Wednesday, October 24, 2012

FINRA Arbitration Panel Award Upheld by Fifth Circuit

A Fifth Circuit panel upheld a FINRA arbitration award against claims that the panel exceeded its authority. The case involved investor claims that a fund manager engaged in a fraudulent scheme that induced them to invest substantially in four highly risky mutual funds. The appeals panel said that the parties expressly agreed to abide by FINRA Rules, which provide at Rule 12409 that the arbitration panel has the authority to interpret and determine the applicability of all provisions under the  Code and that such  interpretations  are  final  and  binding  upon  the  parties. Thus, because  the  parties  agreed  to  submit  the issue to arbitration, a federal court may  only  set  aside the  arbitration  panel’s  decision  in very unusual  circumstances under which the arbitration panel exceeded its powers” under the Federal Arbitration Act. (Morgan Keegan & Co. v. Garrett, CA-5, Oct 23, 2012, No. 11-20736).

The appeals panel said that the district  court erroneously held that the arbitrators exceeded their authority by arbitrating derivative claims and non-customer claims.  In doing so, the district court impermissibly premised its decision to vacate upon finding error in the arbitration panel’s conclusion that the claims were not derivative and that the claims were customer claims.  The high standard for the district court to vacate the arbitration panel’s award on the merits was not satisfied.

The appeals panel noted that federal courts are not authorized to reconsider the merits of an award even though the parties may allege that the award rests on errors of fact or on misinterpretation of the contract. Federal courts do not sit to hear claims of factual or legal error by an arbitrator as an appellate court does in reviewing decisions of lower courts.

Under FINRA Rule 12409, it was clearly within the arbitration panel’s scope of authority to decide whether, under the FINRA Rules, the claims were derivative and were customers’ claims for purposes of  arbitration. The arbitration panel determined that the claims were not derivative and that they  were customer claims, thereby subjecting the claims to FINRA arbitration. Because the appeals court concluded that the arbitration panel did not exceed its powers in reaching these conclusions, it declined to reach the merits of investor assertions that their claims were derivative or not the claims of customers.