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N.D. Illinois Denies Broker’s Attempt to Block Zoom Arbitration Hearing

Zoom hearingThe Northern District of Illinois recently denied a broker’s motion for a temporary restraining order and a preliminary injunction against the Financial Industry Regulatory Authority (FINRA) seeking to stop a scheduled remote arbitration hearing.

A copy of the opinion in Legaspy v. Fin. Indus. Regulatory Auth., Inc. is available at: Link to Opinion.

In February 2019, the plaintiff’s former clients filed a statement of claim against the plaintiff and his firm seeking damages of $2.765 million, loan interest, dividends, and lost appreciation related to alleged losses in their brokerage account. The parties signed a FINRA uniform submission agreement stating that “in the event a hearing is necessary, such hearing shall be held at a time and place as may be designated by the Director of FINRA…” and that “the arbitration will be conducted in accordance with the FINRA Code of Arbitration Procedure.”

The arbitration hearing was originally scheduled to begin Aug. 17, 2020 in Boca Raton, Florida, but due to the COVID-19 pandemic, FINRA notified the parties that the in-person hearing was canceled and would either be rescheduled or held via ZOOM or telephone conference by joint agreement or panel order. Two days later the panel ordered the hearing to be conducted via FINRA’s virtual hearing services on its original date of Aug. 17, 2020. The plaintiff noted his objection at a pre-trial hearing and in a letter in late July.

The plaintiff claimed that FINRA breached its Code of Arbitration Procedure and the uniform submission agreement, denied him due process, and sought injunctive relief to stop the remote hearing. In support, the plaintiff argued that remote proceedings would be cumbersome and procedurally irregular because the claimants are from Argentina and would require an interpreter, and there are dozens of witnesses and hundreds of documents that would have to be shared remotely. The plaintiff also argued that by the time the hearing is over, he would have spent so much on attorneys’ fees that he will have exhausted his insurance coverage and, if he loses the arbitration, FINRA will deduct any award against his net capital, immediately making his firm undercapitalized under FINRA rules, essentially forcing him out of business before he could file a motion to vacate any award against him.

The Court held that the plaintiff was not likely to succeed on his claim that FINRA breached the uniform submission agreement because FINRA is not a party to the agreement. Instead, the agreement is between the plaintiff and the claimants. Even if FINRA were a party to the agreement, the Court noted that the plaintiff still would not be likely to succeed on his breach of contract claim because, under the Federal Arbitration Act (FAA), the Court does not oversee arbitrators’ procedural rules. Instead, under the FAA, procedural questions which grow out of the dispute and bear on its final disposition are presumptively not for the judge, but for an arbitrator, to decide. Thus, whether FINRA can or should conduct a hearing remotely is a question of procedure that FINRA, not the Court, must decide. 

The Court also rejected the plaintiff’s due process argument, noting that FINRA is a private corporation, not a state actor, and thus cannot be sued for violating the Fifth Amendment.

The plaintiff also failed to demonstrate that he would be irreparably harmed absent injunctive relief because the harms of losing the arbitration would occur no matter when the arbitration starts and how it is conducted. Moreover, the Court saw no reason why the claimants would fare any better than the plaintiff in a remote hearing considering they have the burden of proof in the arbitration. The Court believed that, if anything, the logistical challenges of a remote hearing would be more likely to harm the claimants than the plaintiff.

Finally, the Court noted that, even if the plaintiff could prove that he met the threshold requirements for a temporary restraining order, the equities were not in his favor because the claimants argue they suffered losses in excess of $2.6 million and delaying the hearing delays their chance to be made whole. The Court also believed that waiting until the eleventh hour to seek injunctive relief weighed against the plaintiff, noting that claimants and FINRA arbitrators had invested substantial resources to prepare, and enjoining the hearing would upend their preparation. 

Accordingly, the Court denied the plaintiff’s motion for temporary restraining order and preliminary injunction. 

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Brady Hermann is based in Maurice Wutscher’s Boston office and supports the firm’s litigation matters in its New York office, practicing in the firm’s Commercial Litigation and Consumer Credit Litigation groups. Brady has substantial experience as a litigation attorney. He has represented individual and corporate clients in complex litigation matters, focusing on securities litigation and regulation, business and commercial litigation, multidistrict litigation and class actions and more. In addition, he has represented many of the nation’s largest securities broker-dealers in arbitration and regulatory proceedings before the Financial Industry Regulatory Authority and has represented and counseled clients in regulatory, enforcement and criminal investigations before the SEC, FINRA, state securities regulators, the Department of Justice, the FBI and various other governmental and self-regulatory organizations. For more information, see https://mauricewutscher.com/attorneys/brady-hermann/

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