New York State Supreme Court justice reversed a Finra panel's decision in favor of an investor.
Citigroup Inc. dodged an $11 million bullet in a hotly disputed Finra arbitration case that went before the New York State Supreme Court in Manhattan.
Judge Charles Ramos vacated the multimillion dollar award based on his determination that the parties had agreed to settle the case prior to arbitration for $800,000.
“There can be no legitimate public interest in respecting arbitrations of disputes that have already been settled,” he wrote in his decision. “This award must be vacated.”
The award stems back to a complaint filed in 2010 by John Fiorilla, who was a legal adviser to the Holy See.
Mr. Fiorilla claimed that he had turned over about $16 million worth of Royal Bank of Scotland PLC stock that he had inherited from his father to the care of Smith Barney adviser Robert Loftus, whom he had met through a church organization.
The firm promised that it would be able to hedge the highly concentrated position and protect the account from losses, Mr. Fiorilla said.
But because of negligence on the part of Mr. Loftus' supervisors the investment remained overconcentrated, the complaint alleged.
Mr. Loftus wasn't named in the case.
From 2007 to 2009, the value of Mr. Fiorilla's investment plummeted as RBS stock dropped to $2 a share, from $35 a share, his attorneys said.
An arbitration panel organized by the Financial Industry Regulatory Authority Inc. ultimately awarded Mr. Fiorilla almost $11 million of the $19.5 million he requested in damages.
In August 2012, after the award had been issued, Citigroup filed a motion to vacate, saying that the case should have never gone to arbitration because he and the firm agreed in April 2012 to settle for $800,000.
The firm presented evidence of an e-mail sent by Mr. Fiorilla to his attorney authorizing the settlement.
Counsel from both parties sent an e-mail to Finra saying that the matter had been resolved and to cancel arbitration hearings, Citigroup said.
The bank claimed that Mr. Fiorilla had "settlement remorse" and hired a new attorney who wrongly told Finra that the case had never been settled.
Mr. Fiorilla's second attorney, Kevin Conway of Conway & Conway, didn't respond to a request for comment on the allegations.
In court filings, however, he accused Citigroup of trying to derail a legitimate legal proceeding.
“Petitioners simply do not wish to pay the award and have filed the petition in bad faith,” Mr. Conway wrote. “No settlement exists.”
As part of its petition to overturn the award, Citigroup accused the arbitrators on the panel of not disclosing biases that could influence the case.
For example, it claimed that one of the arbitrators had made multiple complaints against Citigroup over problems with his own accounts, the firm said.
Mr. Conway countered that Citigroup's accusations against the arbitrators amounted to a “smear campaign.”
The justice ultimately found in favor of Citigroup and enforced the original $800,000 settlement without passing judgment on the arbitrators.
“In light of the fact that this matter was in fact settled and that all of the parties so advised the panel and Finra in writing (which a Florida tribunal had found as a fact in a proceeding these respondents commenced) there is no need to delve into the troubling allegations of misconduct by the arbitrators,” Mr. Ramos wrote.
A decision by a court to vacate an arbitration award happens “on rare occasions,” Finra said on its website.
Finra spokeswomen Nancy Condon and Michelle Ong didn't respond to requests for comment.
Mr. Fiorilla couldn't be reached for comment.
A spokeswoman for Citigroup, Danielle Romero-Apsilos, said only that the firm is “pleased with the court's decision vacating the award.”
