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Motion to Vacate FINRA Arbitration Award Fails To Raise Federal Jurisdiction
March 22, 2022
A victorious Claimant in a FINRA arbitration moved to confirm her Award in state court; however, the defeated Respondents moved to vacate in federal court. In federal court, the Respondents seemingly argued that the process of evaluating their motion somehow imbued the court with jurisdiction. Clever tactic? An act of desperation? See what the Court decided.
2021 FINRA Arbitration Award
In a FINRA Arbitration Statement of Claim filed in December 2019, public customer Donna Wagner asserted fraud, negligence,
breach of contract, breach of fiduciary duty and] constructive fraud, violations of FINRA Conduct
Rules, violations of FINRA and federal rules regarding anti-money laundering, negligent supervision, conversion, violations of the Indiana Securities Act, and respondeat superior. Claimant Wagner sought $1,342,483 in "net out-of-pocket losses" or, in the alternative, well-managed-account damages; treble damages; punitive damages; interest; costs; and fees.
Donna J. Wagner, Claimant, v. Brokers International Financial Services, LLC and Mark Christopher Perry, Claimants (FINRA Arbitration Award, 19-03556 / May 17, 2021)
https://www.finra.org/sites/default/files/aao_documents/19-03556.pdf
https://www.finra.org/sites/default/files/aao_documents/19-03556.pdf
Respondents Brokers International Financial Services and Perry generally denied the allegations and asserted affirmative defenses. Respondents did not file executed Submission Agreements but appeared at the hearing.
As set forth in the FINRA Arbitration Award:
[T]he causes of action related to Claimant's allegation that, while a registered representative of BIFS, Perry was the President of an insurance brokerage firm ("Company"). Claimant further alleged that Respondents allowed an unnamed party to use the Company as a conduit to obtain funds from Claimant and convert those funds for his own personal use and that Perry, who was responsible for its operations oversight, appears to be complicit.
The FINRA Arbitration Panel found Respondents jointly and severally liable to and ordered them to pay to Claimant Wagner $795,929 in compensatory damages plus interest, and Claimant is required to assign the $950,000 agreed judgment dated December 17, 2020, entered in her favor in the Indiana state court to Respondents
2021 SDInd Motion to Vacate
Wagner filed a Petition to Enforce the FINRA Arbitration Award in the Indiana state court system; however, on June 16, 2021, Defendants Perry and Brokers International filed a Motion to Vacate the FINRA Arbitration Award in the United States District Court for the Southern District of Indiana ("SDInd"). In response to Defendants' Motion to Vacate, Wagner filed a Motion to Remand back to the state court.
Donna Wagner, Plaintiff/Petitioner/Arbitration Petitioner, v. Brokers International Financial Services, LLC and Mark Christopher Perry, Defendants/Respondents/Arbitration Respondents (Defendants' Motion to Vacate FINRA Arbitration Award, United States District Court for the Southern District of Indiana, 21-CV-01787 / June 16, 2021)
https://brokeandbroker.com/PDF/WagnerMotVacSDIN210616.pdf
In their Motion to Vacate, the Defendants allege that:
1. There was no agreement to arbitrate because Plaintiff candidly admits she wasnever a "customer" of Defendants as that phrase is used and defined by FINRA and relevant legal authorities. Plaintiff never opened an account with Brokers International and never purchased a security (or any good or service) from Brokers International or from Perry. Plaintiff plainly concedes she purchased fixed insurance products (which are not regulated by FINRA and not sold or brokered by Brokers International or Perry) from non-parties Brian Simms ("Simms") and Brendanwood Financial Brokerage and Brendanwood Financial Services (collectively "Brendanwood"), who were found liable for defrauding her (and were accused of defrauding scores of others; see, e.g., https://www.wrtv.com/news/call-6-investigators/secondlawsuit-filed-against-carmel-financial-adviser-for-losing-or-misappropriating-money).
In addition to their argument that Wagner was never a customer of theirs, Defendants further asserted that the FINRA Arbitration Award was barred by res judicata and collateral estoppel because Plaintiff has previously obtained a judgment against the two parties (Simms and Brendanwood) who had sold her the fixed insurance products at issue. Finally, Defendants assert that they had nothing to do with Plaintiff's purchase of the cited insurance products, which are not regulated by FINRA and were sold to her by an individual and entity lacking any affiliation with the Defendants.
2022 SDInd Order
As is too often the case, we find ourselves before a court with relatively little understanding of the moving parts of the engine of underlying facts that prompted a FINRA Arbitration. About all we know at the end of the FINRA Arbitration is that Wagner had alleged that Perry and Brokers had purportedly "allowed an unnamed party to use the Company as a conduit to obtain funds from Claimant and convert those funds for his own personal use and that Perry, who was responsible for its operations oversight, appears to be complicit." As broad a brushstroke as one could imagine. Although a tad more detail is shed in the Defendants' Motion to Vacate, we thankfully have this recitation in Donna Wagner, Plaintiff, v. Brokers International Financial Services, LLC and Mark Christopher Perry, Defendants (Order, United States District Court for the Southern District of Indiana, 21-CV-017878)
https://brokeandbroker.com/PDF/WagnerOrderSDIN220309.pdf:
at Page 2 of the SDInd OrderDonna Wagner made a series of payments totaling over one million dollars to her financial advisor, Brian Simms. Dkt. 4 at 4-5. Mr. Simms told Ms. Wagner that he was investing her money through two companies he owned, Brendanwood Financial Brokerage and Brendanwood Financial Services (together "Brendanwood"). Id. at 3; dkt. 4-4 at 9. Over time, Ms. Wagner became suspicious of her investment account statements and hired a lawyer to investigate. Dkt. 4 at 5. The investigation revealed that Mr. Simms had defrauded her. Id. at 6. Ms. Wagner sued him and Brendanwood, eventually settling the case for $950,000. Id.; dkt. 4-1.Ms. Wagner also initiated a FINRA1 arbitration claim against Mr. Perry and Brokers. Dkt. 4-4. In that claim, Ms. Wagner alleged that Mr. Perry had a "responsibility for oversight of operations" at Brendanwood because he was its president, and that Brokers was responsible for Mr. Perry's conduct because he was one of its "registered representatives." Id. at 2-3. Ms. Wagner's FINRA claim asserted "a number of legal grounds under Indiana law" including fraud, negligence, breach of contract, breach of fiduciary duty and constructive fraud, violations of FINRA Conduct Rules and NYSE Rules, negligent supervision, conversion, violations of the Indiana Securities Act, and respondeat superior. Id. at 19-20. The claim was assigned to a panel of arbitrators selected through FINRA Dispute Resolution Services.= = =Footnote 1: The Financial Industry Regulatory Authority (FINRA) is a private, self-regulatory organization, that operates as a "national securities association" registered with the Securities and Exchange Commission. Aslin v. Fin. Indus. Regulatory Auth., Inc., 704 F.3d 475, 476 (7th Cir. 2013) (describing the relationship between the SEC and FINRA).
Federal Question Jurisdiction
The parties agree that the Federal Arbitration Act does not create federal question jurisdiction over this case, dkt. 18 at 3; dkt. 24 at 6, and that there is no diversity jurisdiction, dkt. 18 at 2, so the only question is whether the Court has subject-matter jurisdiction through some other source.Mr. Perry and Brokers argue that the Court has federal-question jurisdiction over this case because their motion to vacate "involves the resolution of" federal issues. Dkt. 1 at 2. Ms. Wagner argues that the case must be remanded because the operative pleading (her petition filed in state court) is based solely on Indiana law and does not present any federal claim.Dkt. 18 at 2. Therefore, she argues that "any effort to assert a defense to inject a federal question does not transform what is plainly a state law claim into" a federal one. Id.2
at Pages 4 - 5 of the SDInd Order
In considering Defendants' arguments that a federal issue must be resolved, SDInd rejects that assertion [Ed: footnote omitted]:
at Pages 9 - 10 of the SDInd Order[H]ere, Mr. Perry and Brokers have not shown that the claims presented in Ms. Wagner's petition cannot be resolved without reaching a federal issue. Indeed, Mr. Perry and Brokers admit that the federal issue they rely on was instead raised in their motion to vacate. Dkt. 24 at 2, 12. Therefore, unlike in Grable, the federal question in this case is not "necessarily raise[d]" by Ms. Wagner's state court petition. Grable, 545 U.S. at 314. Grable differs from the present case in its substantive claims as well. The Court found federal jurisdiction existed in Grable because the plaintiff's claim "centered on the action of a federal agency (IRS) and its compatibility with a federal statute" and "its resolution was both dispositive of the case and would be controlling in numerous other cases." Empire Healthchoice, 547 U.S. at 700. The claims presented in Ms. Wagner's state court petition do not rely on a federal law or challenge the action of a federal agency. Her award- rendered by an independent arbitration panel interpretating a private organization's rules-was based on the specific facts presented in a single case. These circumstances do not support the exercise of federal jurisdiction where the plaintiff's claim is based solely on state law. See id. at 701 (finding Grable jurisdiction not appropriate over an issue that was "fact-bound and situation-specific.").
In granting Wagner's Motion to Remand and denying without prejudice Perry and Brokers' Motion to Vacate the FINRA Arbitration Award, SDInd summed up its rationale:
The only way any federal issue possibly comes into play in this case would be in evaluating Mr. Perry and Brokers' motion to vacate the arbitration award. Therefore, this is not part of the "'special and small category' of cases in which arising under jurisdiction still lies" over a plaintiff's state-law claim. Gunn, 568 U.S. at 258. The Court lacks subject-matter jurisdiction, and the case must be remanded to state court. 28 U.S.C. § 1447(c).
at Page 10 of the SDInd Order
Bill Singer's Comment
Kudos to SDInd for getting it spot-on perfect: FINRA is nothing more than a "private, self-regulatory organization . . " FINRA is not a governmental actor. Although often characterized as a quasi-governmental actor, in truth, that's a stretch. Further, compliments to the Court for publishing a nice, tight, compelling Order. Well done all around!