Merrill Client Who Lost Big Arbitration Claim Files to Vacate Decision
A client who lost an $8 million-plus arbitration claim against Merrill Lynch that alleged reverse churning and improper opening of advisory accounts has asked a federal judge to throw out the three-person Florida panel’s decision.
In a claim transferred Wednesday to federal court in the Southern District of Florida, Oscar Roberto Celasco argued that the award should be invalidated because the chair of the Financial Industry Regulatory Authority arbitration panel was reclassified midway through the case as a “non-public” arbitrator.
Courts rarely vacate arbitration decisions, and do so only for a narrow set of procedural or behavioral conditions, including arbitrator misconduct and what federal law regarding the arbitration code considers a “manifest disregard” of the law. Lawyers for customers and advisers in the past year have still filed a slew of vacate petitions arguing issues ranging from improper arbitrator classifications to Finra’s alleged failure to notify claimants of certain filing deadlines.
Celasco, a Swiss citizen who lives in Costa Rica, filed his arbitration claim against Merrill in September 2016. He alleged it failed to supervise a broker, John A. Flasco, who he claimed managed most of his $15 million in assets in advisory account programs that were more expensive than commission accounts contrary to his instructions.
The broker’s actions, in what regulators refer to as “reverse churning” to accumulate asset-based fees, cost Celasco $1.2 million between 2009 and 2016, the customer claimed. He also alleged that the broker opened dozens of accounts in his name without permission, and that the value of his accounts had dwindled by $12.5 million throughout the period.
After 18 hearing sessions that ended last November, the arbitrators in January unanimously denied Celasco’s claims “in their entirety” and ordered him to pay the entire $22,425 of hearing session fees accumulated by both parties. They also granted Merrill’s request for expungement of the claim from Flasco’s regulatory record.
The motion to vacate, originally filed in a Miami-area county court, argues that A. Joel Klein, the arbitration panel chairman, had to reclassify his status to being a representative of the public rather than the securities industry to conform with a Finra rule change during pre-hearing sessions. That is an example of arbitrators exceeding their powers under the Federal Arbitration Act, the filing says.
“There’s very little chance that the award gets vacated,” said Adam Gana, a securities lawyer in New York who is not involved in the case. “You really need to show some degree of material omission of information” on the part of the arbitrator.
Merrill also could raise the issue that Celasco did not bring up his objections until after the case was decided, even though he appears to have made no objections when he received notification of the arbitrator’s reclassification before hearings began, Gana said.
Celasco’s lawyer, Matthew L. Jones in Coral Gables, Florida, did not return a call for comment.
Neither Flasco nor a spokesman for Merrill returned requests for comment, and Klein did not return a message sent through social media.
In the underlying claim, whose facts cannot be considered in the vacature request, the arbitrators agreed that Flasco violated rules for using his personal email account in managing Celasco’s accounts but said that the violation reflected “extenuating circumstances and did not in any way cause harm to Claimant’s investment accounts.”