Elwell v. Raymond James Fin. Servs., Inc.

686 F.Supp.3d 281

Christina ELWELL, et al., Petitioners, v. RAYMOND JAMES FINANCIAL SERVICES, INC., et al., Respondents.

22-cv-10125 (JGK)

United States District Court, S.D. New York

Signed August 10, 2023

Phillip Rakhunov, Pollack Solomon Duffy LLP, New York, NY, for Petitioner.

Toby S. Soli, Greenberg Traurig, LLP, New York, NY, for Respondent Raymond James Financial Services, Inc.

Matthew N. Kane, Donnelly, Conroy & Gelhaar, LLP, Boston, MA, for Respondent Daniel Lawrence Pimental.

OPINION & ORDER

JOHN G. KOELTL, District Judge:

The petitioners demanded tens of millions of dollars from the respondents before an arbitration panel of the Financial Industry Regulatory Authority ("FINRA"). The arbitrators awarded the petitioners compensatory damages of $67,917, plus pre-award interest of around $42,000. See ECF No. 1-15 (the "Award"). The petitioners then petitioned the New York State Supreme Court to vacate the Award as baseless and irrational, and the respondents removed the action to this Court based on diversity of citizenship jurisdiction. Not. of Removal, ECF No. 1.

The petitioners now move to remand the action to state court for lack of subject-matter jurisdiction. ECF No. 4. They argue that the amount in controversy falls below the statutory threshold of in excess of $75,000. See 28 U.S.C. § 1332(a). In the event there is subject-matter jurisdiction, the parties also cross-petition to confirm and to vacate the Award. ECF No. 1-2 (petitioners' petition to vacate); ECF No. 13 (respondents' cross-motion to confirm).

For the following reasons, the petitioners' motion to remand is denied, their petition to vacate is denied, and the respondents' cross-motion to confirm is granted.

I.

The following facts, which are undisputed unless otherwise noted, are drawn principally from the Elwells' petition to vacate the Award. ECF No. 1-2 ("Pet."). The Court also draws from the evidentiary record where appropriate for the sole, limited purpose of "discerning whether a colorable basis exists for the panel's award so as to assure that the award cannot be said to be the result of the panel's manifest disregard of the law." Wallace v. Buttar, 378 F.3d 182, 193 (2d Cir. 2004).¹

For more than 15 years, respondent Daniel Pimental served as a financial advisor and broker for petitioners Christina and Erik Elwell, a married couple who live in New York City. Pet. ¶ 7. From 2009 to 2015, Pimental worked for respondent Raymond James Financial Services ("Raymond James"), where Pimental ran investment accounts for the Elwells. Id. In January 2020, the Elwells initiated a FINRA arbitration proceeding against Pimental and Raymond James. Id. ¶ 6.² The Elwells alleged that Pimental engaged in various misconduct at Raymond James, including breaches of fiduciary duty, churning and excessive trading of the Elwells' accounts, unsuitable and unauthorized trading, charging excessive fees, and fraud. Id. ¶ 8. The Elwells also alleged that Raymond James was vicariously liable for Pimental's misconduct and failed to supervise him adequately. Id. According to the Elwells, "[u]ntil October 2019, the Elwells remained unaware of both the inappropriate investment approach and of Pimental's unauthorized trading." Amended Statement of Claim, Sullivan Decl., Ex. A, ECF No. 14-1, ¶ 52.

Between October 5, 2021, and August 17, 2022, a three-member panel of FINRA arbitrators heard testimony from sixteen witnesses and reviewed 898 exhibits in evidence. See Award at 3; Sullivan Decl., ECF No. 14, ¶¶ 15-17. The Elwells sought damages in the tens of millions of dollars using variants of the "well-managed portfolio" model, which measures the "difference between what the claimant's account made or lost versus what a well-managed account, given the investor's objectives, would have made during the same time period." FINRA Arbitrator's Guide, ECF No. 1-4, at 5; see Pet. ¶ 11. The Elwells asserted that they suffered damages of between $17,369,453 and $18,376,571 as of October 29, 2015, when Pimental left Raymond James for another broker-dealer. Pet. ¶ 12. Because the Elwells allegedly were deprived of those gains, "and thus the opportunity to continue investing those funds from October 29, 2015 forward," the Elwells also provided calculations using the well-managed portfolio damages model from October 29, 2015 through August 2021, shortly before the arbitration hearing began, which amounted to alleged total damages of between $34,552,674 and $37,761,429. Id. Alternatively, the Elwells presented calculations of interest on the $17,369,453 to $18,376,571 from October 29, 2015 through August 2021. Id.

The respondents challenged the Elwells' claim that they knew nothing of Pimental's alleged unauthorized trading. See Sullivan Decl. ¶ 18. The respondents introduced evidence that the Elwells signed and submitted to Raymond James documents stating that their investment objectives included speculation; that the Elwells had online access to their accounts; that Mr. Elwell and Pimental regularly communicated; that Raymond James sent eleven activity letters to the Elwells alerting them to the activity in their accounts and the commissions generated in connection with their investments; and that five of these letters were signed by the Elwells and returned to Raymond James. See id.

The respondents also challenged the Elwells' damages calculations. The Elwells' expert, Stuart Ober, had assumed that a "well-managed portfolio account" for the Elwells would have invested in a portfolio of 70-75% S&P 500 index fund and 25-30% Bloomberg Barclays Aggregate Bond Fund. See Sullivan Decl., Ex. I, ECF No. 14-9 ("Hearing Tr."), at pp. 1342-43. The respondents argued that there was no evidence that the Elwells ever wanted these breakdowns of equities and fixed income. See Hearing Tr. at 1697-1702. During the hearing, Ober also conceded that there were suitable investments in the Elwells' accounts; but, when pressed by the FINRA panel, he could not segregate the suitable investments from the allegedly unsuitable ones and acknowledged that he applied his damages formula to every investment to generate the well-managed portfolio models. See id. at 1765-66. At the hearing, one arbitrator challenged this decision, asking Ober the following:

How does the Panel tell how much of the results in the account came from suitable as opposed to unsuitable trades? Is there anything in the document that would allow us, without grabbing a calculator, to determine what amount of the loss or gain comes from suitable as opposed to unsuitable trades? And I realize that's an awkward question, but it's going to have to do.

Id.

In response, Ober stated that he "would say also added to that would be any trades -- there's not a number, if that's what you're specifically asking." Id. at 1766.

Against Ober's testimony, the respondents' expert, E. Steven Sales, opined that the investments in the Elwells' accounts "were suitable based on all that was known about the client." Id. at 3422. Accordingly, the respondents argued that the Elwells' damages were zero.

On August 26, 2022, the arbitrators signed the Award, which FINRA issued on August 29, 2022. Award at 8. The arbitrators found Pimental and Raymond James jointly and severally liable to the Elwells for Pimental's misconduct, although the Award did not specify which violations the arbitrators found. Id. at 5. After acknowledging that the Elwells "requested compensatory damages ranging from $34,552,674.00 to $37,761,429.00," the arbitrators ordered Raymond James and Pimental to pay the Elwells "$67,917.00 in compensatory damages," plus "interest on the above-stated sum at the rate of 9% per annum from October 21, 2015 through and including the date the award is paid." Id. at 3. Documents in evidence showed that October 21, 2015, was the date the Elwells opened an account at Wells Fargo, Pimental's employer after he left Raymond James. See Sullivan Decl. ¶¶ 13-14; Id., Exs. J, K, ECF Nos. 14-10, 14-11. The arbitrators also assessed about $60,000 in fees to be paid by the parties directly to FINRA. See Award at 3-5.

FINRA rules required the respondents to pay the Award within 30 days. Pet. ¶ 25. In late September 2022, Pimental and Raymond James each sent the Elwells a check for $55,125.75, representing 50% of a total payment of $110,251.50 in compensatory damages and interest. See Sullivan Decl., ECF No. 7, ¶ 4; Kane Aff., ECF No. 8, ¶ 4. The Elwells cashed the checks "to ensure that they did not become invalid, but remain ready to return the funds upon the award being vacated." Pet. ¶ 25.

On November 4, 2022, the Elwells petitioned the New York State Supreme Court, New York County, to vacate the Award, arguing that it was irrational and without colorable basis in the record and asking the court to "remand the matter to FINRA for further proceedings." Id. ¶ 31. Among other things, the Elwells claimed that the arbitrators improperly rejected the Elwells' damages calculations, did not explain how the $67,917 figure was calculated, and chose a date from which pre-judgment interest would run (October 21, 2015) that "had no specific relevance to any events in the case." Id. ¶¶ 23-24; see also id. ¶ 24 ("[T]he award simply stated an arbitrary amount and date on which interest would accrue, without explanation.").

The respondents timely removed the action to this Court based on diversity of citizenship jurisdiction. See Not. of Removal. The Elwells now move to remand the action to state court for lack of subject-matter jurisdiction. ECF No. 4. The parties also cross-petition to vacate and to confirm the Award. ECF No. 1-2; ECF No. 13.

II.

The first issue is whether to remand this action to the New York State Supreme Court.

A federal district court must remand a case that has been removed from state court "[i]f at any time before final judgment it appears that the district court lacks subject matter jurisdiction." 28 U.S.C. § 1447(c). A district court has subject-matter...