In Vitale, et al. v. Morgan Stanley Smith Barney, LLC, 2012 WL 4077383 (San Diego Superior Court 37-2012-00099813-CU-PA-CTL, Sep. 17, 2012), a California Superior Court judge granted Morgan Stanley’s motion to vacate a FINRA arbitration award due to a panelist’s “fairly clear” failure to make the mandatory disclosures required by FINRA Rule 13408. Specifically, the court found that the arbitrator failed to divulge that his daughter worked for a brokerage firm and that she maintained investment accounts at Morgan Stanley.
FINRA Rule 13408 states that arbitrators “must make a reasonable effort to learn of, and must disclose to the Director [of FINRA Dispute Resolution], any circumstances which might preclude the arbitrator from rendering an objective and impartial determination . . . ,” including any direct or indirect financial interests in the arbitration’s outcome, such as “[a]ny such relationship or circumstance involving members of the arbitrator’s family . . . .” Minimally, the court found that the arbitrator had failed to respond accurately to Questions 8 of the arbitrator’s mandatory disclosure checklist (asking whether “you, your spouse, or any member of your immediate family maintained an account . . . with a brokerage firm named in this proceeding?”) and Question 17 (asking whether “any member of your immediate family or household has been employed by a brokerage firm?”). The court noted FINRA’s directive to arbitrators “that if there is even a need to ‘think about whether a disclosures is appropriate, then it is: make the disclosure,’” — a directive that the court found the arbitrator “fairly clearly” did not follow. (Citing FINRA’s Arbitrator’s Guide.)
In its discussion, the court also highlighted two important legal issues for any party contemplating a motion to vacate an arbitration award for an arbitrator’s failure to disclose. First, the court reiterated that the “mere failure to disclose [potential conflicts of interest] reasonably creates the impression of partiality.” (Citing Schmitz v. Zilveti, 20 F.3d 1043, 1047-48 (9th Cir. 1994).) Second, in rejecting the opposition’s argument that Morgan Stanley knew about or had a duty to investigate and discover the facts the arbitrator had failed to disclose, the court recognized the widely held view that under FINRA rules “the duty lies with the arbitrator to disclose — there is no duty on the part of the participants to [research] matters or otherwise.” Indeed, both the federal courts and the California Supreme Court have similarly held that the duty correctly and logically falls on the arbitrator.
The Vitale opinion illustrates the importance California courts place on arbitrator disclosure requirements and how strictly courts will apply those rules to ensure fairness in the arbitration process for all parties.