Securities Industry Commentator by Bill Singer Esq

January 8, 2019

BREAKING NEWS: Supreme Court holds that who decides the threshold arbitrability question is a question of contract; and, accordingly, parties may contractually provide that an arbitrator, rather than a court, will resolve threshold arbitrability questions as well as underlying merits disputes.
Henry Schein, Inc., et al. , Petitioners v. Archer and White Sales, Inc (Opinion, United States Supreme Court, No. 17-1272  586 U. S. ____ (2019) / January 8, 2019]
Justice Kavanaugh delivered the unanimous Opinion; and, as a
s set forth in the "Syllabus" to the Opinion:

Respondent Archer & White Sales, Inc., sued petitioner Henry Schein, Inc., alleging violations of federal and state antitrust law and seeking both money damages and injunctive relief. The relevant contract between the parties provided for arbitration of any dispute arising under or related to the agreement, except for, among other things, actions seeking injunctive relief. Invoking the Federal Arbitration Act, Schein asked the District Court to refer the matter to arbitration, but Archer & White argued that the dispute was not subject to arbitration because its complaint sought injunctive relief, at least in part. Schein contended that because the rules governing the contract provide that arbitrators have the power to resolve arbitrability questions, an arbitrator-not the court-should decide whether the arbitration agreement applied. Archer & White countered that Schein's argument for arbitration was wholly groundless, so the District Court could resolve the threshold arbitrability question. The District Court agreed with Archer & White and denied Schein's motion to compel arbitration. The Fifth Circuit affirmed. 

Held: The "wholly groundless" exception to arbitrability is inconsistent with the Federal Arbitration Act and this Court's precedent. Under the Act, arbitration is a matter of contract, and courts must enforce arbitration contracts according to their terms. Rent-A-Center, West, Inc. v. Jackson, 561 U. S. 63, 67. The parties to such a contract may agree to have an arbitrator decide not only the merits of a particular dispute, but also " ‘gateway' questions of ‘arbitrability.' " Id., at 68- 69. Therefore, when the parties' contract delegates the arbitrability question to an arbitrator, a court may not override the contract, even if the court thinks that the arbitrability claim is wholly groundless.

That conclusion follows also from this Court's precedent. See AT&T Technologies, Inc. v. Communications Workers, 475 U. S. 643, 649- 650. 

Archer & White's counterarguments are unpersuasive. First, its argument that §§3 and 4 of the Act should be interpreted to mean that a court must always resolve questions of arbitrability has already been addressed and rejected by this Court. See, e.g., First Options of Chicago, Inc. v. Kaplan, 514 U. S. 938, 944. Second, its argument that §10 of the Act-which provides for back-end judicial review of an arbitrator's decision if an arbitrator has "exceeded" his or her "powers"-supports the conclusion that the court at the front end should also be able to say that the underlying issue is not arbitrable is inconsistent with the way Congress designed the Act. And it is not this Court's proper role to redesign the Act. Third, its argument that it would be a waste of the parties' time and money to send wholly groundless arbitrability questions to an arbitrator ignores the fact that the Act contains no "wholly groundless" exception. This Court may not engraft its own exceptions onto the statutory text. Nor is it likely that the exception would save time and money systemically even if it might do so in some individual cases. Fourth, its argument that the exception is necessary to deter frivolous motions to compel arbitration overstates the potential problem. Arbitrators are already capable of efficiently disposing of frivolous cases and deterring frivolous motions, and such motions do not appear to have caused a substantial problem in those Circuits that have not recognized a "wholly groundless" exception. 

The Fifth Circuit may address the question whether the contract at issue in fact delegated the arbitrability question to an arbitrator, as well as other properly preserved arguments, on remand. Pp. 4-8. 

878 F. 3d 488, vacated and remanded. 

Expungement Granted to Stockbroker Who Engaged in Defensive Allocation
In the Matter of the Arbitration Between Mark Nudelman, Claimant, v. LPL Financial LLC, Respondent (FINRA Arbitration 18-01500, January 4, 2019)
In a FINRA Arbitration Statement of Claim filed in April 2018, public customer Claimant Nudelman asserted breach of fiduciary duty, negligence and negligent supervision, breach of contract and respondeat superior. Claimant Nudelman alleged that Respondent LPL had failed to follow his instructions to purchase unspecified securities. Claimant sought $32,473 in compensatory damages, $3,978 in reimbursed paid advisory fees, and interest, costs, and fees. Respondent LPL generally denied the allegations and asserted various affirmative defenses.  Claimant notified FINRA in August 2018 that the matter had settled, and, non-party Andre Kapulenui Kaluna sought the expungement of the matter from his Central Registration Depository record ("CRD") Although in September 2018, Claimant objected to the expungement, by October 2018, he had withdrawn said objection and did not participate in the expungement hearing. The sole FINRA Arbitrator noted that  Kaluna did not contribute to the $12,000 settlement. The Arbitrator made a FINRA Rule 2080 finding that Claimant Nudelman's claim, allegation or information is false. In recommending expungement, the Arbitrator stated in pertinent part that:

Claimant claimed that non-party Kaluna breached his fiduciary duty by failing to fully invest Claimant's account as requested. But the evidence is uncontradicted that non-party Kaluna informed Claimant that he intended to take a defensive approach and invest approximately 25% initially while he gauged the market in light of the recent election and protectionist trade policies. Claimant did not object as non-party Kaluna proceeded to invest greater percentages of Claimant's funds as recommended. 

The Pre-Emptive EFL Gambit Starts Anew On 2019 FINRA Arbitration Chessboard ( Blog)
Ah yes, it's a new year and we start all over again. You dust off the chessboard. I'll get the box of white and black chess pieces. Let's start another game for 2019 and take a look at the old Preemptive EFL Gambit, in which a former employee (playing as White) who has a balance due on his loans aggressively goes on the attack, which forces the former employer (playing as Black) to initially defend his exposed position but then launch a counter-attack. If you don't understand all the ensuing moves and the endgame, don't worry -- there will be plenty of repeat matches with the same opening throughout 2019.

Customer Complaint of Accredited Investor Who Disregarded Stockbroker's Advice Expunged
In the Matter of the Arbitration Between David Wilford Allen, Claimant, v, Sanford C. Bernstein & Co., LLC, Respondent (FINRA Arbitration 18-02205, January 4, 2019)
In a FINRA Arbitration Statement of Claim filed in June 2018, associated person Claimant Allen sought the expungement of a customer complaint from his Central Registration Depository record ("CRD"). Respondent Sanford C. Bernstein & Co. generally denied the allegations and asserted various affirmative defenses. Respondent did not opposed the requested relief. The customer at issue did not contest the requested expungement and did not participate at the hearing. The sole FINRA Arbitrator made a FINRA Rule 2080 finding that the customer's claim, allegation, or information is factually impossible or cleary erroneous, and offered this rationale in pertinent part:

The customer was an accredited investor with full discretion over his portfolio. He consistently disregarded Claimant's advice to reign in his spending, increase his position in bonds, reduce his exposure to hedge funds, and pay down his margin debt. Claimant acted appropriately within the scope of conventional financial practice.

Expungement Granted to Stockbroker in UBS Puerto Rico Investments Dispute
In the Matter of the Arbitration Between 
Manuel Ojeda, individually and for 
Professional Equipment Corp., Claimant, v. 
UBS Financial Services Inc. and 
UBS Financial Services Incorporated of Puerto

Rico, Respondents (FINRA Arbitration 16-00880, January 7, 2019)
In a FINRA Arbitration Statement of Claim filed in March 2016, public customer Claimant Ojeda asserted breach of fiduciary duty; breach of contract; contractual negligence; fraud and constructive fraud; failure to supervise and control; violation of Section 10(b) of the Exchange Act and Rule 10b-5, and violation of NASD and FINRA rules; and violations of the Puerto Rico Uniform Securities Act arising from investments in Puerto Rico government bonds and Puerto Rico closed-end bond funds, including Respondents' proprietary UBS Puerto Rico closed-end bond funds. Claimants sought at least $5 million in damages plus interest, costs, and fees. Respondents UBS generally denied the allegations, asserted various affirmative defenses, and sought the expungement of the matter from any non-party's Central Registration Depository record ("CRD"). Claimants notified FINRA in July 2018 that the matter had settled, and, non-party Xavier Aguayo sought the expungement of the matter from his CRD. Claimants did not object to the requested expungement and did not participate in the expungement hearing.The FINRA Arbitration Panel noted in the Decision that:

[T]he Panel noted that the settlement amount was substantial. However, it was 10% of the amount of Claimants' losses and non-party Aguayo did not contribute to the settlement amount and did not have input into the settlement. . .

Thereafter, the Panel made a FINRA rule 2080 finding that the Claimants'  claim, allegation, or information is false; and that Aguayo was not involved in the alleged investment-related sales
practice violation, forgery, theft, misappropriation, or conversion of funds. In pertinent part, the Panel offered this rationale:

The Panel finds that virtually all relevant purchases at issue were made prior to nonparty Aguayo being on the account. Not only did non-party Aguayo not recommend holding the subject investments, he affirmatively and repeatedly advised Claimants to diversify the account in order to reduce margin, improve credit quality and provide some geographic diversification. The Panel found no evidence of any act or omission by non-party Aguayo which was in any way linked to any losses of Claimants. In fact, it was clear to the Panel that, had Claimants acted on non-party Aguayo's recommendations, their losses would have been much less (and to the extent to which Claimants did act on those recommendations, their losses were mitigated).