Tag Archives: arbitration

Stanford Ponzi Covered Up by NASD/FINRA’s Arbitrators: Part II

Fox Business has just came out with an interview with Stanford Financial whistleblower Layla Wydler, who was fired from Stanford Financial Group in 2002 when she refused to participate in what seven years later has been finally exposed by federal law enforcement authorities as a “massive Ponzi scheme.”

In 2000, Stanford offered Wydler, a top broker-dealer, a sizeable salary plus a signing bonus. In exchange, Wydler made a five-year commitment to Stanford and brought her valuable book of business with her.

Red Flags

Soon after starting, Wydler became suspicious. First, the Stanford “CDs” were actually administered as a hedge fund and invested in the money market. Consequently, “Stanford was paying about 3% more than everyone else in the world was paying on CDs without explaining how he could earn that return. … [H]ow can you do that, sell a product that you call a CD when it’s really not a CD?” asks Wydler.

Second, Stanford rebuffed requests for portfolio appraisals. “[W]e would never be able to get that from them because they would tell me it’s proprietary information. [There was] a lot of mystery,” says Wydler.

Third, much like Madoff, Stanford’s audits were done by “mom and pop” accountants. “[Standord’s] financials were not audited by a U.S. reputable account[ing] firm. [Instead,] it was done by an unknown firm in Antigua. To me, that was a red flag,” states Wydler.

Fourth, Stanford would claim the CDs were insured by Lloyd’s of London. “[B]ut that’s not what it was,” says Wydler. “It was just to cover the directors and employees in case of a lawsuit, and not the client accounts at all.”

Fifth, the Stanford headquarters building had a plaque stating “Member of SIPC.” This falsely implied the SIPC’s protection covered the CDs. “[I]t’s misleading,” states Wydler. “[Y]ou [would] see the SIPC sign, [and] you would imagine that everything was safe.”

Arbitration

After Wydler refused to sell the CDs, Stanford fired her. “[T]hey wanted me to pay back the promissory note that…was a part of the signing bonus that they gave me when they hired me,” says Wydler. Stanford took Wydler to arbitration before FINRA and sought in excess of $100,000.
Wydler counterclaimed wrongful termination, alleging the firing was punishment for refusing to participate in Stanford’s Ponzi scheme. “[I]n the arbitration, we asked for the documents that would have supported the claim,” i.e., portfolio appraisals and Lloyd’s insurance policies supposedly backing the CDs, says Wydler’s attorney, Mike Falick. “And we were turned down.” Not surprisingly, the arbitrators ruled against Wydler, awarding Stanford over $107,000. (Stanford eventually settled for an undisclosed amount.)

Subsequently, Wydler reported Stanford to the SEC. However, the SEC took no action for five years. “I think there was ineptitude on the part of the regulatory agencies,” states Falick. “NSAD [the predecessor of FINRA and the agency that was responsible for this arbitration] is a self-regulatory body…charged with making [sure] the broker dealers are operating fairly and legally. The SEC is charged with protecting people. I don’t think either one of them, given the opportunities that they had and the information that they had, did what they need to do to make that happen.”

The Hefty Price Tag of Arbitral “Efficiency”

When asked whether he could have subpoenaed the documents to crack the case in court, Falick answered, “If I could’ve gotten this case out of FINRA, the day that we had the discovery issue, when FINRA told me…’we’re not gonna allow you to get those documents,’…that day it would’ve happened.”

Instead of having her day in court, Wydler was forced into a Star Chamber arbitration and panel that denied her the opportunity to support her claims with discovery and to pay the criminal organization she tried to report $107,782. So thanks in part to NASD’s arbitrators, the fraud was allowed to continue for five more years until it finally collapsed under its own weight.

“I asked for the documents that would’ve proven her case and we were stonewalled by Stanford and we were told by FINRA that our document request was irrelevant,” says Falick. “[H]ad we gotten those documents, not only would Leyla have won her case, but maybe 30,000 people wouldn’t have lost their life savings.”

“[W]hen I left, I believe that there was about a billion dollar in the bank,” says Wydler. “[I]t ended at 7.2 billion.”

As an attorney, my advice to my clients is to refuse to participate in any binding arbitration unless they were aware of and understood what arbitration entails at the time they signed the contract containing an arbitration clause. Increasingly courts are recognizing that essentially businesses are using private arbitrators to shield them from the consequences of their lawbreaking, and refusing to enforce arbitration clauses.

Good work by Fox Business! Here’s the full interview and story.
(Note: the video did not play for me with Firefox but played fine with IE)

Here’s my first post on this case.

Fighting Back Against Illegal Arbitration Clauses in Condo Purchase Contracts

Quick Summary: In this post, Greg shows how arbitration provisions in condo purchase agreements violate California law and cannot be enforced.

In my cases representing real estate investors who want their new construction condo and house deposits back, I often encounter arbitration clauses. I have yet to see one that I think would hold up in court under California law.

One such reason is that the arbitration clauses encompasses not only the buyer’s right to a jury trial, but the buyer’s right to a specific form of statutory relief, such as attorneys’ fees or punitive damages. However, in pre-printed form contracts, both state and federal courts usually rule that arbitration agreements which prevent the plaintiffs from seeking a certain form of statutory relief are unconscionable, therefore unenforceable.

In a 1985 case over an arbitration agreement between a car manufacturer and a car dealership, the U.S. Supreme Court ruled “[b]y agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum.” Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614, 628 (1985). This means that if you are entitled to attorneys’ fees under a specific statute in a jury trial, you are equally entitled to attorneys’ fees under the same statute in an alternative forum.

Consequently, the California Supreme Court ruled that an adhesive arbitration agreement abridging an employee’s right to acceptable discovery, judicial review, cost limitations, and punitive damages in a wrongful termination action against her employer is “substantively unconscionable” and thus unenforceable. In the key California Supreme Court case of Armendariz v. Found. Health Psychcare Servs., ruled that California common law “disallows forms of arbitration that in fact compel claimants to forfeit certain substantive statutory rights.” Armendariz v. Found. Health Psychcare Servs., 24 Cal. 4th 83, 99-100 (Cal. 2000). The same rule was cited in three  recent federal cases: Gelow v. Cent. Pac. Mortg. Corp. Circuit City Stores v. Adams. See 279 F.3d 889, 893 (9th Cir. Cal. 2002); Ingle v. Circuit City Stores, Inc., 328 F.3d 1165, 1179 (9th Cir. Cal. 2003); Gelow v. Cent. Pac. Mortg. Corp., 560 F. Supp. 2d 972 (E.D. Cal. 2008).

Besides these common law rulings against arbitration, California’s statutory law also limits the use of arbitration. First, California Civil Code § 1668 states that “All contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.” In other words, a contract cannot give a developer carte blanche to break the law without facing the consequences.

Second, California Civil Code § 3513 says that “Anyone may waive the advantage of a law intended solely for his benefit. But a law established for a public reason cannot be contravened by a private agreement.” Attorneys’ fees, punitive damages, and other statutory remedies often have a public purpose, such as creating a disincentive for committing future wrongdoing. Consequently, the Ninth Circuit Court refused to enforce an arbitration agreement between a petroleum franchiser and a petroleum franchisee that failed to allow for attorneys’ fees and punitive damages, which were available under the Petroleum Marketing Practices Act. In the 1995 case of Graham Oil v. Arco Products Co., the court concluded that these remedies were “important to the effectuation of the PMPA’s policies.” Graham Oil v. ARCO Products Co. (9th Cir. 1995) 43 F.3d 1244.

Finally, the Armendariz court ruled that “[a]rbitration agreements that encompass unwaivable statutory rights must be subject to particular scrutiny.” Armendariz 24 Cal. 4th. This means that if your arbitration agreement limits your right to a specific form of statutory relief, it might not stand up to scrutiny in a court of law.

It is well known that arbitration, while a good alternative to litigation in many contexts, it drastically unfair when the participants are a regular person on one hand, and a giant corporation on the other. If you have a condo deposit and want a refund because you are unable or unwilling to close, do NOT agree to take the case to arbitration. With the assistance of an attorney experienced in condo contract litigation, take the case to court. At that point you can oppose the arbitration clause before a judge, who will hopefully rule in your favor on this issue.

Greg Weston is a graduate of Harvard Law School and experienced business attorney licensed in California and Florida. Mr. Weston’s San Diego-based practice focuses on representing individuals and small businesses against large corporations, including cases involving condominium purchase agreements and other real estate investments. He can be reached at (619) 255-7098 or greg@thewestonfirm.com. Comments about the blog via e-mail are welcomed.