UPDATE: No Rationale And No Explanation In FINRA Arbitration Decision

July 20, 2020

FINRA has a mandatory system of customer arbitration. Many dispute my contention. They say that it's not mandatory because public customers are not forced to arbitrate their disputes against stockbrokers and brokerage firms. Absolutely not the case, some argue. Arbitration is not mandatory, they insist. Arbitration is a private contract, they proclaim. It's freely bargained for, they assert. Really? You go try and open a brokerage account with any FINRA member firm and tell me what happens when you cross out the so-called "voluntary" arbitration clause. In today's featured FINRA customer arbitration case, we consider some of the troubling rules by which this forum operates.

Case In Point

In a FINRA Arbitration Statement of Claim filed in December 2017, and as amended, Claimants asserted breaches of contract, of duty, and of fiduciary duty; professional negligence; violation of the Securities Exchange Act of 1934 and SEC Rule 10b-5; violation of Maryland Securities Act;negligent supervision; misrepresentation and omission of facts; and fraud. Claimants initially requested at least $20 million in compensatory damages and $30 million in punitive damages plus costs, attorneys' fees, and interest. In the Matter of the Arbitration Between Gordon Boone, Estate of Gloria Levin, Stanley Friedler, Gail Friedler, Richard Friedler, Philip Konits, Cindy Konits, Paul Levin, Michael Stern, Wendy Stern, Milan Wister, Amy Wister , Claimants, v. Stifel, Nicolaus & Co., Inc., Kenneth David Blumberg, Coleman Joseph Devlin, Michael Francis Molloy, and Stifel Financial Corp., Respondents (FINRA Arbitration Decision, 17-03299 )

https://www.finra.org/sites/default/files/aao_documents/17-03299.pdf

One, singular sensation?

The FINRA Arbitration Decision asserts that:

At the close of the hearing, Claimant requested $1,524,176.00 in compensatory damages.

SIDE BAR: I'm not quite sure what to make of the Decision's reference to the singular "Claimant." Either one of the Claimants had reduced his/her request for compensatory damages to $1,524,176, or, in the alternative, the Decision has a typo in which "Claimant" should have been published as "Claimants."

Getting Stiffed by One Stifel

Respondent Stifel Financial Corp. is not a member of FINRA; did not voluntarily submit to arbitration; and, accordingly, the FINRA Arbitration Panel made no determination with respect to Claimants' claims against Respondent Stifel Financial Corp. The remaining Respondents (Stifel, Nicolaus & Co., Blumberg, Devlin, and Molloy) generally denied the allegations and asserted various affirmative defenses.

Severance

After Claimants withdrew their claims against Respondent Malloy, they moved to sever from the arbitration the claims of Claimants Michael and Wendy Stern, Levin, and the Estate. Respondents opposed the motion. The Panel granted the motion and the severed Claimants were ordered to filed an Amended Statement of Claim, and the other Claimants were ordered to file a separate arbitration.

Explained Decision

As set forth in the FINRA Arbitration Decision:

[C]laimants also requested that upon conclusion of the hearing, the Panel issue an opinion providing the reasons for its award.

In the Statement of Answer, The Stifel Respondents requested that Claimants' Statement of Claim be denied with prejudice and that the cost of the arbitration be assessed against Claimants. The Stifel Respondents objected to Claimants' request for an explained decision

SIDE BAR: FINRA Code of Arbitration Procedure for Customer Disputes Rule 12904: Awards [Ed: highlighting added]:

(a) All awards shall be in writing and signed by a majority of the arbitrators or as required by applicable law. Such awards may be entered as a judgment in any court of competent jurisdiction.

(b) Unless the applicable law directs otherwise, all awards rendered under the Code are final and are not subject to review or appeal.

(c) The Director will serve the award on each party, or the representative of the party.

(d) The panel shall endeavor to render an award within 30 business days from the date the record is closed.

(e) The award shall contain the following:

(1) The names of the parties;
(2) The name of the parties' representatives, if any;
(3) An acknowledgement by the arbitrators that they have each read the pleadings and other materials filed by the parties;
(4) A summary of the issues, including the type(s) of any security or product, in controversy;
(5) The damages and other relief requested;
(6) The damages and other relief awarded;
(7) A statement of any other issues resolved;
(8) The allocation of forum fees and any other fees allocable by the panel;
(9) The names of the arbitrators;
(10) The dates the claim was filed and the award rendered;
(11) The number and dates of hearing sessions;
(12) The location of the hearings; and
(13) The signatures of the arbitrators.

(f) The award may contain a rationale underlying the award.

(g) Explained Decisions

(1) This paragraph (g) applies only when all parties jointly request an explained decision.
(2) An explained decision is a fact-based award stating the general reason(s) for the arbitrators' decision. Inclusion of legal authorities and damage calculations is not required.
(3) Parties must make any request for an explained decision no later than the time for the prehearing exchange of documents and witness lists under Rule 12514(d).
(4) The chairperson of the panel will be responsible for writing the explained decision.
(5) The chairperson will receive an additional honorarium of $400 for writing the explained decision, as required by this paragraph (g).
(6) This paragraph (g) will not apply to simplified cases decided without a hearing under Rule 12800 or to default cases conducted under Rule 12801.

(h) All awards shall be made publicly available.

(i) Fees and assessments imposed by the arbitrators under the Code shall be paid immediately upon the receipt of the award by the parties. Payment of such fees shall not be deemed ratification of the award by the parties.

(j) All monetary awards shall be paid within 30 days of receipt unless a motion to vacate has been filed with a court of competent jurisdiction. Absent specification to the contrary in the award, 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. An award shall bear interest from the date of the award:

(1) If not paid within 30 days of receipt;
(2) If the award is the subject of a motion to vacate which is denied; or
(3) As specified by the panel in the award.
Interest shall be assessed at the legal rate, if any, then prevailing in the state where the award was rendered, or at a rate set by the arbitrator(s).

Award

The FINRA Arbitration Panel rendered the following Award:

1. Respondent Stifel Nicolaus & Co., Inc., is liable for and shall pay to Claimants Michael Stern, Wendy Stern, Paul Levin, and Estate of Gloria Levin, the sum of $1,524,176.00 in compensatory damages.

2. Claimants' request for an explained decision is denied.

3. Respondent Kenneth David Blumberg's request for expungement of his CRD records is denied.

4. Any and all claims for relief not specifically addressed herein, including punitive damages, attorneys' fees and costs, are denied.

Bill Singer's Comment: Although the Claimants were awarded every penny of their requested compensatory damages, they were denied any fees and costs, and their request for punitive damages was denied -- why? We dunno. The Arbitrators ain't sayin'. This is the crap that FINRA releases to the public in the form of an arbitration decision? Seriously?

In my opinion the Panel's refusal to provide an "Explained Decision" as requested by the public customer Claimants (albeit in the form of a mere rationale) is disgraceful given the circumstances of this case. Pointedly, you have:

the severing of the case and
a denied request for punitive damages and
a denied request for attorneys' fees and costs and
a denied request for an expungement and
a Respondent that was deemed not subject to the forum's jurisdiction.

All of those bullet-points raise independent bases upon which to file an appeal of the FINRA Arbitration Decision pursuant to a Motion to Vacate. Admittedly, said bases are not uncommon and, standing separate and on their own, each does not present a necessarily compelling argument for vacatur; however, when viewed cumulatively, those issues could easily take on a more substantive dimension.

If all parties to a FINRA arbitration desire a given level of non-disclosure of facts and rationale, then so be it. I'm a free-market advocate and all for whatever is a bargain among equal parties (as long as it's legal). That being said, in today's featured arbitration, only the customers requested an Explained Decision and only the industry respondents opposed it. There was not joint request by all parties. Under FINRA's Rule, it takes two to tango -- and in the absence of all parties requesting an Explained Decision, the arbitrators still have the option under FINRA Rule 12904(f) to provide a rationale.

FINRA arbitration is a "private" means of alternative dispute resolution ("ADR") and, as such, the parties have every right to insist upon the confidentiality of certain facts. Notwithstanding such a tacit understanding, a mandatory arbitration forum, which FINRA's ADR forum is for both industry participants and public customers, must acknowledge something of an obligation to provide sufficient content and context in its decisions so as to provide intelligible guidance to those essentially trapped within the system. The adequacy of FINRA's arbitration decisions is most critical when the parties appeal to the courts in order to obtain confirmation or vacatur of an award. A less critical but important consideration is that a given forum's decisions provide important guidance to future litigants about how particular facts are weighed and the nature of monetary and non-monetary awards. Although veteran arbitration lawyers know that there is no precedential value from one arbitration award to another that does not negate the importance of presenting sufficient content and context.

In "Explained Arbitration Decisions / SEC Approves Amendments to Require Arbitrators to Provide an Explained Decision at Parties' Joint Request" (FINRA Regulatory Notice 09-16 / March 2009)
http://www.finra.org/sites/default/files/NoticeDocument/p118141.pdf, we learn the following in pertinent part [Ed: Footnotes omitted]:

Background & Discussion

FINRA is amending its Customer Code and Industry Code to require arbitrators to provide an explained decision at the parties' joint request. The absence of explanations in awards has been a common complaint of non-prevailing parties in FINRA's arbitration forum, especially customers and associated persons. The amendments are intended to address this complaint and increase investor confidence in the fairness of the arbitration process.

An explained decision is a fact-based award stating the general reasons for the arbitrators' decision. It does not need to include legal authorities and/or damage calculations. Normally, the arbitrators will be resolving the entire matter; thus, the explained decision will address all the claims asserted by the parties. However, the parties may request that an explained decision address only certain claims.

Parties will be required to submit any joint request for an explained decision no later than 20 days prior to the first scheduled hearing date.

The chairperson of the arbitration panel will write the explained decision and will receive an additional honorarium of $400. Once the decision is drafted, the other arbitrators will participate in completing the decision as provided in Rules 12904(a) and 13904(a). As with all other awards, the arbitrators will continue to be permitted to concur, concur in part, dissent or dissent in part. The panel may allocate the cost of the honorarium to one party, or may allocate it between or among all parties. Arbitrators will continue to be permitted to decide, on their own, to write an explained decision. If the panel or a member of the panel decides to write an explained decision in the absence of a joint request, FINRA will not pay an additional honorarium to any panel member.

Parties will not be able to require explained decisions in simplified arbitrations that are resolved without a hearing or in default proceedings. Explained decisions are not appropriate in either of these situations because of the abbreviated nature of the proceedings.

The amendments become effective on April 13, 2009, and will apply to all arbitration cases in which an initial prehearing conference has not been held, or waived by the parties, by the effective date.

FINRA's response to complaints about "the absence of explanations in its awards" manifested itself in the cynical requirement that such an explanation would be considered by the arbitrators provided it was in the form of a joint request from all parties. That's nonsense since many arbitrations involve issues that FINRA member firms particularly desire to keep confidential, which was the main driving force behind mandatory intra-industry and public customer arbitration.

To exacerbate matters, FINRA has cynically embedded a $400 so-called "honorarium" as the price of obtaining what should be provided at no extra cost. The problem with that honorarium is that it imposes a further financial burden on parties seeking an explained decision and may well prevent/retard the sua sponte action of the FINRA Arbitration Panel to voluntarily provide a rationale for its Award. If you're going to try and tell me that it's "only" $400 and not that big a deal, great, let FINRA pay the fee out of its own pocket since it's no big deal. The other problem with the $400 is that it's only paid if all parties request an Explained Decision and that request is granted -- so FINRA has engineered a financial disincentive for a Panel to draft a mere Rule 12904(f) rationale because there's no honorarium for that effort! What a lovely plaque FINRA must present to its veteran arbitrators: For 10 Years of Exemplary Service as an Arbitrator Rendering Unexplained Decisions.

If, in fact, this matter winds up in a Court pursuant to motions to vacate, I would hope that the Court would consider imposing sanctions against FINRA for failing to provide a sufficient record of the arbitrators' rationale upon which the motions could be adjudicated.

UPDATE July 2020

When the above article was first published "No Rationale And No Explanation In FINRA Arbitration Decision" (BrokeAndBroker.com Blog / October 8, 2019)
http://www.brokeandbroker.com/4846/finra-explained-decision/, I could not have been clearer in expressing my anger with the garbage of a FINRA Arbitration Decision that FINRA allowed to be published. Similarly, my sentiments were clearly noted when I said that I hoped a reviewing court would sanction FINRA for "failing to provide a sufficient record of the arbitrators' rationale upon which the motions could be adjudicated."

Petition to Vacate: DCMD March 2020

On March 31, 2020, the United States District Court for the District of Maryland ("DCMD") denied Petitioner Stifel's Petition to Vacate the FINRA Arbitration Award. Stifel, Nicolaus & Co.., Petitioner, v. Michael Stern, Wendy Stern, et al., Respondents (Memorandum Opinion, United States District Court for the District of Maryland, 20-CV-00005 / March 31, 2020) (the "DCMD March 2020 Opinion")
http://brokeandbroker.com/PDF/StifelDCMDOp200331.pdf

In the DCMD March 2020 Opinion, we actually learn, for the first time, some aspects of the underlying facts behind the FINRA Arbitration:

The facts in this matter are largely undisputed. Respondents opened brokerage accounts with Petitioner in 2007, under Petitioner's "Horizon Program ." ECF 1-2 at 4. The Horizon Program is a non-discretionary advisory program, meaning that Petitioner could not enter into a transaction absent Respondents' express direction to do so. Id. Kenneth Blumberg ("Blumberg") was the primary financial advisor assigned to Respondents' accounts. Id. From 2011 through mid-2015, Respondents' accounts experienced significant gains in value. As of June, 2015, the Sterns' accounts had increased by approximately $1,252,015 since 2011, to a total value of $1,552,784. Id. at 4-5. Similarly, the Levins' accounts increased by approximately $1,435,585 over the same time period, to a total value of $1,788,609. Id. at 5. Respondents transferred their accounts away from Petitioner's management in or about June, 2016. Id. Although the value of their accounts had decreased from the peak in 2015, Respondents still left with a combined gain of $1,593,680. Id.

Pages 1 - 2 of the March 2020 DCMDOpinion

The Re-Served FINRA Arbitration Decision

An interesting revelation is found in the March 2020 DCMD Opinion:

On December 11, 2019, FINRA "re-served" the award with a somewhat modified letter. ECF 38-10. Whereas the October letter included signatures from only two arbitrators, the December letter included signatures from all three arbitrators, along with a dissent from arbitrator Edward Gutman. See id. Nonetheless, FINRA explained that service of the December letter did "not modify any of the information and applicable due dates referenced in FINRA's October 3, 2019 letter." Id. at 2. Petitioner filed its Motion to Vacate the award in this Court on January 2, 2020. ECF 1.

Pages 2 - 3 of the March 2020 Opinion

What the hell? FINRA "re-served" -- seriously? No, I'm not going to buy whatever the hell it is that FINRA is selling here. The re-creation of a previously published Award to include a Dissent that did not appear in the initial Award is not a mere re-service. It may be an Amended Award. It may be a Corrected Award. It may be a Superseding Award. It sure as hell ain't a re-service -- and shame on FINRA for not updating the published "re-served" Award to denote that it includes a substantive addition of conduct. Go look at the very first page of the Decision and to to the very top of the page, and, you tell me, you see anything indicating that the latter-reserved Award is "amended," "revised," or "re-served"? We got two different PDF addresses but not a simple declaration by FINRA that we have two substantively different Awards -- if for no other reason than a latter version includes an extensive Dissent; compare:

https://www.finra.org/sites/default/files/aao_documents/17-03299.pdf (the so-called Initial Award); and
https://www.finra.org/sites/default/files/aao_documents/17-03299%281%29.pdf the so-called "re-served" Award)

The Dissent that was NOT included with the Initial FINRA Arbitration but published with the "re-served" version:

This Complaint alleged Respondent Blumberg et al "violated their fiduciary duties and defrauded Claimants by purchasing excessive and unsuitable investments in their accounts by deceiving Claimants by misrepresenting and/or omitting material facts concerning their accounts and the transactions executed in them. These actions were taken with knowledge, evil motive, ill will and fraudulent intent necessary."

These accusation were based on the principle brokers who concentrate their client's investments in a few thinly traded holdings of one asset class and in one or two industries, as Respondents clearly did in this case, subject their clients to "catastrophic losses and thus, the broker to liability."

A 5-day hearing was conducted to show Respondents purchased excessive and unsuitable investments in Claimants' accounts. violated their fiduciary duties, and defrauded Claimants by purchasing excessive and unsuitable investments in their accounts concentrated in individual technology and biotech/healthcare securities, in the biotech/healthcare and technology sectors; deceiving Claimants by misrepresenting and/or omitting material facts concerning their accounts and the transactions executed in them, taken with "knowledge, evil motive, ill will and fraudulent intent necessary."

Yet, the majority panel decision found no finding on these allegations or financial losses attributed to these claims. Rather, the financial recovery to Claimant was based solely upon a violation of Restatement Second Section 209 "if the trustee fails to sell trust property which is his duty to sell (because, e.g., the trust so directs or diversification so required, )the beneficiary can charge him with the amount he would have received by timely sale.

The majority of the panel (Catherine Bocskor and John Coker) found the evidence showed a Complainant (Stern) had directed Respondent Blumberg to sell one of the holdings in his portfolio and he did not in violation of his duty to sell under Restatement Second Section 209, and awarded Complainants damages based on the difference in value between the value at the time of the "order" to sell and the value at the time of sale. They made no finding nor was there evidence of "catastrophic losses" for which the broker was liable.

Rather, the 5-day hearing resulted in a decision and award of damages based solely on a finding that Blumberg failed to sell a portfolio holding upon the investor's order.

While the evidence did reveal Complainant, Stern conferred with Blumberg about selling one of the holdings in his portfolio, that Blumberg counseled against selling referencing Warren Buffet's investment philosophy; yet the evidence failed to produce evidence Stern "ordered or directed" Blumberg to sell.

That the evidence Blumberg did not refuse to sell upon an order to sell, and the majority's conclusion may have been defective, may be validated by the evidence of what happened or didn't happen next. True, Blumberg didn't sell but had the customer ordered or directed him to sell as the majority found and he did not sell, there was no explanation why a day later, a week later or at any time had there been no sale. Stern would have not called him and questioned why a sale had not been consummated or reiterated an order to sell. So, while the Restatement may be clear as to a broker's duty, the facts must show a violation and they did not.

In addition, I found no basis in law or fact that Complainants whose claim is based on "unsuitability" is entitled to what the majority described as "lost profits" from an "unsuitable over concentrated investment portfolio," especially inconsistent with their recurring claims Blumberg subjected them to "catastrophic" losses, "astronomical risk,"

Yet, while the Complaint alleged unsuitability, the portfolio earned as profit. Thus, the majority opinion was not based on placing the Complainants in an unsuitable portfolio as alleged, rather, it was the broker's failure to sell the alleged "unsuitable" portfolio at its highest point of profit. A finding unsupported by the evidence produced in a 5 days hearing. . . .

DCMD July 2020 Letter Opinion

On July 17, 2020, DCMD filed Stifel, Nicolaus & Co.., Petitioner, v. Michael Stern, Wendy Stern, et al., Respondents (Letter Opinion, United States District Court for the District of Maryland, 20-CV-00005 / July 17, ,2020) (the "DCMD July 2020 Letter Opinion")
http://brokeandbroker.com/PDF/StifelDCMDLtrOp200717.pdf:

As the parties are well aware, judicial review of arbitration awards "is among the narrowest known at law because to allow full scrutiny of such awards would frustrate the purpose of having arbitration at all." Apex Plumbing Supply, Inc. v. U.S. Supply Co., 142 F.3d 188, 193 (4th Cir. 1998). Permissible grounds for vacating an award "include those circumstances where an award fails to draw its essence from the contract, or the award evidences a manifest disregard of the law." Patten v. Signatore Ins. Agency, Inc., 441 F.3d 230, 234 (4th Cir. 2006).

However, "when the arbitrators do not give their reasons, it is nearly impossible for the court to determine whether they acted in disregard of the law." O.R. Sec., Inc. v. Prof'l Planning Ass'n, Inc., 857 F.2d 742, 747 (11th Cir. 1988). Here, because the panel did not provide an "explained decision" for its arbitration award, the Court does not currently have a viable method to conduct even a limited review of the merits of the decision.

In these circumstances, courts have, at times, remanded a matter to the arbitration panel, seeking further explanation for its decision. See, e.g., Interactive Brokers, LLC v. Saroop, 279 F. Supp. 3d 699 (E.D. Va. 2017) (declining to rule on a motion to vacate in order to remand to arbitration panel for clarification of award); see also Cannelton Indus., Inc. v. Dist. 17, Un. Mine Workers of Am., 951 F.2d 591, 594 (4th Cir. 1991).

Accordingly, the Court requests that each party file a supplement stating its position on whether remand to the arbitration panel would be appropriate in these circumstances. The supplement should be filed on or before August 7, 2020.