Evan K. Halperin Revocable Living Trust v. Charles Schwab & Co. Inc

Background

The Evan K. Halperin Revocable Living Trust maintained an account on Schwab’s online securities-trading platform. The account agreement required disputes arising from the agreement to be resolved through Financial Industry Regulatory Authority arbitration. In the arbitration, the Trust alleged that security features or malfunctions logged it out while it was attempting options trades, causing $1,576,140.34 in losses. Schwab disputed the cause of the interruptions and argued they could have resulted from circumstances involving the computer used for trading, including a virtual private network, poor internet connectivity, or an inactivity timeout.

The arbitration panel conducted discovery and a five-day hearing. The Trust repeatedly sought documents and electronic information that it described as data from a fraud-detection system tracking activity during user sessions. The panel granted some discovery requests in part, limited one production to 2018, denied or resolved other requests, and required Schwab to submit a declaration stating that certain requested reports did not exist. The Trust presented witnesses, including two experts, and evidence at the hearing.

On August 30, 2021, the panel denied all of the Trust’s claims. It awarded Schwab $100,000 in attorneys’ fees and $42,750.22 in costs, and separately assessed $22,500 in hearing-session fees against the Trust.

The Trust’s request to vacate

The Trust petitioned under section 10 of the Federal Arbitration Act (FAA), which permits a court to set aside an arbitration award on limited grounds. The Trust relied on section 10(a)(3), arguing that the panel improperly refused to hear important evidence, and section 10(a)(2), arguing that the panel showed evident partiality or bias in favor of Schwab.

Judge Castel rejected both arguments. For the section 10(a)(3) claim, the court explained that an arbitration panel has broad discretion over discovery and evidence, and that setting aside an award requires a showing that the proceedings were fundamentally unfair. The court found no such showing. The panel considered the Trust’s discovery motions, granted some of them in part, required Schwab to provide a sworn declaration about the requested reports, and allowed the Trust to present witnesses, arguments, and evidence at the hearing. The court concluded that the panel did not improperly refuse to hear material evidence merely by declining to compel production of electronic information that Schwab represented did not exist.

For the section 10(a)(2) claim, the court held that the Trust offered no evidence of partiality beyond the panel’s rulings against it and the panel’s ultimate decision for Schwab. The court noted that the panel had granted at least part of several discovery motions opposed by Schwab. It concluded that the panel’s discovery decisions, its characterization of one motion as premature and frivolous, and the arbitration result did not establish evident partiality.

Other motions and final rulings

The court vacated the clerk’s certificate of default against Schwab because the Trust’s assertion that Schwab had not responded to its first ground for relief was demonstrably untrue. The court denied the Trust’s motion under Federal Rule of Civil Procedure 12(f) to strike the Marinzel Declaration and its exhibits, finding that the materials had been before the arbitration panel and were properly part of the record.

The court denied the Trust’s petition to vacate the arbitration award and granted Schwab’s cross-petition to confirm it. Because the award was not vacated, the court entered final judgment for Schwab in the amount of $164,123.64, representing the award’s $142,750.22 monetary portion plus prejudgment interest at nine percent per year from August 30, 2021. The court also granted Schwab’s request for attorneys’ fees and costs incurred enforcing the award, subject to Schwab’s submission within 14 days of evidence supporting the requested amount. The amount of those additional fees and costs was left to be determined.