Bass, Berry & Sims attorney Chris Lazarini provided insight on vacating an arbitration award if the award compels a party to violate the law. In this case, the arbitration panel directed Ameritrade to deliver to the claimant a physical share certificate for Bancorp International Group (BCIT). Ameritrade could not comply with the award because DTC had placed a lock on all BCIT stock. The Court found that Ameritrade did not have the ability to comply with the award, and forcing compliance would cause Ameritrade to violate the law. The Court vacated the award, but directed Ameritrade to continue to make good faith efforts to comply if and when compliance became legal.

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.

TD Ameritrade, Inc. vs. Kelley, No. 15 Civ. 714 (S.D. N.Y., 9/30/16) 

An arbitration award may be vacated if it compels the violation of law. 

In August 2005, DTC placed a global lock on all Bancorp International Group (“BCIT”) stock after the company announced that fraudulent shares had been issued in a hostile takeover effort. A few days after the DTC lock, Kelley purchased 152,000 BCIT shares at a cost of $1,611 in his Ameritrade account. Those shares bore CUSIP Number 05968X106 (“X106 Shares”). In January 2006, BCIT issued new, unregistered shares bearing CUSIP Number 05968X205 pursuant to §3(a)(10) of the Securities Act (“X205 Shares”). In November 2009, the SEC revoked the registration of all BCIT registered shares.

In August 2012, nearly seven years after his purchase, Kelley demanded that Ameritrade deliver a physical share certificate. Ameritrade responded that it could not make delivery due to the DTC lock. After waiting almost two more years, Kelly initiated a FINRA arbitration, seeking compensatory damages and an award compelling Ameritrade to either deliver a share certificate or provide funds so that Kelley could purchase BCIT shares himself. The sole arbitrator ordered Ameritrade to pay compensatory damages and reimburse Kelley’s filing fee and directed the firm to deliver a physical BCIT share certificate (FINRA #14-01410 (On Papers, 12/22/14)). Ameritrade paid the monetary portion of the Award and moved to vacate the directive to deliver the physical share certificate. Kelley cross-petitioned, seeking confirmation of the Award.

The Court vacates the Award, but directs Ameritrade to continue to make good faith efforts to comply. First, an Award may be set aside if it compels the violation of law. Here, it would be illegal for Ameritrade to purchase either the BCIT shares that had their registration revoked by the SEC or the unregistered X205 Shares, because Ameritrade would have to pay cash for those shares.

Second, the Court declines to address Kelley’s argument that it would not be illegal for Ameritrade to provide him money to purchase BCIT shares. Kelley sought this alternative relief in the arbitration and the arbitrator, in choosing to compel delivery of a share certificate, necessarily rejected it. The Court declines to substitute its judgment for that of the arbitrator.

Finally, Ameritrade cannot deliver the X106 Shares because of DTC’s lock on those shares. The Court rejects Kelley’s argument that Ameritrade should previously have taken some action to secure the X106 Shares, since the only relevant question is whether Ameritrade currently has the ability to make delivery. The Court finds that Ameritrade does not have that ability, but directs it to make good faith efforts to deliver a certificate, if and when it becomes legal and possible to do so. 

It is unclear from the unexplained Award whether TD Ameritrade argued for dismissal under FINRA Rule 12206(a) (the six-year eligibility rule). The BCIT saga is explained in more detail in two explained Awards summarized in our sister newsletter, the Securities Arbitration Alert, Magruder v. Fidelity Brokerage, FINRA ID #13-02841 (SAA 2014-41) and Gill v. TD Ameritrade, FINRA ID #14-00391 (SAA 2015-29). In addition, SLC has reported on issues arising in several other cases addressing BCIT purchasers’ efforts to obtain share certificates. See, e.g., SLAs 2015-04, 2015-09, 2015-26 and 2015-43.