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FINRA Arbitration: 10th Circuit Upholds Dismissal as a Discovery Sanction

On August 31, 2020, the 10th Circuit Court of Appeals dismissed an attempt by broker Zane Piston to vacate a decision made by a Financial Industry Regulatory Authority (FINRA) arbitration panel. In his case, Piston argued that the arbitration panel had exceeded their powers by dismissing his case as a discovery sanction. Unfortunately for Piston, The Federal Arbitration Act allows courts to “vacate an arbitrator’s decision only in very unusual circumstances,” as in the case of clear corruption or bribery.iStock-157725324-1-300x200

Arbitration with FINRA

Zane Piston entered into arbitration with his former firm, TransAmerica Capital, Incorporated (TCI) in July 2017. In the arbitration, Piston alleged that TCI had incorrectly described the reason for his termination, which he contends was false, misleading, and harmed his ability to find similar employment. FINRA requires that brokers and firms — the financial institutions that brokers join in order to do business — settle their disputes through arbitration.

Arbitration is a means of dispute resolution that avoids the time and expense of court proceedings. Instead of a judge, the claimants and FINRA members have decisions handed down by an arbitration panel. Before arbitration begins, neutral arbitrators are randomly selected from FINRA’s Neutral List Selection System. These neutral parties are often current or former members of the securities industry. Depending on the size of the claim, the arbitration panel consists of one or three arbitrators. Each party gets to strike a certain number of arbitrators from the list, and then rank the arbitrators according to their preference. Once the arbitrators have been selected, there’s no going back — claimants and plaintiffs almost always have to live with whatever the panel decides.

Zane Piston Vs. FINRA Arbitration Panel

Zane Piston’s trouble started during the discovery portion of his FINRA arbitration, when TCI requested that Piston produce certain documents. He did not, even when compelled to do so by an established deadline. TCI then issued a motion to sanction Piston by dismissing his claims. Piston also did not respond to that motion, at which point the panel set up a hearing on June 4 for Piston to show good cause why the panel should not grant TCI’s sanction of dismissal.

Piston’s counsel responded that during the timeframe he was supposed to respond, he had undergone dental surgery, travelled to Europe for a week, and then attended to his wife in the hospital after she had experienced a “serious medical incident.” In spite of this, the panel found that Piston had not shown good cause for failing to respond to the deadlines set forth by the panel. The panel dismissed Piston’s claim “with prejudice as a sanction due to the material and intentional failure to comply with prior orders.”

Appeal to the District Court

After the panel dismissed his arbitration, Zane Piston filed an appeal with a district court to vacate the panel’s decision. In July 2020, the 10th Circuit Court denied Piston’s motion, after “applying the narrow standard of review that governs our review of arbitration awards,” which the Order further states are “among the narrowest known to the law.”

So narrow, in fact, that “Courts many not vacate an award based only on showing ‘that the panel committed an error — or even a serious error.’” In this case, Piston argued that the panel did not issue a sanction or a warning before they dismissed his case, which they are required to do according to FINRA Rule 13212.

When a court reviews an arbitration award, they only rule on whether the rules were applied; they do not determine if rules were applied correctly. The Order points out that TCI cited Rule 13212 in its motion for sanctions, after Piston failed to comply with the order to provide documents during the discovery process. According to the Order, the panel’s subsequent dismissal “arguably aligns with Rule 13212’s provision authorizing dismissal ‘if prior warnings or sanctions have proven ineffective’”

That said, the Order does agree that another interpretation of Rule 13212 is possible. It states, “Perhaps reasonable people could disagree about whether sufficient warning occurred under Rule 13212…But whether the panel correctly interpreted Rule 13212 is beyond the scope of our review.” In order for the dismissal to be vacated, the Court would have to find a “manifest disregard of the law.” By mentioning Rule 13212 in their motions, TCI demonstrated all the regard that the court system requires. The Order also states that any errors in the Panel’s factual findings do not warrant vacating the award.

The Final Word on FINRA Arbitration

It’s a difficult thing for sanctioned brokers to accept, but it’s true: Arbitration panels can interpret FINRA rules however they deem appropriate. District courts generally can’t help claimants who feel that their panel reached an incorrect conclusion. Parties to arbitration should take the process seriously — as we’ve seen in this case, the court is quite unlikely to take your side if you don’t meet your deadlines.

 

 

 

 

 

 

 

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