A FINRA arbitrator's arrest and subsequent indictment led to an industry policy change while simultaneously highlighting the great importance of adequate due diligence when it comes to arbitrators.
Because arbitration cases for claims in excess of $100,000 are heard by a panel of three FINRA arbitrators, such review is of tantamount importance since just one arbitrator's vote can prove key in arbitration judgments. Arbitrator due diligence is even more critical for claims less than $100,000, where only one FINRA arbitrator is appointed to make a binding decision.
In October 2011, FINRA public arbitrator Demetrio S. Timban Jr. was arrested and indicted in New Jersey for practicing law without a license for that state.
FINRA reportedly did not receive notice of the late 2011 arrest until February 29, 2012, removing Timban Jr. from its list of arbitrators on March 1, 2012—meaning that Timban Jr. was still a public arbitrator with a "clean slate" for nearly four months after his arrest.
Timban's last arbitration for FINRA was an alleged private-investment investor fraud case, sponsored by Goldman Sachs & Co. and filed by Athena Venture Partners LP in August 2009, for $2.4 million, later reduced to $1.4 million.
In March—months after Timban's arrest and indictment—the arbitration panel denied Athena's claim.
Although FINRA sent updated background information regarding Timban and his co-arbitrators in the Athena case, neither party challenged Timban's placement on the panel, thus paving the way for him to join in the denial of Athena's claim.
Though FINRA has changed its policy to now run annual background checks of its 6,500 arbitrators with added review before appointment to hearing panels, the Timban story sheds light on the importance of independent research and due diligence by both parties and counsel alike.
An arbitrator's failure to disclose material facts is a basis to vacate an arbitration award, as is an arbitrator's evident partiality, corruption, or conflict of interest.
Discovering arbitrator-centric violations can be key to selection of unbiased arbitration panels and in the worst cases, vacatur of adverse awards. As tedious as due diligence in selecting an arbitration panel may be, thorough performance may be the difference between an award and nothing at all.
News: Finra boosts arbitrator oversight after one indicted (InvestmentNews)