Ebbe v. Concorde Inv. Servs., LLC

United States Court of Appeals
For the First Circuit
No. 19-1819
KENNETH EBBE,
Petitioner, Appellant,
v.
CONCORDE INVESTMENT SERVICES, LLC,
Respondent, Appellee,
WESTMINSTER FINANCIAL SERVICES, INC.;
WESTMINSTER FINANCIAL ADVISORY CORPORATION;
RICHARD G. CODY; JILL M. TRAMONTANO f/k/a Jill M. Cody,
Respondents.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Patti B. Saris, U.S. District Judge]
Before
Howard, Chief Judge,
Selya and Lynch, Circuit Judges.
John A. Mangones, with whom Godbout Law PLLC was on brief,
for appellant.
Shane Haselbarth, with whom Gerard J. Kowalski and Marshall
Dennehey Warner Coleman & Goggin were on brief, for appellee.
March 24, 2020
LYNCH, Circuit Judge. The question presented is whether
the district court erred in confirming, and denying appellant's
motion to vacate, a Financial Industry Regulatory Authority
("FINRA") arbitral award which denied certain claims against
Concorde Investment Services, LLC ("Concorde"). For different
reasons than those used by the district court, we agree that
confirmation was required, and affirm.
I.
We briefly outline the facts as presented to the
arbitrators and describe their award. The arbitrators did not
state their reasons for the award, nor did they need to do so.
See United Steelworkers v. Enter. Wheel & Car Corp., 363 U.S. 593,
598 (1960) ("Arbitrators have no obligation . . . to give their
reasons for an award."); Lanza v. FINRA, Nos. 18-2057, 18-2181,
slip op. at 4-5, 12 n.6 (1st Cir. Mar. 24, 2020) (noting that FINRA
Code Rule 12904(g) requires an explained decision only upon the
joint request of all parties to the arbitration); Zayas v. Bacardi
Corp., 524 F.3d 65, 70 (1st Cir. 2008) ("Although arbitrators
frequently elect to explain their decisions in written opinions,
they are under no compulsion to do so.").
The claims asserted against Concorde in the FINRA
Dispute Resolution Statement of Claim were for negligence, breach
of fiduciary duty, violations of FINRA suitability rules and
regulations against deceptive securities practices, and failure to
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properly supervise under the Federal Control Person Statute
(section 20 of the Securities Exchange Act of 1934) and the
Massachusetts Control Persons Statute, Mass. Gen. Laws ch. 110A,
§ 410.
Ebbe worked for Verizon and its predecessors from 1969
to 2002. At the time of his retirement from Verizon, he cashed
out the entirety of his pension and 401(k), a total of $498,000.
Ebbe decided to invest the money with Richard Cody, who then worked
at Leerink Swann. Richard Cody took Ebbe's account with him as he
moved to GunnAllen Financial in 2005 and later to Westminster
Financial ("Westminster")1 in 2010. Ebbe began receiving monthly
distributions from the account after it was opened.
Ebbe and Richard Cody met approximately three times a
year to discuss Ebbe's investments. At these meetings, and during
phone calls between the two, Richard Cody told Ebbe that the
distributions from his account were from the interest only and
that the account's balance remained around $500,000. In reality,
the distributions steadily depleted the account's principal. When
Richard Cody transferred the account to Westminster in March 2010,
its balance had fallen to $144,240.23.
1 Both Westminster Financial Services, Inc. and
Westminster Financial Advisory Corporation were parties to Ebbe's
FINRA claim. Neither is party to this appeal, and we refer to
both as Westminster.
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In 2009, unbeknownst to Ebbe at the time, FINRA's Appeals
Panel suspended Richard Cody for a year for recommending unsuitable
investments and in-and-out trading, a sanction affirmed by the
Securities and Exchange Commission and later by this court. See
Cody v. SEC, 693 F.3d 251, 254-57 (1st Cir. 2012). When the
suspension began in January 2013, Richard Cody was no longer
allowed to serve as Ebbe's advisor, so he transferred the account
from Westminster to Concorde, where his wife, Jill Cody, was a new
investment advisor. At that point, the account's balance was
$59,175.79. In January 2015, its balance was $873. Concorde sent
Ebbe monthly statements, starting in January 2013, that showed
Jill Cody as his registered representative.
Despite his suspension, Richard Cody continued to meet
with Ebbe to discuss his investments, and Ebbe testified he was
unaware that Jill Cody had taken over his account when it moved to
Concorde, despite receiving the statements.
Richard Cody joined Concorde in February 2014 after his
suspension ended. But Jill Cody remained listed as Ebbe's advisor
for the duration of the time his account was at Concorde. The
account statements never listed Richard Cody as Ebbe's
representative.
During the entire time Ebbe's account was at Concorde,
Ebbe received monthly statements from Concorde that accurately
reflected his declining account balance and the substantial
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diminution of its principal. Ebbe discussed this diminution
several times with Richard Cody, and Cody always told him that the
statements did not include all of Ebbe's investments. Ebbe
testified he did not understand the monthly statements and that he
believed Richard Cody's assurances. Ebbe never contacted Jill
Cody, his listed account representative at all, including for
explanation. Concorde closed Ebbe's account in May 2016, at which
point it had a zero balance.
In July 2016, after Concorde learned that Richard Cody
had contacted customers during the period of his suspension,
Concorde terminated both Richard Cody and Jill Cody.
On September 23, 2016, Ebbe received a deposit in his
bank account in the same amount as his normal monthly distribution
had been from Concorde. Ebbe noticed that the payment originated
from an atypical routing number. Cody had arranged this payment
from his individual account. For the first time, Ebbe then
contacted Concorde directly. Ebbe testified that was the first
time he learned that his Concorde account had no value.
On August 1, 2017, Ebbe filed for arbitration with FINRA
against Richard Cody, Jill Cody, Westminster, Concorde, and three
other Concorde supervisory employees. FINRA served the statement
of claim on Richard Cody and Jill Cody, but neither answered or
appeared. The arbitration began on October 16, 2018, and lasted
four full days.
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Ebbe's expert, Patrick McKeon, testified at the
arbitration only as to defalcations by Richard Cody, not as to any
by Jill Cody. As to Concorde, McKeon said its duty was to do
"reasonable" supervision of its registered representatives. He
also did not flatly opine that Concorde had violated a duty as to
such supervision. He admitted there was no evidence that Jill
Cody ever made any misrepresentations to Ebbe.
The panel heard from Concorde's Chief Compliance Officer
that Concorde had hired Jill Cody after a careful check revealed
no red flags, had met its duty to supervise her, had conducted
surprise investigations of Jill Cody, and had found no problems.
Concorde also presented a separate expert who testified
at the hearing that Concorde had complied with all industry rules
and regulations including about supervision of each of the Codys.
And the arbitral panel had reason to doubt the credibility of Ebbe,
who admitted to tax fraud.
The arbitral award stated:
After considering the pleadings, the testimony
and evidence presented at the hearing, and the
post-hearing submissions, the Panel has
decided in full and final resolution of the
issues submitted for determination as follows:
1. Respondents Richard Grant Cody and Jill
M. Cody are jointly and severally liable
for and shall pay to [Ebbe] the sum of
$286,096.00 in compensatory damages.
2. [Ebbe's] claims against Concorde [and
Westminster] are denied.
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3. [Ebbe's] request for attorneys' fees is
denied.
4. [Ebbe's] request for punitive damages is
denied.
5. Any and all claims for relief not
specifically addressed herein are
denied.
The panel did not award Ebbe his full requested damages figure of
over $800,000.
On February 14, 2019, Ebbe filed a motion in the
Massachusetts federal district court to vacate in part and confirm
in part the award. On May 3, 2019, Westminster and Concorde filed
motions to confirm the award as to them. On July 18, 2019, the
district court denied Ebbe's motion to vacate and granted the
motions to confirm. Ebbe v. Concorde Inv. Servs., LLC, 392 F.
Supp. 3d 228, 242 (D. Mass. 2019).
Ebbe timely appealed.
II.
In an action to vacate or confirm an arbitral award, "we
review the district court's decision de novo, mindful 'that the
district court's review of arbitral awards must be extremely narrow
and exceedingly deferential.'" UMass Mem'l Med. Ctr., Inc. v.
United Food & Commercial Workers Union, 527 F.3d 1, 5 (1st Cir.
2008) (quoting Bull HN Info. Sys., Inc. v. Hutson, 229 F.3d 321,
330 (1st Cir. 2000)).
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We have no need to decide whether, as Ebbe asserts, in
the aftermath of Hall Street Associates, L.L.C. v. Mattel, Inc.,
552 U.S. 576, 584-85 (2008), arbitral awards may be vacated under
the doctrine of "manifest disregard of the law." See Dialysis
Access Ctr., LLC v. RMS Lifeline, Inc., 932 F.3d 1, 13 n.13 (1st
Cir. 2019) (declining to decide whether manifest disregard remains
viable where that standard was not met). The manifest disregard
standard allows courts to reject an award that "is (1) unfounded
in reason and fact; (2) based on reasoning so palpably faulty that
no judge, or group of judges, ever could conceivably have made
such a ruling; or (3) mistakenly based on a crucial assumption
that is concededly a non-fact." Mountain Valley Prop., Inc. v.
Applied Risk Servs., Inc., 863 F.3d 90, 95 (1st Cir. 2017) (quoting
McCarthy v. Citigroup Glob. Mkts., Inc., 463 F.3d 87, 91 (1st Cir.
2006)). Where arbitrators have not explained their award, as they
need not, a party challenging the award "is hard pressed to satisfy
the exacting criteria for invocation of the doctrine." Advest,
Inc. v. McCarthy, 914 F.2d 6, 10 (1st Cir. 1990). As in Mountain
Valley Property, we assume dubitante such a manifest disregard
standard may be used. 863 F.3d at 95. Even so, no manifest
disregard has been shown, and certainly none of the three factors
specified above have been shown.
We view the panel's determination as to Concorde as based
on its assessment of the facts, and such factual determinations
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are unassailable on a motion to vacate. See Major League Baseball
Players Ass'n v. Garvey, 532 U.S. 504, 510 (2001) (per curiam).
On manifest disregard review, even "a court's conviction that the
arbitrator made a serious mistake or committed grievous error will
not furnish a satisfactory basis for undoing the decision."
Advest, 914 F.2d at 9.
On the facts here, the arbitrators' conclusion was
reasonable in light of the claims made and the evidence presented.
Ebbe has not nearly come close to showing the arbitrators engaged
in a manifest disregard of the law. There is no showing that "the
arbitrator recognized the applicable law, but ignored it." Raymond
James Fin. Servs., Inc. v. Fenyk, 780 F.3d 59, 64 (1st Cir. 2015)
(quoting Bangor Gas Co. v. H.Q. Energy Servs. (U.S.) Inc., 695
F.3d 181, 187 (1st Cir. 2012)). Nor has Ebbe come close to meeting
any of the statutory bases for vacating awards set forth in the
Federal Arbitration Act.
Ebbe's principal argument that there was manifest
disregard appears to be that since Jill Cody, employed by Concorde,
was found jointly and severally liable with her husband, this means
that Concorde must necessarily be liable "under the doctrine of
respondeat superior for the misconduct of its agent Jill Cody."
This argument fails.
The first reason is that neither of the Codys appeared
for arbitration, and the judgment of the arbitrators was entered
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while they were in default. The panel's finding of liability
against the Codys could reasonably have been nothing more than
entry of a default judgment. Further, Ebbe produced no evidence
of misconduct, including any violations of company rules, by Jill
Cody while she was his representative. The panel's reasons for
not awarding the measure of damages Ebbe requested could well
reflect rejection of some of Ebbe's claims, including that any
liability on the Codys' part should be attributed to Concorde.
Further, under Massachusetts law, respondeat superior
only allows "an employer . . . [to] be held vicariously liable for
the torts of its employee . . . committed within the scope of
employment." Lev v. Beverly Enters.-Mass., Inc., 929 N.E.2d 303,
308 (Mass. 2010) (quoting Dias v. Brigham Med. Assocs., Inc., 780
N.E.2d 447, 449 (Mass. 2002)). The arbitral panel could have
concluded that, if the Codys had any liability, it was not tort
liability and it did not arise from any acts they took within the
scope of any employment by Concorde. For example, the panel
plausibly could have concluded that the acts were not "motivated,
at least in part, by a purpose to serve" Concorde. Id. (quoting
Mosko v. Raytheon Co., 622 N.E.2d 1066, 1068 (Mass. 1993)). As to
Jill Cody, the lack of evidence of either specific tortious conduct
or any misconduct could have led the arbitrators to conclude that
Concorde was not vicariously liable.
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Further, the expert testimony before the arbitrators was
that Concorde had met all of its obligations imposed on it by the
securities laws, and Ebbe failed to put in any contrary evidence.
Concorde provided Ebbe with accurate monthly statements of his
account from the date of its opening and throughout. It further
took measures to oversee the performance of Jill Cody, Ebbe's
listed representative, by investigating her background, contacting
her former employer, requesting a written explanation of her
approach to managing her portfolios, and performing a surprise
inspection of her branch. These factors alone suffice to make
plausible that Concorde violated no duties it owed Ebbe. On these
facts, the panel could have concluded that Concorde was not liable
to Ebbe either on a respondeat superior theory or for failure to
supervise. Beyond that, given Ebbe's own role in subjecting
himself to the harm the Codys imposed on him, it was rational for
the arbitrators to conclude that no finding of liability against
Concorde was warranted.
Ebbe's fallback position is his request that the matter
should be remanded to the arbitrators for a specific finding as to
respondeat superior. That argument also fails. That issue has
been waived many times over. No such request for relief was made
to the district court, and so it is waived. See Flaherty v.
Entergy Nuclear Operations, Inc., 946 F.3d 41, 52 (1st Cir. 2019).
Affirmed. Costs are awarded to Concorde.
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