by Jake Martin and Mason Braswell – March 9, 2021
In a claim zeroing in on the fairness of virtual hearings, a pair of former J.P. Morgan Securities brokers have asked a court to nullify a high profile $19 million award issued last month by a Financial Industry Regulatory Authority arbitration panel.
Brothers Evan A. Schottenstein and Avi E. Schottenstein filed a motion to vacate in U.S. District Court in the Southern District of Florida on Monday alleging that the arbitration process “broke down” over the 43 hearing sessions as the arbitrators dozed off, failed to address a potential conflict and declined to admit an allegedly key piece of video evidence.
The award was tied to a claim for unauthorized trading and elder abuse brought by their grandmother, Beverley Schottenstein, in July 2019. It qualified for vacature under the narrow grounds provided by the Federal Arbitration Act because the arbitrators ‘exceeded their authority’ by refusing the brothers’ request to postpone the hearing until it could be held in-person, they argued in the filing.
“Unfortunately, the unsuitability of this lengthy and complex case proceeding via Zoom was borne out by the flagrant inattention of the arbitrators,” according to the claim. “This award…was the product of a broken and biased process which favored the rapid conclusion to petitioner’s case over all other considerations, including fairness, impartiality, and Finra’s own rules.”
Beverley Schottenstein’s lawyer Scott Ilgenfritz, a partner at Johnson, Pope, Bokor, Ruppel & Burns in Tampa, Florida, did not return a request for comment. JPMorgan did not appear to be involved in the brothers’ motion to vacate the award, which held the brokers individually liable for $9.8 million of the total, and a JPMorgan spokeswoman did not return a request for comment.
A Finra spokeswoman declined to comment. The regulator, which has postponed in-person arbitration hearings until June amid the Covid-19 pandemic, allows for virtual hearings if the parties agree to Zoom or telephone, or the panel orders as such, according to its website.
While the motion makes a novel argument in the Zoom era, the brothers face an uphill battle to convince a court that the arbitrators did not have the authority to give the order, or that the virtual forum worked against them uniquely, according to Andrew Stoltmann, a plaintiff’s lawyer in Chicago who was not involved in the case.
“It’s a relatively novel case, but I don’t think it has much of a chance of succeeding because the other side would have those problems as well,” Stoltmann said.
Sleepy or distracted panelists have also been a long-running complaint in arbitration, but those claims have generally not been persuasive in vacature claims, he said. Success rates for motion to vacate are also low as courts are deferential to arbitrators’ decisions, lawyers say.
The former brokers’ lawyer, Peter S. Fruin, did not return a request for comment. The brothers, who have not been registered in the brokerage industry since they were fired by J.P. Morgan in 2019, could not be reached for comment.
Their motion to vacate argued that the virtual arbitration forum—which Beverley Schottenstein and her lawyers had requested—deprived them of the ability to properly subpoena certain witnesses, and also accused arbitrators of undisclosed conflicts and possible biases.
In one example, the Schottenstein brothers said arbitrator James Scutti, who was appointed to the panel after another arbitrator passed away prior to the hearing, was allegedly misclassified as a public, non-industry arbitrator despite his previous work as an employee at the Securities and Exchange Commission. Finra dispute resolution officials declined to replace the arbitrator despite the respondents’ objections, according to the brothers’ motion.
Scutti’s background was the subject of an earlier motion to vacate by two former Alex. Brown brokers who said in a separate 2019 case that he had been misclassified and also took issue with poems he had published online, according to a report in “Financial Planning.”
As evidence of the panelists’ lack of impartiality the brokers said they failed to admit evidence, including 49 minutes of video, in which Beverley Schottenstein allegedly admitted she had authorized the transactions, including one large multi-million dollar private equity investment.
Beverley Schottenstein could not be reached for comment, and the three arbitrators did not return requests for comment.
The brokers’ petition described their grandmother as an “exceptionally wealthy woman” who lives in Bal Harbor, Florida and has a net worth over $100 million, most of which she inherited in 1984 when her husband, a senior executive at the Schottenstein Stores Corporation, passed away.
The motion also notes that she is “no stranger to intra family lawsuits,” citing a 1985 suit she filed against her brothers-in-law over the family business and a 1987 suit that she and a friend brought against the friend’s son, a broker at Drexel Burnham, over investment losses tied to the market crash that year.