The Expert's Examiner

Stifel, Nicolaus & Co. v. Stern, No. 1:20-cv-00005 (D. Md. Mar. 31, 2020).
September 6, 2020

We reach back in time a bit to present this Explained Award, but for good reason, we think. First, it's still timely, in that a post-Award challenge has just produced a court decision. Second, the explanation of the Panel's reasoning comes not only in the face of a specific objection by the broker-dealer to an Explained Award, but also in the form of a dissent. 

The underlying Award in this matter, Stern v. Stifel Nicolaus, FINRA ID No. 17-03299 (Baltimore, MD, Oct. 1, 2019), tells us little about how a dozen investors (three ultimately, as the others were severed by a Panel order) became Claimants suing Stifel, Stifel's parent, and three individuals in FINRA arbitration. We learn mostly about the facts from a Public Arbitrator's dissent and from the Court Opinion that followed Stifel's vacatur bid to overcome a $1.5 million award. Interestingly, that dissent was submitted more than two months after the majority neutrals signed the original Award and may well have supplied the trigger for Stifel's post-Award legal actions.

The Dissent Explains Majority's Reasoning

The named broker, together with the other Claimants, was accused of violating fiduciary duties and defrauding Claimants by "purchasing excessive and unsuitable investments in their accounts" and by engaging in actions "...taken with knowledge, evil motive, ill will and fraudulent intent...." They allegedly "concentrated investments in a few thinly traded holdings of one asset class and in one or two industries," specifically the biotech/healthcare and technology sectors. Despite this meaty menu of alleged misdeeds, the dissent charges that the majority made "no findings on these allegations or financial losses attributed to these claims." Instead, the awarded amount resulted from adherence to a principle in the Restatement of Trusts (§209), which indicates that the remedy for a failure to sell may be "the amount [the beneficiary] would have received by timely sale."

In this matter, the dissent relates, the majority "found the evidence showed a Complainant (Stern) had directed Respondent Blumberg to sell one of the holdings in his portfolio and he did not in violation of his duty to sell...." He maintains that the majority awarded damages based upon "the difference in value between the value at the time of the 'order' to sell and the value at the time of sale." Despite a five-day hearing length and the parties' focus on the declines in portfolio value, the "award of damages [was] based solely on a finding that Blumberg failed to sell a portfolio holding upon the investor’s order." As the dissent could not find the supposed order to sell to have been definite and certain, he would not award on that claim. "In addition," he continues, "I found no basis in law or fact that Complainants whose claim is based on 'unsuitability' is entitled to what the majority described as 'lost profits' from an 'unsuitable over concentrated investment portfolio'....”

The Arbitrator concludes with the observation that the portfolio value during the period in contention actually produced a profit, so that the majority opinion was not based on unsuitability at all. Rather, "it was the broker's failure to sell the alleged 'unsuitable' portfolio as its highest point of profit." That finding, he believes, was "unsupported by the evidence produced" by the parties.

The Court Explains the Law

That the Arbitrator's dissent arrived in the parties' hands two months after the original Award was delivered became a focal point in the post-Award proceedings before the District Court of Maryland. The Stern Respondents filed a motion to dismiss, insisting that Stifel filed too late, based upon a deficiency that was not cured by Stifel until after the 90-day time limit in Section 12 of the FAA.  It also cited the Maryland UAA, which has a thirty-day limit. Stifel made that 30-day limit, if it could persuade the Court to consider the re-service with the third signature (and the dissenting "Opinion") as a separate and distinct Award, but it also argued that it conformed substantially with the FAA requirement. The Court accepted Stifel's reasoning and proceeded to consider the primary thrust of the motion to dismiss, which was that Stifel paid the Award within the first 30 days of the initial Award being delivered. By doing so, Respondents argued, Stifel waived the right later to file a motion to vacate. Stifel paid, the Court found, to comply with FINRA Rule12904(j), which requires it to satisfy arbitration awards within 30 days or risk disciplinary sanctions. No benefit was received by Stifel for that payment and no detriment to Respondents resulted. Says Judge Stephanie A. Gallagher in Stifel, Nicolaus & Co. v. Stern, No. 1:20-cv-00005 (D. Md. Mar. 31, 2020): “Petitioner simply paid the $1.5 million award to Respondents within 30 days of the arbitration decision, as required by FINRA. Accordingly, Petitioner is not foreclosed from pursuing its Motion to Vacate the award.” Indeed, the Court observes, "the usual rule in the federal courts is that payment of a judgment does not foreclose an appeal."

(ed: *This decision only resolved the motion to dismiss; the vacatur motion remains in the Court's hands. We will report that determination when it issues. **We began by suggesting that the late-received dissent could well have stimulated the vacatur action. We base that supposition entirely on the coincidence of the $1.5 million payment by Stifel before making the vacatur filing. Stifel did not have to make this payment, if it knew it was going to challenge the Award. Rule 12904(j) provides an exception to the 30-day requirement where a motion to vacate has been filed. ***The "specific objection" by Stifel to an Explained Award occurred pre-hearing. Claimants made a formal request for an Explained Award under FINRA Rule 12904(g); Stifel opposed the request and the Arbitrators (the majority at least) therefore declined to accommodate Claimants.)

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