Wednesday, January 18, 2017

Petition urges ‘look through’ of motions to vacate arbitration awards for jurisdiction

By Amy Leisinger, J.D.

Two investors have asked the Supreme Court to determine that a party seeking to vacate an arbitration award under Section 10 of the Federal Arbitration Act is entitled to the same “look through” analysis for jurisdiction as a party seeking to compel arbitration under Section 4. In addition, the petitioners ask the Court to consider whether federal subject matter jurisdiction arises under the “manifest disregard” of law when arbitrators found no margin call despite a mandatory call by operation of law (Goldman v. Citigroup Global Markets Inc., December 23, 2016).

Arbitration. When their financial advisor moved to Citigroup Global Markets Inc. during the start of the financial crisis, the investors transferred their accounts. However, the advisor and the firm did not warn the couple that they would be subject to a margin call upon receipt of the securities, one higher than could expected based on their status as “new investors.”

The investors filed an action with FINRA for arbitration. Following evidentiary battles and a determination that there was no margin call, the couple lost their claim. They then filed a motion to vacate under FAA Section 10, but the district court dismissed the action for lack of subject matter jurisdiction. A Third Circuit panel affirmed, finding that a court cannot look through a Section 10 motion to the arbitration subject matter to establish federal-question jurisdiction.

Cert petition. The petitioners seek reversal of this holding in accord with the Seventh, Ninth, and D.C. Circuits and urge the Supreme Court to the Second Circuit’s holding in Doscher v. Sea Port Group Securities, LLC, which was decided just after the Third Circuit’s decision in the petitioners’ case. In Doscher, the Second Circuit overruled its own precedent and held that the district court could look through a motion to vacate to determine if the underlying dispute involved substantial questions of federal law. The petitioners ask the Court to resolve the circuit split by adopting the Second Circuit position and apply the principles of the Supreme Court’s decision in Vaden v. Discover Bank to motions to vacate. In Vaden, the Supreme Court held that a federal court may look through a petition to compel arbitration under FAA Section 4 in order to determine whether the petition is predicated on an action arising under federal law. Those subjected to arbitration should have the same rights as those who seek to compel it, according to the petitioners.

Moreover, the petitioners argue, the motion to vacate itself raised federal-question jurisdiction by demonstrating “manifest disregard” of federal margin laws by the arbitrators, who refused to regard evidence of the margin call that arose by operation of law. “That manifest disregard of law also demonstrates the evident partiality or outright corruption of arbitrators in this case,” the petitioners stated. The Third Circuit panel ignored this evidence in finding that the motion to vacate failed to raise a substantial question of federal law, the petitioners concluded.

The petition is No. 16-874.