Bass, Berry & Sims attorney Chris Lazarini commented on the case of Moors & Cabot, Inc. vs. Dever in which the court denied a motion to vacate an arbitration award, finding that the party challenging the award waived his right to claim arbitrator bias by failing to seek recusal of the arbitrator at issue during the course of the arbitration proceeding. Chris provided the analysis for Securities Litigation Commentator (SLC). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SLC, please visit the SLC website to sign up for the newsletter.
Moors & Cabot, Inc. vs. Dever, No. SUCV2014-02129 A (Mass. Super., Suffolk Cty., 2/17/15)
Courts generally will not grant vacatur based on alleged arbitrator bias that the party seeking vacatur did not fully develop before the arbitrators.
Courts will not second-guess an arbitration panel's evidentiary decisions or thought process.
This case arises out of a vigorously contested arbitration brought by a financial advisor (Dever) against his former firm and individuals associated with the firm (Foley and Joyce). Dever's allegations included wrongful termination and defamation in the firm's U5 disclosure. Foley counterclaimed, alleging that Dever defamed him in the broker comment section of his U4 by claiming that Foley introduced firm clients to a private placement penny stock company without the firm’s knowledge and then threatened and attempted to bribe Dever when Dever confronted him about his actions. Both Dever and Foley sought damages and expungement of the disclosures. After a lengthy hearing, the Panel denied all of Dever's claims, awarded Foley $75,000 for defamation and granted the request to expunge Dever's U4 comments (FINRA #11-04672 (Boston, 7/1/14)). The firm, Foley and Joyce moved to confirm the Award, and Dever moved to vacate. Applying well-settled law that judicial review of arbitration Awards is extremely narrow, the Court confirms the Award.
First, Dever claimed bias by one of the arbitrators, based on events at an earlier proceeding before a different arbitration panel on which the arbitrator sat. Dever, a witness in the case, alleged that he and the arbitrator had "a confrontation outside of a bathroom" because Dever supplied information that led to another arbitrator's recusal. Dever argued to the Court that this event created an "incapacitating bias" in the arbitrator against Dever in the present case. The Court notes that, when Dever's counsel raised concerns to the panelist at the start of the hearing, the latter affirmed that his prior experience would not impact his objectivity. Dever did not, however, seek recusal of the arbitrator and did not raise the bathroom incident, later claiming to be "too frightened" to tell his attorney about it. The Court questions Dever's failure to fully develop his bias claim at the arbitration hearing when he had the opportunity to do so and finds that that failure amounts to a waiver of the right to raise them now in support of his vacatur request.
The Court next considers Dever's argument that the panel improperly admitted a FINRA no action letter into evidence. Dever alleged to FINRA that Foley was engaged in a criminal enterprise. FINRA issued a no action letter at the conclusion of its investigation. FINRA's letter noted that it had no evidentiary weight in any arbitration or judicial proceeding, but also stated that it could be introduced into evidence in a later proceeding if, in that proceeding, an opposing party made representations inconsistent with the letter. While the Court questions whether the exception permitting admissibility actually existed in the arbitration, the Court declines to second-guess the panel's evidentiary ruling. Instead, the Court finds that its admission was of no consequence and does not come close to the kind of misconduct or corruption to warrant vacatur.
Finally, the Court examines Dever's claim that the Award was procured through fraud. Dever argued that Foley presented false income information to support his damages claim. The Court declines to second-guess the panel's thought process, stating that Dever had the opportunity to challenge the proof at the hearing and that, in any event, it was not clear that the panel based its damages award solely on Foley's income, as opposed to reputational harm or emotional distress.
A party who feels an arbitrator is biased against him sits in the unenviable position of further alienating the arbitrator(s) by asking for recusal or facing a waiver argument if he remains silent and only later raises the issue when trying to vacate an adverse award. Sometimes the choice is easy; but in close calls, the party should, at a minimum, state his concerns fully on the record and proceed under protest.