Investors seeking to recover their damages as a result of the sale of defective or otherwise tainted investment products by Wall Street, since 1987, have been required to bring these claims in a forum sponsored and paid for by the securities industry, the Financial Industry Regulatory Authority or FINRA, formerly known as the National Association of Securities Dealers.
Although the process, and the forum has been rife with criticism, particularly under the old Code of Arbitration Procedure, where at least one person on the arbitration panel that decides an investor’s fate was from within the securities industry, FINRA has adopted new rules that provide for an all public panel, comprised of individuals that have no connection to the securities industry. At least so we are told.
But when FINRA makes a mistake, and frequently mis-classifies an arbitrator with industry ties as a public arbitrator, or FINRA chooses not to disclose information that the arbitrator does disclose to FINRA, at least according to the United States Court of Appeals for the Third Circuit, in its affirmation of the District Court’s decision in Lawrence Stone v. Bear Stearns & Co., Inc., Case 2:11-cv-05118-LDD, it is the investor’s fault.
Laurence Stone, a Pennsylvania businessman and investor, lost millions of dollars investing with Bear Stearns. Stone subsequently filed a $7.6 million FINRA arbitration claim seeking to hold Bear Stearns responsible for his losses. With the parties’ input, FINRA appointed a three-person panel to hear the case. One of the arbitrators was Jerrilyn Marston.
Marston’s FINRA biography, which the parties received prior to selecting the panel, cursorily noted that she had a “family member” associated with the “University of Pennsylvania.” In fact, Marston’s husband, Dr. Richard Marston, is a well-known professor of finance at the Wharton School who regularly lectures to brokerage firms, insurance companies, banks, and investors.Marston had previously disclosed to FINRA her husband’s ties to the securities industry, but FINRA never incorporated the information into Marston’s biography.
In fact, Dr. Marston also obtained compensation and served in an advisory capacity to entities associated with JP Morgan Chase, the owner of Bear Stearns.
The arbitration did not go well for Stone. The panel unanimously sanctioned him $15,000 for discovery violations mere weeks before the first hearing, and in July of 2011, the three arbitrators unanimously rejected all of Stone’s claims.
Stone Does His Research to Find Evidence of Bias
A few days later, Stone started digging. He spent twenty (20) hours, more or less, painstakingly researching each of the three arbitrators, looking for evidence that they were biased against him.
By his own admission, Stone had done no background investigation on the arbitrators at any time before he lost his case, although he certainly could have done so. Stone’s sleuthing uncovered the relationship between arbitrator Marston and Dr. Marston, as well as Dr. Marston’s ties to the financial sector. Stone brought this information to his lawyers and eventually filed this lawsuit seeking to overturn the adverse arbitration award. In Stone’s opinion, given Dr. Marston’s close relationship with the securities industry, arbitrator Marston should never have heard his case. Further, according to Stone, Marston’s alleged non-disclosure of her husband’s professional dealings requires vacatur of the award on three separate grounds. First, Stone contends that Marston demonstrated “evident partiality” against him by virtue of her purported failure to disclose. 9 U.S.C. Sect: 10(a)(2). Second, Stone argues that the aforementioned failure to disclose constitutes “misbehavior” by Marston under 9 U.S.C. Sect: 10(a)(3). And finally, Stone asserts that Marston “exceeded [her] powers” as an arbitrator as provided in 9 U.S.C. Sect: 10(a)(4) because FINRA improperly designated her as a “public arbitrator.”
District Court Denied Motion to Vacate
However, the District Court denied Stone’s Motion to Vacate the arbitration award because Stone did disclose her husband’s affiliation with the securities industry; unfortunately, that disclosure just never made it to Stone. Although Marston could have been more diligent in updating her disclosures, we cannot say that her conduct constitutes either “evident partiality” or “misbehavior” warranting vacatur under Section 10(a)(2) or 10(a)(3) of the Federal Arbitration Act (FAA). Additionally, even if Marston did not qualify as a “public arbitrator,” her participation in Stone’s case (1) did not fall so far outside the parties’ agreed-upon arbitration as to require vacatur under Section 10(a)(4), and (2) constituted harmless error in any event because the three arbitrators rendered a unanimous decision.
According to the District Court “Stone unearthed this information about the Marstons while thoroughly and systematically digging for dirt on each of the three arbitrators shortly after they ruled unanimously against him. Stone could have done this research earlier, before the panel was selected, and certainly before he lost his case.”
Marston disclosed to FINRA that her “husband is a Professor of Finance at the Wharton School of the University of Pennsylvania.” In that capacity, he has spoken to brokers, traders, and financial consultants from various investment banks and brokerage houses, and Industry Groups such as the Securities Institute and IMCA.
But no one from FINRA followed-up with Marston about her husband’s activities.
In fact, Dr. Marston runs a program at Wharton counseling ultra-high net worth investors such as Stone.
However, accordingly to the District Ccourt, FINRA’s failure to disclose Marston’s husband’s relationship with the securities industry in general, and J.P. Morgan in particular [the owner of Bear Stearns] was meaningless, because Stone and his lawyer should have not trusted FINRA’s disclosure and classification of Marston, and should have done their own investigation to find out whether the information provided by FINRA was indeed accurate.
According to the Court, absent a showing of actual bias, “even where an arbitrator fails to abide by arbitral or ethical rules concerning disclosure, such a failure does not, in itself, entitle a losing party to vacatur.”
According to the Court, Stone could have done this research earlier in the process but did not.
The Court states that “Given all this, as well as (1) the importance of the finality of arbitration awards and (2) the need to curtail undesirable tactical behavior by losing parties grasping for a re-do, we believe the Third Circuit would endorse the idea of waiver in failure-to-disclose-type arbitration award challenges (in the appropriate circumstances, of course).”
The Court was correct. On October 20, 2013, the United States Court of Appeals for the Third Circuit, Rendell, Circuit Judge, found the District Court’s opinion “thoughtful and thorough” and that the District Court’s reasoning as to all of the arguments raised “is in no need of amplification or improvement.”
Guiliano Law Firm
The practice of Nicholas J. Guiliano, Esq., and The Guiliano Law Firm, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost to unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. If you own the common stock of TradeStation and purchased your shares before April 21, 2011, and wish to learn more about these claims, contact us at (877) SEC-ATTY