
ALSO READ:
'Occurrence or Event Giving Rise to a Claim'"(PIABA Bar Journal, Vol. 20, No. 1, 2013, by Philip M. Aidikoff, Robert A. Uhl, Ryan K. Bakhtiari, Katrina M. Boice, Steven B. Caruso):
Page 38 of PIABA ArticleVII. CONCLUSIONFor over twenty years, the courts and FINRA have been telling the brokerage industry that the purchase date is not, as a matter of law, the "occurrence or event" that determines the eligibility of claims under FINRA Rule 12206 and its predecessors. Rather, post-Howsam the "occurrence or event" giving rise to a claim is a factual inquiry left to the arbitrators and the purchase date is often not the trigger for the six-year time limit.
"Triggering and Tolling:
Application Of The FINRA Eligibility Rule From A Claimant's Perspective " (AboutSecuritiesLaw.com; by Jenice L. Malecki, Esq., Malecki Law; Adam M. Nicolazzo, Esq.and Robert M. Van De Veire, Esq.) [Ed: footnotes omitted]:
Pages 4 - 5 of AboutSecuritiesLaw.com ArticleIn many FINRA customer arbitrations, there are underlying elements of fraud and instances of an ensuing "cover up," or ongoing omissions in supervision and/or disclosure. In these cases, the triggering "event or occurrence" rightfully should be when the victim actually discovered that they had been harmed. Investors are frequently recommended unsuitable investment products, which the respective investor does not appreciate were unsuitable until the previously latent, hidden risks come to bear and manifest themselves to the investor in the form of significant losses or illiquidity.To hold that the six year clock does not begin to run until the customer becomes aware that they had been harmed is consistent with previous holdings going back as far as 20 years by the NASD's own Director of Arbitration. The FINRA Director of Arbitration has denied motions to dismiss in cases under the former eligibility rule (Section 15 of the NASD Code of Arbitration) on various occasions, holding that "[I]t has been determined that the purchase date is not the event of occurrence that gave rise to this dispute. Also, Section 15 does not refer specifically to the purchase date as the time that the six year limitation begins to run. Therefore, it is equally appropriate that the discovery by the claimant be treated as the occurrence or event giving rise to the dispute." Order of Director of Arbitration (July 26, 1991).