Schwab Wins Battle Over Confirmation of FINRA Arbitration Award Predicated on Alleged Discovery Abuses

Charles Schwab & Co. successfully petitioned the Southern District of New York for confirmation of a FINRA arbitration award against one of its account holders, fending off challenges predicated on Schwab’s alleged discovery abuses in the process.

The Evan K. Halperin Revocable Living Trust initiated arbitration against Schwab through FINRA’s dispute resolution office. The trust alleged that certain security features of the schwab.com trading platform caused the trust to be logged out of its schwab.com account without explanation while attempting to execute various options trades. The trust alleged that these unexplained interruptions in service caused approximately $1.5 million in losses for which Schwab was liable. The “key dispute” in the arbitration was whether the trust was logged out due to certain malfunctions or security features internal to schwab.com or whether it occurred due to the computer and systems used by the trust.

The discovery process during the arbitration proceeding was highly contentious. The trust repeatedly filed motions alleging that Schwab was engaging in discovery abuses and refusing to produce certain materials that it alleged were key to its case, chiefly in the form of certain electronically stored information (ESI) that Schwab purportedly maintained related to a “fraud detection system.” Schwab repeatedly denied that it was withholding discovery, going so far as to file a declaration from its director of client authentication stating that no such “fraud detection system” existed. In addition, Schwab produced substantial amounts of other ESI related to a user’s activity and log-on/log-off records. The FINRA arbitration panel ruled in Schwab’s favor and, pursuant to the parties’ arbitration agreement, ordered the trust to pay Schwab’s attorneys’ fees and costs totaling $142,750.

The trust petitioned the district court for vacatur based on its view that the arbitrators had exhibited “evident partiality or corruption” or had engaged in misconduct. Its arguments were principally based on the FINRA panel’s refusal to compel Schwab to produce the ESI that the trust alleged pertained to the fraud detection system maintained by Schwab.

The court found that the FINRA panel did not refuse to hear evidence by not compelling Schwab to produce the ESI sought by the trust, information that did not exist per Schwab’s representation in a declaration executed under penalty of perjury. The court noted that “[t]he Trust provides no evidence beyond the Panel’s denial of several of its motions and Schwab’s ultimate success in the Arbitration to support its claim of the Panel’s ‘evident partiality’ in favor of Schwab.” The court stated that “bias” of an arbitration panel is “not even established by showing that an arbitrator consistently agrees with the arguments of one side and repeatedly finds in their favor. … Fundamental fairness does not mean that a party must win a minimum percentage of motions.”

The trust’s “dissatisfaction with the Panel’s rulings and the Award” did not render the arbitration fundamentally unfair. The court denied the trust’s petition for vacatur and granted Schwab’s cross-petition for confirmation, including the award of fees and costs, and awarded Schwab prejudgment interest at the rate of 9% per annum, based on the presumption in favor of the award of prejudgment interest on a motion to confirm an arbitration award.

Evan K. Halperin Revocable Living Trust v. Charles Schwab & Co., No. 1:21-cv-08098 (S.D.N.Y. Sept. 19, 2022).