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The James Frank Story Revisited: Ninth Circuit Vacates Tainted Award As Fundamentally Unfair
Posted on Categories Court Decisions, News, Securities ArbitrationTags , , , ,

We covered this story on the arbitration side when it first broke in early 2014 (SAA 2014-12); this coming week, we will cover the legal side in full in SAC's weekly online Litigation Alert (aka SOLA), with summaries of opinions by the District Court and Circuit Court that start a new chapter in the matter.

A Frank Fraud

This past week, the Ninth Circuit cracked open this huge auction-rate securities dispute, decided by Award and “finally” resolved seven years ago, because the Arbitration Chair misrepresented himself as an attorney licensed in California, Florida and New York, when he was not. According to the Ninth Circuit’s reversal of a vacatur dismissal in Move, Inc. v. Citigroup Global Markets, Inc., No. 14-56650 (11/4/16), James H. Frank, a long-time FINRA Arbitrator, who had deliberated in some 40 cases and who was chair-qualified, was not in fact James Hamilton Frank, a licensed California attorney, but, rather, James Hamilton Hardy Frank, an impostor. FINRA found this out in 2013, as part of a challenge launched by counsel in a then-current case, removing Mr. Frank from the case, from all future cases and from its roster.

Long Time Passing

It didn't end there, of course. Move, Inc. found out subsequently about Mr. Frank's subterfuge in 2014. Move had lost a case involving more than a hundred million dollars in auction-rate securities in a 2009 case against Citigroup Global Markets, in which Mr. Frank served as Chair. The Award, FINRA ID #08-03355, ended with Move, Inc. losing and, while it did not move to vacate at the time, it did move in June 2014, within three months of learning of Mr. Frank's unveiled deceit. Thus, a major issue before the Court was the long interval between Award and vacatur motion. Bridging that gap with equitable tolling required the Ninth Circuit to be the first federal circuit to apply tolling principles to the meaningfully short 90-day period permitted by FAA, Section 12.

The length of time that had passed since the challenged Award issued did not seem to weigh in the decision to toll, but, rather, the promptness with which Move, Inc. did act when the Arbitrator’s “fraudulent misrepresentation” was revealed to be false. As for the pertinence of Mr. Frank’s “deceit” to the making of the Award itself, the District Court failed to see a nexus. It wrote: “Mr. Frank's deceit, if cognizable at all under [the FAA], did not violate Move’s contractual rights under its Client Agreement with Citigroup.” The Ninth Circuit Panel, however, saw in the “purposeful and material deception” a direct connection to the “fundamental fairness” of the process.

Why the Award was Fundamentally Unfair

Move had expressed a desire for an experienced attorney to deal with the complex issues of its case. It relied on Mr. Frank’s profile, as presented and affirmed by Mr. Frank, as accurate. The “due process” promised by the later sections (§§ 9-12) of the FAA, when weighed against the policy of finality built into the Act, must trump the latter in these circumstances, if fairness is to prevail. The Court vacates on grounds of “arbitrator misconduct,” stating that: “... where an arbitrator’s purposeful and material deception resulted in his selection as chairperson of a panel, we agree with Move that such misbehavior constitutes grounds for vacatur under §10(a)(3).”

(ed: *We have so much we could say about this one. If there's time, we'll write a piece for SAC's Blog. **In addition to leaping the 90-day hurdle, the Court also adopts the view that the misrepresentation of a credential can disqualify the arbitrator and equate to “misconduct” under § 10(A)(3). Should FINRA as a forum have notified all parties in those 40 cases, when it learned of this arbitrator's deception? It did hit the public press in 2014 and FINRA did react with strong measures to prevent a recurrence, but we did not hear that it went further. Ironically, one reason against notice to the parties, assuming it was considered, might well have been counsel’s advice that the time for vacatur for all those earlier cases would have run years before -- no longer solid advice in the Ninth Circuit.) (SAC Ref. No. 2016-42-03)

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