UBS Alleges Arbitrator Bias, Asks Court to Toss $4.8-Mln P.R. Bond Award
UBS Financial Services has gone to court in an effort to overturn a $4.8 million award in a Puerto Rico bonds dispute issued against the wirehouse in May by a divided panel of three Financial Industry Regulatory Authority arbitrators.
Dwayne E. Clark, who served as the chairperson in the Finra proceeding, did not disclose as mandated at least five of seven lawsuits in which he had been a plaintiff, preventing the parties from making “informed decisions about arbitrator selection and retention” and violating the Federal Arbitration Act, UBS claimed.
“Any reasonable person would conclude being a serial plaintiff would create a reasonable impression of partiality,” UBS’s lawyers wrote in the petition. “Had UBS known that the Chairperson was a serial plaintiff with a long history of filing claims against corporate defendants, it certainly would have struck him from the proposed arbitrator roster as it was permitted to do under FINRA rules.”
The appeal seeks to have the case remanded to arbitration for “a full and fair hearing before three different, impartial arbitrators.”
Clark did not respond to requests for comment on UBS’s claims or the panel’s decision in the underlying matter.
He had been one of two panelists who voted in favor of awarding the claimants $4.65 million in “rescission” damages, which require UBS to repurchase the underlying assets. The case is one of billions of dollars worth of claims related to the sale of Puerto Rico bonds and closed-end funds by UBS as the U.S. territory in 2013 headed toward the equivalent of municipal bankruptcy.
UBS has gone to court following other large awards, although it will have to show “specific facts which indicate improper motives” to qualify for vacature under the narrow grounds provided by the FAA, according to Jeffrey Sonn, a lawyer in Aventura, Florida.
Sonn, who was not involved in the case but has represented investors in other Puerto Rico bond cases, added that having an arbitrator who was a plaintiff–or defendant–many times in the past, doesn’t on its own prove “evident partiality” one way or the other.
“Courts don’t like it when the losing party waits until after an award to conduct an investigation, and nondisclosures are normally limited to whether there was a relationship between an arbitrator and a party or an attorney for either side,” Sonn said.
A UBS spokesman declined to comment beyond the filing.
UBS also alleged the panel issued an “incomplete” award–also grounds for vacature under the FAA–as the arbitrators “unwound only one side of the transaction.” To truly rescind the trade, the panel should have also required the claimants to pay back funds from a securities-backed loan they had used to purchase additional closed-end funds, UBS said in the petition.
The claimants in the underlying arbitration–Eugenia Fidalgo Gutierrez, Mercedes Fidalgo Gutierrez and Fidalgo Gutierrez Holding Corp., in San Juan, Puerto Rico–had requested total damages of about $15 million, including over $10.4 million tied to rescission, according to the Finra award document.
UBS acknowledged the Puerto Rican bond market’s “sudden” and “precipitous” crash in 2013 but said that the investors still did not have any actual losses. The accounts were invested in “U.S.-backed paper,” and still had overall profits of $857,000, UBS said.
The attorney who represented the Fidalgo Gutierrez party in the Finra arbitration, Francisco A. Feliu Nigaglioni, did not respond to a request for comment.
The third arbitrator, who had dissented from the rescission portion of the award, concurred with the panel’s overall findings “except for the damages for rescission from which I respectfully dissent,” the award document said. The arbitrator, William D. Goren, did not provide in the award any further explanation for his partial dissent.