Post Image
Shirking FINRA Arbitrator Disclosure Requirements Might Not Be Cause for Vacatur: Vitale & Paladino v. Morgan Stanley Smith Barney, LLC
Posted on Categories Court Decisions, Securities ArbitrationTags , ,

No. D063033 (Cal. App., 4Dist., 6/30/14). Award Challenge * Confirmation of Award * Arbitrator Bias * Waiver (Foreknowledge) * FAA (Evident Partiality) * Disclosure Issues (Arbitrator Checklist) * SRO Rules (FINRA Rule 13408) * State Statutes Interpreted (Cal. CCP §1286.2).Failure to disclose facts specifically prompted by forum disclosure checklists may violate the forum’s standards, but it does not justify vacatur, without some proof that the nondisclosure leads to a reasonable impression of bias.

Two brokers, Todd G. Vitale and John P. Paladino, won some $5 million in a FINRA arbitration against Morgan Stanley Smith Barney (MSSB) (FINRA ID #11-01633). MSSB sought and won vacatur in the trial court (SLA 2012-38), based on the fact that one of the three Arbitrators on the case did not “make all objectively reasonable disclosures” required under FINRA Rules. Messrs. Vitale & Paladino, former MSSB brokers, accused Morgan Stanley of false promises that induced them to move from UBS and to suffer losses in income as a result of the misrepresentations they relied upon. The Panel unanimously awarded the brokers almost $5 million. During the course of the proceedings, one of the selected Arbitrators, Barry E. Kersh, made a number of disclosures about people he knew at MSSB and about witnesses listed by MSSB whom he had encountered in other arbitration proceedings. He did not disclose, though, despite questions on the FINRA disclosure checklist expressly designed to elicit answers, that his son-in-law, who was recruited from Mr. Kersh’s firm, moved to and works at Morgan Stanley, that another son-in-law had been aggressively recruited by Morgan Stanley, and that his daughter and the son-in-law who works for MSSB were in the midst of a marital separation. Mr. Kersh also did not disclose that his daughter had once worked for a brokerage firm and that she held investment accounts at Morgan Stanley. It was these latter nondisclosures that formed the basis for the trial court’s vacatur ruling, because they were specifically addressed by the FINRA disclosure checklist (Qs. 8 & 17).

Under California law, if an arbitrator fails to disclose a ground for disqualification or improperly fails to disqualify himself, that would be a ground for vacatur. FINRA rules require an affirmative effort to disclose on the part of arbitrators and they are required to submit a disclosure checklist, which “prompts the arbitrator to consider topics and relationships that are likely to create the impression of bias.” The disclosure obligation under FINRA Rule 13408 is continuous as well. In the case at hand, the Court deals with each nondisclosure, starting with those relied upon by the trial court. First, Morgan Stanley has an obligation, not only to demonstrate that the disclosure was called for by the checklist, but to demonstrate why the nondisclosure justifies disqualification. The daughter’s employment by a firm for which Mr. Kersh worked was undisclosed, but it happened 10 years ago or more. As to the Morgan Stanley accounts, no cogent argument explains “why the existence of the accounts creates the reasonable perception that Kersh has a bias against Morgan Stanley.” That leaves the disclosures relating to the sons-in-law. The Court finds that the knowledge Morgan Stanley surely had, i.e., of the recruitment efforts relating to the pair, sufficed as “necessary knowledge to probe any potential bias that existed ….” Thus, while it would have behooved Arbitrator Kersh to disclose “these facts, …his failure to do so does not justify vacating the arbitration award, because it is clear on the record … that Morgan Stanley was aware” of sufficient facts to trigger an inquiry that would have disclosed the relationships it claims were pivotal to its bias claim. The Award stands and the trial denial of vacatur is affirmed.

(ed: The Court specifically finds that “Kersh’s failure to disclose he was the father-in-law of both Childs and Harvey, his hostility toward Childs, and Childs and Mandy were getting a divorce, would not cause a reasonable observer to view Kersh as potentially biased against Morgan Stanley.” Call us unreasonable, but those disclosures would have made us nervous. Because the two recruited brokers were not involved at all in the arbitration, the Court views these emotional tie-ins to Morgan Stanley as too speculative. We surmise that the Court’s impression of Morgan Stanley’s ire over nondisclosure as a post-hearing development may account for its relative insensitivity to the evidence regarding the sons-in-law.) (SLC Ref. No. 2014-26-03)