Mun. Workers Comp. Fund, Inc. v. Morgan Keegan & Co.

• Decision Date: 03 April 2015
• Docket Number: 1120532.
• Citation: 190 So.3d 895
• Court: Alabama Supreme Court
• Parties: MUNICIPAL WORKERS COMPENSATION FUND, INC. v. MORGAN KEEGAN & COMPANY, INC., and Morgan Asset Management, Inc.

190 So.3d 895

MUNICIPAL WORKERS COMPENSATION FUND, INC.

v.MORGAN KEEGAN & COMPANY, INC., and Morgan Asset Management, Inc.

1120532.

Supreme Court of Alabama.

April 3, 2015.

Rehearing Denied Sept. 30, 2015.

Jere L. Beasley of Beasley, Allen, Crow, Methvin, Portis & Miles, PC, Montgomery; and Peter J. Mougey, Page A. Poerschke, and Laura S. Dunning of Levin, Papantonio, Thomas, Mitchell, Rafferty & Procter, P.A., Pensacola, Florida, for appellant.

Drayton Nabers, Jr., Peter S. Fruin, and Donald F. Winningham III of Maynard, Cooper & Gale, P.C., Birmingham; George D. Sullivan of Greenberg Traurig, LLP, New York, New York; S. Lawrence Polk of Sutherland Asbill & Brennan, LLP, Atlanta, Georgia; and Terry R. Weiss of Greenberg Traurig, LLP, Atlanta, Georgia, for appellees.

Joseph P. Borg, Alabama Securities Commission, Montgomery, for amicus curiae Alabama Securities Commission, in support of the appellant.

Richard S. Frankowski and Robert E. Norton of Burke, Harvey & Frankowski, LLC, Birmingham; and Adam M. Nicolazzo of Malecki Law, New York, New York, for amicus curiae Public Investors Arbitration Bar Association, in support of the appellant.

Charles M. Thompson, Birmingham; and William A. Jacobson and Birgitta K. Siegel of Cornell Securities Law Clinic, Cornell Law School, Ithaca, New York, for amicus curiae Cornell Securities Law Clinic, in support of the appellant.

R. Bernard Harwood, Jr., of Rosen Harwood, P.A., Tuscaloosa, for amicus curiae Business Council of Alabama, in support of the appellees.

BOLIN

, Justice.

Municipal Workers Compensation Fund, Inc. (“the Fund”), appeals from the Jefferson Circuit Court's order denying the Fund's motion to vacate a judgment entered on an arbitration award. We reverse and remand.

I. Facts and Procedural History

The Fund is a nonprofit corporation that administers a self-insured group workers' compensation fund for the benefit of its members, which comprise approximately 624 municipalities and governmental organizations in Alabama. The purpose of the Fund is to provide affordable workers' compensation insurance to its members, who contribute to the Fund by paying premiums. The Fund entrusted the management and investment of approximately $50 million in assets to Morgan Asset Management, Inc. (“MAM”), and Morgan Keegan & Company, Inc. (“Morgan Keegan”). MAM served as an investment advisor for a managed account and certain mutual funds owned by the Fund. Morgan Keegan served as the broker-dealer for the Fund's managed account and had the authority as the broker-dealer to execute transactions in that account as directed by the Fund. A second account at Morgan Keegan held the mutual funds that had been sold to the Fund through a Morgan Keegan broker.

The Fund states that it directed MAM and Morgan Keegan to invest its funds conservatively and that it relied on MAM and Morgan Keegan for sound financial advice and management. However, according to the Fund, MAM and Morgan Keegan disregarded this mandate by recommending that the Fund purchase and hold what the Fund says were unsuitable investments, by overconcentrating the Fund's assets in investments that had undue exposure to the sub-prime mortgage market and in other risky investments, and by misrepresenting and failing to disclose material facts pertaining to the investments. The Fund claims that it sustained losses in excess of $15 million in 2007 and 2008 as a result of the actions of MAM and Morgan Keegan.

On May 28, 2009, the Fund initiated arbitration proceedings against MAM and Morgan Keegan by filing a statement of claim with the Financial Industry Regulatory Authority (“FINRA”) pursuant to the arbitration provision contained in its contracts with MAM and Morgan Keegan. The Fund asserted claims of breach of fiduciary duty; breach of contract; negligence; fraud; violations of NASD and NYSE Rules; and violations of the Alabama Securities Act.

The arbitration provisions contained in the Fund's contracts with MAM and Morgan Keegan provided that arbitration was to be conducted before FINRA in accordance with that organization's rules and procedures. As part of the standard FINRA arbitration proceedings, the parties were required to submit “Uniform Submission Agreements,” which provided that the parties understood and agreed that the arbitration would be conducted in accordance with the “FINRA By–Laws, Rules, and Code of Arbitration Procedure.”

The FINRA Rules contain specific procedures regarding the selection of an arbitrator. Included within those procedures are rules requiring disclosure by the arbitrator. Rule 12405 provides:

“(a) Before appointing arbitrators to a panel, the Director will notify the arbitrators of the nature of the dispute and the identity of the parties. Each potential arbitrator must make a reasonable effort to learn of, and must disclose to the Director, any circumstances which might preclude the arbitrator from rendering an objective and impartial determination in the proceeding, including:

“(1) Any direct or indirect financial or personal interest in the outcome of the arbitration;

“(2) Any existing or past financial, business, professional, family, social, or other relationships or circumstances with any party, any party's representative, or anyone who the arbitrator is told may be a witness in the proceeding, that are likely to affect impartiality or might reasonably create an appearance of partiality or bias;

“(3) Any such relationship or circumstances involving members of the arbitrator's family or the arbitrator's current employers, partners, or business associates;

“....

“(b) The obligation to disclose interests, relationships, or circumstances that might preclude an arbitrator from rendering an objective and impartial determination described in paragraph (a) is a continuing duty that requires an arbitrator who accepts appointment to an arbitration proceeding to disclose, at any stage of the proceeding, any such interests, relationships, or circumstances that arise, or are recalled or discovered.”

Pursuant to FINRA's arbitrator-disclosure requirements, arbitrators submit detailed biographical information when they submit an application to join FINRA's roster of arbitrators. This biographical information is compiled to create an arbitrator-disclosure report. During the arbitrator-selection process, the parties are given the opportunity to review a potential arbitrator's disclosure report. The parties depend on the information contained in the arbitrator-disclosure reports as part of the process of selecting a panel of arbitrators. In order to ensure that the arbitrator-disclosure reports are accurate and current, FINRA provides the arbitrators with their disclosure reports each time an arbitrator is appointed to a case. FINRA's Arbitrator Guide provides, in part:

“It is extremely important that arbitrators update their Disclosure Reports frequently ....

“Arbitrator disclosure is the cornerstone of FINRA arbitration, and the arbitrator's duty to disclose is continuous and imperative. Disclosure includes any relationship, experience and background information that may affect—or even appear to affect—the arbitrator's ability to be impartial and the parties' belief that the arbitrator will be able to render a fair decision. When making disclosures, arbitrators should consider all aspects of their professional and personal lives and disclose all ties between the arbitrator, the parties and the matter in dispute, no matter how remote they may seem. If you need to think about whether a disclosure is appropriate, then it is: make the disclosure. ”

FINRA's arbitrator-disclosure requirements are designed to provide the arbitrating parties with an honest, unbiased adjudicatory process, and FINRA “strongly encourages arbitrators to make a wide variety of disclosures [and] ... when in doubt, always err in favor of making a disclosure,” because meeting the disclosure requirement is part of an “arbitrator's overarching duty ... to preserve the integrity and fairness of the arbitral process.” FINRA arbitrators also receive a FINRA arbitrator's manual, which states that “[i]t is extremely important that the [arbitrator-disclosure] profile be completed accurately and updated periodically.”

Once an arbitrator is selected to serve on a case, FINRA forwards to the arbitrator information regarding the case, including the names of the parties, the names of the parties' representatives, and the nature of the case; the oath of arbitrator, which includes the arbitrator-disclosure checklist; and the case materials, which include the pleadings, disclosures of the other arbitrators selected, and the witness list. The arbitrator is obligated to review these materials and to perform a conflicts check. Only after these case materials have been reviewed, the disclosure checklist completed, and a conflicts check performed should the arbitrator sign the oath of arbitrator.

On November 16, 2009, FINRA provided the Fund, MAM, and Morgan Keegan with a list of 30 proposed arbitrators for the parties' pending arbitration from which they were to select a panel of 3 arbitrators by using a systems of “ranks” and “strikes” based on the arbitrator-disclosure reports, which were also provided to the parties. The final panel of arbitrators appointed consisted of William Julavits (chairperson), Patricia Dewitt (public panelist), and Eric Kunis (non public/securities-industry panelist).

On March 26, 2012, the parties received Julavits's disclosure checklist. Included in the checklist was question 11, which appeared within the checklist section entitled “Subject Matter Disclosures.” Question 11(A) specifically asked:

“Have you, your spouse, or an immediate family member been involved in a dispute involving the same or similar subject matter as the arbitration?”

Julavits answered “No.” Question 11(B) asked:

“Did the dispute assert any of the same allegations as the assigned arbitration, even if the dispute was not securities related?”

Julavits answered “NA,” i.e., not...