Hosier v. Citigroup Global Markets, Inc.

Citations: 835 F. Supp. 2d 1098; 2011 WL 6413812; 2011 U.S. Dist. LEXIS 146670Docket: Civil Action No. 11-cv-00971-CMA-CBS

Court: District Court, D. Colorado; December 20, 2011; Federal District Court

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The Court, presided over by District Judge Christine M. Arguello, addresses the Petition by Gerald D. Hosier, Brush Creek Capital LLC, and Jerry Murdock, Jr. to confirm an Arbitration Award and the Motion to Vacate from Citigroup Global Markets, Inc. (CGMI). The Court denies CGMI's Motion to Vacate and confirms the Arbitration Award. 

Petitioners filed a Statement of Claim with FINRA on June 2, 2009, seeking recovery for losses from investments made with CGMI, asserting multiple causes of action, including breach of fiduciary duty, breach of contract, and misrepresentation of investment risks. They alleged that CGMI improperly marketed investment products as low-risk alternatives to municipal bonds, leading to significant financial losses, quantified at $48,190,417 in compensatory damages, as well as requests for punitive damages and attorneys' fees.

CGMI's defense hinged on Subscription Agreements signed by Petitioners, which included risk disclosures that they acknowledged reading and understanding. CGMI argued that these disclosures legally barred the claims during the arbitration hearing. The arbitration panel convened on March 13, 2011, and after a nine-day hearing, issued an Award on April 11, 2011, granting compensatory damages totaling $33,058,948 to the Petitioners, along with $17,000,000 in punitive damages and $3,000,000 in attorneys' fees.

Following the Award, Petitioners sought confirmation from the Court under the Federal Arbitration Act, asserting no valid grounds existed for vacating the Award. CGMI responded with its own Motion to Vacate, which the Court ultimately rejected. The procedural history included responses and replies from both parties, culminating in the Court's decision to uphold the Arbitration Award.

Confirmation of an arbitration award under § 9 of the FAA is intended to be a summary process, requiring courts to grant confirmation unless the award is vacated, modified, or corrected (9 U.S.C. § 9). District courts do not review arbitrators’ decisions for factual or legal errors as appellate courts do (Morrill v. G.A. Mktg., Inc.). Arbitrators' awards must be confirmed even if they contain errors in factual findings or legal interpretations (Denver, Rio Grande W. R.R. v. Union Pac. R.R.). Maximum deference is afforded to arbitrators because parties have chosen arbitration over litigation, trading the formal judicial process for a more expeditious and informal resolution. Courts can only vacate arbitration awards on very limited grounds, characterized as "among the narrowest known to the law" (U.S. Energy Corp. v. Nukem, Inc.). Section 10 of the FAA outlines the exclusive circumstances for vacating an award: corruption, evident partiality, misconduct by arbitrators, or exceeding arbitrators' powers (9 U.S.C. § 10). Additionally, the Tenth Circuit recognizes a few judicially created grounds for vacating or modifying awards, including "manifest disregard of the law" (Sheldon v. Vermonty). However, the validity of the "manifest disregard" standard is uncertain following the Supreme Court's ruling in Hall Street Associates, L.L.C. v. Mattel, Inc., which affirmed that the FAA provides exclusive grounds for judicial review of arbitration awards (552 U.S. 576). Both the Supreme Court and the Tenth Circuit have refrained from definitively stating whether the "manifest disregard" standard persists post-Hall Street (Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp.; Abbott v. Law Office of Patrick J. Mulligan).

The Court refrains from deciding whether the manifest disregard standard for vacating arbitration awards should be entirely abandoned due to a lack of clear guidance from the Supreme Court or the Tenth Circuit, and because it is not critical to this case's outcome. For this order, the Court assumes that an arbitration award can be vacated if arbitrators acted with manifest disregard of the law, which involves more than mere error; it requires evidence that arbitrators knowingly and willfully ignored applicable law. This standard applies only to legal conclusions, not to factual findings.

CGMI argues for vacating the award on two grounds: first, that the Panel manifestly disregarded controlling legal precedent in awarding damages to the Petitioners, and second, that the Panel exceeded its authority by not adhering to FINRA procedures in awarding punitive damages or attorneys' fees. 

Regarding the manifest disregard claim, CGMI contends that the Petitioners, having signed subscription agreements with risk disclosures, should have been aware of the investment risks and could not rely on contradictory oral representations. CGMI believes the Panel disregarded the precedent set in Zobrist v. Coal-X, Inc., which is not applicable here since it interprets federal law while the claims before the Panel were based on Colorado state law. The Court finds CGMI's reasoning unconvincing, noting that the Panel could not be said to have deliberately ignored governing law, as federal and state courts apply different legal standards. Furthermore, CGMI’s attempt to equate Colorado law with Zobrist does not demonstrate the necessary intent to disregard the law as required by the manifest disregard standard.

CGMI argues that even if Colorado law would require a different outcome, it did not present relevant cases to the Panel, which lacked awareness of this purported controlling law. CGMI's interpretation of Zobrist is overstated; the case established that an investor's failure to read a risk disclosure agreement results in constructive knowledge of its contents, but it does not absolve a defendant from liability for fraud based solely on such disclosures. Zobrist clarifies that reliance on misrepresentations may be justified under different circumstances, making the determination of whether Petitioners justifiably relied on CGMI's misrepresentations a complex issue that the Panel resolved favorably for Petitioners, without ignoring controlling law. CGMI's failure to demonstrate "willful inattentiveness" by the Panel means that the Award will not be vacated.

Additionally, CGMI claims that the Panel exceeded its authority in awarding punitive damages, arguing that the Panel did not adhere to Colorado law or FINRA procedures. Under Colorado law, punitive damages can be awarded for fraud, malice, or willful and wanton conduct. CGMI contends that Petitioners did not sufficiently demonstrate the necessary wrongful conduct to warrant such damages beyond a reasonable doubt, effectively attempting to re-litigate the case's merits.

CGMI contends that punitive damages should be vacated due to insufficient evidence of intent, but the court clarifies that it cannot review such matters, as errors in factual findings or legal interpretations by an arbitrator do not warrant reversal. Insufficiency of evidence is not a valid reason to set aside an arbitration award under the FAA. Regarding procedural compliance, CGMI argues that the Panel did not adhere to FINRA rules, which could support a claim of manifest disregard of the law. Both parties had agreed to FINRA's procedures, which allow for punitive damages. The Arbitrator's Guide recommends, but does not require, that arbitrators specify the basis for punitive damages and seek additional information if necessary. CGMI claims the Panel failed to provide a sufficient basis for the punitive damages awarded, referencing the case of Pyle v. Sec. U.S.A. Inc. However, the court finds that the Panel did cite a basis for its decision. Moreover, the court interprets the recommendation in the Arbitrator's Guide as not imposing an obligation, thus CGMI's argument lacks legal support. The court concludes that the Panel acted within its powers in awarding punitive damages.

The Panel's award of attorneys' fees did not exceed its authority, as argued by CGMI. CGMI contends that the Panel failed to follow FINRA procedures, specifically citing a lack of compliance with rules regarding the authority to award fees. The Arbitrator's Guide states that the authority for such awards must be included in the arbitration award, and if there are doubts, parties should brief the issue. The guide outlines three circumstances under which attorneys' fees may be pursued, one being when they are allowed under a statutory claim. The Panel awarded fees based on Colorado Revised Statutes § 11-51-604, which allows for recovery of attorneys' fees in relation to violations of the Colorado Securities Act (CSA). Although CGMI acknowledges that this statute permits recovery, it argues the Panel exceeded its powers because the Petitioners did not explicitly assert a CSA violation in their statement of claim. However, the Petitioners assert that they requested attorneys' fees within their submission, implying that the matter was included for arbitration. The court emphasizes a strong presumption in favor of arbitrability and deference to the arbitrators' judgment regarding the scope of issues submitted to them. FINRA rules grant arbitrators the authority to interpret the provisions of the FINRA Code of Arbitration Procedure, and such interpretations are binding on the parties involved.

To initiate arbitration, a claimant is required to file a statement of claim detailing pertinent facts and the remedies sought. Petitioners filed a Statement of Claim (SOC) that included requests for attorneys' fees, and by signing Submission Agreements, both parties allowed the Panel to address the issue of attorneys' fees. The inclusion of pleadings in the Uniform Submission Agreement gave the arbitrators the authority to award these fees, supported by case law indicating that such agreements empower arbitrators similarly. Although Petitioners did not cite specific code sections of the Colorado Securities Act (CSA) in their SOC, evidence suggests that CGMI was aware the case involved CSA claims, as CGMI's counsel referenced relevant case law and elements of fraud in closing arguments. The elements of common law fraud and CSA claims are closely related, which undermines CGMI's argument that it was unaware of the CSA claim. Furthermore, parties can acquiesce to the awarding of attorneys' fees through their conduct during arbitration; CGMI did not challenge the Panel's authority to award fees nor objected to the request at any point during the proceedings, effectively waiving any right to contest the fees. CGMI's assertion that the $3 million award violated FINRA procedural requirements due to lack of proof of the fees is unfounded, as the Panel was satisfied with the evidence presented by Petitioners. Consequently, the Panel acted within its authority to award attorneys' fees.

CGMI's Motion to Vacate the Arbitration Award is denied, while the Petitioners' Petition to Confirm the Arbitration Award is granted. Petitioners' request for CGMI to cover their costs and attorneys' fees, included within their response, is denied without prejudice due to procedural rules requiring separate motions. They have 14 days to file a proper motion demonstrating entitlement and reasonableness of the fees. The Panel awarded Petitioners $33,500 in expert witness fees, $13,168.29 in court reporter costs, and $600 for a non-refundable filing fee, which CGMI does not contest except for its motion to vacate the entire Award. The Federal Arbitration Act allows for modification of an award if arbitrators exceed their scope, with differing circuit interpretations regarding the "manifest disregard" standard. CGMI's argument about reliance on false information is deemed a question of fact under Colorado law, outside the review's scope. To claim the Panel acted in manifest disregard of the law regarding punitive damages, CGMI must prove the Panel was aware of and ignored the law, which it has not established. The Panel was not required to seek additional briefing on punitive damages. The authority for awarding attorneys' fees must be specified in the award, but the lack of detail does not invalidate the award per Colorado case law. CGMI did not cite FINRA rules mandating a statutory basis in the statement of claim, and the claims relate to securities sales as per Colorado law.