Graham v. Jeffery A. Mascio, & Meridian Capital Advisors LLC

PETER GRAHAM and SUZANNE GRAHAM, husband and wife Respondents, v. JEFFERY A. MASCIO,and MERIDIAN CAPITAL ADVISORS LLC,a Colorado Limited Liability Company Appellants.

No. 76967-7-I

COURT OF APPEALS FOR THE STATE OF WASHINGTON DIVISION ONE

December 3, 2018

UNPUBLISHED OPINION

ANDRUS, J. — Jeffery A. Mascio and his company, Meridian Capital Advisors LLC (jointly referred to as Meridian), appeal the $1.5 million judgment entered against them. Meridian argues the trial court erred in finding it waived the right to arbitrate this dispute and in entering summary judgment under the Securities Act of Washington, ch. 21.20 RCW. We affirm.

FACTS

Suzanne and Peter Graham hired Meridian to provide investment advice. On May 20, 2011, they executed an Investment Management Agreement under which Meridian managed their investment portfolio. The Grahams generally agreed that Meridian had full discretion to invest, buy, sell and trade within their investment accounts, but the Grahams informed Meridian that they desired a conservative, long-term investment strategy. They sent Meridian's president, Jeffery A. Mascio, an email informing him that their investment goals were to ensure the ability to pay for their children's college educations, to have sufficient resources to assist aging parents who might need financial support, and to provide for their own retirement. In August 2011, Meridian prepared a "Retirement Policy Statement" for the Grahams in which Meridian assessed the Grahams' retirement needs and made recommendations for investing based on these needs. Under this assessment, Meridian identified the Grahams' short-term investment risk tolerance to be "moderate."¹

Paragraph VI of the 2011 agreement contained a "Pre-Dispute Arbitration Agreement" clause that provided:

In consideration of opening one or more [Meridian] accounts, Client agrees that any dispute between Client and [Meridian] relating to Client's Account, transactions with or for Client, or this Agreement shall be settled by arbitration under the rules of the American Arbitration Association, except to the extent set forth herein. The arbitration panel shall consist of at least three individuals, with at least one panelist having knowledge of investment advisory activities. Client understands and acknowledges that:

a. Pre-arbitration discovery is generally more limited than and is different from court proceedings.

b. The arbitrators' award is not required to include factual findings or legal reasoning, and any party's right to appeal or seek modification of rulings by the arbitrators is strictly limited.

The foregoing does not preclude other rights or remedies the Client may have under the federal or any applicable state securities laws.

In May 2015, at Meridian's urging, the Grahams opened accounts with Interactive Brokers and transferred their investments previously held in Charles Schwab accounts. Meridian also asked the Grahams to sign a new Investment Management Agreement. When Peter Graham received a copy of the documents to sign, he noted multiple risk warnings he was asked to accept. He sent an email to Mascio, which read in pertinent part, "I'd just like [to] make sure we're not going to be jumping into a bunch of speculative or highly leveraged trading that I don't have a good understanding of. Please confirm." Graham sent this email because the Interactive Brokers account appeared to permit trading in riskier and more exotic securities than he was comfortable with.

Mascio responded that

All of the disclosure[s] are to give you access to the full capabilities of [Interactive Brokers]. These include international Exchanges such as China and Europe, FOREX, Futures, options on futures, [etc]. We will most likely never access the full spectrum of capabilities and will not be venturing into high risk high speculation markets.

(emphasis added). Mascio admitted the Grahams signed the 2015 agreement only after they received this confirmation from him.

The 2015 agreement also contained an arbitration clause, but the language differed from the 2011 agreement:

IX. ARBITRATION.

Client hereby agrees that all controversies and disputes which may arise between Client and Advisor concerning any transaction or the construction, performance, or breach of this Agreement between Client and Advisor, whether entered into prior to, on, or subsequent to the date hereof, shall be determined by mandatory and binding arbitration. Client understands that this Agreement to arbitrate does not constitute a waiver of the right to seek a judicial forum where such waiver would be void under federal securities laws. Any arbitration shall be held in the City of Denver, State of Colorado, administered by the American Arbitration Association (the "AAA") pursuant to the Federal Arbitration Act in accordance with this Agreement and the Commercial Arbitration Rules of the AAA. . . . To the extent that any inconsistency exists between this Agreement and such statutes or rules, this Agreement shall control. Judgement [sic] upon the award rendered by the arbitrators may be entered in and enforced by any court having jurisdiction and in accordance with the practice of such court.

In August 2015, Meridian executed a series of highly speculative margin trades in a security known as "VXX." According to Mark Whitmore, the Grahams' securities expert, the Chicago Board Options Exchange publishes an index known as VIX to track the volatility of options for stocks comprising the Standard & Poor's 500. The VIX index is not a security and cannot be directly traded, but VXX is a traded security, the value of which is based on changes in the VIX index. VXX is highly volatile and unpredictable, posing tremendous risk. Meridian engaged in a strategy known as a "synthetic short" of VXX in the Grahams' accounts. This purchase and sale strategy is effectively a bet that the value of the underlying asset, the VXX security, will decrease.

The VXX short maneuver turned out to be a very bad bet. The value of VXX increased, rather than decreased. Because Meridian had placed the bet "on margin," essentially borrowing money from Interactive Brokers to fund the VXX purchases, when the Grahams began losing money, Interactive Brokers' margin requirements led to the automatic sale of securities in the Grahams' account to pay off the debt owed to Interactive Brokers. As a result, between August 21 and 25, 2015, the Grahams lost over $1 million.

On January 22, 2016, the Grahams sued Meridian in King County Superior Court, alleging negligence, negligent misrepresentation, breach of fiduciary duty, Consumer Protection Act claims, and claims under the Securities Act of Washington. On February 4, 2016, after Meridian expressed a desire to arbitrate these claims, the Grahams filed an arbitration demand with the American Arbitration Association (AAA). The Grahams filed a document entitled "Demand for Arbitration, Consumer Arbitration Rules," and they requested a hearing in Seattle, Washington. They sought and obtained an unopposed order staying the lawsuit pending the arbitration.

On March 7, 2016, AAA notified the parties it had determined its Consumer Arbitration Rules applied to the dispute.² AAA notified Meridian that because it had not registered its arbitration clause with AAA's Consumer Clause Registry, as required by R-12 of the organization's rules,³ Meridian needed to pay an additional fee to expedite review of the clause. In addition, it stated that under its Consumer Rules, Meridian was required to pay a filing fee of $2,200 and an arbitrator deposit of $1,500 for each of the three arbitrators. It requested payment of a total of $6,950 by March 21, 2016. AAA notified Meridian that if it did not make the requested payment, "the AAA may decline to administer this dispute."

Meridian did not respond because, as Mascio later testified, he wanted to force the Grahams to arbitrate in Denver, Colorado, pursuant to the venue provision in the 2015 agreement. He stated he contacted AAA by telephone and was informed if he paid the fees, the arbitration would move forward in Seattle. So he refused to pay and did not respond to AAA.

AAA issued a second letter on March 28, 2016, again seeking payment of fees from Meridian and setting April 11, 2016, as the new deadline. AAA notified Meridian, in bold text:

Please note: should the business not comply with our request by the above response date, we may decline to administer any other consumer disputes involving this business and request that the business remove the AAA name from its arbitration clause so that there is no confusion to the public regarding our decision. Furthermore, pursuant to the R-1(d) of the Consumer Arbitration Rules, should the AAA decline to administer an arbitration, either party may choose to submit its dispute to the appropriate court for resolution.

AAA inquired whether the Grahams were willing to pay the fees owed by Meridian and to seek recovery of the fees through the arbitrator's award. But AAA made it clear that "Claimant is not obligated to pay respondent's fee."

Again, Meridian did not respond. On April 24, 2016, AAA notified the parties that it was closing its file and declining to administer the case because of Meridian's non-payment. AAA also indicated it may decline to administer future consumer disputes involving Meridian and asked it to remove the AAA from its arbitration clause so that there would be no confusion to the public regarding its decision.

On May 6, 2016, the Grahams filed a motion to lift the stay in King County Superior Court, arguing that Meridian had waived any right it had to arbitrate based on its non-responsiveness to AAA and AAA's refusal to administer the case. Mascio argued to the Grahams that the initial arbitration demand the Grahams filed did not reflect the parties' 2015 agreement requiring arbitration in Denver, Colorado.⁴ The Grahams decided to withdraw the motion to lift the stay and to refile an arbitration demand with...