The legal adage  “bad cases make bad laws” is generally attributed to Judge Oliver Wendell Holmes, Jr., the same distinguished jurist that brought us “three generations of imbeciles are enough.”  Buck v. Bell, 274 U.S. 200 (1927).

However, in fact, although the adage traces back to 1837, Holmes, in Northern Securities Co. v. United States (1904) Holmes really said “great cases like hard cases make bad law.”   Either way, often with dire consequences, both adages unfortunately hold true today.  Case in point, Goldman v. Citigroup Global Markets, Inc. et al., Case No. 15-2345 (3rd Cir. Aug. 22, 2016).

On August 22, 2016, the United States Court of Appeals for the Third Circuit handed down its thirty-one page decision in the matter of Judith and  Kenneth Goldman vs. Citigroup Global Markets, Barry Guariglia, The Financial Industry Regulatory Authority, Frederick Pieroni, (and just about everyone else).

In its decision, the Third Circuit expressly held that violations of FINRA rules do not raise questions of federal law.   The Court reasoned that to recognize federal questions jurisdiction over the violation of self-regulatory rules, might result in the “flood of cases that would enter federal courts if the involvement of a self-regulatory organization were itself sufficient to support jurisdiction.”

Perhaps more importantly, the Third Circuit, fearful of sweeping a “kind of run-of-the-mill arbitration dispute into federal court” also held that a district court in connection with a motion to vacate an arbitration award under the Federal Arbitration Act, 9 U.S.C. Section 10, may not “look through” a motion to vacate to the underlying subject matter of the arbitration in order to establish federal question jurisdiction.

Arbitration is quick, it is relatively inexpensive, and perhaps most importantly, it provides a forum for the resolution of claims that may otherwise consume scarce judicial resources, (if these matters, particularly arising under the federal securities laws, were heard in federal court).   However, the entire process, its perceived fairness, and all the economies associated therewith, will evaporate and become meaningless, if awards,  which are the product of injustice and willful incompetence are allowed to stand.

The perceived unfairness of arbitration, and particularly, the “unwillingness” of the judiciary to earnestly examine “egregious” arbitration awards, has motivated Congress to seek to make these arbitrations “voluntary.”    On July 12, 2008,  Congress introduced Senate Bill 1782, entitled the “Arbitration Fairness Act,” based upon a Congressional finding that:

Mandatory arbitration undermines the development of public law for civil rights and consumer rights, because there is no meaningful judicial review of arbitrators’ decisions. With the knowledge that their rulings will not be seriously examined by a court applying current law, arbitrators enjoy near complete freedom to ignore the law and even their own rules.

Senate Bill 1872 at Section 2 (July 12, 2008, 110th Congress, First Session).

Certainly the Third Circuit’s decision in Goldman does not help.  Further narrowing the basis to challenge wayward arbitration awards, as Judge Posner of the Seventh Circuit once observed,  the review of arbitration awards is so narrow it ought to be called “no review at all,”  Bavarati v. Josephtal, Lyon & Ross, Inc., 28 F.3d 704, 709 (7th Cir. 1994)(Barrack H. Obama counsel for Appellant).

Some background is nonetheless instructive.

In 2010, Claimants Judith and Kenneth Goldman filed an arbitration claim before FINRA against Merrill Lynch, Pierce Fenner & Smith, Inc., Citigroup Global Markets, Inc., the stockbroker, Barry Guariglia, and ostensibly, the broker’s supervisors, William R. Meagher and Carmela Nocerino.  FINRA Arbitration No. 10-04386 (Sept. 28, 2010).

According to the Statement of Claim, after the Goldmans lost money in the stock market, they alleged that they were pushed into “short-term trading of high-risk, speculative securities” that were “far outside [their] investment objectives,” and that Merrill Lynch and CGMI and their employees “knew it.”  They also alleged that Guariglia and his colleagues induced the Goldmans to take on ever more unsustainable risk by trading on margin. Most important to the case at bar, the Goldmans contend that, when they transferred their account from Merrill Lynch (where they say they received favorable margin requirement treatment) to CGMI (where they allegedly faced a higher margin requirement), they were subjected to a “devastating margin call,” leading to the liquidation of a “sizable portion of their investments” and “the loss of their entire retirement.”

Based upon the facts as adduced by the arbitration panel and the Courts, the Claimant, Mr. Goldman “Besides having a law degree, he had previously held a securities license and he had been managing his own accounts for many years.”  “The testimony of both Judith and Kenneth Goldman amply demonstrated that Kenneth Goldman made all of the decisions in his wife’s account with her approval. There was no claim for unauthorized trades in the Judith Goldman account. In addition there were no losses in Judith Goldman’s account while at Morgan Stanley Smith Bamey. Finally, there was no violation, forgery, theft or misappropriation by Barry Guariglia.”  FINRA Arbitration Award No. 10-04386 October 2, 2014).

As one commentator has suggested, what happens next can best be described as “The Gilligan’s Island Iliad Odyssey Of A FINRA Customer Arbitration.”

In any event, Citigroup Global Markets, Inc., now known as Morgan Stanley Inc., following the June 2009, merger of the Smith Barney division of Citigroup Global Markets, Inc. into a joint venture with Morgan Stanley to form formed Morgan Stanley Smith Barney, L.L.C., a newly formed registered broker-dealer, was represented by George D. Sullivan of Greenberg Traurig.   By way of background, George Sullivan, a consummate professional, is one of the leading securities arbitration defense lawyers in America and prior to joining Greenberg Traurig, was was managing director and head of litigation for the Retail Brokerage and Investment Management businesses at Morgan Stanley.

Merrill Lynch, Pierce Fenner & Smith, Inc. was also represented by veteran securities arbitration defense lawyer, Robert E. Goldberg of Bressler, Amery & Ross.  Prior to joining Bressler in March 2009, Mr. Goldberg was First Vice President and Assistant General Counsel for Merrill Lynch, where he worked in house for more than thirty years.

Somewhere during the arbitration process, the parties appear to have agreed to mediation.  Mediation is a confidential, non-binding process where the parties, through the use of a neutral mediator, seek to find the resolution of their claims.  Good cases settle, and in fact, bad cases settle in mediation.  The question is for how much do they settle, and the old adage that both parties walk away unhappy from a successful mediation, with one side taking less than they had expected and one side paying more than they had expected, is generally true.

In this particular case, it is interesting to note that either through a list of mediators provided by FINRA, or privately through the agreement of the parties, which is most often the case, Frederick or Fred Pieroni was selected at the mediator.  Pieroni is one of the first mediators appointed by FINRA, then the NASD, when it launched its mediation program in 1986.  Historically, he has been one of the top securities mediators in the New York metropolitan areas.  Although Pieroni is not a lawyer, he has an unmatched understanding of the federal securities laws, and has sat on countless FINRA, NASD and NYSE arbitration panels, where he as rendered substantial awards against both Merrill Lynch and Morgan Stanley, including most notably, Cartel Pacific v. Merrill Lynch, Pierce Fenner & Smith, NASD Arbitration Award No. 98-00991, where he award Claimant $1, but ordered Merrill Lynch to pay Claimant’s legal fees of $1.2 million.   In another case, Stanton Family Trust v. Merrill Lynch, Pierce Fenner & Smith, NASD Arbitration No. 08-04586, Pieroni rendered an $8.1 million award against Merrill Lynch.

Anyway, back to Gilligan’s Island.

As stated above, Claimants, Citigroup and Merrill Lynch mediated their case with Fred Pieroni. Claimants settled with Merrill Lynch, Barry Guariglia, during the period of his association with Merrill Lynch, and William R. Meagher and Carmela Nocerino.

Claimants however were unable to settle their claims with Citigroup.

Based upon Court documents, and the notion that because Citigroup failed to supposedly offer Claimants any money, and refused to negotiate in good faith, left the mediation when the Goldmans so demanded, and then “snuck back in[] … through a side door” to “spy” on the confidential negotiations between the Goldmans and Merrill Lynch, Claimants filed a motion before the arbitration panel to have George Sullivan and Greenberg Traurig removed or disqualified as counsel for Citigroup.

As a general matter, however, except when there is a continuance, arbitration panels are not informed when parties agree to mediate their case.  Moreover, as standard practice by all mediators, including Mr. Pieroni. by agreement, and in some states by statute, information exchanged during the course of a mediation is confidential, and a mediator will not disclose information to an opposing party, unless specifically authorized to do so.

In any event, the Panel denied the Goldman’s request.  However, the Panel chair, James Geiger, based upon his relationship with Mr. Pieroni, as both ostensibly being formerly associated with the New Jersey Education Association, abstained from ruling on Claimants’ Motion.

By way of background, James Geiger is one of the most knowledgeable and professional FINRA arbitrators in the New Jersey/Pennsylvania arbitration pool.  Because he is respected by both Claimants and Respondents, through the Neutral List Selections process, he has rendered more than 100 arbitration awards, including the arbitration claims of Philadelphia 76ers basketball owner Pat Croce in Pasquale W. Croce, Jr. and Diane Croce vs. UBS Financial Services, Inc., FINRA Arbitration No. 10-00361.  In any event, after the Panel denied the Goldmans’ request, they rushed off to federal court to enjoin the arbitration.

The District Court denied the motion, holding that there was “no lawful basis” for relief and that the Goldmans had improperly asked the Court to intervene “as an emergency court of interlocutory appeals from arbitration orders.” After a different judge was assigned the case, the District Court denied a second motion for a temporary restraining order, then subsequently dismissed the case with instructions to re-file after the arbitration was concluded, if the Goldmans wished to challenge any resulting arbitration award. There was another false start in the summer of 2014, when the Goldmans filed a motion to vacate the arbitration award before it was actually finalized, and that motion too was dismissed.

Thereafter, the arbitration panel took evidence and heard argument for 10 days between August 2012 and February 2014. After the Goldmans presented their full case in chief, Citigroup moved to dismiss for lack of evidence. The panel granted the motion, concluding that, “[w]hile all the claims were quite stridently argued, not a single claim was proven to be true by evidence.”   FINRA Arbitration Award No. 10-04386 October 2, 2014).

In particular, the panel noted that the Goldmans “failed to offer a scintilla of proof” that they were subject to a margin call. The panel thus determined that “there was no margin call” , and, on October 2, 2014, it issued a final award dismissing the Goldmans’ claims and assigning administrative fees among the parties.  Id.

In fact, after denying Claimants’ claims, and the expressed revelation that Kenneth Goldman was a lawyer and previously held a securities license, and that Kenneth Goldman made all of the decisions in his wife’s account, where there were no losses, the panel agreed to hear  Guariglia’s motion for an expungement.  Id. at 5.

FINRA Rule 2080 with respect to Expungement provides that an award directing expungement contains at least one of the following judicial or arbitral findings:

1. the claim, allegation or information is factually impossible or clearly erroneous;
2. the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds;
3. or the claim, allegation or information is false.

See, e.g., FINRA Regulatory Notice 08-79.   In connection with a motion for expungement, a Panel must also hold a separate evidentiary hearing.

However, the Goldmans never showed up at the expungement hearing, or otherwise declined to participate, which resulted in the Panel making the expressed finding, which was also probably otherwise true, that the claim or information is false and was otherwise frivolous or without a “scintilla of proof.”

When the arbitration was finally completed, Claimants returned to the District Court by submitting what they styled as a “re-filed” motion to vacate the arbitration award, which was the motion decided by the District Court.

According to Claimants’ Motion to Vacate, improperly filed in the form of a Complaint, Claimants argued that  FINRA arbitration panel behaved improperly in that it demanded “voluminous” and irrelevant discovery from them did not permit sufficient discovery of CGMI’s documents, exhibited partiality towards CGMI, and “refused to resign” at the Goldmans’ request.

As the Circuit Court explained, “[r]esorting to the typographical arts and extravagant language, the Goldmans practically shout that:

the treatment of the FINRA members demonstrates to the reasonable person that unavoidably, the Panel was partial to one side and the favorable treatment unilateral. … Defendants use the “BIG LIE” to maximize the advantage they enjoyed in the FINRA forum as a FINRA member and associated member. … The Biggest of the “Big Lies” is Defendants’ persistent perjury that “THERE WAS NO MARGIN CALL” upon transfer of the Goldman accounts from Merrill Lynch to Defendants in November 2008.

In cursory fashion, the Goldmans ask us to reverse the District Court’s order denying them leave to file an amended motion to vacate. They make no specific argument, however, for why the District Court abused its discretion in denying them leave to amend.

The Court explaned, that

“though that motion meanders, it does make something apparent: the Goldmans point to no federal law as the reason there should be a vacatur. Instead, they reference Pennsylvania state law governing vacatur of arbitration awards and then proceed to discuss the indignities they allegedly suffered during the arbitration proceedings. Lengthy though the motion to vacate is, it is entirely about the arbitration process.

The Goldmans complain of a “bitter prehearing arbitration discovery process,” “evident partiality of the [arbitration] Panel,” “paltry” discovery production from CGMI, CGMI being “allowed to spy” on confidential mediation negotiations, the mediator’s alleged perjury, the arbitration panel’s “manifest[] disregard[] [of] the existence of a margin call” , “falsification of records”, and “contemptuous treatment by the Panel Chair of the Goldmans.”

All of those grievances are variations on the theme that the contract to arbitrate was undermined by “blatant misconduct by” CGMI, despite CGMI’s obligation “to arbitrate properly under the FINRA A[rbitration] Submission Agreement,” and that CGMI’s misconduct was “insidiously tolerated by a panel sworn to be impartial.”

The essence of the motion to vacate is therefore a breach of contract complaint, alleging that CGMI, with the aid of the FINRA panel, engaged in procedural chicanery and failed to honor the agreement to arbitrate.

Accordingly the Third Circuit affirmed the District Court’s ruling, “that basic contract claim arises under state, not federal, law.”

However, now, it is certainly more settled in the Third Circuit that in connection with a motion to vacate an arbitration award under the Federal Arbitration Act, 9 U.S.C. Section 10, a court may not “look through” a motion to vacate to the underlying subject matter of the arbitration in order to establish federal question jurisdiction, and that the violation of FINRA rules do not raise questions of federal law.

Bad cases make bad law!

Nicholas J. Guiliano has over twenty years experience representing investors before the Financial Industry Regulatory Authority, the New York Stock Exchange and before the National Association of Securities Dealers, Office of Dispute Resolution. Over the last twenty years, he has represented more than a thousand investors from all across the United States and from several foreign countries, in claims against stockbroker and broker-dealers for fraud, breach of fiduciary duty, churning or excessive trading, the sale of unsuitable investments, the sale of defective investments, the sale of unregistered securities, and the failure to supervise. He is frequently quoted in the national media on securities and investment related issues, most recently on National Public Radio. He offers his services on purely a contingent fee basis, and is also a member of Public Investors Arbitration Bar Association.

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