Arbitrators in expungement hearings are obliged, in order to ensure procedural fairness, to hear the testimony of the customer who makes an appearance, if it hears the testimony of the broker, and must also provide a right of cross-examination.

Royal Alliance Associates, Inc. vs. Liebhaber, No. B264619 (Cal. App., 2Dist., 8/30/16).

Before the Arbitrators and in the Court Below

This FINRA expungement proceeding received some notoriety when the New York Times Dealbook published an article (“A Murky Process” dtd. 9/25/14) by reporter Susan Antilla, quoting from the arbitration transcript to relate a customer’s (and her counsel’s) attempts to oppose a Stipulated Award granting expungement relief to the implicated broker, Kathleen Tarr. In the confirmation proceedings below, the trial court denied expungement, thereby vacating the Stipulated Award (FINRA ID No. 13-01522 (Los Angeles, 9/10/14)), and ruled that the Arbitrators engaged in misconduct and exceeded their powers by not allowing the customer and her counsel to air fully her opposition at the expungement hearing (SLA 2015-22). The Appellate Court recounts the events in thorough detail in this Opinion.

Royal Alliance Argues

Royal Alliance, as the Appellant, moves for confirmation and reversal of the vacatur order. It argues, citing FINRA Rule 12805, that expungement proceedings were not designed for live testimony and that “Liebhaber failed to take advantage of the opportunity to submit written statements.” Had counsel been permitted to ask his questions of Ms. Tarr and Ms. Liebhaber, it would not have changed the outcome and “neither FINRA’s nor Liebhaber’s interests were affected by the award.” That Ms. Tarr appeared and gave unsworn statements in support of the expungement relief did not prejudice any party, as she was not a “witness” and this was not a merits hearing. Finally, the Arbitrators did not, as FINRA and Respondent argue, violate FINRA rules on the conduct of expungement hearings and the Panel, thus, did not exceed its powers.

The Customer Counters

Ms. Liebhaber responded that she did have an interest in the proceedings, because the arbitrators, in awarding expungement, had deemed her claims “false.” She had been branded a “liar” without the opportunity for challenge or the right to cross-examine her accuser. She was also protecting a public interest in maintaining the “integrity of the CRD system….” FINRA argued that the Arbitrators, in refusing to allow Ms. Liebhaber’s complete participation and accepting the unsworn testimony of the broker, had not properly followed procedures under FINRA Rule 2080 and had exceeded their powers by “violating applicable FINRA rules….”

The Judges Adjudicate

The Court adheres to California law in affirming the vacatur, ruling that the Arbitrators violated California Code of Civil Procedure, § 1286.2, a statutory “safety valve” against arbitrators restricting a party from “fairly presenting its case.” It is unnecessary to find that FINRA’s forum rules were violated, in order to find “substantial prejudice” under Section 1286.2. On the issue of whether the Arbitrators refused to hear “material evidence,” the Court finds in the affirmative and rules that that conduct constituted “substantial prejudice.” While both parties were allowed to submit written statements, only Royal Alliance was permitted to offer oral evidence. “The arbitrators barred Liebhaber from doing so.” Section 1282.2 also provides the right of cross-examination to parties present at a hearing. Ms. Tarr did not technically testify (because she was unsworn), but she “appeared and acted as a witness by submitting oral evidence for the arbitrators’ consideration…. Yet the arbitrators denied Liebhaber any opportunity to question Tarr.” Given the above, the Court finds, “[t]he prejudice criterion was satisfied here…. Simply put, the hearing was not fair.”

(ed: *FINRA made the unusual move of participating in the confirmation proceedings below and making a case against its own arbitrators. It appears that one reason it did was RAA’s failure to obtain a waiver under FINRA Rule 2080. We don’t know if RAA attempted to obtain the waiver or simply determined to short-cut the process and name FINRA as a party. **Robert S. Banks, Jr., a partner with Portland’s (OR) Samuels Yoelin Kantor LLP, represented Ms. Liebhaber in the underlying arbitration proceedings. Leonard Steiner, Steiner & Libo (CA), represented Ms. Liebhaber as Respondent to the appeal. ***There’s an interesting question of standing in these post-expungement proceedings. Ms. Tarr was an unnamed broker, so RAA has championed her appeal (even though her employment ended in July 2010). ****As we indicated in our coverage of the lower court decision, it was not long after this Award issued and was challenged that FINRA revised its expungement guidance on inviting customers to attend expungement hearings (SAA 2015-10). The treatment of “Settled Cases” on pp. 72-74 of The Arbitrators’ Guide now contains elaborate guidance concerning customer participation, with this admonition at the start of the text: “It is important to allow customers and their counsel to participate in the expungement hearing in settled cases if they wish to.”)

(SLC Ref. No. 2016-34-03)

NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA), from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis.

Like what you see here?

Twice a week we present blog posts consisting of one write-up from each of our two flagship weekly online Alert services. Consider a subscription to these publications to receive the full array of coverage right on your desktop every week. Give it a try and sign up for a free trial to the Securities Arbitration Alert and the Securities Litigation Alert.