Charles E. Butterworth, Jr. Family Trust et al v. Morgan Keegan & Company, Inc.
MEMORANDUM OPINION. Signed by US Magistrate Judge T Michael Putnam on 9/28/2012. (KAM, )
2012 Sep-28 PM 05:03
U.S. DISTRICT COURT
N.D. OF ALABAMA
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ALABAMA
CHARLES E. BUTTERWORTH, JR.
Family Trust by Joyce ButterworthEngler, Trustee, JOYCE BUTTERWORTHENGLER, WILEY L. ESTES, T.J. KASSOUF,
MARY JO KASSOUF, SHIRLEY A. KELCE,
KIMBERLY GLASGOW, MARY K. LEWIS,
ELLEN DAVIES ROGERS, DARCIE A.
SIMMONS, BONNIE FAE SPARKSMITCHELL,
MORGAN KEEGAN & COMPANY, INC.
Case No. 2:12-cv-00337-TMP
This case is before the court on two interrelated matters: (1) plaintiffs’ application to confirm
an arbitration award pursuant to 9 U.S.C. § 9 (doc. 1), and (2) the defendant Morgan Keegan &
Company, Inc.’s motion to vacate the arbitration award that plaintiffs seek to confirm. (Doc. 3). The
parties have filed briefs and evidentiary materials in support of their respective positions and the
court has considered fully the submissions of both parties, including the transcript from a two-week
evidentiary hearing in the underlying proceedings. Accordingly, the plaintiffs’ application to confirm
the arbitration award and the defendants’ motion to vacate the award are ripe for resolution.1
The parties consented to magistrate judge jurisdiction under 28 U.S.C. § 636(c).
BACKGROUND AND PROCEDURAL HISTORY
This is a case that resembles a number of other actions that have been filed across the country
against defendant Morgan Keegan regarding certain investment funds (referred to collectively as the
“RMK Funds”) that it marketed and sold over the course of several years beginning as early as 1999.
The collapse of the funds spawned nationwide litigation alleging the impropriety of the funds being
invested in the risky, “lower tranches”2 of asset-backed securities. Lawsuits of this genre typically
allege that the collapse of the funds was not attributable to market downturn or even the financial
crisis of 2007-2008, as evidenced, plaintiffs allege, by the fact that the “tremendous losses” of the
RMK funds were not suffered by other “comparable” bond funds during the same period of time.3
How the funds operated and why the funds collapsed involves expertise and an explanation of
structured finance, complex investment models, and fluency in financial acronyms.4 Such expertise
“‘Tranche’ is the French world for ‘slice.’ In the field of investments, tranche refers to a
security that its sellers split into smaller pieces to be sold to investors. Where the security is an assetbacked security, like those at issue here, each tranche has different rules for paying its investors. The
“top” tranche contains the safest securities, and its investors receive principal and income payments
first. The lowest tranche contains the riskiest securities. Its investors receive payment only if all
investors in the higher tranches are paid first. Thus, if borrowers default on the assets backing the
securities, those who have invested in the lowest tranches bear any losses first.” In re Regions
Morgan Keegan Sec., Derivative, & Erisa Litig., 743 F. Supp. 2d 744, 752 (W.D. Tenn. 2010)
reconsideration denied, 07-2784, 2010 WL 5464792 (W.D. Tenn. Dec. 30, 2010), citing Consulting
Serv. Group, LLC v. Morgan Keegan & Co., Nos. 10–02045, MDL 2009, 2010 WL 2650736, at *1
n. 2, 2010 U.S. Dist. LEXIS 66917, at *4 n. 2 (W.D. Tenn. July 2, 2010).
Regarding “comparable” funds, the court notes that plaintiffs allege that the RMK funds
were marketed as “high yield bond funds” despite the fact that the funds were not true high yield
bonds. The RMK funds, plaintiffs allege, were subject to “spectacular losses” because they were
invested in the aforementioned “low-priority tranches of structured finance deals.” True high-yield
bonds, plaintiffs allege, did not experience the losses that the RMK funds experienced during the
same period of time.
By way of example, a sampling of relevant acronyms includes ABS (asset-backed
securities), CBOs (collateralized bond obligations), CLOs (collateralized loan obligations), CMOs
and explanation was offered at the underlying arbitration and considered by the court in its review
of the transcript from the proceedings. For purposes of this matter, however, where this court must
either confirm or vacate the arbitration award, the intricacies of structured finance need not be
parlayed, debated, or otherwise conveyed beyond mention. Here, it is sufficient to note that the
funds at issue in the underlying arbitration were allegedly invested, unbeknownst to the plaintiffs,
in high-risk sectors that resulted in the funds losing allegedly more than 90% of their value.
On or around August 27, 2010, plaintiffs filed with the Financial Industry Regulatory
Authority (“FINRA”) a Statement of Claim against defendant Morgan Keegan that commenced the
underlying arbitration.5 The Statement of Claim asserts several causes of action including breach
of fiduciary duty, breach of contract, unsuitability, failure to supervise, violations of securities
regulatory rules, violations of the Alabama Securities Act, intentional and negligent
misrepresentation, unjust enrichment, breach of duty of good faith and fair dealing, gross negligence,
and reckless disregard. In support of these claims, plaintiffs make a number of factual allegations
that include the following:
All of the Claimants herein, with the exception of Mark K. Lewis, James W. Nabors and
Wilma H. Nabors, Darcie A. Simmons, and Bonnie Fae Sparks-Mitchell were sold the RMK
(collateralized mortgage obligations), and CDOs (collateralized debt obligations).
According to its website, www.finra.org, “FINRA is the largest independent regulator for
all securities firms doing business in the United States.” The FINRA website further provides that
it “operates the largest dispute resolution forum in the securities industry to assist in the resolution
of monetary and business disputes between and among investors, brokerage firms and individual
brokers.” An investor must arbitrate at FINRA if the arbitration is required by written agreement and
the dispute involves the securities business of the broker and/or brokerage firm. There is no dispute
here that Morgan Keegan is a FINRA member.
funds through the Morgan Keegan Branch office located at 2900 Highway 280, Suite 100,
The claimants fully relied on Morgan Keegan to oversee their investments and to provide
them with sound investment strategies. Morgan Keegan represented to the Claimants that
these Funds were relatively safe and conservative investments that would protect their
investment principal and provide income. The claimants trusted Morgan Keegan to make
a suitable recommendation.
Morgan Keegan misrepresented or failed to disclose material facts relating to the funds
including, but not limited to:
Failure to disclose the true speculative nature of the securities;
Failure to disclose the nature of the risk of investment in the funds;
Failure to disclose that the funds were not typical bond funds;
Failure to disclose the illiquidity of the underlying securities held by the funds;
Failure to disclose the extent of the funds’ vulnerability to lack of marketability;
Failure to disclose the extent to which the value of the funds was based on mere
estimates of value and the uncertainty inherent in such estimated values;
Failure to disclose that investors would be exposed to extraordinary credit risk;
Failure to adequately disclose the imminent risks of default associated with the
portfolio assets as Morgan Keegan became aware of the risks;
Failure to disclose the concentration of investments in a single industry;
Failure to disclose that the fund’s assets were concentrated in the lowest-priority
tranches of asset-backed securities, CDOs, CMOs, and CLOs and derivative
Failure to disclose that an investment in the lowest-priority, highest-risk tranches of
asset-backed and mortgage-backed securities carries extraordinary risk compared to
Mark K. Lewis is alleged to have procured the subject funds through a Morgan Keegan
Financial Advisor in Memphis, Tennessee. James W. Nabors and Wilma Nabors, Darcie A.
Simmons, and Bonnie Fae Sparks-Mitchell all are alleged to have procured the funds from a Morgan
Keegan Financial Advisor in Pelham, Alabama.
the average interest rate risk, prepayment risk, and credit risk of the underlying
Failure to disclose that the credit ratings reported do not incorporate the risks
associated with the low priority tranches of the CDOs that dominated the funds’
Failure to disclose that the consistent dividend return of the funds was a result of
fraudulently smoothing the valuation of the portfolio holdings; and
Failure to disclose that the Lehman Brothers Ba Fund was not a proper benchmark
for the RMK Funds.
Given these misrepresentations and omissions, there is simply no way that the Claimants
could have foreseen the risks and subsequent losses to their accounts. As a result of the
fraudulent disclosures or lack of disclosures, the Claimants did not understand what they
were investing in, or the true risks.
The claimants were customers of Morgan Keegan, and were simply looking for advice from
Morgan Keegan on how best to invest their money. Morgan Keegan lied to the Claimants
and failed to explain to them the nature of their investments.
(Doc. 3-1, Exh. A).
Before commencing the actual evidentiary hearing in the underlying arbitration, both parties
filed pre-hearing motions with the FINRA panel including a motion to sever, where the defendant
argued that the arbitration should be severed into “seven separate arbitration proceedings” because
“each Claimants’ case requires the Panel to focus on the relationship between the Claimant and
financial advisor.” (Doc. 8-12, Exh. B, p. 2). The motion to sever was denied by the arbitration
panel at a pre-hearing conference and the arbitration proceeded as it was originally filed. (Doc. 8-13,
Exh. C). Prior to the evidentiary hearing, the defendant moved in limine also to preclude the
plaintiffs from presenting evidence of certain regulatory matters and the alleged mismanagement of
the RMK Funds. (Doc. 8-14, Exh. D). The panel deferred ruling on the motion until the final,
arbitration hearing. (Doc. 3-7, p. 4). Morgan Keegan did not pursue this motion in limine at the
underlying arbitration and, consequently, the “Panel deemed the motion moot.” (Doc. 3-7, p. 4).
The arbitration took place in Birmingham, Alabama, over the course of two weeks in January 2012,
and was conducted by a FINRA arbitration panel. After the evidentiary hearing was concluded, and
after the panel considered the pleadings, testimony, and evidence presented at the hearing, it found
that Morgan Keegan was liable and it awarded compensatory damages and attorneys fees to each
On January 31, 2012, the plaintiffs filed with this court an application to confirm the
arbitration award. (Doc. 1). The defendant filed a motion to vacate the arbitration award on
February 29, 2012, and thereafter moved for an extension of time to file an amended brief in support
of its motion to vacate. (Docs. 3, 6). The extension was granted and the amended brief was filed
on April 30, 2012. The plaintiffs have filed a response to the motion to vacate and, on June 8, 2012,
filed supplemental case authority in support of their application to confirm the arbitration award.
(Docs. 8, 9). On August 7, 2012, the court entered an order advising that both the application to
confirm the arbitration award and the motion to vacate the arbitration award were being taken under
submission. (Doc. 10).
The disposition of this case is straightforward. The plaintiffs seek confirmation of an
arbitration award that was rendered in their favor by a FINRA arbitration panel after a two-week
The compensatory awards were as follows: Butterworth, Jr. Family Trust: $52,769.00;
Butterworth-Engler: $52,167.00; Estes: $18,468.00; T.J. and M. Kassouf: $27,584.00; Kelce and
Glasgow, Jt. Tenants: $18,020.00; Kelce: $149,095.00; Lewis: $16,523.00; Rogers:$77,586.00;
Simmons: $11,280.00; Sparks-Mitchell: $27,427.00. The panel denied pre-judgment interest on
evidentiary hearing. The defendant, Morgan Keegan, opposes confirmation and has moved the court
to vacate the award, primarily, on grounds that the arbitrators exceeded their powers under 9 U.S.C.
§ 10(a)(4). Plaintiffs assert that section 9 of the Federal Arbitration Act (“FAA”) provides the
authority, indeed the mandate, to confirm their award, while the defendant relies on section 10 of
the FAA to persuade the court otherwise -- that this is a case where vacatur is warranted. While both
parties argue that they have a statutory foothold to buttress their respective positions, the defendant’s
challenge is more daunting. This is due, in no small measure, to the fact that “[t]here is a
presumption under the FAA that arbitration awards will be confirmed, and ‘federal courts should
defer to an arbitrator's decision whenever possible.’” Frazier v. CitiFinancial Corp., LLC, 604 F.3d
1313, 1321 (11th Cir. 2010), citing B.L. Harbert Int'l, LLC v. Hercules Steel Co., 441 F.3d 905, 909
(11th Cir. 2006); see also AIG Baker Sterling Heights, LLC v. American Multi-Cinema, Inc., 508
F.3d 995, 1001 (11th Cir. 2007) (“Because arbitration is an alternative to litigation, judicial review
of arbitration decisions is “‘among the narrowest known to the law.’” (citations omitted); Gianelli
Money Purchase Plan & Trust v. ADM Investor Servs. Inc., 146 F.3d 1309, 1311 (11th Cir. 1998)
( “The Federal Arbitration Act (‘FAA’) provides that a federal district court can vacate an arbitration
award, but only in extremely narrow circumstances.”
Section 9 of the FAA governs the confirmation of arbitration awards by federal courts and
that provision states, in part:
If the parties in their agreement have agreed that a judgment of the
court shall be entered upon the award made pursuant to the
arbitration, and shall specify the court, then at any time within one
year after the award is made any party to the arbitration may apply to
the court so specified for an order confirming the award, and
thereupon the court must grant such an order unless the award is
vacated, modified, or corrected as prescribed in sections 10 and 11 of
this title. If no court is specified in the agreement of the parties, then
such application may be made to the United States court in and for
the district within which such award was made.
9 U.S.C. § 9.8 Plaintiffs contend that this statute mandates confirmation of their award because there
are no grounds that warrant the award being vacated, modified, or corrected; additionally, they
contend that arbitration of their disputes with Morgan Keegan was required by agreement. (Doc. 1,
p. 3). On the other hand, the defendant argues that vacatur is warranted under § 10 of the FAA,
which permits vacatur only in four limited circumstances:
(1) where the award was procured by corruption, fraud, or
(2) where there was evident partiality or corruption in the arbitrators,
or either of them;
(3) where the arbitrators were guilty of misconduct in refusing to
postpone the hearing, upon sufficient cause shown, or in refusing to
hear evidence pertinent and material to the controversy; or of any
other misbehavior by which the rights of any party have been
(4) where the arbitrators exceeded their powers, or so imperfectly
executed them that a mutual, final, and definite award upon the
subject matter submitted was not made.
9 U.S.C. § 10(a). Here, the defendant maintains that the arbitrators exceeded their powers and that
vacatur is warranted therefore under §10(a)(4) of the FAA. Again, the difficulty for the defendant
It should be noted that plaintiffs’ application to confirm the arbitration award was filed the
day after the award was entered by the panel and is, therefore, indisputably timely.
is not only convincing the court that the arbitrators did, in fact, exceed their powers, but also
persuading the court that there is enough evidence of excessive power to overcome the well-settled
presumption that arbitration awards will be confirmed. Put simply, the defendant’s burden is heavy
and “judicial review of the arbitration process and of the amount of the award is narrowly limited.”
Booth v. Hume Pub., Inc., 902 F.2d 925, 932 (11th Cir. 1990) (internal citations omitted).9 It is
against the backdrop of a statutorily-circumscribed, limited, and narrow review that the court
undertakes consideration of the subject arbitration award and, in turn, the defendant’s argument that
the “arbitrators clearly exceeded their powers in rendering the award.” (Doc. 8).
The main contention offered by the defendant as grounds for vacating the arbitration award
is that the arbitrators exceeded their powers because they considered, in violation of an internal
FINRA rule, derivative claims. The defendant argues also that the panel exceeded its powers by
hearing claims of certain plaintiffs who failed to comply with FINRA discovery rules and that the
award should be vacated because the arbitrators made an alleged mistake in calculating one of the
individual awards; but, these arguments are ancillary to the defendant’s main contention that the
subject claims are derivative in nature and should not have been arbitrated under FINRA rules.
Non-Member/Derivative Claim Argument
The crux of the defendant’s motion to vacate concerns the application of FINRA rules to the
underlying dispute and the alleged violation of those rules as grounds for vacating an arbitration
award under § 10(a)(4) of the FAA. Principally, the defendant’s argument implicates the substance
of the plaintiffs’ claims and whether those claims are derivative in nature. Tucked into the argument
“Moreover, the district court need not conduct a full hearing on a motion to vacate or
confirm; such motions may be decided on the papers without oral testimony.” Booth v. Hume Pub.,
Inc., 902 F.2d 925, 932 (11th Cir. 1990), citing Legion Insurance Co. v. Insurance General Agency,
Inc., 822 F.2d 541, 543 (5th Cir.1987).
that the award should be vacated because the Panel heard derivative claims is the additional assertion
that the Panel exceeded its power by hearing, and issuing an award upon, “the alleged misdeeds of
nonparties and nonmembers.” Both the derivative claim argument and the non-member/non-party
assertion rest on the foundational supposition that FINRA rules were incorporated into the subject
arbitration agreements – a point in fact that the plaintiffs do not appear to dispute.10 The court
construes the defendant’s non-member and derivative claim arguments as raising questions regarding
scope and substance.
First, did the arbitrators exceed the scope of their jurisdiction and
concomitantly, their power, by allegedly hearing claims against non-members? And, second, are the
plaintiffs’ claims, in substance, derivative claims that the arbitrators exceeded their power in hearing
because FINRA rules prohibit arbitration of shareholder derivative actions? The court has
considered the positions of both parties regarding each question and it will address them in turn.
In the underlying arbitration, plaintiffs filed their Statement of Claim against one defendant:
Morgan Keegan & Company. The plaintiffs did not file any claims against Morgan Asset
Management (“MAM”), a Morgan Keegan affiliate that allegedly managed the RMK Funds at issue,
or Jim Kelsoe, the fund manager, who was the alleged architect behind the scheme to defraud
investors from realizing the true risk of the subject investments. The defendant argues that even
though the plaintiffs did not sue MAM or Kelsoe, their claims were, in essence, directed against
Thus, from the defendant’s perspective, the cause of the plaintiffs’ injuries was
The subject arbitration agreements have not been submitted for the court’s review. Because
the plaintiffs do not appear to dispute that the FINRA rules apply, the court will not belabor the issue
of whether the arbitration agreements incorporated FINRA rules. It should be noted that the
defendant contends that the plaintiffs signed a FINRA Arbitration Submission Agreement, a copy
of which the defendant states that it will file upon receipt. Again, because the plaintiffs do not
dispute signing the Submission Agreement, the court does not find it necessary to review the
document in order to complete the analysis here.
mismanagement of the RMK Funds and that occurred at the hands of non-parties MAM and Kelsoe,
not Morgan Keegan, the only entity, the defendant contends, within the jurisdictional reach of the
FINRA arbitration. This argument implicates Rule 12101 which provides that the “Code applies to
any dispute between a customer and a member or associated person of a member that is submitted
to arbitration.” From this rule, the defendant infers that the arbitrators were not permitted to hear
claims against MAM and Kelsoe because they were not FINRA members.11 Thus, according to the
defendant, when the Panel heard evidence against MAM and Kelsoe they exceeded their power in
deciding claims based on “the alleged misdeeds of nonparties and nonmembers.” While the
defendant may be ultimately correct in its observation regarding the jurisdictional reach of a FINRA
arbitration, the court is not convinced, for several reasons, that this is a compelling argument for
vacatur of the arbitration award here.
To begin, the FINRA rule that the defendant cites, Rule 12101, includes language that the
FINRA Code applies to “an associated person of a member.” Without deciding the issue, the court
posits that Kelsoe, who plaintiffs allege was employed by Morgan-Keegan, and MAM, who plaintiffs
allege was an affiliate of Morgan Keegan with the same parent corporation, may both fall within the
intended meaning, or coverage, of the “associated person” language. Even if the “associated person”
language is not construed to include MAM or Kelsoe, however, the court is unpersuaded
nevertheless that the plaintiffs’ claims in this case can be reduced to claims only against these nonparties. While it is true that evidence was presented regarding the alleged mismanagement of funds,
and Kelsoe’s role in that regard, plaintiffs contend, convincingly, that such evidence was presented
in addition to evidence of Morgan Keegan’s direct involvement in the alleged wrongdoing. Having
There does not appear to be any dispute that MAM and Kelsoe were not FINRA members.
reviewed the transcript of the arbitration, the court agrees that evidence was presented to implicate
Morgan Keegan directly. Indeed, all plaintiffs maintained brokerage accounts at Morgan Keegan
and testified, individually, about how they relied on representations from Morgan Keegan financial
advisors in purchasing the RMK funds at issue. The plaintiffs further testified that the Morgan
Keegan brokers failed to disclose risks associated with the funds and that they suffered losses
accordingly. The court is persuaded that this evidence is enough, especially given the extremely
limited review this court has at this juncture, to find that the arbitrators were within their power to
hear the plaintiffs’ claims – even if that means that in the course of the evidentiary hearing they
heard, in addition to the evidence against Morgan Keegan, evidence of the alleged wrongdoing of
non-parties as well. Arbitrators enjoy “wide latitude in conducting an arbitration hearing” and
“[a]rbitration proceedings are not constrained by formal rules of procedure or evidence,” and,
therefore, the admission of evidence implicating MAM and Kelsoe does not necessarily bear
consequence on how the arbitrators ultimately arrived at the final award in this case. Rosenseweig
v. Morgan Stanley & Co., Inc., 494 F.3d 1328, 1333 (11th Cir. 2007). This is especially true here,
where the Panel’s written order does not indicate what evidence it considered in rendering the award.
In addition to arguing that the arbitrators exceeded their power in hearing claims of nonparties beyond their jurisdictional reach, the defendant argues also that the arbitrators exceeded their
power in hearing shareholder derivative claims.12 This argument implicates the substance or nature
The principal argument that the defendant puts forth as warranting a vacatur of the
arbitration award in this cases implicates the breadth of the arbitrators’ authority under the arbitration
agreement. Because the court does not have the arbitration agreement before it, it cannot speculate
on the breadth of that authority here. Plaintiffs have submitted, as supplemental authority, an order
by Judge Robert S. Vance confirming an arbitration award in the Circuit Court of Jefferson County,
Alabama. In that case, which also involved a FINRA arbitration over losses in various Morgan
Keegan bond funds, the arbitration provision applied to “any controversy or claim or issue in any
controversy arising from events which occurred prior to, on or subsequent to the inception of this
of the plaintiffs’ claims and rests on the prohibition of FINRA rule 12205, which states that:
“[s]hareholder derivative actions may not be arbitrated under the Code.” Further, the argument
hinges on at least two necessary predicates: (1) that the claims asserted by the plaintiffs are derivative
in nature and (2) that the violation of a FINRA “rule” constitutes excessive power as contemplated
under §10 of the FAA. As to the argument that the claims are derivative in nature, the defendant
maintains that the evidence presented at the arbitration consisted of misrepresentations and
omissions by the fund manager (Kelsoe) directly to the shareholders, and therefore plaintiffs’ claims
were a “textbook derivative claim.” The defendant points to instances in the underlying arbitration
where plaintiffs conceded that the brokers did not intentionally deceive the plaintiffs, rather they (the
brokers) were duped as well by the “nondisclosure” of information from Kelsoe, the fund manager.
Also, the defendant points out that in closing argument plaintiffs’ counsel stated that “the most
important person in this case is not in this room, and his name is Jim Kelsoe.” (Doc. 8, p. 7, citing
Butterworth Trans. at 2774:14 to 2776:15). Essentially, the defendant argues, plaintiffs’ case and
chief complaint is about the mismanagement of the RMK funds and mismanagement claims are
As mentioned above, it is true that plaintiffs put on evidence in the underlying arbitration that
implicated the management of the RMK funds. Likewise, it is true that plaintiffs did not sue the
individual brokers in this litigation. On the other hand, it is true also that individual plaintiffs
arbitration agreement.” (Doc. 9-2, p. 6). Judge Vance concluded that the “scope of the arbitration
obligation arising from this language is very broad, essentially covering any dispute between the
parties,” and this court agrees with his assessment. (Doc. 9-2, p. 6). Obviously, without the benefit
of reviewing the arbitration agreement, the court cannot assess what authority the arbitrators were
given under the contract. To the extent the provisions prove similar, however, the court notes that
it would likely conclude, as Judge Vance did, that the “arbitrator cannot be said to have exceeded
his [broad] authority in deciding the claim put forward [by the plaintiff].” (Doc. 9-2, p. 6).
testified at the evidentiary hearing about the alleged fraud that was perpetrated upon them by being
misled into investing in funds that were totally unsuitable for their investment objectives. For
example, plaintiff Rogers testified that she was never told the RMK funds were risky and that she
was told it was a conservative investment. (Doc. 8-2, p. 387). Similarly, plaintiff Kassouf testified
that he told his broker he wanted to invest in something “safe.”
(Doc. 8-2, p. 460). Plaintiff
Simmons testified that she was certain her broker did not disclose the true risk of the fund and that
she was never told that the fund would be very aggressive. (Doc. 8-3, pp. 718, 726). Plaintiff
Sparks-Mitchell testified that she thought, based on representations made to her, the subject funds
would have risk similar to a Certificate of Deposit (CD). (Doc. 8-3, pp. 793). Moreover, the
statement of the claim alleges:
The claimants fully relied on Morgan Keegan to oversee their
investments and to provide them with sound investment strategies.
Morgan Keegan represented to the Claimants that these Funds were
relatively safe and conservative investments that would protect their
investment principal and provide income. The Claimants trusted
Morgan Keegan to make a suitable recommendation.
In making their decision to purchase the Funds, Claimants relied
solely on Morgan Keegan’s advice and recommendations. However,
the reality of these funds did not match Respondent’s representation.
As a result of the Respondent’s recommendation, the Claimants have
suffered extraordinary losses to their accounts.
(Doc. 3-1, p. 10).
The court is not persuaded that plaintiffs’ claims can be reduced to general dissatisfaction
about the management of the RMK Funds when both the claims and testimony purport to allege
personal wrongdoings to individual plaintiffs. While the transcript of the underlying arbitration
does, as the defendant contends, bear witness to plaintiffs’ position that the alleged fraud “emanated
from Kelsoe himself,” the record substantiates also distinct claims of fraud and misrepresentation
on behalf of each individual plaintiff, most notably, in the form of individual plaintiffs testifying
about the representations that were made to them in advance of purchasing the subject funds. Thus,
to the extent that fund mismanagement was a central theme of plaintiffs’ case in the underlying
arbitration, the fact remains that plaintiffs’ claims “were based on fraudulent omissions under the
Alabama Securities Act and common law which induced Plaintiffs to buy shares of the RMK funds
believing them to be bond funds suitable for retirees, when in fact the RMK funds were speculative
investment funds.” (Doc. 5, p. 3). In other words, the introduction of mismanagement evidence at
the arbitration does not, necessarily, transform plaintiffs’ claims into derivative ones.
The determination of whether a claim is derivative, or one that can be brought individually
in a direct action, is informed by considerations of whether the alleged injury is distinct to the
individual shareholder. Recently, the Alabama Supreme court reiterated the difference between
derivative and individual claims under Alabama law:
‘As explained in Galbreath [v. Scott, 433 So.2d 454 (Ala.1983),] the
primary difference between derivative and individual claims is one of
standing, and standing is determined by the directness of the injury.
If the wrong directly damages the corporation and its assets from
waste, conversion and intentional mismanagement, the claim is the
corporation's. Hardy v. Hardy, 507 So.2d 409 (Ala.1987); Shelton v.
Thompson, 544 So.2d 845 (Ala.1989). A consequential decrease in
the value of the shareholder's shares does not vest in him an
individual claim. Green v. Bradley Construction, Inc., 431 So.2d
1226 (Ala.1983); Stevens v. Lowder, 643 F.2d 1078 (5th Cir.1981).
But if the wrong is committed directly against the shareholder and his
interests, such as oppression or fraud, so that his injury is unique, he
will have standing to assert individual claims. McDonald v. U.S. Die
Casting & Dev. Co.,  So. 2d 1064 (Ala.1989).’
Altrust Financial Services, Inc. v. Adams, 76 So. 3d 228, 241-42 (Ala. 2011), citing Gilland v.
USCO Power Equipment Corp., 631 So. 2d 938, 940 (Ala. 1994) (quoting Andrew P. Campbell,
Litigating Minority Shareholder Rights and the New Tort of Oppression, 53 ALA. LAW. 108, 114
(March 1992)).13 In this case, there are aspects of the plaintiffs’ claims that exhibit tendencies of
both derivative and direct actions; as such, the court does not underestimate the difficulty in pleading
a direct shareholder claim, nor does the court fault the defendant for arguing that the plaintiffs’
claims are derivative. But, in a case where judicial review is so circumscribed that it is “among the
narrowest known to the law,” the court cannot grant vacatur by indulging a close-call:
That aside, expanding the detailed categories would rub too much
against the grain of the § 9 language, where provision for judicial
confirmation carries no hint of flexibility. On application for an order
confirming the arbitration award, the court “must grant” the order
“unless the award is vacated, modified, or corrected as prescribed in
sections 10 and 11 of this title.” There is nothing malleable about
“must grant,” which unequivocally tells courts to grant confirmation
in all cases, except when one of the “prescribed” exceptions applies.
Hall St. Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 587, 128 S. Ct. 1396, 1405, 170 L. Ed. 2d
254 (2008). With “no hint of flexibility,” the court must confirm the award in this case unless the
record substantiates that the arbitrators exceeded their power in presiding, as the defendant argues,
The court notes that “[i]n a diversity action, the determination [of whether a claim is direct
or derivative] will be made under state law; in suits in which the rights being sued upon stem from
federal law, federal law will control the issue whether the action is derivative.” Medkser v. Feingold,
307 F. App'x 262, 264 (11th Cir. 2008), citing 7C Wright, Miller & Kane, Federal Practice and
Procedure, § 1821 (3d ed.2007).
over derivative claims. As mentioned above, the court is unconvinced that the plaintiffs’ claims
were transformed into derivative ones by the introduction of mismanagement evidence. Likewise,
the court is unwilling to categorically construe plaintiffs’ claims as derivative claims when the record
evinces that, at the least, it would be reasonable for the arbitrators to consider the plaintiffs’ claims
as direct ones.
Several procedural matters in the arbitration proceeding itself suggests that the defendant
viewed the plaintiffs as direct claims, not derivative one. Before the two-week evidentiary hearing
in the underlying arbitration began, the defendant filed a motion to sever the plaintiffs’ claims “based
on the seven distinct sets of Morgan Keegan financial advisors who serviced the particular
Claimants’ accounts.” (Doc. 3-2, p. 1) (emphasis added). The motion to sever set forth that
“evaluating each Claimants’ case requires the Panel to focus on the relationship between Claimant
and financial advisor.” (Doc. 3-2, p. 2). Further, the defendant urged the panel to sever the
plaintiffs’ claims on grounds that the joinder standard had not been met. In making this joinder
argument, the defendant stated:
That these Claimants invested in the same or similar funds with the
same brokerage firm, and are pursuing identical legal claims, is not
sufficient to amount to “questions” of fact or law to justify joinder.
See Ex parte Novartis Pharmaceuticals Corp., 2008 WL 1759109, *8
(Ala. 2008) (quotations and citation omitted) (“[T]he mere fact that
two cases assert similar [or the same] theories of recovery does not
constitute a common question of law so as to warrant consolidation,”);
see also Papagiannis v. Pontikis, 108 F.R.D. 177, 178 (N.D. Ill. 1985)
(holding that consolidation should not be allowed when complaint did
not provide any link between plaintiffs or alleged representations made
to each.). In this case, the questions of fact that must be answered are
almost entirely individual ones . . . These individual fact questions
(among others), which go to the heart of each Claimant’s burden of
proof on each claim (including, for example, reliance, causation, and
damages) as well as Morgan Keegan’s affirmative defenses, cannot be
handled in bulk. Investors do not act in monolithic fashion; their
choices, decisions, and motives are as individual in the investment
context as in any other.
(Doc. 3-2, pp. 4-5). Also, the defendant argued that the plaintiffs’ claims were “due to be severed
for the additional reason that they simply do not arise out of the ‘same’ transaction or occurrence,
or series of transactions or occurrences.” (Doc. 3-2, pp. 2-3). In emphasizing the uniqueness and
individuality of the plaintiffs’ claims, and urging the arbitrators to focus on the distinct relationship
between individual plaintiff and broker, the motion to sever does nothing to dispel the proposition
that the plaintiffs’ injuries were unique and therefore indicative of direct claims. Certainly, the
motion to sever was not meant as a concession regarding the nature of the plaintiffs’ claims, and the
court is not inclined to construe it beyond its intended reach or context; but, neither is the court
willing to conclude that the arbitrators exceeded their authority by hearing allegedly derivative
claims when those same claims have been described by the defendant as individual and distinct in
relation to causation and damages.
In addition to the motion to sever, a motion in limine to exclude “regulatory evidence and
other evidence pertaining to certain non-parties” was filed before the final hearing. (Doc. 8-14, Exh.
D). In that motion, it was argued that any evidence regarding the mismanagement of funds should
be excluded on grounds that such evidence pertains to derivative claims that the arbitrators were
prohibited from hearing under FINRA Rule 12205 — the rule which states that shareholder
derivative actions may not be arbitrated under the FINRA Code. Essentially, the defendant asserted
the same derivative claim argument in its motion in limine that it raises now as grounds for vacatur.
While the motion in limine establishes that the defendant has not, after losing at arbitration, asserted
this derivative claim argument for the first time, it does not validate the position as a compelling
ground for vacatur either. Primarily, this is due to the fact that the panel of arbitrators deemed the
motion moot when it was not pursued at the final hearing.14 To the extent that the defendant “did
not pursue” an argument that plaintiffs’ claims were derivative at the underlying arbitration, the court
is unwilling, in hindsight, to find that the arbitrators exceeded their authority in hearing those claims.
Taken together, the plaintiffs’ statement of the claim and the defendant’s pre-hearing motions
(motion to sever and motion in limine) can be construed as evincing that not only are the plaintiffs’
claims are direct as opposed to derivative claims, the defendant urged that position as well in the
arbitration. On the other hand, there are aspects of the plaintiffs’ claims that make the derivative
claim argument at least plausible. The fact that an argument can be made on either side of the
direct/derivative claim issue underscores the inherent difficulty of determining the nature of the
plaintiffs’ claims at this juncture. To say now that the plaintiffs’ claims are derivative in nature, when
there was evidence before the arbitrators that the claims were direct, is not a supposition that the
court is willing to accept as a viable ground for vacating the arbitration award here. This is
especially true given that the award may well have been rendered by the panel on the basis of the
direct evidence of alleged misrepresentations (in the form of the individual plaintiffs testifying at the
evidentiary hearing), instead of evidence regarding fund mismanagement.
To be precise, the Final Award recites that “On or about December 20, 2011, Respondent
filed a Motion in Limine to Exclude Regulatory and Other Evidence Pertaining to Certain NonParties asserting, among other things, that Claimants should be precluded from presenting irrelevant
evidence at the final hearing related to regulatory matters and any alleged mismanagement of the
RMK Funds by the Fund’s Investment advisor and portfolio manager. . . .The panel deferred ruling
on the motion until the final hearings. During the final hearings, Respondent did not pursue its
motion and the Panel deemed the motion moot.” (Doc. 3-7, Exh. G, p. 5).
Even if the court did apprehend the nature of the plaintiffs’ claims as more derivative than
direct, it cannot vacate the award unless the arbitrators exceeded their power in hearing those claims
and that raises the question of whether violating an internal FINRA prohibition against hearing
shareholder derivative claims constitutes an excess of power as contemplated under 9 U.S.C.
§ 10(a)(4). The defendant cites Morgan Keegan & Co. v. Garrett, 816 F.Supp. 2d 439 (S.D. Tex.
2011), and two Alabama Supreme Court cases, In re Grantland Rice, II, 67 So. 3d 45 (Ala. 2010) and
Ex parte Morgan Asset Management, Inc., No. 1100714, 2011 WL 3963004 (Ala. Sept. 9, 2011),
as authority for their position vacatur is warranted, and the court addresses these decisions in turn.
In Morgan Keegan & Co. v. Garrett, the court vacated an arbitration award entered against
Morgan Keegan in a FINRA arbitration that involved facts similar to those alleged in this case;
namely, that the plaintiff-investors were misled into investing in certain bond funds. After a six-day
arbitration hearing, a FINRA arbitration panel awarded $9.185 million to the plaintiff-investors.
In moving to vacate the award, the defendant made three primary arguments: (1) the arbitrators
exceeded their power by hearing the claims of two plaintiffs who were not Morgan Keegan
customers, having bought shares from a third-party broker; (2) the arbitrators exceeded their power
in hearing derivative claims; and (3) the award was based on “knowingly false testimony” and,
therefore, must be vacated. Garrett, 816 F.Supp. 2d at 441-442. The court vacated the award on the
basis of all three grounds. Id. at 442. Regarding the derivative claim argument for vacatur, the court
Here, the claimants sued for fraud and said Morgan Keegan
intentionally lied about the fund’s value. The only evidence they
offered was a technical witness who said the funds lost more value
than the average fund when the market crashed. That proves nothing.
Inevitably some funds will be above or below average. It does not
mean there was fraud.
The real complaint is that they did not like how the funds were
invested or the internal pricing of the funds. The claimants thought
that Morgan Keegan mismanaged the fund, causing the fund to lose
value. They sued because they lost money. It is a textbook derivative
Id. In the instant matter, as already discussed, a number of plaintiffs testified at the evidentiary
hearing regarding representations that were made to them about the RMK funds and their alleged
injuries from investing in those funds. While there was testimony also concerning the alleged
mismanagement of the funds, this court does not read the transcript to only offer mismanagement
evidence, as the Garrett court concluded under the facts of that case. Further, an important
distinction in Garret, that does not exist here, involves fraudulent testimony, or, as the court
described it, “technical lies.” Id. In Garrett, a witness whose “testimony was key to [the] claimants’
success” at arbitration, admitted (after arbitration) that he testified falsely regarding the claimants’
losses. Id. The false testimony was the “only technical financial evidence” at the arbitration and,
consequently, the Garrett court concluded that the “panel’s reliance on McCann’s testimony
vitiate[d] the award.” Id. Thus, the court decided that “[e]ven if the panel had power to hear the
claims, the award would still have been vacated because it was based on fraudulent testimony.” Id.
In this case, the court perceives the “real complaint” as more than mere dissatisfaction with
how the RMK funds were invested and managed. There is enough in the plaintiffs’ statement of the
claim and the testimony of individual plaintiffs at the evidentiary hearing to convince the court that
the real complaint in this case concerned misrepresentations (what they were told or not told about
the risk of the RMK funds) and the investment of money in a high-risk sector when conservative
investments were sought. This is different from how the court construed the plaintiffs’ claims in
Garrett. Further, the procedural underpinnings of Garrett are distinct from this case – in Garrett,
Morgan Keegan moved to dismiss all claims on grounds that the claims were not arbitrable; here,
any argument that the plaintiffs’ claims were derivative and not arbitrable was not pursued and
deemed “moot” by the panel, only to be pursued now, after an award has been entered. The
differences between Garrett and this case outnumber the similarities and, consequently, the court is
not apt to deduce here that the plaintiffs’ claims are “textbook derivative” so as to warrant, without
more, a vacatur of the arbitration award.
The defendant cites Ex parte Regions Financial Corp., (In re Grantland Rice, II), 67 So. 3d
45 (Ala. 2010) and Ex parte Morgan Asset Management, Inc., (In re Reed), 86 So. 3d 309 (Ala.
2011), as additional authority in support of its vacatur argument. Like the instant matter, these cases
involved litigation over RMK funds. In both cases, the defendants moved the trial court to dismiss
the litigation against them on grounds that the claims were derivative in nature and could be asserted
only in compliance with Rule 23.1 of the Alabama Rules of Civil Procedure, which governs
derivative actions by shareholders under Alabama law. Specifically, the defendants argued that the
plaintiffs failed to comply with the requirements of Rule 23.1, which resulted in a lack of standing
and, concomitantly, a lack of subject-matter jurisdiction. In each case, the Jefferson County Circuit
Court denied the motions to dismiss and the defendants petitioned, respectively, the Alabama
Supreme Court for writs of mandamus directing the trial court to dismiss the claims against them.
Because the linchpin of the defendants’ argument for dismissal was the contention that the plaintiffs’
claims were derivative in nature, that issue was the central determination to be decided on mandamus
review. Ultimately, the court agreed with the defendants and held that the plaintiffs’ claims were
derivative under Maryland law, the jurisdiction where the RMK funds were incorporated.
In concluding that the plaintiffs’ claims were derivative, the court abided by a principle under
Maryland law that provides:
‘[i]n deciding whether a shareholder may bring a direct suit, the
question the Maryland courts ask is not whether the shareholder
suffered injury; if a corporation is injured those who own the
corporation are injured too. The inquiry, instead, is whether the
shareholders’ injury is ‘distinct’ from that suffered by the
In re Grantland Rice, II, 67 So. 3d at 50; In re Reed, 86 So. 3d at 314-15 (internal citations omitted).
Applying this principle, the court in the Reed case concluded that, despite the “various theories”
under which the plaintiffs sought relief, their claims were, essentially, for injuries associated with
the “diminution in value of the RMK funds, which was a result of alleged mismanagement.” Id. at
317. Therefore, the court decided that the plaintiffs had alleged an injury that “‘falls directly on the
corporation as a whole and collectively, but only secondarily, upon its stockholders as a function and
in proportion to their pro rata investment in the corporation.’” Id. (internal citations omitted).
Because the court construed the claims as derivative, and the plaintiffs did not comply with Rule
23.1, it held that the plaintiffs did not have standing and the trial court did not have subject-matter
jurisdiction over the claims. Id. The court reached the same conclusion in the In re Grantland Rice
II case, holding that “. . . because the claims asserted by the shareholders are properly viewed as
derivative claims, and because the shareholders did not comply with the requirements of Rule 23.1
for asserting such claims, the shareholders lack standing.” In re Grantland Rice, II, 67 So. 3d at 56.
Again, the court is not dismissive of the defendant’s position and views the Reed and Rice
cases as making the direct/derivative claim determination, at the least, a close-call. The procedural
posture of the instant action, as compared to the mandamus review of a motion to dismiss, cannot
be underestimated, however, and it is a key distinction that the court recognizes also. Here, the court
is restricted to a severely circumscribed review where a statutory directive unambiguously instructs
that confirmation of the award must be granted unless a limited exception comes into play. Indeed,
the exception that the defendant attempts to invoke (§ 10(a)(4)) is applicable only in the most narrow
It is not enough for petitioners to show that the panel committed an
error—or even a serious error. See Eastern Associated Coal Corp. v.
Mine Workers, 531 U.S. 57, 62, 121 S.Ct. 462, 148 L.Ed.2d 354
(2000); Paperworkers v. Misco, Inc., 484 U.S. 29, 38, 108 S.Ct. 364,
98 L.Ed.2d 286 (1987). “It is only when [an] arbitrator strays from
interpretation and application of the agreement and effectively
‘dispense[s] his own brand of industrial justice’ that his decision may
be unenforceable.” Major League Baseball Players Assn. v. Garvey,
532 U.S. 504, 509, 1015, 121 S.Ct. 1724, 149 L.Ed.2d 740 (2001)
(per curiam) (quoting Steelworkers v. Enterprise Wheel & Car Corp.,
363 U.S. 593, 597, 80 S.Ct. 1358, 4 L.Ed.2d 1424 (1960)). In that
situation, an arbitration decision may be vacated under § 10(a)(4) of
the FAA on the ground that the arbitrator “exceeded [his] powers,”
for the task of an arbitrator is to interpret and enforce a contract, not
to make public policy.
Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., ___ U.S. ___, 130 S. Ct. 1758, 1767, 176 L. Ed. 2d
605 (2010). By contrast, in the cases cited by the defendant, the appellate court was reviewing the
propriety of subject-matter jurisdiction and was not encumbered by considerations inherent to falling
within a very narrow and limited, statutory exception. Further, noncompliance with Alabama Rule
of Civil Procedure 23.1, which is not at issue in this case, implicates standing and the question of
whether the plaintiffs could commence the litigation at all. The arbitration here, however, was
commenced and litigated to conclusion, with an award being entered following a two-week
evidentiary hearing; and, this happened without any sustained effort to dismiss or prevent the
arbitration proceedings on grounds that the plaintiffs’ claims were derivative and, as such, could not
be arbitrated under FINRA rules.15 Cf. Morgan Keegan & Co. v. Shadburn, 829 F.Supp. 2d 1141
(M.D. Ala. 2011) (where Morgan Keegan moved for and was granted a preliminary injunction to
enjoin an arbitration on grounds that the defendant was a “non-customer” and therefore arbitration
would violate FINRA Rule 12220). This distinction hinders the defendant in making a persuasive
analogy between this case and the Reed and Rice matters and, more significantly, underscores the
reality here – that the procedural posture of this case posits very little discretion in the court to do
anything other than confirm the award.16
Again, the court notes that the defendant raised the derivative claim argument in a motion
in limine that was filed advance of the arbitration proceeding but that motion was not pursued and
the Panel “deemed the motion moot.” (Doc. 3-7, Exh. G, p. 5).
As explained above, there are aspects of the plaintiffs’ claims that the court finds indicative
of direct claims and, on balance, these aspects weigh more in favor of a determination that the
plaintiffs claims are direct, not derivative ones. Even if the court did view the plaintiffs’ claims as
derivative, however, the award should be vacated only if violation of a FINRA rule constitutes an
excess of power as contemplated under 9 U.S.C. §10(a)(4), and that is not a conclusion that this
court is ready to make under the facts of this case. Moreover, the court is not convinced that an
individual investor should be denied the ability to file an individual claim for misrepresentation (in
connection with purchasing a security) on grounds that there is no distinct injury because the fund
was mismanaged and the loss, of which the aggrieved investor complains, was an injury to the fund
that concomitantly affected all shareholders. In this regard, the court notes Justice Murdock’s dissent
in the Reed case:
There is a clear difference between the claim of a prospective investor
misled into investing in a fund by the fraudulent advice of an
Failure to Enforce Discovery Rules
In addition to the derivative claim argument for vacatur, the defendant makes an argument
that the Panel failed to enforce FINRA’s rules concerning discovery and, therefore, the award should
be vacated. As an example of the alleged failure to enforce discovery rules, the defendant cites to
a “glaring illustration,” namely, the failure of one plaintiff to produce her tax returns until “the
morning she actually took the stand and testified.” (Doc. 8, p. 13). Tax returns, the defendant
argues, are part of the initial mandatory document production and were among the documents
requested in the defendant’s motion to compel, which the Panel granted. Thus, the failure of the
Panel to enforce its motion to compel and abide by FINRA discovery rules constitutes, according
to the defendant, an excess of power that requires the award to be vacated.
investment advisor and a claim by a ‘shareholder’ who never received
fraudulent investment advice but who nonetheless eventually suffered
a loss when a fund manager subsequently mismanages a fund. . .
.That is, the direct claim asserted by the sisters [plaintiffs] is not one
complaining of the concealment of alleged mismanagement of the
RMK funds. Instead, the sisters [plaintiffs] are seeking damages for
fraud based on alleged misrepresentations as to the nature of the
securities in which the funds already were and would remain invested,
fraud that allegedly induced the trusts established for the benefit of
the sisters [plaintiffs] to be ‘shareholders’ in the RMK fund when
they otherwise would not have been. Thus, as noted, although the
sisters [plaintiffs] losses eventually might have been experienced at
the same time and perhaps even in the same measure as the losses
suffered by investors who were injured solely as a result of the
defendants’ eventual mismanagement of the RMK funds, they are
nonetheless, in the contemplation of the law, a different injury
resulting from a distinctly different cause of action.
In re Reed, 86 So. 3d at 322, 324 (Ala. 2001) (Murdock, J. dissenting).
Again, the court must confirm the arbitration award here unless statutory exception exempts
application of the general rule requiring confirmation. The defendant urges that the arbitrators
exceeded their powers in failing “to punish the plaintiffs for their delay in compliance.” (Doc. 8, p.
14). The court construes the defendant’s argument as invoking 9 U.S.C. § 10(a)(4). The defendant
has cited no authority, and the court is not aware of any, where a failure to enforce a motion to
compel or abide by a FINRA discovery rule constitutes a basis to vacate an arbitration award under
9 U.S.C. § 10(a)(4). See Stone v. Bear, Stearns & Co., 2012 WL 1946938, No.2:11-cv-5118, at *16
(E.D. Pa. May 29, 2012) (“To hold otherwise would risk turning every minor violation of FINRA
rules, even unknown by FINRA at the time of the arbitration, into grounds for vacatur. This would
run counter to the policy in this country favoring the finality of arbitration awards, as well as the
Supreme Court's recent admonitions in Hall Street that “exceed[ing] ... powers” in Section 10(a)(4)
is a species of “extreme arbitral conduct,” [citation omitted], and Stolt–Nielsen that Section 10(a)(4)
attacks must fail unless the “arbitrator strays from interpretation and application of the agreement
and effectively ‘dispense[s] his own brand of industrial justice.’” (citation omitted)). Accordingly,
the court will not vacate the arbitration award here on grounds that the arbitrators exceeded their
authority in allegedly violating a FINRA discovery rule.
Alleged Mistake in Damages Calculation
The final argument that the defendant urges is one for partial vacatur of plaintiff SparksMitchell’s award on grounds that the “Panel exceeded their powers in failing to follow their own
damage formula.” (Doc. 8, p. 14). The gist of this argument is that the arbitrators awarded damages
to nine of the ten plaintiffs based on the same formula, but inexplicably used a different formula for
calculating the damages of one plaintiff. Notably, the award itself does not indicate or describe any
formula that the Panel used in calculating the damages; rather, it only recites the dollar amount
awarded to each individual plaintiff. Based on the damages awarded, however, the defendant
hypothesizes that the Panel awarded all plaintiffs 100% of their trading losses in the Intermediate
Fund and exactly 50% of their trading losses in the other RMK funds at issue. So, the defendant has
submitted what it believes to be the formula that the arbitrators used in calculating the damages, even
though the award itself does not indicate as much.
In an effort to explain the different damage amount awarded to plaintiff Sparks-Mitchell,
opposing counsel suggests that “[o]ne reason that the Panel may have used a different damage
calculation for Bonnie Sparks-Mitchell on her suitability claim is that she had income of less than
$25,000 and few assets so that the acts of the broker towards her were particularly egregious.” (Doc.
5 at p. 15). Plaintiffs then cite Isenhower v. Morgan Keegan & Co., Inc., 311 F.Supp. 2d 1319 (M.D.
Ala. 2004), for the following proposition:
Despite seeking modification of the arbitration award, Plaintiffs make
no argument that any of the three statutory bases for modification of
the arbitration award exist. Indeed, the Court's own independent
review of these bases for modification of the arbitration award
compels the conclusion that the arguments advanced by Plaintiffs for
modification of the arbitration award are simply not grounded in any
recognized statutory basis for modification set forth in the FAA.
Isenhower, 311 F.Supp 2d at 1324. Thus, the plaintiffs conclude “there is no statutory basis for
setting aside the Award here even if Morgan Keegan’s argument that the Arbitrator’s incorrectly
applied damage formula usage is correct.” (Doc. 5, p. 15).
Under 9 U.S.C. § 11, a court may modify an arbitration award under the following
(a) Where there was an evident material miscalculation of figures or
an evident material mistake in the description of any person, thing,
or property referred to in the award.
(b) Where the arbitrators have awarded upon a matter not submitted
to them, unless it is a matter not affecting the merits of the decision
upon the matter submitted.
(c) Where the award is imperfect in matter of form not affecting the
merits of the controversy.
9 U.S.C. § 11. Accordingly, “[t]he order may modify and correct the award, so as to effect the intent
thereof and promote justice between the parties.” Id. The defendant’s motion to vacate does not
invoke any of the §11 statutory grounds for modification, rather it asserts that the arbitrators
exceeded their power in their damages calculation of plaintiff Sparks-Mitchell’s award. The court
is unconvinced that the damages calculation, even if mistaken, is grounds for vacatur in this case
when courts have held that “[c]ourts are generally prohibited from vacating an arbitration award on
the basis of errors of law or interpretation, and the express terms of 9 U.S.C. §§ 10 and 11 have often
been deemed the exclusive grounds for vacation or modification.” Ainsworth v. Skurnick, 960 F.2d
939, 940 (11th Cir. 1992) (citations omitted). Even if the court construes the defendant’s argument
under 9 U.S.C. § 11(a), instead of an excessive power argument under 9 U.S.C. § 10(a)(4), there is
still insufficient evidence of a material miscalculation that would compel the court to modify the
award under the facts of this case. This is especially true in the absence of any explanation in the
award itself regarding how the damages were actually calculated. See e.g., Fellus v. Sterne, Agee
& Leach, Inc., 783 F. Supp. 2d 612, 622 (S.D.N.Y. 2011) (“[the defendant] does not point to any
patently obvious miscalculation on the face of the award, nor can it do so, for the award does not
explain the arbitrators' rationale in reaching their decision or reference any numbers other than the
total damages awarded. Therefore, the arbitration award does not contain an evident material
miscalculation warranting modification.”). The court is unwilling construe the award in this case
as evincing a patently obvious miscalculation on the face of the award when the defendant has not
argued as much and plaintiffs have offered an explanation for the difference in Sparks-Mitchell’s
award. Accordingly, the court declines to vacate or modify the arbitration award of plaintiff SparksMitchell.
Consistent with the foregoing discussion of the evidence presented and law governing this
action, this court determines that plaintiffs’ application to confirm arbitration award (doc. 1) is due
to be GRANTED, and the defendant’s motion to vacate arbitration award (doc. 3) is due to be
An order granting the application to confirm arbitration award will be entered
DONE and ORDERED this the 28th day of September, 2012.
T. MICHAEL PUTNAM
U.S. MAGISTRATE JUDGE
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