Be Neutral
A Publication of the Georgia Office of Dispute Resolution

  
 
Case Watch: For Arbitrators

$5 Million Award Vacated Over Arbitrator’s Failure to Disclose Conflicts

A $5 million arbitration award was vacated by a California court this year after it was found that an arbitrator had failed to disclose family relationships involving one of the parties, thus creating the appearance of a conflict of interest.

The original dispute involved the recruitment by the financial services firm Morgan Stanley of two brokers from a competing firm.  The brokers alleged that Morgan Stanley breached oral and written promises it made during the recruitment process.

In June 2012, a panel of arbitrators awarded the two brokers damages of $4.6 million plus additional attorney fees and filing fees of $355,000 for a breach of contract claim.  The Financial Industry Regulatory Authority (FINRA) panel ordered Morgan Stanley to pay the award.  Morgan Stanley petitioned a California state court to vacate the award based on a finding that one of the arbitration panel members had failed to disclose that he had family connections to Morgan Stanley.

In September, the California court found that the arbitrator had failed in his duty to disclose several key facts as required under the FINRA arbitration rules: that his son-in-law worked as a financial adviser at Morgan Stanley; that the son-in-law was in a disputed divorce proceeding with the arbitrator’s daughter; and that another of the arbitrator’s sons-in-law had been recruited by Morgan Stanley.  It wrote:
 

“Under FINRA rules, the duty lies with the arbitrator to disclose—there is no duty on the part of the participants to Google matters or otherwise.”

The court granted Morgan Stanley’s petition to vacate the $5 million award, finding that the failure by the arbitrator to disclose his family connections to Morgan Stanley created an implication of partiality and tainted the proceedings.  The case is Vitale et al. v Morgan Stanley Smith Barney LLC, case number 37-2012-0099813; Morgan Stanley Smith Barney LLC v. Vitale et al.,case number 37-2012-00099937 [Superior Court of the State of California, County of San Diego, 2012].

NOTE TO GEORGIA ARBITRATORS:  The obligation to disclose relationships between arbitrators and their family members with either the parties or counsel for the parties is scrutinized by the courts.  When the required disclosure is incomplete, that failure is challenged, and the challenge is supported by the facts, courts are likely to grant the vacatur petition based on the implication of partiality by the arbitrator who failed to disclose.  Vacatur, as seen above, can be costly in time, money and reputation for all participants.

Neutrals have the obligation to serve as neutrals without financial or personal ties to the parties or counsel.  Where these relationships exist, arbitrators have an affirmative obligation to disclose any ties and permit the parties to weigh the information and decide whether to proceed with the arbitrator’s participation in the panel and the award.

 













 

John Allgood is of counsel at Ford & Harrison.  For more than 20 years he has arbitrated and mediated cases in commercial, employment, construction and securities law, as well as in real estate and anti-trust matters.  An adjunct professor of ADR at Emory University School of Law, he was a member of the U.S. Olympic Committee panel of arbitrators during the 1996 and 1998 Olympic Games.

Phone: 404-888-3832; fax: 404-888-3863;