A federal district judge in New York has rejected an attempt by a securities broker-dealer, involved in ICDR arbitration related to Bernard Madoff’s Ponzi scheme, to change the arbitral forum by a retroactive amendment to its customer agreement. Anwar v. Fairfield Greenwich Ltd., 2010 U.S. Dist. LEXIS 87449 (S.D.N.Y. Aug. 20, 2010).
Four months after Madoff had admitted the Ponzi scheme in December 2008, the Standard Chartered Bank sent its account holders a new customer agreement, retroactive to November 2008. The new agreement was with a successor entity, a new broker-dealer, and provided for arbitration before a panel appointed by the Financial Industry Regulatory Auhority (“FINRA”). (The original agreement had provided that the bank could modify it on written notice to the customer.)
The customers, mainly Chilean investors holding 24 accounts, started an ICDR arbitration as a consolidated rather than class action. The claim was that Standard Chartered had invested Claimants’ money in a Madoff “feeder fund” without adequate due diligence.
In a partial award in June 2010, the ICDR tribunal ruled that it had jurisdiction despite the purported substitution of FINRA arbitration retroactively, and also held that proceeding with all 24 investor claims on a consolidated (but not “class action”) basis was proper.
The broker-dealer then started this action, seeking declaratory and injunctive relief that the ICDR Tribunal lacked jurisdiction, that consolidated arbitration should be disallowed, and that discovery in the arbitration should be stayed for the duration of the discovery stay in related Madoff class action federal securities fraud cases pending before the federal district judge to whom the application was made.
Turning first to the question of ICDR jurisdiction, the Court, applying traditional injunction criteria, expressed doubt whether arbitrating before an ICDR rather than a FINRA tribunal would qualify as irreparable harm, but focused it analysis on Standard Chartered’s likelihood of success on its claim to have validly changed the arbitration clause. It found the broker-dealer’s position wanting, in part because of deficiencies in the giving of notice of the amendment, and in part (agreeing in this regard with the Tribunal’s analysis) due to the arguable substantive unconscionability of a change in an arbitration clause which (i) shifted proceedings to an arbitral forum, FINRA, admitted to be more favorable to securities broker-dealers, and (ii) required claimants to arbitrate separately in duplicative proceedings their identical claims against the predecessor and successor broker-dealers entities responsible for managing their accounts.
On the consolidation issue, the court found that the broker-dealer could scarcely claim irreparable injury, because the FINRA arbitration rules it sought to enforce provide expressly for consolidation. As to the merits, the court found that the ICDR tribunal’s partial award was subject to only the limited, deferential standards for vacatur specified in Section 10 of the Federal Arbitration Act (fully applicable to international arbitrations with a U.S. seat), because the consolidation question was properly viewed as an issue of arbitration procedure rather than arbitrability. The question therefore was whether the ICDR tribunal had exceeded it powers, and, finding that the tribunal had reasonably relied on New York law and industry custom and usage in construing an ambiguous clause, the court held that the tribunal had acted within its mandate. Further, taking note of the U.S. Supreme Court’s remarks in the Stolt-Nielsen case about the fundamentally different character of class arbitration, the court found that “[u]nlike the differences between bilateral and class arbitration, the differences between the limited consolidation here and bilateral arbitration are not so great.”
The court also gave “significant deference” to the tribunal’s ruling denying a stay of discovery. It went on to note that there was no merit to Standard Chartered’s argument that the stay of discovery in federal securities litigation pending resolution of motions to dismiss, mandated by federal law, extends to arbitrations of claims similar to those pending before a court.
One final comment is in order. The court assumed that FAA standards for vacatur were relevant to its review of the consolidation and discovery stay issues, presumably because the tribunal had included these rulings in a partial award. But these were merely procedural rulings in an ongoing arbitration, and the tribunal presumably retained power to amend them. Further, the proceeding was not brought under the FAA as a motion to vacate the partial award, but in effect as a petition to enforce the amended arbitration agreement providing for FINRA arbitration. The FAA contains no express provision for an action seeking to enjoin a pending or proposed arbitration. The court might have properly resolved the consolidation and discovery issues simply by holding that there is no statutory basis for interlocutory review of procedural orders in an ongoing arbitration.