Articles Posted in Arbitration

A Financial Industry Arbitration Panel says that Stifel Financial Corp. (SF), the brokerage unit of Stifel Nicolaus, must pay $2.7 million to, Sean Horrigan. Stifel’s ex-head trader claims that the brokerage firm defamed him and withheld his bonus without just cause. Now, the panel is holding the broker-dealer liable.

Horrigan was fired from Stifel in 2012. According to his lawyer, his termination happened several weeks after he overheard a phone call in which a manager insulted his wife to a salesperson. Horrigan’s wife was also employed at Stifel at the time. After the incident, he reacted emotionally. It was after trading hours. The firm then demoted him before letting him go just weeks prior to giving him his bonus for 2011.

Stifel contended that Horrigan was not entitled to get that money because on the day that the bonuses were issued he no longer worked for the firm. His attorney, however, says that unless an industry professional signs a contract mandating that an employee has to be employed on bonus payout day, he/she is still entitled to that money.

The Public Investors Arbitration Bar Association (PIABA) is working with consumer rights group Public Citizen to get the US Securities and Exchange Commission to release documents about its oversight of the Financial Industry Regulatory Authority’s selection of the arbitrators who preside over disputes between broker-dealers and investors. According to PIABA President Jason Doss, because customers are “forced” into only having securities arbitration as a resolution venue when they sign documents to set up brokerage accounts (in the event of future disputes), they should be allowed to know how FINRA decides who hears the arbitration cases.

PIABA is a lawyers’ group that represents investors with securities arbitration claims. Contending that this is an issue of “transparency,” the attorneys have been trying to gain access to these documents for the last few years.

The group’s efforts started in 2010 with a Freedom of Information Act query to the SEC asking for documents that address how the regulator inspects FINRA’s process for selecting arbitrators and looking into their backgrounds. However, even though FOIA grants the public access to federal agency records, it has exemptions. (The exemption exists to protect sensitive matters, such as customer’s private financial data.)

In a case preceding the credit crisis, a Financial Industry Regulatory Authority panel has awarded Michael Farah, an ex-star broker at Wedbush Securities Inc, a $4.2M arbitration award against the brokerage firm. Farah had accused the broker-dealer of making misrepresentations and omissions related to the collateralized-mortgage-obligation investments he recommended to clients, which he contends resulted in him losing not just customers but also yearly income.

He was the firm’s leading producer for a long time, working there from 1995 to 2005. Farah filed his securities claim against Wedbush, formerly known as Wedbush Morgan Securities Inc., in 2005 and then submitted an amended case last year.

Farah sold millions of dollars in CMOs. He claimed that he was told that the securities were bond replacements. However, he contends that the plunging of CMOs price in early 2003 was not in linr with what the bond desk had informed him about the securities’ volatility.

According to former broker David Evansen, he is the reason that Mitchel C. Atkins, the Financial Industry Regulatory Authority Inc.’s District 7 region director, resigned. His claim differs from the SRO’s statement about how Atkins decided to step down “pursue other interests.” Aktins, as FINRA regional director, was in charge of Florida, Atlanta, New Orleans and Dallas, and he worked with the agency for 20 years.

Evansen said that he wrote to FINRA chief executive Richard Ketchum and regulatory operations EVP Susan Axelrod to let them know that Atkins was indicted on both a misdemeanor and felony charge in Louisiana two decades ago. He said that he couldn’t confirm for sure that his letter is why Atkins resigned but he is convinced that it is.

Per Evansen, Atkins purportedly used bingo game earnings for non-charitable purposes, which is illegal in that state. While the felony charge was dropped, Evansen said that Atkins pleaded guilty to the misdemeanor charge. After Atkins complied with his sentence term, which included conditional probation, community service, and other specifics, his record was expunged.

The U.S. Court of Appeals for the Second Circuit is allowing a $20.5M award issued by a Financial Industry Regulatory Authority arbitration panel against Goldman Sachs Execution & Clearing LP to stand. The court turned down Goldman’s claim that the award should be vacated because it was issued in “manifest disregard of the law” and said that the clearing arm must pay this amount to the unsecured creditors of the now failed Bayou hedge fund group known as the Bayou Funds, which proved to be a large scale Ponzi scam.

Goldman was the prime broker and only clearing broker for the funds. After the scheme collapsed in 2005, the Bayou Funds sought bankruptcy protection the following year. Regulators would go on to sue the fund’s funders over the Ponzi scam and the losses sustained by investors. Meantime, an Official Unsecured Creditors’ Committee of Bayou Group was appointed to represent the debtors’ unsecured debtors. Blaming Goldman for not noticing the red flags that a Ponzi fraud was in the works, the committee proceeded to bring its arbitration claims against the clearing firm through FINRA. In 2010, the FINRA arbitration panel awarded the committee $20.58M against Goldman.

In affirming the arbitration award, the 2nd Circuit said that in this case, Goldman did not satisfy the manifest disregard standard. As an example, the court pointed to the $6.7M that was moved into the Bayou Funds from outside accounts in June 2005 and June 2004. While the committee had contended during arbitration that these deposits were “fraudulent transfers” and could be recovered from Goldman because they were an “initial transferee” under 11 U.S.C. §550(a), Goldman did not counter that the deposits weren’t fraudulent or that it was on inquiry notice of fraud. Instead, it claimed the deposits were not an “initial transferee” under 11 U.S.C. §550 and the panel had ignored the law by finding that it was.

In Marmet Health Care Center, Inc. v. Brown, the US Supreme Court has issued a ruling holding that federal and state courts have to follow the Federal Arbitration Act and support any arbitration agreement that is covered under the statute. The Court said that the FAA pre-empts a state law that doesn’t allow the enforcement of this type of agreement, which requires that personal injury and wrongful claims against nursing homes be resolved outside of court. By holding, the Supreme Court was reaffirming its holding in AT&T Mobility v. Concepcion that FAA displaces conflicting rule when state law doesn’t allow the arbitration of a certain kind of claim.

In this latest ruling, the Court examined three nursing home negligence lawsuits filed by the relatives of patients that died at assisted living facilities. Each family had a signed agreement noting that any disputes, except for those regarding non-payment, would be dealt with via arbitration. Although the trial court rejected the plaintiffs’ claims because of the arbitration agreements, the West Virginia Supreme Court decided to reverse the court’s ruling, holding that public policy of the state prevented a pre-occurrence arbitration agreement in an admission contract for a nursing home that mandated that a negligence claim over wrongful death or personal injury be resolved through arbitration.

By issuing this decision the state’s Supreme Court was rejecting the way the US Supreme Court interpreted the FAA on the grounds that Congress would not have meant for the Act to be applicable to civil claims of injury or death that are tangentially connected to a contract—especially when needed service is a factor.

The US Supreme Court, however, reversed that decision, staying with its own interpretation of the FAA being controlling and a lower court not being able to ignore precedent. The Court sent the case back to state court where inquiry into whether the provision allowing only for arbitration can’t be enforced under state common law principals not specifically addressing arbitration and therefore the FAA wouldn’t pre-empt.

At Shepherd Smith Edwards and Kantas, LTD, LLP, our stockbroker fraud law firm represents individual and institutional investors with securities fraud claims and lawsuits. We have helped thousands of investors recoup their losses via arbitration and through the courts.

With securities fraud, the majority of claims have to be resolved through arbitration. One reason for this is that most investors that sign up for accounts through brokerage firms almost always end up agreeing to binding arbitration clauses.

Read the Supreme Court’s ruling in Marmet Health Care Center, Inc. v. Brown (PDF)

The Federal Arbitration Act


More Blog Posts:

Senate Passes Bill Banning Congressional Insider Trading, Institutional Investor Securities Blog, February 8, 2012

With Confirmation of Richard Cordray as Its Director, The Consumer Financial Protection Bureau Can Finally Get to Work, Institutional Investor Securities Blog, January 4, 2012

SEC and SIPC Go to Court to Over Whether SIPA Protects Stanford Ponzi Fraud Investors, Stockbroker Fraud Blog, February 6, 2012

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