PHILADELPHIA - A couple’s lawsuit over their lost retirement savings can’t make any headway in federal court.
A three-judge panel of the U.S. Court of Appeals for the Third Circuit on Aug. 22 affirmed the ruling of a federal judge in the Eastern District of Pennsylvania, dismissing a couple’s request that the court vacate an arbitration award. The court determined the motion to vacate didn’t raise a substantial federal question.
Judith and Kenneth Goldman had worked with their former financial adviser, Barry Guariglia, since the 1990s, when he worked at Merrill Lynch. In 2008, Guariglia moved to Citigroup Global Markets Inc., and the Goldmans followed him there.
Following losses in the stock market, the Goldmans claimed they were pushed into “short-term trading of high-risk, speculative securities” that both brokerage firms knew were outside the couple’s investment goals.
The plaintiffs alleged their adviser and others convinced them to take on increasingly unsustainable risk. They claim that, at CGMI, they faced a higher margin requirement, requiring them to deposit more cash or securities to cover possible losses -- a step called a “margin call.” As a result, they had to liquidate a “sizable portion of their investments” and lost their retirement.
In 2010, the Goldmans initiated arbitration with the Financial Industry Regulatory Authority, or FINRA, against Merrill Lynch, CGMI, Guariglia and other employees of the financial institutions. Their claims included securities fraud in violation of the Securities Exchange Act, fraudulent misrepresentation, lack of supervision of employees, lack of suitability of investment recommendations, breach of fiduciary duty, breach of contract and negligence.
FINRA hears many cases like this, said Eric Chaffee, a professor at the University of Toledo College of Law who focuses on tax and business law.
“It’s designed to be the neutral third party that is not a government entity,” Chaffee told the Pennsylvania Record. “It's a well-regarded institution.”
Brokers and financial institutions favor FINRA because of its expertise in securities matters. Alternatively, if a judge oversees the case, he or she may not have the same depth of knowledge about securities and financial services law.
On the other hand, investors such as the Goldmans may prefer a state or federal court where they “may end up with someone more sympathetic” to their case, Chaffee said.
FINRA proceedings produced a settlement for the Goldmans with Merrill Lynch. For the claims against CGMI and the financial adviser, an arbitration panel took evidence and heard arguments over 10 days, after which the panel granted the defendants’ motion to dismiss the claims for lack of evidence. The panel concluded there was no “margin call” as the Goldmans alleged.
“While all the claims were quite stridently argued, not a single claim was proven to be true by evidence,” the panel concluded.
The Goldmans took their case to the district court, filing a motion to vacate the arbitration award, under the Federal Arbitration Act. They claimed the FINRA panel acted improperly, showing a bias toward the defendants, who, they claim, bargained in bad faith and spied on mediation proceedings. But the arbitration law doesn’t create federal subject-matter jurisdiction, so the court dismissed the case, according to court documents.
The appeals court agreed, saying the plaintiffs didn’t provide a federal reason to vacate the arbitration agreement. It also pointed to state courts’ primary role in enforcing arbitration agreements.
“Expanding federal question jurisdiction to contractual disputes like this one runs the risk of ‘disturbing (the) congressionally approved balance of federal and state judicial responsibilities,’” the decision stated.
Chaffee said the parties could take the matter to state court but it would be difficult for them to prevail. Courts were once more skeptical of arbitration but it has become much more common, with support from the courts.
“They might be able to get the court to litigate this matter but it would be an exceptional case,” he said. “There’s a strong preference right now for arbitration.”