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Overdue Inquiry on Arbitrator Ethical Issues Abrogates Attack on Award: Goldman Sachs & Co. v. Athena Venture Partners, L.P.
Posted on Categories Court Decisions, Securities ArbitrationTags , ,

By David C. Franceski, Jr.

A party to arbitration with constructive knowledge, i.e., that the party knew or by the exercise of reasonable diligence should have known, of a basis to challenge an arbitrator’s participation during the arbitration, who fails to do so until after an unfavorable Award is entered, waives the right to vacate the Award on such basis.

Goldman Sachs & Co. vs. Athena Venture Partners, L.P., No. 13-3461 (3rd Cir., 9/29/15).

Vacatur Below

Following its failure as claimant to prevail on its multi-million dollar claim for losses in Appellant Goldman Sachs’ “low principal risk, short-term,” allegedly higher-yielding alternative to cash investments, Appellee Athena Venture moved in the District Court to vacate the Award (FINRA ID #09-04771 (Phila., 3/13/13)) based on a post-Award investigation. That investigation revealed that, in addition to the one bar association complaint disclosed by the arbitrator after the first day of the hearing, he had other state bar association complaints against him, including at least one criminal charge for issuing bad checks. Athena challenged the Award and the District Court granted the motion to vacate, finding that FINRA had failed to provide the parties with three qualified arbitrators, in accordance with §§ 10(a)(3) and 10(a)(4) of the FAA.

Reinstatement on Appeal

Goldman Sachs appealed, arguing that, by failing to object in the course of the hearing to the arbitrator’s incomplete and misleading disclosure or to investigate further on the basis of that disclosure, Athena had waived its right to seek vacatur of the Award. Based on the doctrine of constructive notice, and in the interest of finality, the Third Circuit agrees with Goldman, reverses the District Court and reinstates the Award in Goldman’s favor.  According to the Court, if a party could have reasonably discovered during the course of the proceeding “any type of malfeasance, ranging from conflicts-of-interest to non-disclosures such as those at issue here…,” it should be precluded from challenging the subsequent Award on those grounds.

Alarm and Inquiry

Further, while the Court concedes that several of the bar association issues, including the bad check charge uncovered in its post-Award investigation, arose between the first and second days of the hearing, and, therefore, could not have been known at the time that the arbitrator made disclosure of the initial unauthorized-practice-of law charge (which the arbitrator characterized as a technical failure to seek pro hac vice admission in a small municipal court matter for a family friend), “it does not change the fact that Athena should have raised a challenge based solely on the initial disclosure.” In so holding, and apparently dismissing Athena’s claim that it was the third arbitrator’s failure to sign which led to the post-Award investigation, the Appellate Court emphasizes that the charge of lawyer misconduct which the arbitrator did disclose was a serious misrepresentation to a court of law. The disclosure challenged the arbitrator’s “character and fitness to serve as an arbitrator” that should have provoked “alarm,” further inquiry, and, ultimately, discovery of at least four previous bar association complaints dating back to 1999.

No "Second Bite"

Characterizing the matter as “a paradigmatic case of the ‘sore loser,’” seeking “a second bite at the apple,” the Court emphasizes that a party should not wait until losing to begin scouring the Internet for adverse information with which to challenge an Award. And, though the Court further observes in a footnote that the arbitrator’s “grossly misleading” disclosure is, as noted by the District Court, an important factor militating against waiver, the constructive knowledge standard even trumps that malfeasance. Finally, the Appellate Court expressly chides FINRA (as did the District Court) for failing to conduct any further investigation or due diligence and then comments (in apparent dictum?) that “it would be remiss not to mention” that, even had Athena raised the issue during the panel hearing, it is unclear under which statutory ground Athena could have demanded the arbitrator’s removal.  Nonetheless, it concludes, “this potential inequity” does not alter its waiver analysis.

(D. Franceski: Putting aside the fairness of the result, which can surely be questioned on the facts presented, this opinion would clearly seem to raise more questions than it answers. To catalogue just a few: If an Award can be entered by any two of three arbitrators, absent evidence that the challenged arbitrator who did not sign the Award in some way adversely influenced the Award against the interests of the party seeking vacatur, on what basis can the Award be challenged for arbitrator bias or misconduct, i.e. what prejudice did Athena suffer from the non-disclosure? Is prejudice a necessary element of an arbitrator misconduct claim? What level of due diligence is required/reasonable if absolutely nothing negative is disclosed by the arbitrator? How can obviously misleading disclosures, which are no fault of the parties, be constructive notice of additional issues? How much reliance may parties in arbitration place on the FINRA background check process? What bearing, if any, does the amount in controversy or the degree of constructive notice have on the magnitude and expense of due diligence that will be found adequate? How frequently after receiving constructive knowledge must a party do a “bring-down?” How many of the arbitrator’s disciplinary issues, especially the most recent ones, were even public; absent an adverse determination most such bar proceedings are confidential and non-public? If, as the District Court found, it was FINRA’s failure to provide the parties with three qualified arbitrators” which violated the FAA, of what relevance was Athena’s conduct to the outcome? By what standard did the Appellate Court review the District Court’s decision? If “[Athena] should have raised a challenge based solely on the [arbitrator’s] initial disclosure,” of what relevance at all was “constructive knowledge” and its “should have known” standard to the Court’s decision? Is this even a “constructive knowledge” case, or is that part of the Court’s decision pure dictum? If the Appellate Court “appreciated” Athena’s argument about the timing of the subsequent legal issues (the most egregious of which occurred after the arbitrator’s misleading disclosure), why did it insist that Athena had “constructive knowledge” of them as a basis for its challenge? And, finally, and perhaps most importantly, if, as the Court says, it is “unclear under which statutory [read FAA] ground [Athena] could have called for [the arbitrator’s] removal”, what right, in fact, did Athena “waive”? Two things are, however, quite clear from the Court’s opinion: in the absence of a FINRA rule change or a change to the parties’ agreement about the nature and legal effect of the arbitration selection process, (1) practitioners will likely henceforth dedicate far greater resources (and expense) to an already onerous and sometimes unwieldy arbitrator selection process; and (2) challenges within the Third Circuit based on matters first uncovered in post-Award investigations have just grown exponentially less likely to succeed.) (EIC: Mr. Franceski wrote a summary of the District Court’s vacatur Opinion in SLA 2013-32. We previously covered the peculiar circumstances surrounding the issuance of the Award in our sister e-mail service, the Securities Arbitration Alert, SAA 2013-24.)

(SLC Ref. No. 2015-38-02)

NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA)from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis.

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