A federal judge late on Thursday tossed out a securities arbitration ruling against an investor who sought to recoup $1.4 million from Goldman Sachs Group Inc , citing an arbitrator's failure to fully disclose his involvement in an unrelated criminal proceeding, according to a court opinion.
Judge J. Curtis Joyner of the U.S. District Court for the Eastern District of Pennsylvania threw out the arbitration award after ruling that the investor's legal rights in the proceeding were compromised by an arbitrator who misled the parties about his indictment for the unauthorized practice of law and by not participating in the decision, according to the opinion.
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A spokeswoman for Goldman Sachs did not immediately return phone calls or respond to an email requesting comment. The case already has led to a new initiative by FINRA beefing up oversight of its 6,500 securities arbitrators by conducting annual background checks.
The investor, Athena Venture Partners LP, lost the Financial Industry Regulatory Authority (FINRA) arbitration against Goldman in May, after alleging it was misled by the firm in a private debt fund investment. Athena is the family investment vehicle of Richard Caruso, who founded Integra LifeSciences Holdings Corp in 1989.
Caruso said he was pleased with the decision, but declined further comment.
FINRA, Wall Street's industry funded watchdog, also runs the arbitration forum where investors and their brokerages typically agree to resolve their arbitration disputes.
It is rare for the courts to overturn FINRA arbitration rulings, say lawyers. Arbitration rulings are typically binding, but parties may ask courts to overturn them in limited circumstances, such as when an arbitrator is biased. Parties who are successful at overturning their securities arbitration awards must present their arbitration cases again in FINRA's forum.
"This is a rare step in a really unique case," said Andrew Stoltmann, a Chicago-based securities arbitration lawyer. "The court reached the common sense conclusion it had to," said Stoltmann, who was not involved in the Goldman case, but who typically represents investors.
One of the three arbitrators who heard the case between Goldman and Athena, Demetrio Timban, had been indicted by the state of New Jersey for practicing law without a license, although charges were later dropped under a state program to deal with nonviolent offenses. He was also reprimanded by a Michigan regulator for the New Jersey incident and passing $18,000 in bad checks. FINRA did not learn of Timban's troubles until months after the case started.
A disclosure Timban sent to the parties about his indictment was misleading, Athena alleged, because it described his law practice violations as a one-time incident when Timban was actually running an office in New Jersey.
Athena also alleged that Timban did not participate in deciding the case because his signature did not appear on the award along with those of the two other arbitrators.
Nonetheless, there is "no evidence" that FINRA took action to remove Timban from the case after learning of his troubles, the court wrote.
A FINRA spokeswoman did not immediately return a call or respond to an email requesting comment.
FINRA rules "clearly entitled (Athena) to a panel composed of at least three qualified arbitrators," Judge Joyner wrote in a 19 page opinion. Athena's rights were prejudiced by Timban's behavior and, as a consequence, a "mutual, final and definite award was not made," Judge Joyner wrote.
(Reporting by Suzanne Barlyn; Editing by Linda Stern and Chris Gallagher)