Author: admin

In court, judges are subject to a vast network of state and federal rules and laws that provide instructions on how to conduct—and ultimately decide—the cases before them.  If the trial judge misapplies one of these rules or laws (or provides a jury with flawed jury instructions related to the applicable laws), the judge’s action can be appealed to a higher (appellate) court and potentially overturned.  Thus, judges are keen to strictly follow and enforce laws, and they have robust guidance—often directly contained in state and federal statutes—on how to go about doing that.    

FINRA arbitrators, on the other hand, are far less shackled to state and federal rules and laws.  Instead, they are generally bound only to abide by FINRA’s Code of Arbitration Procedure (the Code), which is far less comprehensive and far more open ended than the laws and rules applicable in court.  The plain text of FINRA’s Code leaves much to the arbitrators’ and parties’ discretion and provides limited guidance on how to address many issues that regularly arise in FINRA arbitrations.

Fortunately, FINRA does not leave arbitrators with just the Code:  FINRA also maintains and distributes the FINRA Arbitrator’s Guide, a nearly 100-page long supplemental guide for arbitrators that provides them counsel on how to interpret and abide by the provisions of the Code, as well as guidance on how to address many issues that frequently come up during FINRA arbitrations.  

Arbitration parties routinely cite the FINRA Arbitrator’s Guide, and arbitrators often consult it.  Indeed, as counsel to FINRA arbitration parties, Montgomery G. Griffin and Theodore S. Avery reference the Arbitrator’s Guide with regularity.  And as a member of FINRA’s Board of Arbitrators since 1996, Montgomery Griffin has sat as an arbitrator at FINRA in various states on approximately 40 arbitration cases, including having served as a Panel Chairperson.  In that capacity, Monty himself has treated the Arbitrator’s Guide as authoritative guidance.  FINRA itself states to arbitrators, “We encourage you to review the Arbitrator’s Guide, and refer to it frequently during your service in our forum.”  

Below are 10 of the most significant things the Law Offices of Montgomery G. Griffin believes investors should know about the directions of the Arbitrator’s Guide: 

1. Equity should prevail.  The Arbitrator’s Guide opens with a quote from Domke on Artistotle, stating, “Equity is justice in that it goes beyond the written law . . . and the reason why arbitrators were appointed was that equity might prevail.”  FINRA’s decision to open its guide with this quote reflects both an important truth about arbitration, as well as a key insight into FINRA’s vision for the arbitration process. Arbitrators are far less bound to follow dry principles of law than judges.  They are given broad leeway to do as they see fit in arbitrations before them, even if a judge could not act similarly or render equivalent awards. Individual arbitrators vary in how far they go with this discretion—indeed, some follow the law very closely and attempt to recreate court outcomes while others have a reputation of creatively deciding cases.  In either event, the flexibility afforded to FINRA arbitrators is a significant difference compared to that afforded to judges in a court of law.
   
2. Various Damages Theories:  Arbitrators may consider a variety of remedies, including market-adjusted damages.  Brokerage firms frequently argue that customers are entitled to recovery of only the investor’s so-called “net out of pocket losses” (the actual depreciation of the customer’s account) (sometimes called the “NOP”).  The Arbitrator’s Guide, however, makes clear that FINRA arbitrators are entitled to consider a variety of remedies, including market-adjusted damages (or what the Arbitrator’s Guide calls “well-managed” damages), which is the difference between how the customer’s account performed and how it would have performed had it been properly managed consistent with the investor’s investment objectives and risk tolerance.  Additionally, the Arbitrator’s Guide further provides that FINRA arbitrators can include other types of damages in their Awards, including attorneys’ fees, costs, punitive damages, and financial elder abuse damages.
   
3. FINRA’s eligibility rule is subject to tolling.  FINRA Rule 12206 states that where six years have elapsed from the occurrence or event giving rise to an investor’s claim, that claim is not eligible for submission to FINRA arbitration.  Brokerage firms routinely argue that this means that claims related to investments purchased over six years prior to the filing of the arbitration are not eligible for arbitration.  FINRA’s Arbitrator’s Guide, however, states the contrary.  Specifically, the Arbitrator’s Guide states that the “panel determines whether a claim meets the six-year eligibility requirement,” and it gives the panel unfettered discretion in this regard.  The Arbitrator’s Guide also specifically explains that the arbitrators “may find that there is a continuing occurrence or event giving rise to the dispute,” giving the example of a stock that was purchased 10 years ago but that was subject to continuing fraud to a time within 6 years of the claim being filed.  The Law Offices of Montgomery G. Griffin has frequently been successful—including in a multimillion dollar case against a large Wall Street firm—in arguing that this example applies to churning fact pattern which reach back 10 (or more) years.  Thus, the Arbitrator’s Guide plainly demonstrates that disputes related to investments purchased long before six years prior to filing may be subject to FINRA arbitration.
   
4. Senior citizens and seriously ill parties should receive expedited arbitrations.  FINRA reminds arbitrators that where a party is a senior (a person 65 years old or older) or seriously ill, special efforts should be made to expedite the arbitration process.  Part of this is handled by the FINRA staff, who ventures to expedite their administration of the case (such as by promptly commencing the arbitrator selection process and promptly serving the final award).  
   
5. Arbitrators must be neutral and should avoid and disclose conflicts of interest.  For arbitration to provide a fair means of dispute resolution, it is critical that arbitrators be neutral and avoid and disclose any conflicts of interest.  FINRA embraces this principle wholeheartedly and reminds arbitrators of it in the Arbitrator’s Guide.  Failure to abide by this mandate may lead to the removal of an arbitrator, and it can even result in vacatur of an arbitration award.
   
6. Discovery is important, and parties are required to cooperate to the fullest extent practicable in the exchange of documents and information.  Exchanging relevant (or potentially relevant) documents and information is an important part of any litigation process, including FINRA arbitration.  FINRA reminds arbitrators that the parties are expected to cooperate fully in discovery. In application, parties are expected to conduct diligent searches for required documents and information and timely provide to the opposing party a complete set of copies of those documents and information.  Failure to do this or otherwise cooperate in discovery can be a violation of FINRA rules. Indeed, in 2019, Morgan Stanley was ordered by a FINRA arbitration panel to pay an investor a whopping $3 million as a discovery sanction for what the arbitration Panel determined was a purposeful refusal to provide relevant documents to the investor.
   
7. Depositions are permitted under only extraordinary circumstances.  Depositions are a mainstay of court litigation, but they are exceedingly rare in FINRA arbitrations.  In FINRA arbitration, they are available only in extraordinary circumstances, such as a dying witness, as an accommodation to distant witnesses who are unwilling to travel for the hearing, or the like.  From a cost perspective, this is an advantage of FINRA arbitration over court litigation since deposing a witness can be a very expensive event. But it also means that the first time a customer will get to question most witnesses will be at the arbitration hearing.  This “one bite at the apple” opportunity to cross examine dishonest financial advisors and their supervisors places a high premium on effective hearing preparation and the need to be represented by counsel familiar with the nuances of the securities industry and FINRA rules which govern the conduct of financial advisors and their supervisors.  Attorney Monty Griffin is a former financial advisor, having worked at two of Wall Street’s largest firms for approximately 10 years before completing law school in 1995.
   
8. Permissible information requests are limited.  Another marked difference between FINRA arbitrations and court litigation is that requests for information are substantially limited in FINRA arbitrations.  In court litigation, parties often serve and field a litany of interrogatories and requests for admission. The only similar discovery device permitted under FINRA arbitration rules are an investor’s ability to make requests for information on the brokerage firm and financial advisor.  Such requests for information, however, are generally limited to relevant dates and identities; open-ended requests that seek to probe details behind an opponent’s contentions are prohibited. Again, this has the advantage of saving costs versus court litigation discovery rules, but the relative lack of prehearing information available also complicates hearing preparation—which, once again, amplifies an investor’s need to be represented by skilled lawyers with years of experience working in the securities industry. 
   
9. Failure to comply in discovery can lead to (severe) sanctions.  The Arbitrator’s Guide reminds arbitrators that they can impose sanctions on parties who fail to comply with their discovery obligations.  And, depending on the degree of the party’s lack of cooperation, FINRA arbitrators can invoke severe sanctions. As mentioned above, in 2019, Morgan Stanley was ordered by a FINRA arbitration panel to pay an investor a whopping $3 million as a discovery sanction for its purposeful refusal to provide relevant documents to the investor. 
   
10. Arbitration awards are final and binding. Finally, and importantly, FINRA reminds arbitrators that their awards are final and binding.  FINRA arbitration parties have no right to appeal arbitrators’ decisions. The closest thing they can do is try to have the arbitrators’ award vacated by an appropriate court, but that is rarely successful and can be based on only very limited grounds.  For this reason, it is paramount that parties to FINRA arbitrations put on as compelling a case as possible during the “one bite at the apple” arbitration hearing, as they will not get a second chance with appeal or otherwise. The first, and perhaps most important, step to achieving that is choosing your representation wisely—an issue discussed by Montgomery Griffin in this video
    

The Law Offices of Montgomery G. Griffin focuses its practice almost exclusively on FINRA arbitrations and has deep expertise, decades of experience, a devoted work ethic, and results that speak for themselves. If you need assistance with a potential FINRA arbitration, you can contact the Law Offices of Montgomery G. Griffin at the link below for a free consultation.  

Down the Procedural Rabbit Hole

It is not uncommon in FINRA arbitration (or for that matter, arbitrations of any kind) that the testimony of a non-party witness becomes important.  In FINRA customer arbitrations, for instance, the broker whose conduct is at issue may no longer be employed by the respondent brokerage firm or working in the securities industry at large, rendering him or her a non-party witness over whom FINRA arbitrators lack jurisdiction.  The arbitrators or one or both of the parties may nonetheless wish to question such a non-party witness and receive his or her testimony on the topics at issue in the arbitration.  

In a court proceeding, such a situation is generally unproblematic.  A party may have a subpoena issued commanding the person to appear at trial (or for a deposition), and if that person refuses to comply, the party may enforce the subpoena through routine court procedure, forcing the witness to appear at trial (or for deposition).  

And many arbitration practitioners assume it is the same in arbitration: one simply has the arbitrators issue a subpoena (or “summons”)—FINRA Rule 12512, for example, specifies that “[a]rbitrators shall have authority to issue subpoenas for . . . the appearance of witnesses”—and if the witness does not comply, one runs to court for rubber-stamp enforcement.  

Practitioners who make this assumption, however, are in for a rude awakening should they ever actually need to enforce their subpoenas.  In reality, enforcing an arbitration subpoena against a non-party witness is one of the most pitfall-ridden procedures an arbitration practitioner can attempt.  Indeed, when a recalcitrant non-party witness forced the Law Offices of Montgomery G. Griffin (“LOMGG”) to enforce an arbitration subpoena for testimony, the LOMGG conducted extensive legal research and could not identify a single case where a party had successfully enforced an arbitration subpoena for testimony against a resisting out-of-state, non-party witness.  As discussed here, the LOMGG prevailed over Greenberg Traurig LLP in a federal district court in the State of Florida in its effort to enforce the subpoena at issue in a $42 million California arbitration matter.  The breakthrough result hinged on enormous research, creative arguments, and careful navigation of the myriad issues surrounding enforcement of arbitration subpoenas discussed below.  

The first step is identifying the legal authority that one will use to enforce the subpoena.  Importantly, the authority must indeed be a law and not a provision of the arbitration rules applicable to the parties (such as FINRA Rule 12512 quoted above)—non-parties are not at all bound by the parties’ arbitration agreement.  Hay Group, Inc. v. E.B.S. Acquisition Corp., 360 F.3d 404, 406 (3d Cir. Pa. 2004).  

One has two basic options when it comes to selecting their legal authority: state arbitration laws, or the Federal Arbitration Act (“FAA”).  State arbitration laws regarding enforcement of subpoenas are generally more straight forward and less demanding than the FAA. Unfortunately, however, there is a question as to whether the FAA preempts state laws regarding subpoena enforcement in arbitrations that are based on a “contract evidencing a transaction involving commerce . . . .”  9 U.S.C. § 2. Indeed, although the result is questionable, what appears to be the only case to address the issue determined that the FAA does in fact preempt state laws regarding subpoena enforcement in such arbitrations. In re Beck’s Superior Hybrids, Inc., 940 N.E.2d 352, 363 (2011). 

Thus, unless one wants to gamble enforcement on successful non-preemption arguments, one must rely on the FAA.  Regarding subpoena enforcement, Section 7 of the FAA provides in relevant part:

The arbitrators selected . . . or a majority of them, may summon in writing any person to attend before them or any of them as a witness . . . . The fees for such attendance shall be the same as the fees of witnesses before masters of the United States courts. Said summons shall issue in the name of the arbitrator or arbitrators, or a majority of them, and shall be signed by the arbitrators, or a majority of them, and shall be directed to the said person and shall be served in the same manner as subpoenas to appear and testify before the court; if any person or persons so summoned to testify shall refuse or neglect to obey said summons, upon petition the United States district court for the district in which such arbitrators, or a majority of them, are sitting may compel the attendance of such person or persons before said arbitrator or arbitrators . . . .

This text raises many issues.  To start, it makes clear that at least a majority of arbitrators must sign a subpoena for it to be enforceable.  Since it is customary in many arbitral forums for just a chairperson to sign a subpoena, this may mean that a party first needs to go back to the arbitrators for a new subpoena and serve that new subpoena.   

Section 7 also specifies that one must serve the subpoena “in the same manner” as subpoenas in court.  Courts have taken this to mean that section 7 incorporates the service and enforcement provisions of Federal Rules of Civil Procedure, Rule 45 (“Rule 45”), which governs subpoenas in federal court.  See, e.g., Alliance Healthcare Servs. v. Argonaut Private Equity, LLC, 804 F. Supp. 2d 808, 811 (N.D. Ill. 2011).  For service, this means including payment of witness fees to the witness upon service.  For enforcement, this adds the complications that Rule 45 requires (1) that a witness can be compelled only to attend a hearing within 100 miles of where the witness resides or does business, and (2) a petition to enforce the subpoena must be brought in the federal district court where compliance is required.  

These Rule 45 enforcement requirements set up a potential conflict with the rest of the language of FAA Section 7.  Section 7 of the FAA vests enforcement authority with only the district court where a majority of the arbitrators are “sitting.”  Therefore, to avoid a conflict that could be fatal to enforcement efforts, a party seeking to enforce a subpoena must ensure that (1) the hearing that the witness is to attend is within 100 miles of the witness, (2) the petition to enforce the subpoena is in the same location, and (3) at least a majority of the arbitrators are “sitting” in that location.  

In the LOMGG case referenced earlier, this was no simple task since the arbitration was pending in California and the witness (a former broker of the LOMGG’s clients) had relocated from California to Broward County in Florida.  One solution could be to host a videoconferencing session for the witness to attend within 100 miles of the witness and then seek enforcement in the court located there. But in such a scenario, would the “hearing” be determined to be within 100 miles of the witness as Rule 45 requires?  Or, would it be determined to be in the distant location where the arbitrators and parties were receiving the witness’s video testimony? The few courts that have addressed the issue have generally found that the hearing would be in the latter location, making such a videoconferencing subpoena unenforceable under Rule 45.  See Lin v. Horan Capital Mgmt., LLC, 2014 U.S. Dist. LEXIS 114631 (S.D.N.Y. 2014); Roundtree v. Chase Bank USA, N.A., 2014 U.S. Dist. LEXIS 76255, *3 (W.D. Wash. 2014).  Furthermore, even if that hurdle were overcome, there would be the issue of determining whether the arbitrators could be said to be “sitting” where the witness was attending, as would be necessary to bring the enforcement action there under FAA Section 7.  

With video conferencing out of the picture, the only apparent promising route to achieve an enforceable subpoena would be to physically convene the hearing within 100 miles of the witness.  This could be cost prohibitive in many arbitrations where the witness is distant, since it involves travel and lodging costs for the arbitrators and parties (and their lawyers) simply to obtain the testimony of a single witness.  As noted by the court in the LOMGG case, however, there were approximately $42 million in losses at issue, making it a worthwhile endeavor in that matter. 

But even if the parties do convene a hearing near the witness, what of the “sitting” issue?  Would choosing to physically convene a hearing at the location be enough to have the arbitrators be deemed to be “sitting” in that location, as required to bring enforcement proceedings there under FAA Section 7?  Unfortunately, at the time of the LOMGG’s case, there was virtually no authority that interpreted the “sitting” language of Section 7.  

Those familiar with international commercial arbitrations may quickly think of the “seat” of the arbitration when reviewing the “sitting” language.  In international commercial arbitration parlance, the “seat” of an arbitration is effectively its legal location—a fixed location not subject to change based on where hearings are held.  If one assumes that the arbitrators are “sitting” at the legal “seat” of the arbitration, though, that would likely mean that the arbitrators cannot change where they sit, and thus could not move where they are sitting to be in the same location as the witness for enforcement purposes. 

Indeed, this is the interpretation that the recalcitrant witness took through his counsel (Greenberg Traurig LLP) in the LOMGG enforcement matter.  The witness argued that since the parties, arbitrators, and all prior proceedings had taken place in California, the arbitrators were all inexorably “sitting” there for purposes of Section 7, making enforcement at the witness’s location impossible.  

As the LOMGG pointed out, however, such an interpretation is contrary to good sense and the plain text of Section 7 alike.  Under that interpretation, arbitration parties would largely be powerless to command participation of non-parties, rendering arbitration a substantially inferior means of dispute resolution relative to court litigation—a result contrary to the spirit of the FAA.  Furthermore, Section 7’s language appears to contradict this “seat” interpretation. Section 7 speaks of where the majority of arbitrators are sitting, which contemplates that arbitrators may sit in different places, an impossible result under the “seat” interpretation of the sitting language.  The LOMGG argued that a more sound interpretation is that the arbitrators “sit” wherever they convene for the hearing at issue in the subpoena.   

As if all of these issues were not enough, other problems riddle arbitration subpoena enforcement.  Perhaps most notably, despite that both Rule 45 and Section 7 command a party seeking enforcement to do so in a federal district court, some federal courts have determined that the mere fact that one is seeking subpoena enforcement under Section 7 does not grant the court subject matter jurisdiction.  See Amgen, Inc. v. Kidney Ctr., 95 F.3d 562, 567 (7th Cir. Ill. 1996); Nielsen Transp. Group, Inc. v. Celanese AG, 430 F.3d 567, 572 (2d Cir. N.Y. 2005).  Instead, some alternative basis for subject matter jurisdiction must be demonstrated.  This is a challenge since there is no obvious amount in controversy for purposes of diversity jurisdiction, and it is not clear what provides federal question jurisdiction if not Section 7 itself.  The bulk of these authorities seem to indicate, however, that there is subject matter jurisdiction over the enforcement petition if there would be subject matter jurisdiction over the arbitration itself, a requirement that was satisfied in the LOMGG matter. 

Fortunately, after reviewing substantial briefing by both sides, the United States District Court for the Southern District of Florida adopted the LOMGG’s position on all of these issues and enforced the subpoena at issue.  As mentioned before, to the LOMGG’s knowledge, this result represented the first successful court enforcement of an arbitration subpoena against an out-of-state, non-party witness.  Indeed, a 2015 publication by the New York City Bar Association International Commercial Disputes Committee remarked that the committee was not aware of any federal decisions that considered the sitting issue the LOMGG litigated, further confirming that the decision was likely the first of its kind.   Additionally, the decision created precedent on a variety of important issues related to arbitration subpoena enforcement, such as the meaning of the “sitting” language in Section 7.  But as the above makes clear, achieving this outcome was no easy task. Further, significant uncertainty and traps for the unwary remain when it comes to arbitration subpoena enforcement.  Hopefully, substantial clarification will at some point come from courts or legislators, so that arbitration parties, like court parties, can enjoy reliable and routine enforcement of subpoenas to non-party witnesses.  In the meantime: arbitration practitioners beware!