Fourth Circuit Upholds $900K FINRA Arbitration Award After Bank Fails to Weigh in on Arbitral Panel

A unanimous panel of the United States Court of Appeals for the Fourth Circuit has reportedly upheld a contested $900,000 Financial Industry Regulatory Authority (“FINRA”) arbitration award.  In UBS Financial Services Inc. v. Padussis, No. 15-2148 (4th Cir., Nov. 22, 2016), a man, Padussis, began working as a financial advisor for a bank, UBS, in 2009.  Upon beginning his employment, Padussis signed a promissory note for a $2.7 million loan that became immediately due upon his resignation.  Padussis also signed a number of other agreements related to the terms of his employment.  Each contract stated any future disputes between Padussis and UBS would be subject to binding arbitration before a FINRA panel.

In 2013, Padussis left UBS.  According to the financial advisor, UBS cost him several valuable clients and required Padussis to share commissions with other financial advisors in violation of the terms of his employment contract.  At the time, Padussis still owed about $1.6 million to UBS.  After Padussis refused to pay the remaining sum to UBS, the bank initiated arbitral proceedings.  Padussis then filed a counterclaim against UBS for breach of contract and tortious interference with his team of financial advisors.

The Director of FINRA Dispute Resolution mailed both Padussis and UBS a list of potential arbitrators as required by the FINRA Code of Arbitration Procedure for Industry Disputes.  Under the FINRA rules, each party has 20 days during which to strike up to four names from the Director’s list and rank those remaining. Although Padussis returned his ranked list, UBS failed to reply before the 20-day deadline expired.  After the proscribed time period passed, the bank unsuccessfully sought to extend the deadline.

A FINRA panel was ultimately selected using Padussis’ preference list.  Following arbitration proceedings, the FINRA panel awarded UBS approximately $1.6 million and awarded Padussis more than $900,000.  In response, UBS filed a motion to vacate or amend the arbitral award to include an offset.  Instead, the district court confirmed the entire award and UBS filed an appeal with the nation’s Fourth Circuit.

On appeal, the court first stated the scope of judicial review for an arbitral award is extremely narrow.  The appellate court then examined the grounds on which UBS sought to vacate the FINRA panel’s arbitration award.  The court dismissed the bank’s claim that “the arbitrators were not selected according to the parties’ agreement,” when the Director of FINRA Dispute Resolution refused to extend the 20-day deadline for ranking the proposed arbitrators.  The court stated:

We will not second-guess FINRA’s decision that there was not good cause to extend the deadline. The parties agreed to arbitrate their disputes according to rules that clearly gave the Director the authority to make that decision. To usurp the Director’s authority would be to open courts to legions of questions about whether arbitral bodies properly applied one rule or another. This would deprive parties of the very benefits they sought by agreeing to arbitration – relatively prompt and inexpensive dispute resolution.

Next, the appellate court denied the bank’s request to impose an offset on the award because it would constitute a modification of the arbitration award.  The court said:

Under the Federal Arbitration Act, a court can modify an award only under specific, narrow circumstances. Relevant here, a court may modify an award “[w]here the award is imperfect in matter of form not affecting the merits of the controversy.” 9 U.S.C. § 11. Any order to modify an award must “effect the intent thereof and promote justice between the parties.” Id.

Assuming arguendo that imposing an offset would be a “matter of form not affecting the merits of the controversy,” an offset here would not effectuate the intent of the arbitrators, and we thus decline to impose one. The award itself is silent on the question of an offset, and there is no evidence in the record that would enable us to say that the arbitrators intended for the award to include one.

Because there was no basis for overturning the FINRA panel’s arbitration award, the United States Court of Appeals for the Fourth Circuit affirmed the district court’s order confirming the award in its entirety.

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