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FINRA Award Vacated Because of Arbitrator Misconduct

In a Memorandum and Order dated August 1, 2013 (“M&O”), the United States District Court for the Eastern District of Pennsylvania vacated a FINRA Arbitration Award after finding that the investor, Athena Venture Partners, L.P. (“Athena”), was “prejudiced by [an arbitrator’s] misbehavior.”

According to the Court, the “misbehavior” involved conduct by former FINRA public arbitrator Demetrio S. Timban, Jr., while he was serving on the panel of a $1.4 million case brought by Athena against Goldman Sachs.

In October 2011, Timban was indicted in New Jersey for practicing law without a license. According to the M&O, in March 2012, Timban submitted a disclosure to FINRA and the parties that in September of 2011, he was served with a complaint from the State of New Jersey charging him with the unauthorized practice of law. Timban went on to say that it was one isolated incident involving the representation a family friend in a local municipal court matter.

Subsequent to Timban’s disclosure, none of the parties requested Timban’s removal from the panel, and FINRA did not take any action to remove him from its arbitrator pool. It was later discovered that Timban’s disclosure was neither truthful nor complete. According to the Court, it was not limited to one isolated incident as he had claimed. Rather, Timban opened a law office in Cherry Hill, New Jersey under the name “Timban Law Group, LLC”, and actively practiced law in New Jersey for at least one year, despite not being licensed in New Jersey.

Following the issuance of an Arbitration Award in favor of brokerage firm Goldman Sachs, Athena moved to vacate the Award based on its contention that Timban’s legal problems had an impact on the outcome of the arbitration. It contended that if Timban’s indictment had been accurately disclosed and Timban replaced with a different arbitrator, the case would have ended differently.

The Pennsylvania Court said it would be inclined to agree with Goldman Sachs’ position that, by failing to object or request Timban’s removal following the issuance of the updated disclosure in March, 2012, Athena waived its right to now challenge the Award, were it not for the fact that Timban’s disclosure was so grossly misleading and incomplete. The M&O went on to state that FINRA rules clearly entitled the parties to a panel composed of at least three qualified arbitrators and in this case, FINRA failed to provide three qualified arbitrators.

The Court granted Athena’s motion to vacate and remanded the case back to FINRA.

The Court also found it notable that FINRA, the self-proclaimed “largest independent securities regulator in the United States”, did not see fit to investigate the circumstances of Timban’s disclosure at the time it was made.

Last month, FINRA announced that it would increase its review of arbitrators’ backgrounds.

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