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Securities Arbitration – Get It Right The First Time Around

Plaintiffs rarely enjoy having their case jettisoned from court and onto the arbitration table – whether right or wrong, arbitration has a decidedly pro-defense rep that makes plaintiffs’ attorneys do just about anything to avoid it. But as shown in the recent Court of Special Appeals of Maryland case of Gordon v. Lewis, No. 1505, Sept. Term 2011, arbitration isn’t always a graveyard for meritorious claims, and plaintiffs can even score punitive damages that are quite hard to overturn. Simply put, courts are loath to revise an arbitrator’s decision, even when it involves an exemplary award.

In Gordon, appellant Kathy Gordon, a financial advisor, advised the appellees, her clients, to invest a quarter of a million dollars in a Somerset County real-estate venture that, coincidentally, just happened to be owned by her son. The clients received supposedly secured promissory notes that assured repayment, but that never actually happened, even while Gordon repeatedly stated that high rates of interest were being earned. Meanwhile, unbeknownst to the investors, the development company had actually gone belly-up into bankruptcy. When the clients eventually discovered this important little detail, they weren’t too pleased that their notes were – despite what they had been told – completely unsecured. In other words, it was nice knowing you, 250 grand.

The investors sought relief in court, but, over their objection, the case was kicked to the Financial Industry Regulatory Authority (an independent nonprofit authorized by the U.S. Congress to oversee the securities industry and resolve disputes) for arbitration. The alternate venue didn’t much help our wayward wealth (mis)manager, however, as the panel found that she and other defendants owed her clients a full refund of their investment, plus interest, plus filing fees, plus another $25,000 in punitive damages. But before the plaintiffs could let loose a celebratory “boo-yah!” Gordon ran back into court to try to get the award tossed, particularly the punitives.

Gordon argued that withholding information from clients about their investments could not, by itself, support punitive damages – and blatantly attempted to keep the court’s consideration limited to that argument by failing to provide a transcript of the arbitration proceedings. Noting that the award plainly stated that Gordon had acted willfully, the court found that she hadn’t presented enough evidence to show that the arbitrators’ decision had exceeded their authority. On appeal, the Court of Special Appeals agreed, assuming, without the benefit of a transcript, that the arbitration panel did everything properly, and further holding that an advisor’s willful withholding of information is a type of fraudulent action that opens the doors to punitive damages. Moreover, the Court noted, if Gordon didn’t understand the full reasoning behind the award, she could have asked for a full explanation under Md. Code, Cts. & Jud. Proc. § 3-222(c), but didn’t.

In short, the Court saw through Gordon’s attempt to squirm around the arbitration decision and wasn’t too sympathetic. The larger point, however, is that the heavy presumption of propriety that accompanies review of an arbitration award isn’t easy to overcome by either party – even when the recovery comes sweetened with punitive damages. Businesses in arbitration shouldn’t assume a reviewing court will give extra scrutiny to punitive damages or take an active role in adjusting them, so it’s important to win the battle the first time around. To make sure your arbitration is aggressively defended, contact Bill Sinclair, head of STSW’s commercial litigation group, at 410-385-9116 or

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