In 2008, Move, Inc., initiated a FINRA arbitration against Citigroup Global Markets, alleging that Citigroup improperly invested over $131 million of Move’s assets in illiquid and unsuitable auction rate securities. The parties picked their three-person Panel through FINRA Dispute Resolution’s arbitrator selection process, and James H. Frank was appointed as the Chairperson. In 2010, after eight days of hearings, the Panel denied Move’s claims (the “2010 Award”). Move, Inc. v. Citigroup Global Markets, Inc., FINRA DR Case No. 08-03355.
In 2013, nearly three years later, FINRA removed Mr. Frank from its arbitrator pool, having learned that Mr. Frank misrepresented his educational background and falsely reported that he was an attorney. Prior to his removal, Mr. Frank had participated in over 38 hearings (including 25 in which he had served as chair or the sole arbitrator). In March 2014, Move sought to vacate the 2010 Award in federal court. The United States District Court for the Central District of California denied Move’s motion. Move then appealed to the Ninth Circuit which earlier this month reversed and ordered a new arbitration hearing.1 Surely, neither Move nor Citigroup foresaw that they would be re-trying the case seven years after the Award was issued.2
Putting aside the legal issues raised by the Ninth Circuit’s opinion,3 the decision provides a practical reminder that arbitration parties should conduct an extensive and thorough review of potential arbitrators before selecting them. Consider including these proactive steps in analyzing potential arbitrators:
- Critically review the arbitrator’s disclosure report to identify inconsistencies, inaccuracies, gaps and far-fetched disclosures.
- Research the arbitrator’s disclosed publications, affiliations and memberships.
- Besides analyzing the disclosed awards, search for additional undisclosed awards, vacated awards and awards from different forums.
- Conduct internet research, including ethically-permissible searches of social and professional networking sites, through which you may:
- Verify licenses and professional designations or locate undisclosed disciplinary matters;
- Find matters where the arbitrator was a party, party representative, witness or neutral;
- Locate undisclosed publications; and
- Further examine the arbitrator’s employment background and business affiliations.
- Contact others who may know the arbitrator or have had experiences before the arbitrator.
- Seek additional information from the arbitrator during the selection process under FINRA Rules 12402, 12403, 13402 or 13404.
While extensive research may not uncover all potential problems,4 using these approaches, we have identified missing or inaccurate information in arbitrator disclosure reports and actual or potential conflicts of interest that caused us to strike arbitrators who we might otherwise have ranked. Examples include an arbitrator who failed to disclose that he was a lead plaintiff in a securities class action involving similar securities as those at issue in the arbitration and an arbitrator representing claimants in a related case against the respondent. We have also discovered information about arbitrators who, like Mr. Frank, should not have been in, and were subsequently removed from, FINRA’s arbitrator pool. Examples include an arbitrator with an unreported and disqualifying felony conviction and an arbitrator who had left private practice and become a FINRA employee.
Due diligence during the arbitrator selection process will help you identify arbitrators who you believe are well-suited to hear your case and may provide an ounce of prevention to reduce the likelihood that your opponent’s post-arbitration challenge will succeed.
1 Move, Inc. v. Citigroup Global Markets, Inc., 2:14-cv-04418-JFW-E (C.D. Cal.).
2Move, Inc. v. Citigroup Global Markets, Inc., 2016 WL 6543522 (9th Cir. Nov. 4, 2016).
3 These issues include, among others: (a) how might the split between Circuit Courts concerning whether the Federal Arbitration Act’s vacatur provisions are subject to equitable tolling be resolved; (b) what is the standard of proof to demonstrate prejudice under 9 U.S.C. 10(a)(3); and (c) how did Mr. Frank’s misrepresentations violate fundamental fairness absent proof of actual or suggested bias by him.
4 In the case of Mr. Frank, it appears that participants in at least 38 arbitrations between 1996 and 2011 did not discover the truth.