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<xTITLE>Eleventh Circuit Upholds $3 Million Sanction FINRA Award Against Morgan Stanley</xTITLE>

Eleventh Circuit Upholds $3 Million Sanction FINRA Award Against Morgan Stanley

by George Friedman
January 2021 George Friedman

This article was first published on the Securities Arbitration Alert (SAA), here.

(This analysis is authored by SAA Editorial Board member Robert Pearce, a Securities Arbitration Lawyer at the Law Offices of Robert Wayne Pearce, P.A. The words that follow are his, lightly edited.) In an unpublished per curiam Opinion, the Eleventh Circuit, has affirmed unanimously a Southern District of Florida decision confirming a FINRA Award of over $3 million in sanctions against Morgan Stanley.

Briefly stated, the Petitioners were residents of Puerto Rico who filed sales practice claims arising out of their Morgan Stanley’s advisors' recommendation and over-concentration of the investments in Puerto Rico bonds and closed-end funds using securities-backed loans. The Arbitration Panel’s stated compensatory damage Award in Litovich-Quintana and Torres v. Morgan Stanley Smith Barney, LLC, FINRA ID 17-01908 (Miami, FL July 16, 2019), was relatively small ($261,420.63 in compensatory damages), compared to the $3 million sanction for violating the Arbitrators’ discovery orders. The District Court, in a case we covered in SAA 2020-14 (Apr. 15), denied Morgan Stanley’s Motion to vacate the Award (see No. 1:19-cv-22977-MGC (S.D. Fla. Oct. 1, 2019)), and this appeal followed.

Motion to Vacate

Morgan Stanley argued “evident partiality” by the Arbitrators and that they “exceeded their powers” in ordering sanctions as their statutory bases for vacatur of the Award. The District Court had rejected those two arguments and found expressly that “the sanctions award was compensatory rather than punitive.” In so doing, the District Court relied upon the Panel’s reasoning for the monetary sanctions; that is, “the negative effect that [MSSB’s] noncompliance with the Panel’s Orders had on its efforts to achieve a fair arbitration hearing” and “the extreme prejudice [MSSB’s] failure of compliance caused [Petitioners’] counsel in preparing their case and asserting their claims without the documents which the panel deemed were highly relevant to the dispute in question, the central figure of which was the terminated employee whose related documents were being withheld.” Notably, the $3 million in sanctions was relatively close to the actual alleged compensatory damages, attorney’s fees, and interest that Petitioners requested the Panel awarded them in the arbitration.

The Appeal

Notwithstanding, Morgan Stanley appealed to the Eleventh Circuit seeking to reverse the District Court’s findings that there was no “evident partiality” and that the Panel had not “exceeded its powers.” The unanimous Court in Torres v. Morgan Stanley Smith, Barney, LLCNo. 20-11535 (11th Cir. Dec. 10, 2020) (per curiam)(unpublished)rejects both arguments, holding that Morgan Stanley failed to establish a statutory basis for vacating an arbitration Award under the Federal Arbitration Act.

Issue on Appeal: Evident Partiality

Morgan Stanley had contended that two of the Arbitrators demonstrated: “evident partiality” because they purportedly knew of, but failed to disclose information which would have led Morgan Stanley to believe there was a potential conflict of interest in selecting them as Arbitrators. However, the Eleventh Circuit found the Arbitrators made sufficient disclosures and that what Morgan Stanley contended should have been disclosed was: 1) false; 2) gave rise to “no reasonable impression of partiality;” and/or 3) could not “conclude that an objective reasonable person would believe the potential conflict existed.”

Issue on Appeal: Exceeding Powers

The Eleventh Circuit then turned its attention to the “exceeded powers” argument and reminded Morgan Stanley of its ruling in Gherardi v. Citigroup Global Markets, Inc., 975 F. 3d 1232, 1236-38 (11th Cir. 2020), a case covered in SAA 2020-36 (Sep. 23): “When parties agree to arbitrate their disputes, they ‘opt out of the court system’ and, thus, have limited avenue for relief in federal court.” The Court noted its jurisdiction was limited to making sure the arbitration agreement gave the Panel authority to reach the issues it resolved and that the agreement in this case expressly incorporated: “FINRA By-Laws, Rules, and Code of Arbitration Procedure,” and that Morgan Stanley had agreed to be bound by same. Further, that the Arbitrators’ power to impose sanctions under FINRA’s Code of arbitration Procedure was undisputed. The Court also rejected Morgan Stanley’s argument that the sanctions were prohibited by “applicable law.” In that regard, it stated: “Whether the Panel applied its rules consistent with ‘applicable law’ or in an arbitrary manner are legal questions that are beyond the limited scope of our judicial review.”


(ed: The vacatur fever has been prevalent in the Puerto Rico arbitration cases resulting in big Awards to investors. It’s time the big wire-houses honor the rules they pushed upon investors and remember they opted-out of the court system for their own brand of justice in every case -- not only when the vote goes their way!)



George H. Friedman is the publisher and Editor-in-Chief of the Securities Arbitration Alert, a weekly online publication covering the latest developments in financial services arbitration and mediation. He is also the principal of George H. Friedman Consulting, LLC, providing expert advice on arbitration and mediation in general and the FINRA dispute resolution forum in particular.

He is former Executive Vice President - Dispute Resolution of the Financial Industry Regulatory Authority (“FINRA”), a position he held through January 2013. He held the same title at NASD, which consolidated with NYSE Member Regulation to form FINRA in 2007. In this capacity, he was in overall charge of FINRA's dispute resolution program, carried out by the company's four regional offices and 72 hearing locations in the United States and abroad, 200 employees, and an annual budget of $50 million. He also served as Secretary of the Securities Industry Conference on Arbitration. He has been referred to by the U.S. Court of Appeals—4th Circuit as a “leading arbitration expert.” He is a member of the American Arbitration Association's National Roster of Neutrals.

Mr. Friedman is an Adjunct Professor of Law at Fordham Law School, where he has taught a course on alternative dispute resolution since 1996. He is Chairman of the Board of Directors of Arbitration Resolution Services, Inc. of Coral Springs, Florida. Arbitration Resolution Services is an innovative online arbitration services company facilitating an affordable alternative to costly courtroom litigation and in-person arbitration for resolving Business-to-Business, Business-to-Individual, and Vehicle and Property Damage disputes. ARS is unique in that its entire process can be completed online through the company website.

In his extensive dispute resolution career, he previously held a variety of positions of responsibility at the American Arbitration Association, most recently as Senior Vice President from 1994 to 1998. He joined NASD in 1998 as Senior Vice President of NASD's Dispute Resolution Division, and was named Executive Vice President in 2002.

Mr. Friedman received a B.A. in Political Science from Queens College, and a Juris Doctor from Rutgers Law School - Newark, where he was an editor of the Law Review. He is admitted to the New York and New Jersey Bars and the United States Supreme Court, and is a Certified Regulatory and Compliance Professional. Mr. Friedman is a member of the Securities Experts Roundtable, and of several bar associations. He is past chair of the Committee on Alternative Dispute Resolution of the New York County Lawyers Association. He is a member of the Banking Advisory Committee of Bergen (NJ) Community College.

Mr. Friedman has lectured extensively on the subject of alternative dispute resolution, and has the distinction of being one of the architects of the American Arbitration Association’s Due Process Fairness Protocols for both employment arbitration and health care dispute resolution, and assisted in creating the Consumer Due Process Protocol. He has published often, with articles appearing in the Securities Arbitration Commentator, the ABA's Dispute Resolution Magazine, the New York Law Journal, the Rutgers Law Review, and the National Law Journal. He has blogs at Arbitration Resolution Services, Inc., the Securities Arbitration Commentator, and the World Future Society, among others.

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