False Identity by FINRA Panel Chair Leads to Vacatur of Arbitration Award

Courts rarely vacate arbitration awards. The standard for vactur has become so high that a district court refused to vacate a FINRA arbitration award even in the face of undisputed identity theft by a panel chair. To repeat: the panel chair faked his identity, pretending to be a lawyer when he wasn't one, and still a federal district judge in Los Angeles declined to vacate the arbitration award.

The Ninth Circuit, in an opinion released late last year, reversed the district court in one of the more unusual FINRA vacatur cases in some time, Move, Inc. v. Citigroup Global Markets, 842 F.3d 1152 (Nov. 9, 2016).

Move, Inc. complained that Citibank had “mismanaged $131 million of Move’s funds by investing in speculative auction rate securities.” (Background about the auction-rate securities market and its meltdown in 2008 can be found here and here.)

Move sought relief against Citibank in a FINRA arbitration. In 2009, the FINRA panel issued a unanimous award denying Move’s claims.

More than four years later, claimant Move discovered the identity theft. Chairperson Frank was not a licensed attorney at all, but pretended to be one. During panel selection four years before, the chairman had identified himself as “James H. Frank.” According to the FINRA Arbitrator Disclosure Report (ADR), “James H. Frank” received a law degree from Southwestern University in 1975 and was licensed to practice law in California, New York, and Florida. 

The impostor had a similar name “James Hamilton Hardy Frank” to a retired California attorney named “James Hamilton Frank,” thus apparently enabling the impostor to perpetuate the falsehood.

The Ninth Circuit vacated the award on two grounds. First, the Ninth Circuit allowed claimant Move to file its motion to vacate four years late under the doctrine of equitable tolling. Under the Federal Arbitration Act, a party moving to vacate must file its motion within three months. Here, the court reasoned that chairperson Frank's fake identity equitably tolled Move's three-month deadline. Among other things, the court reasoned that “[b]alancing the needs for both finality and due process, the arbitral process will not be disrupted if parties are permitted to satisfy the high bar of equitable tolling in limited circumstances. More importantly, permitting equitable tolling will enhance both the accuracy and fairness of arbitral outcomes.”

Second, the court sided with Move on the merits of its motion to vacate. The court noted that “[u]nder § 10(a)(3) of the FAA, courts may vacate an arbitration award upon finding that “the arbitrators were guilty of . . . any . . . misbehavior by which the rights of any party have been prejudiced.” (Emphasis added.)

Here, despite the unanimous award of the three-member FINRA panel, the court observed that Move had stated its desire for an attorney chairperson. Further, the court rejected Citigroup's argument that Move had failed to present any evidence that impostor chairperson Frank influenced the outcome of the award. The Ninth Circuit countered: “there is simply no way to determine whether that was the case.”

On January 5, 2017, the Ninth Circuit denied Citigroup's motion for rehearing and motion for rehearing en banc.