Elwell v. Raymond James Financial Services, Inc.

Background

Christina and Erik Elwell brought an arbitration proceeding before the Financial Industry Regulatory Authority (FINRA) against their former financial adviser, Daniel Pimental, and Raymond James Financial Services, Inc. They alleged that Pimental engaged in misconduct, including breaches of fiduciary duty, excessive and unsuitable trading, unauthorized trading, excessive fees, and fraud. They also alleged that Raymond James was responsible for Pimental’s conduct and failed to supervise him adequately.

The Elwells sought damages in the tens of millions of dollars. After hearing testimony from 16 witnesses and reviewing 898 exhibits, a three-member FINRA panel found Pimental and Raymond James jointly and individually responsible for the misconduct. The panel awarded the Elwells $67,917 in compensatory damages, plus interest at 9% per year beginning October 21, 2015. The award also assessed approximately $60,000 in fees payable directly to FINRA. The respondents paid the Elwells a total of $110,251.50, and the Elwells cashed the checks while preserving their position that the award should be vacated.

The Elwells petitioned New York State Supreme Court to vacate the award, arguing that it was irrational, lacked support in the record, did not explain the $67,917 figure, and used an unjustified date for calculating interest. The respondents removed the case to federal court and cross-moved to confirm the award.

Federal jurisdiction

The Elwells moved to remand the case to state court, arguing that the amount in controversy was only the $67,917 compensatory award and therefore did not exceed the $75,000 requirement for diversity jurisdiction. The respondents argued that the amount in controversy included the award’s interest, the total amount paid, or the much larger damages the Elwells had sought in arbitration.

The court explained that the Federal Arbitration Act allows federal courts to confirm or vacate arbitration awards but does not itself create federal jurisdiction. The court therefore had to determine whether an independent basis for jurisdiction existed. The parties did not dispute complete diversity of citizenship; the dispute concerned the amount in controversy.

The court noted that courts had used both a “demand” approach, which looks to the amount sought in the underlying arbitration, and an “award” approach, which looks to the amount awarded. The court did not decide whether the demand approach remained valid after the Supreme Court’s decision in Badgerow v. Walters. Instead, it held that jurisdiction existed under the award approach.

The court treated the pre-award interest as part of the amount in controversy because the Elwells challenged both the compensatory damages and the interest award. On the date the arbitrators signed the award, the combined damages and pre-award interest totaled $109,800.39. The court therefore held that the amount in controversy exceeded $75,000 and denied the motion to remand.

Petition to vacate

The court explained that federal review of arbitration awards is extremely limited. The Elwells did not rely on the four specific statutory grounds for vacatur under the Federal Arbitration Act. Instead, they argued that the arbitrators had acted with “manifest disregard of the law,” a court-created ground requiring a showing that the arbitrators knew the governing legal rule, understood that it controlled, and deliberately refused to apply it.

The court held that the Elwells did not meet this demanding standard. The arbitrators were not required to award damages using one of the theories or calculations proposed by the Elwells. The court also stated that disagreement with the arbitrators’ evaluation of the evidence, by itself, was not a proper basis for vacating the award.

The record supplied a colorable justification for the award. The Elwells’ damages expert acknowledged that some investments were suitable but had applied the damages formula to every investment without separating suitable investments from allegedly unsuitable ones. The respondents’ expert testified that the investments were suitable. The court concluded that the arbitrators could reasonably have rejected some or all of the Elwells’ damages theory and awarded a smaller amount based on selected investments. The court also found support for the October 21, 2015 interest date because documents showed that the Elwells opened their Wells Fargo account on that date.

The court therefore denied the Elwells’ petition to vacate the award.

Confirmation of the award and disposition

Because the court denied vacatur and found a colorable justification for the award, it granted the respondents’ cross-motion to confirm. The award was confirmed.

The court’s final dispositions were: the Elwells’ motion to remand was denied; the Elwells’ motion to vacate the award was denied; and the respondents’ motion to confirm the award was granted. The Clerk was directed to close the case and all pending motions.