Metropolitan News-Enterprise


Monday, November 7, 2016


Page 1


Ninth Circuit Rules:

Award Invalid Because Arbitrator Was Phony Lawyer




A corporation that accused its broker of mismanaging its funds through speculative investments is entitled to a new arbitration hearing because the chairman of the arbitration panel misrepresented himself as an attorney, the Ninth U.S. Circuit Court of Appeals ruled on Friday.

The panel, ruling on what it said was an unsettled question in the circuit, held that the three-month statute of limitations for challenging an award under the Federal Arbitration Act is subject to equitable tolling. Addressing the merits, it held that the plaintiff was deprived of a fundamentally fair hearing, and that the award had to be vacated as a result.

The plaintiff, Move, Inc., had an investment account with Citigroup Global Markets, Inc. Its client agreement mandated arbitration of any and all disputes before a securities industry panel.

In September 2008, Move initiated arbitration before the Financial Industry Regulatory Authority, alleging that Citigroup mismanaged $131 million of Move’s funds by putting it in auction rate securities. FINRA provided the parties with a list, and resumes, of 30 potential members of the three-member arbitration panel.

First Choice

Move ranked James H. Frank as its first choice. According to his resume, Frank was a Southwestern Law School graduate and admitted to practice in California, New York, and Florida.

Frank served as chair of the panel, which also included attorney Arthur Berggren and Daniel Brush, a certified public accountant and certified financial planner. The panel ruled in favor of Citigroup.

Over four years later, The AmLaw Litigation Daily reported that Frank had lied about being a licensed attorney. In fact, the arbitrator, whose full name is James Hamilton Hardy Frank, had assumed the identity of retired attorney James Hamilton Frank of Santa Monica.

FINRA ultimately confirmed that Frank had lied on his resume and removed him from its roster of arbitrators.

Less than three months after the AmLaw report appeared, Move moved to vacate the arbitration award under the Federal Arbitration Act, asserting equitable tolling of the statute of limitations. Citigroup argued that the FAA does not permit equitable tolling, that it would be unjustified under the facts of the case even if it were permitted, and that even if the statute were tolled, the unanimous decision of the arbitrators should stand on its merits.

District Court Ruling

U.S. District Judge John F. Walter ruled for Citigroup.

He reasoned that while the issue of equitable tolling under the FAA was unsettled, the plaintiff had the better of the argument. But he agreed with Citigroup on the merits, concluding that Frank’s misrepresentations did not deprive Move of a fundamentally fair hearing as required by §10(a)(3) of the act, and that the panel’s decision was entitled to deference.

Senior Judge Dorothy W. Nelson, however, in her opinion for the appeals court, said Move was entitled to equitable tolling and to a judgment vacating the arbitration award.

She said the law of the circuit should be settled in favor of equitable tolling.

The usual rule in federal cases, she explained, is that a statute of limitations is subject to equitable tolling unless the text of the statute is to the contrary. “We agree with the district court and conclude that neither the text, nor the structure, nor the purpose of the FAA is inconsistent with equitable tolling,” Nelson wrote.

Prejudice Found

Turning to the merits, the judge said Move established prejudice resulting from arbitral misbehavior under §10(a)(3).

Move, she said, made it clear that it wanted Frank as an arbitrator because it understood him to be an attorney who could interpret the “sophisticated legal concepts” at the heart of its case. The company, she noted, exercised its right to strike potential arbitrators who lacked the experience Frank represented himself as having.

Rejecting Citigroup’s argument that there was no prejudice because the other two arbitrators were untainted, Nelson said there was no way to know whether they were influenced by Frank. Besides, she wrote, Frank’s involvement was itself prejudicial because Move had the right to have its case heard by three qualified arbitrators, not merely two.

Judge Richard A. Paez and Senior District Judge Elaine E. Bucklo, visiting from the Northern District of Illinois, joined in the opinion.

Move, Inc. v. Citigroup Global Markets, Inc., 14-56650, was argued in the Ninth Circuit by Susan J. Williams of Hennelly & Grossfeld LLP for the plaintiff and Fred Anthony Rowley Jr. of Munger Tolles & Olson LLP for the defendant.


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