Aug 1 A federal judge late on Thursday tossed
out a securities arbitration ruling against an investor who
sought to recoup $1.4 million from Goldman Sachs Group Inc
, citing an arbitrator's failure to fully disclose his
involvement in an unrelated criminal proceeding, according to a
Judge J. Curtis Joyner of the U.S. District Court for the
Eastern District of Pennsylvania threw out the arbitration award
after ruling that the investor's legal rights in the proceeding
were compromised by an arbitrator who misled the parties about
his indictment for the unauthorized practice of law and by not
participating in the decision, according to the opinion.
A spokeswoman for Goldman Sachs did not immediately return
phone calls or respond to an email requesting comment. The case
already has led to a new initiative by FINRA beefing up
oversight of its 6,500 securities arbitrators by conducting
annual background checks.
The investor, Athena Venture Partners LP, lost the Financial
Industry Regulatory Authority (FINRA) arbitration against
Goldman in May, after alleging it was misled by the firm in a
private debt fund investment. Athena is the family investment
vehicle of Richard Caruso, who founded Integra LifeSciences
Holdings Corp in 1989.
Caruso said he was pleased with the decision, but declined
FINRA, Wall Street's industry funded watchdog, also runs the
arbitration forum where investors and their brokerages typically
agree to resolve their arbitration disputes.
It is rare for the courts to overturn FINRA arbitration
rulings, say lawyers. Arbitration rulings are typically binding,
but parties may ask courts to overturn them in limited
circumstances, such as when an arbitrator is biased. Parties who
are successful at overturning their securities arbitration
awards must present their arbitration cases again in FINRA's
"This is a rare step in a really unique case," said Andrew
Stoltmann, a Chicago-based securities arbitration lawyer. "The
court reached the common sense conclusion it had to," said
Stoltmann, who was not involved in the Goldman case, but who
typically represents investors.
One of the three arbitrators who heard the case between
Goldman and Athena, Demetrio Timban, had been indicted by the
state of New Jersey for practicing law without a license,
although charges were later dropped under a state program to
deal with nonviolent offenses. He was also reprimanded by a
Michigan regulator for the New Jersey incident and passing
$18,000 in bad checks. FINRA did not learn of Timban's troubles
until months after the case started.
A disclosure Timban sent to the parties about his indictment
was misleading, Athena alleged, because it described his law
practice violations as a one-time incident when Timban was
actually running an office in New Jersey.
Athena also alleged that Timban did not participate in
deciding the case because his signature did not appear on the
award along with those of the two other arbitrators.
Nonetheless, there is "no evidence" that FINRA took action
to remove Timban from the case after learning of his troubles,
the court wrote.
A FINRA spokeswoman did not immediately return a call or
respond to an email requesting comment.
FINRA rules "clearly entitled (Athena) to a panel composed
of at least three qualified arbitrators," Judge Joyner wrote in
a 19 page opinion. Athena's rights were prejudiced by Timban's
behavior and, as a consequence, a "mutual, final and definite
award was not made," Judge Joyner wrote.