Interactive Brokers LLC v. Saroop et al
Filing
95
MEMORANDUM OPINION. Signed by District Judge Robert E. Payne on 12/18/2018. (tjoh, )
J_L
In\
19
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF VIRGINIA
CLERK, U.S. DISTRICT COURT
RICHMOND. VA
Richmond Division
INTERACTIVE BROKERS LLC,
Plaintiff,
Civil Action No. 3:17-cv-127
V.
ROHIT SAROOP, PREYA SAROOP,
and GEORGE SOFIS,
Defendant.
MEMORANDUM OPINION
This matter is before the Court on the PLAINTIFF'S MOTION TO
VACATE MODIFIED ARBITRATION AWARD (EOF No. 79) and DEFENDANT'S
MOTION TO CONFIRM THE MODIFIED ARBITRATION AWARD (EOF No. 80). For
the reasons set forth below, the PLAINTIFF'S MOTION TO VACATE
MODIFIED ARBITRATION AWARD (EOF No. 79) will be granted and the
DEFENDANT'S MOTION TO CONFIRM THE MODIFIED ARBITRATION AWARD (EOF
No. 80) will be denied. Further, the Court will remand the matter
to
a
new
panel
of
arbitrators
to
consider
the
Plaintiff's
counterclaims.
BACKGROUND
This matter is a familiar one to the Court. In January 2017,
a Financial Industry Regulatoiry Authority ("FINRA") arbitration
panel
rendered
an
arbitration
award
(the
"first
arbitration
decision") in favor of Claimants George Sofis and Rohit and Preya
Saroop
("Claimants")
and
against
Interactive
Brokers,
LLC
("Interactive") (ECF No. 1-2). Interactive moved to vacate that
award (ECF No. 1) and Claimants moved to confirm it (ECF No. 18).
Faced with an inscrutable award, this Court remanded the first
arbitration decision back to the same panel of arbitrators for
clarification.1 ECF No. 50 (hereinafter, the "Remand Opinion").
Fully aware of the Court's instructions in the Remand Opinion, the
arbitrators
issued
a
modified
award
(the
"second
arbitration
decision") in January 2018, again in favor of the Claimants. ECF
No. 71-1. Once again. Interactive moved to vacate the award (ECF
No. 79) and Claimants moved to confirm it (ECF No. 80).
A.
Factual Background
The factual background is set out fully in the Remand Opinion
(ECF No. 50) and is incorporated here.
Interactive is an online brokerage firm that provides a web-
based platform for sophisticated investors to purchase and sell
securities and other products on various exchanges throughout the
world. ECF No. 1 at 6. Interactive offers these services to its
customers without any accompanying financial advice.
It merely
executes the trades that its customers (or its customers' own
investment advisors) request. Id. Consequently, Interactive's
1 Claimants appealed the Court's remand to the Arbitrators (ECF
No. 55); the Fourth Circuit dismissed the appeal on the grounds
that it was a non-appealable interlocutory order. ECF No. 67.
contracts with its customers include, among other things,2 waivers
of liability for any and all losses sustained through the market.
ECF No.
1-3, 1-4.
The
Claimants
in
this case
were
three
such
customers.
The Saroops opened an account with Interactive on June 18,
2012
with
an initial
deposit of
$25,000.
They deposited
an
additional $75,000 in 2013, and another $50,000 in 2014. Sofis
opened his accovint with Interactive on October 15, 2012 with a
deposit
of
$100,000.
Both
the
Saroops
and
Sofis
hired
an
independent financial advisor, Vikas Brar of Brar Capital LLC, to
run their accounts with Interactive and to make trades on their
behalf. The parties appear to agree that neither Brar nor his
company has ever been employed by or affiliated with Interactive,
and that the decision to hire Brar was made solely by the Claimants
themselves.
Over
the
course
of
their
contractual
relationship
with
Interactive, the Claimants (through Brar) engaged in a high-risk
trading strategy that relied on the sale of so called "naked short
2 Of particular relevance to these proceedings, the contracts also
included: (1) a mandatory arbitration provision; (2) a choice of
law provision stating that Connecticut law governs contract
interpretation; (3) and an attorneys' fee provision that purports
to give Interactive (only) the right to fees.
call" options^ and "margin" trading.
These strategies initially-
resulted in large profits for the Claimants, but that changed in
2015.
On January 15, 2015, at Brar's request, the Saroops converted
their account with Interactive from a Regulation
margin account
to a portfolio margin account. Sofis did the same in July of 2015.
This change in account type allowed Brar to engage in still riskier
transactions on behalf of the Claimants: under Regulation T's
margin requirements, investors may borrow up to fifty percent of
the purchase price of a security using a loan from the broker;
3 A call option is the option to buy some underlying security (such
as the Exchange Traded Notes ("ETNs") at issue in this case) at a
predetermined "strike price" up until some future date. If the
value of the underlying security never hits the "strike price,"
the option is worthless and the seller pockets the premium from
the sale of the option. Because this is a risky strategy, investors
often hedge their position by buying the underlying security
involved in the transaction, thereby limiting their risk (and
reward). When an investor sells such an option without owning the
underlying security (thereby exposing him or herself to higher
risk), it is called a "naked" short call.
^ Essentially, trading on the "margin" refers to a method of buying
securities (or stock, etc.) that involves borrowing a part of the
sum
needed
to
execute
the
transaction
from
the
broker
himself—
here, Brar. Margin trading may result in quicker profits, but it
also exposes the investor to the risk of losses in excess of the
amount of their initial investment.
5 12 C.F.R. § 220.
under Portfolio
Margin,
investors
can
(usually)
achieve far
greater leverage.®
By
the
time
the
Claimants'
acco\mts
were
converted
to
portfolio margin accounts in 2015, Brar was exclusively (or nearly
exclusively) relying on a strategy of selling naked call options
of iPath S&P 500 VIX Short-Term Futures (VXX), an exchange traded
note ("ETN") designed to give investors exposure to the so-called
"fear index." In doing so, Brar was essentially betting (on behalf
of
the
Claimants)
that
the
market
would
remain
stable.
Brar
continued to rely upon and execute these trades after the Claimants
converted their accounts to portfolio margin.
The
parties
dispute
whether,
and
to
what
extent,
FINRA
Regulations (specifically. Rule 4210 and regulatory notice 08-09)
permitted such trades to be executed using the portfolio margin.
It is iindisputed, however, that such trades were executed using
the portfolio margin, and that they resulted in profits for the
Claimants until late August of 2015."' Indeed, by the close of
® Unlike Regulation T's initial margin requirement of 50% (2-1
leverage limit on equity), Portfolio Margin uses a sophisticated
algorithm to calculate margin requirements based on the overall
hypothetical risk of the portfolio (which, in turn, factors in the
historical volatility of the underlying securities involved).
'
It is clear from the "Arbitrator's Report" in both the first
arbitration decision (ECF No. 1-2) and the second arbitration
decision (ECF No. 71-1) that the arbitrators concluded that the
VXX options were not eligible to be traded using portfolio margin.
markets on August 19, 2015, Sofis' account had a net asset value
("NAV") of $500,529.48 and the Saroops had a NAV of $520,450.40.
On
Thursday,
August
20,
2015,
Brar
continued
this
same
strategy, selling hundreds of naked VXX call options. Over the
next several days, however, the market experienced a spike in
volatility,
culminating
on
August
24,
2015,
when
the
Dow
experienced the largest one-day decline in its history. The parties
dispute the cause of this volatility and decline: while Interactive
attributes the loss to the market generally, the Claimants argue
that the
losses
unreasonable
occurred, at least in part,
"auto-liquidation"
procedures
because of
deployed
the
by
Interactive.
Notwithstanding this factual dispute, both sides agree that
by the time the market opened on August 24, the value of the
Claimants' accounts had decreased by 80 percent. This precipitous
drop caused the Claimants' accounts to fall into so-called "margin
deficiency"-the equity remaining in the accounts had fallen below
the minimum maintenance requirements. This margin deficiency, in
turn,
triggered
Interactive's
"auto-liquidation"
procedures,
which, in a period of about thirty minutes, wiped out the remaining
balance in the Claimants' accounts (and left them with a still-
large margin deficiency). The Claimants responded by bringing an
arbitration claim against Interactive.
B.
The First Arbitration Decision
In December 2015, the Claimants filed an arbitration claim
with FINRA, as required by their contracts with Interactive. Their
Statement of Claim ("SC") asserted multiple claims, including:
breach
of
contract,
promissory
estoppel,
violation
securities
statutes,
commercially unreasonable
of
state
disposition
of
collateral, negligent and intentional misrepresentation, unjust
enrichment, and vicarious liability. SC ft 46-61 (ECF No. 1-10).
Interactive filed an answer and counterclaim in response, seeking
an award equal to the amount of the Claimants' debt remaining after
their accounts had been liquidated. ECF No. 1-11. Both sides also
sought
attorneys'
fees,
and
signed
FINRA
Uniform
Submission
Agreements, in which they agreed to submit the matters pled in the
Statement of Claim, answer, and counterclaims for resolution by a
FINRA arbitration panel (ECF No. 1-12). Although they had a right
to do so under FINRA rules, neither side requested a reasoned award
from the arbitrators.
An arbitration hearing was held from December 5, 2016 to
December 9, 2016. Both sides presented fact and opinion testimony,
including experts. Ultimately, on January 10, 2017, the panel
rendered a monetary award in favor of the Claimants, including an
award
of
attorneys'
fees
and
a
denial
of
Interactive's
counterclaim. ECF No. 1-2. The arbitrators summarized the claims
in the case as follows:
Claimants asserted the following causes of action:
breach of contract and promissory estoppel, violation of
state securities statutes, commercially unreasonable
disposition of collateral, vicarious liability, and
common law fraud. The
unspecified securities.
causes
of
action
relate
to
Unless specifically admitted in the Statement of Answer,
Respondent denied the allegations made in the Statement
of Claim and asserted various affirmative defenses.
In its Counterclaim, Respondent asserted the following
causes of action: failure to mitigate and pay a debt.
id- a-t 3. The panel also noted that the Claimants withdrew their
claim for allowing a non-registered broker to make trades at the
close of the arbitration hearing. Id.
Because
neither
side
requested
a
reasoned
award,
the
arbitrators provided little explanation for their decision.
The
"Arbitrator's Report" consists of just three sentences, followed
by details of the monies owed. In their entirety, the "ARBITRATOR'S
REPORT" and "AWARD" state:
ARBITRATOR'S REPORT
The Claimants are awarded the value of their accounts on
August 19, 2015 ($520,450.40 to the Saroops and
$500,529.48 to Sofis). Respondent's Counterclaim was
dismissed based on Respondent's violation of FINRA Rule
4210 as further explained in regulatory notice 08-09.
The securities placed in the portfolio margin account
were not eligible for that account based on these rules
and regulations.
AWARD
After considering the pleadings, the testimony and
evidence presented at the hearing, and the post-hearing
submissions, the Panel has decided in full and final
resolution of the issues submitted for determination as
follows:
1. Respondent is liable for and shall pay to Claimants
Rohit and Preya Saroop compensatory damages in the
amount of $520,450.40 plus interest at the rate of 8%
per annum from 30 days of the date of the award until
payment.
2. Respondent is liable for and shall pay to Claimants
Rohit and Preya Saroop attorneys' fees representing 40%
of the compensatory damages and 30% of the net claimed
by Respondent for a total of $274,006.16. The Panel
granted attorneys' fees pursuant to the parties'
agreement.
3. Respondent is liable for and shall pay to Claimant
George Sofis compensatory damages in the amount of
$500,529.48 plus interest at the rate of 8% per annum
from 30 days of the date of the award until payment.
4. Respondent is liable for and shall pay to Claimant
George Sofis attorneys' fees representing 40% of the
compensatory damages and 30% of the net claimed by
Respondent for a total of $249,858.49. The Panel granted
attorneys' fees pursuant to the parties' agreement.
5. Claimants' claim for witness fees is denied.
6. Respondent is liable for and shall pay to Claimants
$600.00 as reimbursement of the non-refundable portion
of the filing fee previously paid.
7. Respondent's
entirety.
Counterclaims
are
denied
in
their
8. Respondent's request for attorneys' fees is denied.
9. Any and all claims for relief not specifically
addressed herein, including punitive damages, are
denied.
Id. at 4. The remainder of the
decision contained
non-relevant
information on arbitration fees. Id. at 5. Interactive moved for
this Court to vacate the first arbitration decision (EOF No. 1),
while the Claimants sought to confirm it (ECF No. 18).
C.
The Remand Opinion (ECF No. 50)
After considering the parties' motions to confiinn and vacate
the first arbitration decision, the Court did neither. Rather, it
denied both motions, and remanded the matter to the original
arbitrators to clarify their opinion. ECF No. 50.
The
Court
recognized
the
extreme
deference
owed
to
arbitrators' decisions. Id. at 11-14. However, it also noted that
"[w]hen an arbitrator does provide reasons for a decision and when
those reasons are so ambiguous as to make it impossible for a
reviewing court to decide whether an award draws its essence from
the agreement, the court may remand the case to the arbitrator for
clarification." Cannelton Indus., Inc. v. Dist. 17, United Mine
Workers of Am., 951 F.2d 591, 594 (4th Cir. 1991); ECF No. 50 at
14.
The
Court
foiind
the
first
arbitration
decision
to
be
a
situation where remand was warranted.
First, the
Court could not "concoct a scenario where the
amount of compensatory damages awarded in this case makes sense."
ECF
No.
50
at
16.
Nor
could
the
Court
determine
what
the
arbitrators considered to be the predicate for liability. Id. The
first arbitration decision was especially perplexing because it
stated that "[a]ny and all claims for relief not specifically
addressed herein, including punitive damages, are denied."
10
ECF
No. 1-2 at 4. But, the award was in no way clear about which claims
had been "specifically addressed." ECF No. 50 at 17. Further still,
the damages awarded to the Claimants did "not correspond to any
theory of liability that the Court can apprehend, much less the
two principal theories of liability articulated by the Claimants
at the arbitration."® Id. at 17.
Second,
the
award
of
attorney's
fees
was
also
quite
perplexing. Id. at 19. The Court found a possible legal basis for
the award of such fees (in the parties' agreement), but nothing
supported a finding of percentage fees. Id. Accordingly, the Court
concluded that the fee awarded also needed to be clarified.
In
sum,
the
Court
simply
could
not
reconcile
the
first
arbitration decision with any legal theories with which it was
familiar.
The Court refused to rubber stamp a decision it could
not understand. Id. While "the arbitrators need not give a full
opinion, a brief explanation for the basis of the amount of damages
awarded is necessary before any semblance of judicial review can
be accomplished." Id. at 20. Accordingly, the Court remanded the
matter to the same panel of arbitrators for clarification as to
the predicate for liability, how the damages were determined, and
the basis for attorney's fees. Id. at 19-20.
®
These
two
theories
were:
(1)
Interactive's
allowance
of
ineligible securities to be traded on portfolio margin, and (2)
Interactive's auto-liquidation procedure. ECF No. 50 at 17-18.
11
D.
The Second Arbitration Decision
The arbitrators issued their second, modified decision on
January 30, 2018. ECF No. 71-1. The modified decision only added
a
few
sentences
to
the
first
arbitration
decision.
As
far
as
explanations go, it was not very helpful.
Nearly identically to the first arbitration decision, the
arbitrators
summarized
the
case
as
follows
(the
new
text
is
underscored):
Claimants asserted the following causes of action:
breach of contract and promissory estoppel, violation of
state
securities
statutes,
declaratory
judgment,
commercially unreasonable disposition of collateral,
vicarious liability, and common law fraud. The causes of
action relate to unspecified securities.
Unless specifically admitted in the Statement of Answer,
Respondent denied the allegations made in the Statement
of Claim and asserted various affirmative defenses.
In its Counterclaim, Respondent asserted the following
causes of action: failure to mitigate and pay a debt.
Id. at 3. This list added "declaratory judgment" from the first
arbitration decision. See ECF No. 1-2 at 2. Under "OTHER ISSUES
CONSIDERED
AND
DECIDED,"
the
arbitrators
added
a
paragraph
explaining the procedural history of the case, concluding with:
"After due consideration, the Panel submits this Modified Award."
ECF No. 71-1 at 3.
The next two sections of the second arbitration decision are
the "ARBITRATOR'S REPORT" and "AWARD." Those sections repeat much
12
of the first decision and then add some text.
those
sections state
as follows
In their entirety,
(with additions to the first
arbitration decision underscored):
ARBITRATOR'S REPORT
The Claimants are awarded the value of their accounts on
August 19, 2015 ($520,450.40 to the Saroops and
$500,529.48 to Sofis). Respondent's Counterclaim was
dismissed based on Respondent's violation of FINRA Rule
4210 as further explained in regulatory notice 08-09.
The securities placed in the portfolio margin account
were not eligible for that account based on these rules
and regulations. Respondent's position that the Panel
should not enforce a FINRA rule amounts to saying that
FINRA should provide an opportunity for investors to
commit financial suicide by investing in securities that
are ineligible for inclusion in a portfolio margin
account. To ignore a FINRA rule by the Panel would defeat
the purpose of FINRA.
AWARD
After considering the pleadings, the testimony and
evidence presented at the hearing, and the post-hearing
siibmissions, the Panel has decided in full and final
resolution of the issues submitted for determination as
follows:
1. Respondent is liable for and shall pay to Claimants
Rohit and Preya Saroop compensatory damages in the
amount of $520,450.40 plus interest at the rate of 8%
per annum from 30 days of the date of the award until
payment.
2. Respondent is liable for and shall pay to Claimants
Rohit and Preya Saroop attorneys' fees representing 40%
of the compensatory damages and 30% of the net claimed
by Respondent for a total of $274,006.16. The Panel
granted
attorneys'
fees
pursuant
to
the
parties'
agreement.
3. Respondent is liable for and shall pay to Claimant
George Sofis compensatoory damages in the amount of
13
$500,529.48 plus interest at the rate of 8% per annum
from 30 days of the date of the award until payment.
4. Respondent is liable for and shall pay to Claimant
George Sofis attorneys' fees representing 40% of the
compensatory damages and 30% of the net claimed by
Respondent for a total of $249,858.49. The Panel granted
attorneys' fees pursuant to the parties' agreement.
5. There was no evidence of profits or losses in
securities ineligible for portfolio management accounts
from the time that the parties signed the portfolio
management agreements and
the parties' accounts^
net
asset values, all cash on August 19, 2015. Therefore,
the panel could not consider what happened prior to the
investment of cash on August 19, 2015 in the portfolio
management accounts.
The damages set forth above stem from the amounts, all
cash, on August 19, 2015, which were sxibsequently
invested in securities that were ineligible for
investment in portfolio margin accounts. Values were
determined
from
Claimants'
Exhibits
70
and
71
and
Respondent's Exhibits R-48 and R115.
Counsel fees were based on an agreement between the
attorneys for both parties. There was a dispute as to
whether the agreement was cancelled. The Panel found for
the Claimants. The amounts were based on a written fee
agreement
between
the
counsel
and
each
party.
Percentages
and
fees
were
obtained
from
Claimants'
Exhibits 53 and 63 and Respondent's Exhibit R-49.
6. Claimants' claim for witness fees is denied.
7. Respondent is liable for and shall pay to Claimants
$600.00 as reimbursement of the non-refundable portion
of the filing fee previously paid.
8. Respondent's
entirety.
Counterclaims
are
denied
in
their
9. Respondent's request for attorneys' fees is denied.
10. Any and all claims for relief not specifically
addressed herein, including punitive damages, are
denied.
14
ECF No. 71-1 at 4-5 (new text underscored). Again, the remainder
of the arbitrator's decision dealt with non-relevant filing fees.
Id. at 5-6.
In sum, the second arbitration decision added "declaratory-
judgment" as one of the causes of action asserted by the Claimants;
it added a brief procedural history of the case leading to the
second, modified award; it added two sentences to the "Arbitrator's
Report"
regarding FINRA rules; and it added Paragraph Five of the
"Award" explaining the calculation of damages.
E.
Procedural Posture
Following the second arbitration decision. Interactive filed
PLAINTIFF'S MOTION TO VACATE MODIFIED ARBITRATION AWARD (ECF No.
79) on March 26, 2018; Claimants filed DEFENDANT'S MOTION TO
CONFIRM THE MODIFIED ARBITRATION AWARD on the same day (ECF No.
80). The parties briefed the matter fully (ECF Nos. 81-85; 89;
91). Thereafter, the Court heard oral argument, and both motions
were fully submitted to the Court. The matter is now ripe for
decision.
LEGAL STANDARD
Section
10
of
the
Federal
Arbitration
Act
sets
out
the
specific, limited grounds upon which an arbitral award may be
vacated. They include:
(1) where the award was procured by corruption, fraud,
or undue means;
15
(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 prejudiced;
or
(4) where the arbitrators exceeded their powers, or so
imperfectly executed them that a mutual, final, and
definite award upon the subject matter siibmitted was not
made.
9 U.S.C. § 10(a). The Supreme Court has issued further instructions
interpreting the fourth of these circumstances: where arbitrators
exceed their powers.
In Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064 (2013),
the Supreme Court explained that "a party seeking relief under
§ 10(a)(4) bears a heavy burden." Id. at 2068. The Court instructed
further:
It is not enough . . . to show that the arbitrator
committed an error—or even a serious error. Because the
parties bargained for the arbitrator's construction of
their agreement, an arbitral decision even arguably
construing or applying the contract" must stand,
regardless of a court's view of its (de)merits. Only if
the arbitrator acts outside
the scope of his
contractually delegated authority—issuing an award that
simply reflects his own notions of [economic] justice
rather than drawing its essence from the contract—may a
court overturn his determination. So the sole question
for us is whether the arbitrator (even arguably)
interpreted the parties' contract, not whether he got
its meaning right or wrong.
Id. at 2068 (internal citations and quotations omitted).
16
The Fourth Circuit has explained that an arbitration award
may be vacated on common law grounds where it "fails to draw its
essence from the contract," or where the award demonstrates a
"manifest disregard of the law." See Choice Hotels Int'l, Inc. v.
SM Prop. Mgmt., LLC, 519 F.3d 200, 207 (4th Cir. 2008). An award
fails to draw its essence from, the contract "when an arbitrator
has disregarded or modified unambiguous contract provisions or
based an award upon his own personal notions of right and wrong."
Three S Delaware, Inc. v. DataQuick Info. Sys., Inc., 492 F.3d
520, 528 (4th Cir. 2007).
Manifest disregard of the law requires the moving party to
show that the arbitrator was "aware of the law, understood it
correctly, found it applicable to the case before [him], and yet
chose to ignore it in propounding [his] decision." Long John
Silver's Restaurants, Inc. v. Cole, 514 F.3d 345, 349 (4th Cir.
2008). This standard is "not an invitation to review the merits of
the underlying arbitration," and will apply only where: "(1) the
disputed legal principle is clearly defined and is not subject to
reasonable debate; and (2) the arbitrator refused to apply that
legal principle." Jones v. Dancel, 792 F.3d 395, 402-03 (4th Cir.
2015), cert, denied, 136 S. Ct. 591 (2015). A district court cannot
overturn an arbitration award "just because it believes, however
strongly, that the arbitrators misinteirpreted the applicable law."
17
Id. at 401 (quoting Wachovia Sec., LLC v. Brand, 671 F.3d 472, 478
(4th Cir. 2012)). The arbitrators must disregard it.
Notwithstanding
these
possible
grounds
for
vacatur,
the
Fourth Circuit has repeatedly emphasized that "judicial review of
an arbitration award in federal court is severely circumscribed."
Id. (quoting Apex Plumbing Supply, Inc. v. U.S. Supply Co., 142
F.3d 188, 193 (4th Cir. 1998)). Indeed, the Fourth Circuit has
described such review as "among the narrowest known at law," Apex,
142 F.3d at 193, and has instructed that "a court sits to determine
only whether the arbitrator did his job—not whether he did it well,
correctly, or reasonably, but simply whether he did it." Wachovia,
671 F.3d at 478 (internal citations omitted). Thus, "as long as
the arbitrator is even arguably construing or applying the contract
and acting within the scope of his authority, that a court is
convinced he committed serious error does not suffice to overturn
his decision." Choice Hotels, 519 F.3d at 207 (quoting U.S. Postal
Serv. V. Am. Postal Workers Union, AFL-CIO, 204 F.3d 523, 527 (4th
Cir. 2000)).
In
sum,
this
Court
"'must'
confimn
an
arbitration
award
'unless' a party to the arbitration demonstrates that the award
should be vacated vmder" one of the permissible grounds, which
includes manifest disregard of the law. Dance1, 792 F.3d at 401
(quoting Hall St. Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576,
582 (2008)).
18
DISCUSSION
With this framework in mind, the Court moves to the merits of
the
case, fully aware
of
its
limited
role
in reviewing
the
arbitration decision. Still, the arbitration decision must comport
with the law. After thoroughly reviewing the record in this caseespecially in light of the specific instructions that the Court
gave the arbitrators in the Remand Opinion—the Court concludes
that the arbitrators based their finding of liability against
Interactive on a violation of FINRA Rule 4210. That is a manifest
disregard of the law because the law is clear that there is no
private right of action to enforce FINRA rules; the arbitrators
knew of and imderstood the law on this point; they found it to be
applicable to the case; and they ignored it. When such manifest
disregard for the law occurs, the Court must vacate the arbitration
award. Because the arbitrator's impermissible finding of liability
is the basis for the damages and attorney's fees award against
Interactive, those findings are also erroneous. Accordingly, the
Court will only deal with the liability issue here. Lastly, because
the arbitrators dismissed Interactive's counterclaims based on the
alleged violation of FINRA Rule 4210, the Court will reinstate
those
claims
and
remand
to
a
consideration thereof.
19
new
panel
of
arbitrators
for
A.
The Arbitrators' Liability Detezmination is Predicated on a
Violation of FINRA Rule 4210
The
arbitrators'
second
arbitration
decision
does
not
expressly state that it is basing its liability finding against
Interactive on any of the causes of action recited in the award.
The decision starts with a list of the causes of actions asserted
by the
Claimants—breach of
contract and promissory estoppel,
violation of state securities statutes, declaratory judgment,
commercially unreasonable disposition of collateral, vicarious
liability, and common law fraud. EOF No. 71-1 at 3. These causes
of action "relate to unspecified securities." Id.^
After
identifying
"ARBITRATOR'S
REPORT"
those
potential
makes
a
finding
causes
of
of
action,
liability
the
against
Interactive without stating which cause of action serves as the
basis for such liability or how damages were determined.
Indeed,
the "REPORT" does not identify any of the specified causes of
action delineated on the previous page of the decision as the
predicate for the award.
More importantly, the only basis for
liability cited by the arbitrators in their modified award—after
they were specifically instructed by the Court to provide an
®
The
arbitrators
then
state
that
in
Claimants'
"Statement
of
Claim"
they
requested:
compensatory
damages,
direct
or
consequential damages, market adjusted damages and/or punitive
damages, interest, lost opportunity damages, rescission, statutory
damages, costs, legal fees, and any and all other relief available.
Id.
20
explanation for the predicate for liability-is a violation of FINRA
Rule 4210.
In the first arbitration decision, the "ARBITRATOR'S REPORT"
stated that Interactive's counterclaims were dismissed "based on"
Interactive's
"violation
of
FINRA
Rule
4210"
and
"securities placed in the portfolio margin account
that
the
were
not
eligible for that accovint based on these rules and regulations."
EOF No. 1-2 at 4 (emphasis added). In the second arbitration
decision, the arbitrators appear to double down on their reliance
of a FINRA rule violation as the basis for liability by adding the
following two sentences—and only these sentences—to the "REPORT":
Respondent's position that the Panel should not enforce
a FINRA rule amounts to saying that FINRA should provide
an opportunity for investors to commit financial suicide
by investing in securities that are ineligible for
inclusion in a portfolio margin account. To ignore a
FINRA rule by the Panel would defeat the purpose of
FINRA.
ECF No. 71-1 at 4. This is the only explanation in the modified
"ARBITRATOR'S
REPORT"
that
relates
to
the
predicate
for
liability.
^0 In the modified "AWARD," where the arbitrators attempt to explain
the damages calculation, they also appear to double-down on a FINRA
rule violation: "The damages set forth above stem from the amounts
. . . which were subsequently invested in securities that were
ineligible for investment in portfolio margin accounts." ECF No.
71-1 at 4 H 5.
21
Further support for that conclusion is found in the final
paragraph of the "AWARD," where the arbitrators write: "Any and
all claims for relief not specifically addressed herein, including
punitive damages, are denied."
at 5 f 10. In the Remand Opinion
(EOF No. 50), the Court noted that the first arbitration decision's
use of this identical language was unclear: "[O]ne cannot discern
from the Arbitrator's Report or the Award which claims for relief
were, as the arbitrator put it, 'specifically addressed.'" ECF No.
50 at 17. Instead of following the Court's instruction to clarify
the predicate for liability, however, the arbitrators used the
same "specifically addressed" language and added language about
FINRA rule violations. By process of elimination, if all other
claims were rejected (by the arbitrators' express admission) and
the only language added to the "ARBITRATOR'S REPORT" indicates
that liability is predicated on a FINRA Rule 4210 violation, it is
hard for the Court to conclude anything other than that a violation
of FINRA Rule 4210 is the basis for liability here.^^
In the DEFENDANT'S OPPOSITION TO PLAINTIFF'S MOTION TO VACATE
THE MODIFIED ARBITRATION AWARD (ECF No. 85), the Claimants concede
that
commercially
unreasonable
disposition
of
collateral,
vicarious liability, and declaratory judgment were likely not the
basis for liability here. ECF No. 85 at 12. Accordingly, Claimants
assert that breach of contract and promissory estoppel, violation
of state securities statutes, and common law fraud remain as bases
for the arbitrator's finding of liability. Id.; see also Oral Arg.
Tr. at 45 (ECF No. 94). However, on its face, the arbitration
decision makes clear that liability is predicated on a violation
of FINRA Rule 4210.
22
The arbitrators were on notice that the Court was perplexed
by the "specifically addressed" language and to the extent they
clarified
their
award,
they
have
made
it
clear
that
they
"specifically addressed" FINRA Rule 4210.
B.
The Arbitrators' Award Manifestly Disregards the Law in
Relying on FINRA Rule 4210 as the Predicate for Liability
It is a manifest disregard of the law to predicate liability
on a violation of FINRA Rule 4210. Accordingly, the arbitration
award cannot stand.
Distilling the Fourth's Circuit's "manifest disregard" cases,
the Court uses the following framework to assess this issue.
First, the legal principle must be "clearly defined and. . .not
subject to reasonable debate." Dance1, 792 F.3d at 402. Second,
the arbitrators must have: (1) been aware of this clearly defined
law,
(2)
understood
that law
correctly,
(3) found
that law
applicable to the case before them, and (4) ignored that law in
coming to a decision. See Long John Silver's, 514 F.3d at 349.
Each of these elements has been met in this case.
1. The Law Is Clearly Defined That There Is No Private Right
of Action Under FINRA Rules
The clear weight of authority holds that a violation of the
rules of a financial self-regulatory entity like FINRA (or its
23
predecessor, NASD)^^ does not give rise to a private right of
action. More than 40 years ago, the Fourth Circuit considered
whether New York Stock Exchange ("NYSE") Rules or American Stock
Exchange ("ASE") Rules governing margin maintenance requirements
created a private right of action for an investor. Carras v. Burns,
516 F.2d 251, 260 {4th Cir. 1975). The Court of Appeals found that,
because
"[m]argin
maintenance
requirements
are
established
primarily to protect the solvency of brokers by assuring adequate
collateral for their loans that finance consumer speculation,"
these requirements standing alone "create no cause of action" for
the investor. Id. While Carras did not deal with FINRA rules, it
did deal with margin requirements like those in this case and those
in
FINRA
Rule
4210.
The
Court
does
not
discern
a
material
difference between violations of the NYSE or ASE margin rules in
Carras and FINRA Rule 4210 here. See also Stern v. Merrill Lynch,
Pierce,
Fenner & Smith,
Inc., 603 F.2d 1073 (4th
Cir. 1979)
(finding no private right of action to enforce Regulation T credit
rules).
Other cases cited by Interactive in its briefing both to the
Court and to the arbitrators further establish that there is no
private
right of action to enforce
FINRA or NASD
rules.
For
^2 FINRA succeeded NASD in 2007. See Santos-Buch v. Fin. Indus.
Regulatory Auth., Inc., 591 Fed. Appx. 32 (2d Cir. 2015)
(unpublished).
24
example, in Weinraub v. Glen Rauch Sees., Inc., the Court rejected
Weinraub's
securities
fraud
allegations
on
several
grounds,
including that he could not "state a valid cause of action based
on violations of [NYSE] and NASD rules and guidelines, as these
rules confer no private right of action." 399 F. Supp. 2d 454, 462
(S.D.N.Y. 2005) (footnotes omitted). See also Thompson v. Smith
Barney, Harris Upham & Co., Inc., 709 F.2d 1413, 1419 (11th Cir.
1983) (rejecting contention that there is private right of action
under
federal
securities
laws
for
violation
of
NYSE
and
NASD
Rules); SSH Co., Ltd. V. Shearson Lehman Bros. Inc., 678 F. Supp.
1055, 1058 (S.D.N.Y. 1987) (same); Parsons v. Hornblower & Weeks-
Hemphill Noyes, 447 F. Supp. 482, 494 (M.D.N.C. 1977) ("Under the
clear weight of authority, there is no private right of action for
alleged violations of NASD rules in the absence of facts which
demonstrate fraud, independently cognizable under the antifraud
provisions of the securities laws.").
In
a
Notice
of
Supplemental
Authority
(ECF
No.
89),
Interactive also cites to a recent Southern District of New York
case, Hauptman et al. v. Interactive Brokers, LLC, No. l:17-cv09382-GBD
(S.D.N.Y.
June
12,
2018).
Tjie
Court
stated
unequivocally that "no private right of action exist[s]. . . for
"Interactive also provided a more recent opinion in Hauptman, No.
l:17-cv-09382-GBD
(S.D.N.Y.
Oct.
19,
2018),
that
denied
the
Plaintiffs' Motion to Amend based on the futility of such an
amendment. ECF No. 91.
25
violations of. . .FINRA rules." Hauptman, slip op. at 15 (quoting
Lobaito V. FINRA, No. 13-CV-6011, 2014 WL 4470423, at *7 n.3
(S.D.N.Y.
Sept.
9,
2014)).
Hauptman
was
decided
after
the
arbitrators decided this case, so it cannot serve as a basis to
establish that the law was clearly defined on this issue when the
arbitrators had this matter before them. Hauptman quotes the
earlier Lobaito case, which pre-dated the arbitration in this case,
and thus could establish this principle of law. Lobaito, however,
was discussing whether there was a private right of action against
FINRA for actions it takes "in furtherance of its regulatoiy
duties, including enforcement of its own rules." Lobaito, 2014 WL
4470423, at *7 & n.3. Private rights of action against FINRA are
not at issue in the instant case.
Nonetheless, Hauptman also cites to Gurfein v. Ameritrade,
Inc., discussed infra. In Gurfein, the Second Circuit taught that
there
is
no
private
right
of
action
under
the
rules
of
organizations like FINRA. 312 Fed. Appx. 410, 414 (2d Cir. 2009)
(stating that "Gurfein does not contend that the regulatory rules
themselves provide investors with a private right of action" and
"Gurfein is precluded from creating a private cause of action for
violations of these rules and regulations by fashioning her claim
as one for breach of contract"). Thus, even leaving Lobaito and
Hauptman aside, it is clear that the Second Circuit understood
there was no private right of action under rules of entities like
26
FINRA.
Further, the Court has not found—nor have the Claimants
provided-any case that holds that there is a private right of
action to enforce violations of FINRA rules. Accordingly, the Court
considers that question—whether there is a private right of action
to enforce FINRA rules—to be beyond dispute.
Undeterred, Claimants also attempt to make the more nuanced
argument that a violation of FINRA rules can provide the basis for
a common law claim. To that end, they argue that a violation of
FINRA rules could have supported a finding by the arbitrators that
Interactive violated one of the common law causes of action.
See,
6•g*/ ECF No. 85 at 13-14. By making this argument, the Claimants
concede that the arbitrators were relying on a violation of FINRA
Rule 4210 to establish liability, but were doing so to establish
one of the common law claims.
Claimants also cite several cases that they think support
their theory.
Those cases, however, are about using FINRA rules
to define the scope of a common law duty—or to provide evidence of
whether that duty was met—not about establishing the predicate for
liability in the first place.
In Rioseco v. GAMCO Asset Mgmt., a New York state trial court
decision, the court considered whether FINRA rules (there, the so-
" Counsel for the Claimants conceded this point at oral argument,
answering "no" when directly asked by the Court if there were any
cases holding that there is a private right of action to enforce
FINRA rules. Oral Arg. Tr. at 28 (ECF No. 94).
27
called "suitability rules") could "be considered as evidence of
industry standards for purposes of a common law malpractice claim."
No. 15862/10, Seq. No. 003, 2011 WL 4552544, at *79 (N.Y. Sup. Ct.
Sept. 23, 2011) (emphasis added). The Rioseco court noted that a
violation of FINRA rules does not give rise to a private cause of
action. Id. However, since the court had already determined that
GAMCO owed fiduciary duties to Rioseco, the violation of the FINRA
rules could be probative of "whether GAMCO committed malpractice."
Id. at *80.
The
Rioseco
court
understood
the
difference
between
FINRA
rules creating a private cause of action and their informing the
scope of existing causes of action and common law duties. If a
FINRA rule "gave rise to a private right of action, the violation
of
the
rule,
standing
alone,
would
be
sufficient
to
impose
liability." Id. at *79. There is no private right of action under
FINRA rules, but the Rioseco court found that the rules could
provide
evidence
of
whether
there
was
malpractice
once
it
established that GAMCO owed a fiduciary duty. In the instant case,
the Court cannot ascertain which common law cause of action that
a FINRA rule violation could inform. The arbitrators state that
they are denying "any and all claims for relief not specifically
addressed herein," yet only address a violation of FINRA rules.
ECF No. 71-1 at 4-5. That implies that the basis for liability is
a FINRA rule violation.
Accordingly, Rioseco is not on point.
28
The same analysis holds true for other cases cited by the
Claimants. Those cases all deal with using a violation of FINRA or
NASD rules to provide evidence of a violation of an existing common
law cause of action, like negligence. They do not use the FINRA or
NASD rule violation as an independent cause of action as the
arbitrators did here. See Milliner v. Mut. Sees., Inc., 297 F.
Supp. 3d 1060, 1065 (N.D. Cal. 2016) ("[C]ourts have often looked
to such rules in defining the scope of common law duties."); Walnut
St. Sees. V. Lisk, 497 F. Supp. 2d 714, 719-720 (M.D.N.C. 2007)
(violation of NASD rules could be basis for failure to supervise
liability); Scott v. Dime Sav. Bank of New York, FSB, 886 F. Supp.
1073, 1080-81 (S.D.N.Y. 1995) (jury could have considered evidence
of NASD rule violation in determining negligence); Merrill Lynch,
Pierce, Fenner & Smith, Inc. v. Cheng, 697 F. Supp. 1224, 1227
(D.D.C. 1988) (violation of NASD rule may be considered by jury in
determining negligence). These cases make clear that violating a
FINRA or NASD rule can be considered in defining the scope of a
common law duty. But here, the arbitrators state that they are
rejecting all claims not specifically addressed and only address
the FINRA rule violation. There, thus, is no common law claim upon
which they could have based the finding of liability.
Further still, recent Second Circuit case law holds that an
investor may not create a private right of action for the violation
of
financial
regulatory
rules,
29
including
NASD
rules,
by
refashioning his claim as a breach of contract claim. Gurfein v.
Ameritrade, Inc., 312 Fed. Appx. 410, 412-14 (2d Cir. 2009). In
Gurfein,
the
plaintiff's
Customer Agreement
with
her online
financial brokerage firmi stated that "[a]11 transactions under
this Agreement are made subject to the constitution, rules,
regulations, customs and usages of the various execution points
and their clearinghouse, if any." Id. at 413. The Second Circuit
determined that such a clause "is a notice provision that informs
the customer that her trades are constrained by the rules of
governing regulatory agencies" and did not "impose[] [contractual]
obligations" on the broker-dealer. Id. at 413-14. Gurfein could
not
"creat[e]
a
private
cause
of
action
for
violations
of
[financial regulatory] rules and regulations by fashioning her
claim as one for breach of contract based on violations of rules
and regulations impliedly incorporated into the agreement." Id. at
414.
Like Gurfein, this case involves a Customer Agreement that
acknowledges that "[a]11 transactions are subject to rules and
policies of relevant markets and clearinghouses, and applicable
laws and regulations." Interactive Brokers LLC Customer Agreement
t 6 (ECF No. 1-4).
And, like Gurfein, this provision puts the
customer on notice about how his trades will be governed. But, as
the Second Circuit has made clear, it does not create a private
30
cause of action for violation of financial regulatory rules and
regulations under a breach of contract theory.
The Court is satisfied that the law is clearly defined that
there is no private right of action to enforce FINRA rules. Because
it is apparent on the face of the arbitrator's decision that a
violation of FINRA Rule 4210 is the basis for liability in this
case, that is the end of the matter.
Claimants' argument that
FINRA or NASD rules can provide evidence to support a common law
cause of action presupposes that one exists. Where the arbitrators
state
that
they
are
rejecting
all
claims
not
specifically
addressed, and only address a violation of FINRA rules, cases of
that hue are simply inapposite.
2. The Arbitrators Knew the Law, nnderstood It, Knew It Was
Applicable, and Disregarded It
Once it is established that the law on the issue is clearly
defined, the next step in the "manifest disregard of the law"
analysis is to show that the arbitrators knew the law, understood
it, knew it was applicable, and disregarded it. See Long John
Silver's, 514 F.3d at 349; see also Raymond James Fin. Servs. v.
Bishop, No. 3:07-cv-28, slip op. at 28 (E.D. Va. Dec. 18, 2008),
aff'd, 596 F.3d 183 (4th Cir. 2010).
It
is
clear
that
the
arbitrators
knew
the
law
because
Interactive made clear in their briefing to the arbitrators that
there was no private right of action for violation of FINRA rules.
31
See Raymond James, slip op. at 28 ("Raymond James correctly
informed the panel of the principle in its Motion to Dismiss. . .
.").
In both its pre-hearing brief before the arbitrators and its
memorandum in support of its motion for summary judgment (ECF No.
31), Interactive cited clear authority establishing that there is
no private right of action for violation of FINRA rules. See ECF
No. 82 at 4-6 (discussing the two ways in which Interactive
provided law to the arbitrators). The arbitrators were aware of
the law cited in these briefs because they state that "they have
each read the pleadings and other materials filed by the parties."
ECF
No.
71-1
at
2.
Accordingly,
the
Court
finds
that
the
arbitrators were aware of the law.
Second, the arbitrators understood the law.
Raymond
This Court in
James found that arbitrators understood the "causation
element of a fiduciary damages claim" because the arbitrators were
"licensed attorneys" and such knowledge is "hornbook law. . .
required. . .for admission to the bar." Raymond James, slip op. at
29. As Interactive points out, the chairman of the arbitration
panel here is an attorney and he stated that the panel members
"are not iineducated or inexperienced jurists." ECF No. 82 at 6. In
the Remand Opinion (ECF No. 50), the Court instructed that the
arbitrators needed to make clear the predicate for liability. That
damages must be tied to a recognized cause of action is "hoimbook
law." And, since at least one of the arbitrators is an attorney
32
and
represented
that
the
members
of
the
panel
are
"not.
.inexperienced jurists," the Court finds that the arbitrators
understood the law in this case.
Third, the arbitrators knew the law was applicable. Once
again, the arbitrators had the benefit of this Court's Remand
Opinion in
which
the
Court instiructed
the
arbitrators to tie
damages to a cause of action. ECF No. 50 at 17. Further, the
arbitrators acknowledged Interactive's position by stating in the
"AEIBITRATOR'S
REPORT":
"Respondent's
position
that
the
Panel
should not enforce a FINRA rule amounts to saying that FINRA should
provide an opportunity for investors to commit financial suicide.
. . ." ECF No. 71-1 at 4. The arbitrators knew they had to tie the
damages to a cause of action. They knew that Interactive's position
was that there was no private right of action to enforce FINRA
rules. They knew that the law applied to this case because they
stated it in their "REPORT." On this record, the Court finds this
element to be satisfied.
Finally, the arbitrators disregarded the law by finding
Interactive liable solely on the basis of violating FINRA Rule
4210. They were aware of the law, understood it, and knew it was
applicable to the case.
After receiving clear guidance from this
Court that they needed to establish a predicate for liability, the
arbitrators doubled down by adding to their "REPORT" more language
about violating FINRA rules rather than discussing one of the
33
claims for relief stated in the ''CASE SUMMARY." See EOF No. 71-1
at 3-4. On this record, the Court has no choice but to find that
the arbitrators utterly disregarded the law that FINRA rules
provide no private case of action.
Claimants cite several cases to refute that the Court is able
to determine from the face of the award that the panel acted in
tianifest disregard of the law. None of these cases support that
proposition in this case. In Waveland Capital Partners, LLC v.
Tommeirup, 928 F. Supp. 2d 1227 (D. Mont. 2013), the Court rejected
an argument that it could determine that the arbitrators based a
finding
of
liability
on
"violations
of
self-regulatory
organization rules." Id. at 1232. That case is different for two
reasons. First, the arbitrators did not even address the self-
regulatory organization (like FINRA) rules. Id. Second, the Court
found several grounds upon which the arbitrators could have based
their award. Id. at 1233. Neither of those situations are present
here: the arbitrators expressly discussed a FINRA rule violation
and the Court cannot find another basis for the finding of
liability.
In The QMS Group, LLC v. Benderson, 326 F.3d 75 {2d Cir. 2003),
the Second Circuit found that arbitrators did not act in manifest
disregard of the law in applying NASD rules. But in that case,
there was no written opinion by the arbitrators, id. at 81, and
the Court determined that the facts and the law were unclear such
that it could not say the arbitrators acted in manifest disregard
of the law. Id. at 82-83. This case differs because the Court does
have an opinion and the law is clear. Thus, the Court can determine
that the arbitrators manifestly disregarded the law.
Lastly, Claimants cite two New York state cases. In a half-page
opinion, a New York trial court rejected a challenge to an
arbitration decision that "concerned the alleged breach of two
rules of" NASD. Freeman v. Arahill, No. 111119/01 (N.Y. Sup. Ct.
Oct. 18, 2001). It did so because Freeman did "not cite any case
law for the proposition that a private right of action based on
the violation of self-regulatory organization rules cannot be
brought in arbitration." Id. While this statement cuts against the
Court's determination here, the Court is not convinced by an
unreasoned, half-page state trial court decision in the face of
the other authority cited in this opinion. Claimants also cite In
re Grace Fin. Group, LLC v. Dino, which upheld an arbitration award
34
In sum, the Court finds that the law applicable in this case
is clearly defined—there is no private right of action for the
violation of FINRA rules. The Remand Opinion put the arbitrators
on notice that they were to tie their damages award to a cause of
action. Rather than explaining which of the stated causes of action
they relied
on,
they added
more
language
about
FINRA
rule
violations. In so doing, the arbitrators made it quite clear that
liability was based solely on Interactive's violation of FINRA
Rule 4210.
Further, the arbitrators knew of the law, understood
it, knew it to be applicable, and continued to disregard it. All
of the elements for vacatur for manifest disregard of the law have
been met. See Dance1, 792 F.3d at 402; Long John Silver's, 514
F.3d at 349. Accordingly, the PLAINTIFF'S MOTION TO VACATE MODIFIED
ARBITRATION AWARD (EOF No. 79) will be granted.
C.
Interactive's Counterclaims
Before
address
concluding, however, it is necessary briefly to
Interactive's
Interactive
asserted
counterclaims.
counterclaims
During
arbitration.
against the
Claimants for
failure to mitigate and pay a debt. ECF No. 71-1 at 3. It requested
dismissal of the Claimants' claims, compensatory damages of
as not manifestly disregarding the law where the award did not
refer to FINRA rules, but rather characterized the claim as
asserting "only excessive fees and mark-ups." 138 A.D. 3d 644, 645
(N.Y. App. Div. 2016). The Court implied, however, that if, like
here, the arbitrators had sought to use FINRA rules to establish
a private cause of action, the award would have been vacated. Id.
35
$220,172.09 from Rohit and Preya Saroop, compensatory damages of
$166,087.53 from Dr. Sofis, interest, costs, and attorney's fees.
Id.
The "ARBITRATOR'S REPORT" briefly assesses Interactive's
coxinterclaims: "Respondent's Counterclaim was dismissed based on
Respondent's violation of FINRA Rule 4210 as further explained in
FINRA Regulatory Notice 08-09." Id. at 4. Finally, in the "AWARD,"
the arbitrators denied Interactive's Counterclaims "[i]n their
entirety," as well as denied Interactive's request for attorney's
fees. Id. at 5 ft 8-9.
Because
the
Court
has
determined
that
it
was
manifest
disregard of the law for the arbitrators to award damages to the
Claimants based solely on the violation of FINRA Rule 4210, it was
likewise improper to dismiss the counterclaim on this same ground.
If FINRA Rule 4210 cannot support a finding of liability standing
alone, neither can it provide a sort of affirmative defense that
the arbitrators can use to reject Interactive's counterclaims.
But, given the difficulty that the arbitrators in this case
had in following the Court's previous order (ECF No. 50) and their
rather flagrant disregard of
settled law in ruling against
Interactive, the Court cannot in good conscience remit Interactive
to
the
same
panel of
arbitrators
for
reconsideration
of
its
counterclaims. See, e.g., Montes v. Shearson Lehman Bros., Inc.,
128 F.3d 1456, 1464 (11th Cir. 1997) (remanding to new panel of
arbitrators where original panel was foimd to manifestly disregard
36
the
law).
Accordingly,
the
Court
counterclaims and remands to a
reinstates
Interactive's
FINRA arbitration panel
with
specific instructions that the counterclaims be considered by a
different FINRA arbitration panel,
CONCLUSION
For the reasons set forth above, it is hereby ORDERED that
the PLAINTIFF'S MOTION TO VACATE MODIFIED ARBITRATION AWARD (EOF
No.
79)
is
GRANTED
and
the
DEFENDANT'S
MOTION
TO
CONFIRM
THE
MODIFIED ARBITRATION AWARD (EOF No. 80) is DENIED. Furthermore, it
is hereby ORDERED that this matter is be remanded to a new panel
of
FINRA
arbitrators
for
reconsideration
of
Interactive's
counterclaims.
It is so ORDERED.
/s/
Robert E. Payne
Senior United States District Judge
Richmond, Virginia
Date; December 18, 2018
37
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