Three executives with a prominent New York law firm provided some insights recently on the high punitive damages that are being awarded in arbitration cases and the challenges firms face in fighting these awards.
An article on the topic was written for AdvisorHub by Howard Elisofon, former trial counsel for the SEC’s Division of Enforcement, who serves as co-chair of Herrick, Feinstein LLP’s securities litigation practice. Maxim Nowak, who serves as counsel at the firm, and Anna Boltyanskiy, one of its associates.
They examined two recent awards issued by Financial Industry Regulatory Authority arbitration panels that highlight the significant role punitive damages can play in securities arbitration involving the broker-dealer industry.
In one case in February, FINRA arbitrators ordered UBS Financial Services and broker Andrew Burish to pay over $92 million to nine investors after UBS and Burish were accused of recommending an “unsuitable and risky strategy of selling shares of Tesla, Inc. common stock short and recommended that [investors] continue to hold the positions in the face of mounting losses.”
UBS went to court in an effort to overturn the award, which included $69 million in punitive damages, calling it “impermissibly excessive” and contrary to public policy. The firm also contended the arbitrators exceeded their authority and violated Iowa state law by ordering the award.
In March, another FINRA arbitration panel ordered Stifel, Nicolaus & Co. to pay a family of investors approximately $132 million, including $79.5 million in punitive damages, for misrepresenting the risk of complex structured notes.
Though Stifel intends to appeal the damages, the family already filed an appeal in federal court to confirm the award.
The article points out the challenges firms face in fighting outsized punitive damage awards, saying, “Generally, arbitration awards are treated very deferentially by courts, with “only a barely colorable justification” needed to confirm the award, in order to “encourage and support the use of arbitration.”
The authors note that under Section 10(a)(4) of the Federal Arbitration Act (“FAA”), awards may be vacated based on only several grounds such as where the award was obtained by corruption or fraud, where the arbitrators were clearly partial or guilty of misconduct, or where the arbitrators exceeded their powers in granting the award. A court deciding whether to vacate an arbitration award focuses on “whether the arbitrators had the power, based on the parties’ submissions or the arbitration agreement, to reach a certain issue, not whether the arbitrators correctly decided that issue.” While overturning an arbitration award poses a difficult hurdle, it is not an impossible one.
Firms attempting to overturn high-dollar damage awards often contend the arbitrators exceeded their authority. Elisofon, Nowak, and Boltyanskiy point out that this argument may hinge on what the arbitration agreement between the parties authorized with regard to punitive damages.
“If the arbitration is subject to the FAA, arbitrators generally have the authority to issue punitive damages unless the arbitration agreement between the parties explicitly states otherwise,” the authors write. “The U.S. Supreme Court in Mastrobuono v. Shearson Lehman Hutton held that an agreement provision authorizing punitive damages governs, even where the same agreement’s choice of law provision states that the contract is governed by a state’s law that otherwise prohibits punitive damages in arbitration.”
Litigants can attempt to overturn an arbitrator’s punitive damages award as excessive and in manifest disregard of the law but the article emphasizes that in the context of a “contractually agreed to arbitration” rather than a jury or court-issued award, arguments about excessiveness of punitive damages awards and any related due process concerns are difficult to prove.
The authors advise firms facing outsized arbitration awards to consult with knowledgeable counsel about their options.
Furthermore, they add, “Firms should also be mindful that when their arbitration agreements state that they are proceeding under the rules of a federal arbitral board like FINRA, implicit in their contracts is a recognition that punitive damages are subject to arbitration, making such awards exceedingly hard to challenge. Finally, even if it would be challenging to win an award vacatur, moving to vacate an arbitration award is often a colorable tactic to increase leverage for a post-award settlement with a claimant.”
At Lewitas Hyman, our attorneys have handled hundreds of arbitrations before FINRA, , the Chicago Board Options Exchange, the Chicago Board of Trade, JAMS, the American Arbitration Association and other self-regulatory organizations nationwide. We have also appeared in courts throughout the United States in various types of securities-related matters. For more information about our arbitration and litigation services, please contact us at (888) 655 6002 or through our online contact form.
