Removal of FINRA Arbitrator Cited by Schwab and Interactive Brokers in HFT Customer Dispute

SIDE BAR: As classified in the FINRA Arbitration Award:

Hereinafter, Emilie Dawson, Bryce Dawson, Nadine Dawson, Tony Eason, Christine Eason, Brandon Ehrlich, Natasha Ehrlich, Carol Hilton, Ian Hilton, Joann LaCanfora, Robert LaCanfora, Irene Guerrero, Peter Guerrero, David Miller, Carrie Miller, Gary Wyatt, and Martha Wyatt are collectively referred to as "Leon Guerrero Claimants".

. . .

Hereinafter, Stephen Apt, Pamela Apt, Hamilton, Stephen Naramore, Diana Naramore, Robinson, Capdevielle, Rogers, and McQuery are collectively referred to as "Naramore Claimants". 

Respondent Interactive Brokers: 

• $2,727,394.65 in compensatory damages plus interest
• Leon Guerrero Claimants: $835,300.41 in attorneys' fees
• Naramore Claimants: $149,056.58 in attorneys' fees
• $600 filing fee joint/several with Schwab
  
  

Respondent Charles Schwab: 

• $606,087.70 in compensatory damages plus interest
• Leon Guerrero Claimants: $278,433.37 in attorneys' fees
• Naramore Claimants: $49,685.52 in attorneys' fees
• $600 filing fee joint/several with Interactive
  
  

6. On December 15, 2020, the Panel issued a written order that held Schwab and Interactive Brokers liable for negligence, breach of contract, and violations of the Washington Consumer Protection Act. Schwab and Interactive Brokers then discovered for the first time that one of the arbitrators, Pamela Bridgen, was a plaintiff in an ongoing civil securities fraud case pending in United States District Court for the Southern District of California. See Bridgen et al. v. Lee et al., 3:14-cv-0052-BGS-NLS (S.D. Cal.). Ms. Bridgen had omitted this information from her Arbitrator Disclosure Report in violation of FINRA rules. In fact, Ms. Bridgen's involvement as a plaintiff in ongoing securities litigation temporarily disqualified her from serving as an arbitrator under FINRA rules. 

7. Ultimately, Schwab and Interactive Brokers discovered Ms. Bridgen's involvement in three cases and her interest in a brokerage account at Scottrade. Although FINRA rules required Ms. Bridgen to report such activity and interests in her Disclosure Report and other checklists provided to the parties, Ms. Bridgen had failed to do so.

REMOVAL OF ARBITRATOR PAMELA BRIDGEN, RESUMPTION OF
ARBITRATION PROCEEDINGS, AND THE PANEL'S FINAL ORDER 

8. Based on this discovery, Schwab and Interactive Brokers asked the Panel to recuse themselves and requested that FINRA remove the Panel. While the Panel refused to recuse themselves, FINRA ultimately removed Ms. Bridgen, citing a rule allowing the FINRA Director of Arbitration to remove an arbitrator based "on information required to be disclosed . . . that was not previously known by the parties." FINRA denied Schwab and Interactive Brokers' joint request to remove the two other Panel members without reasoning, and replaced Ms. Bridgen with a new arbitrator. 

9. On March 26, 2021, the two original Panel members issued a damages ruling (the "Award") that awarded Defendants over $3.3 million in damages and $1.3 million in attorneys' fees. The newly-appointed Panel member dissented from the ruling without reasoning. A true and correct copy of the Award is attached to this Petition as Exhibit "A."

[Ms.] Bridgen's failure to disclose her involvement in a factually similar securities-related dispute (and related bankruptcy litigation) was fatal to her ability to serve as a neutral decision-maker. FINRA recognized this failing, and removed Ms. Bridgen from the arbitration panel. The question before the Court is not whether Ms. Bridgen's participation caused evident partiality. The question is whether the remedy imposed by FINRA was sufficient. The Court concludes that it was not. "A finding of evident partiality in one arbitrator generally requires vacatur of the arbitration award." Schmitz v. Zelveti, 20 F.3d 1043, 1049 (9th Cir. 1994). The fact that the arbitrator who substituted in for Ms. Bridgen dissented from the remaining panelists is not dispositive of the issue of prejudice, but is instructive. See Id. (noting that a tainted panel is reasonably inferred "when the other panel members vote with the evidently partial arbitrator."). 

Defendants ask the Court to consider whether Plaintiffs waived their objection to Ms. Bridgen's evident partiality by raising the issue only after the panel issued its tentative ruling on liability. The Court agrees that the timing of the objection is suspect, but concludes that the issue of vacatur is not waived. Unlike many of the cases cited by Defendants, Ms. Bridgen did not leave a trail of clues that Plaintiffs should have been expected to follow. She was not selected by the opposing party, and therefore presumed to be possibly aligned with that party. The Court does not find that Plaintiffs were on constructive notice of Ms. Bridgen's bias. Although Plaintiffs raised the issue of bias after a significant portion of their case had been litigated, they did not raise the issue for the first time after arbitration concluded.

The Brokers negotiated for FINRA rules and remedies in the event of a dispute with investors. FINRA Rule 12407(b) expressly states: 

After the first hearing session begins, the Director may remove an arbitrator based only on information required to be disclosed under Rule 12405 that was not previously known by the parties. The Director may exercise this authority upon request of a party or on the Director's own initiative. Only the Director may exercise the authority under this paragraph (b). 

The issue the Brokers took with Bridgen was her nondisclosure and affirmative misrepresentation of her role in ongoing litigation of a similar subject to the dispute between the Customers and Brokers. Bridgen's suit was somewhat comparable to the controversy here; a customer brought a claim against a financial advisor for marketing an investment strategy as low risk, but which resulted in significant losses. However, a key distinguishing fact was that Bridgen filed suit against her financial advisor, not a brokerage firm. Additionally, unlike other cases where vacatur was upheld based on evident partiality, Bridgen did not have a relationship or connection to the Customers, Brokers, or firms representing them in arbitration. See, e.g., Monster Energy Co. v. City Beverages, LLC, 940 F.3d 1130, 1135-36 (9th Cir. 2019) ("under our case law, to support vacatur of an arbitration award, the arbitrator's undisclosed interest in an entity must be substantial, and that entity's business dealings with a party to the arbitration must be nontrivial"); Ploetz for Laudine L. Ploetz, 1985 Tr. v. Morgan Stanley Smith Barney LLC, 894 F.3d 894, 899 (8th Cir. 2018) (a decision on vacatur on this basis turns "on whether the undisclosed relationship demonstrates that the arbitrator had evident partiality"); Positive Software Sol., Inc. v. New Century Mortg. Corp., 476 F.3d 278, 283 (5th Cir. 2007) ("in nondisclosure cases, an award may not be vacated because of a trivial or insubstantial prior relationship between the arbitrator and the parties to the proceeding"). In the absence of authority establishing that vacatur is proper where the sole basis for the claim of evident partiality is that an arbitrator has been involved in similar litigation, we decline to so hold.

FINRA applied the remedy of removing Bridgen for nondisclosure in violation of its rules and reconstituting the arbitration panel. This remedy was precisely one for which the Brokers negotiated by selecting arbitration under FINRA as part of the express terms of the contract. While they assert that Bridgen's participation in the liability stage of the arbitration tainted the panel, offering only Kaseburg's dissent in support of this claim, that is not the standard for vacatur of the arbitration award. Because the Brokers fail to allege evident partiality on the part of the FINRA Director as to the remedy decision, or the newly-constituted panel which issued the final award, they fail to meet their "high hurdle," and vacatur was improper. As such, we reverse and remand for entry of an order confirming the arbitration award. 

[Ms.] Bridgen's failure to disclose her involvement in a factually similar securities-related dispute (and related bankruptcy litigation) was fatal to her ability to serve as a neutral decision-maker. FINRA recognized this failing, and removed Ms. Bridgen from the arbitration panel. The question before the Court is not whether Ms. Bridgen's participation caused evident partiality. The question is whether the remedy imposed by FINRA was sufficient. The Court concludes that it was not. . . .

• FINRA
• Arbitration
• Schwab
• Interactive Brokers
• HFT
• Motion to Vacate
• Rule 12407
• Director of Arbitration
• Nondisclosure
• Leggett
• Partiality
• BrokeAndBroker
• Bill Singer