Trombetta v. Raymond James Financial

Decision Date22 August 2006
Citation907 A.2d 550
PartiesJames TROMBETTA, Tara Trombetta Witover and Julie Trombetta Gray, Appellants, v. RAYMOND JAMES FINANCIAL SERVICES, INC., Raymond James & Associates, Inc., Peter Gialames and Edward Lewis, v. Neil M. Niren, M.D., and James A. Trombetta, James Trombetta, Tara Trombetta Witover and Julie Trombetta Gray, v. Raymond James Financial Services, Inc., Raymond James & Associates, Inc., Peter Gialames and Edward Lewis, Appellees, v. Neil M. Niren, M.D., and James A. Trombetta, Appeal of: Raymond James Financial Services, Inc., Raymond James & Associates, Inc. and Edward Lewis.
CourtPennsylvania Superior Court

BEFORE: DEL SOLE, P.J.E., TAMILIA and JOHNSON, JJ.

OPINION BY TAMILIA, J.:

¶ 1 James Trombetta and his daughters Tara Trombetta Witover and Julie Trombetta Gray appeal from the March 4, 2005 Order denying appellants' request for de novo review of an unfavorable decision rendered by a three-member National Association of Securities Dealers arbitration panel ("NASD arbitration panel").

¶ 2 Raymond James Financial Services, Inc., Raymond James & Associates, Inc., Peter Gialames, and Edward Lewis cross-appeal from the Order ruling that the parties were governed by a de novo review arbitration clause in an agreement between the parties.1

¶ 3 In May of 1998, appellant James Trombetta transferred brokerage accounts held in joint tenancy by him and his daughters to Raymond James. Peter Gialames, a long time friend of Trombetta's2 and the branch manager of the Allegheny County office of Raymond James, became appellants' broker on these accounts. Upon transfer, appellants moved $1.36 million in mutual fund investments into Account Number 85178329 ("Main Account"), signing an agreement to that effect ("Client Agreement"). The Main Account was held in joint tenancy by the three appellants.

¶ 4 In the spring of 1999, Mr. Trombetta attended an appointment with his dermatologist appellee Dr. Neil Niren, M.D. During the appointment, Trombetta and Niren had a discussion about Niren's investment strategy—which was comprised mostly of investing in high-growth technology stocks and naked put option trading. N.T., Arbitration Hearing, Vol. I, 9/22/03, at 148-153. Shortly after this discussion, Trombetta requested Niren meet with him and Gialames to discuss Niren's investment strategy. Id. at 150. Following this meeting, Trombetta instructed Gialames to open an option account for the purpose of implementing Niren's strategy. Id. at 444. Pursuant to internal operating procedures, however, Raymond James rejected a proposed agreement to create an option account for appellants because Trombetta had no prior experience with option trading. Id. at 303. Subsequent to this rejection, Gialames devised a strategy whereby he would draft a second proposed agreement to create an option account listing Trombetta and Niren as joint account holders, thereby satisfying the Raymond James requirement that an option account holder have option trading experience. Id. at 169-170. Pursuant to this strategy, Gialames executed the second proposed agreement ("Option Agreement"). In April of 1999, Raymond James accepted the agreement, and an option trading account ("Option Account") was opened listing Trombetta and Niren as tenants-in-common.

¶ 5 Subsequent to the opening of the Option Account, Trombetta commenced trading options. Trombetta would call Niren to learn which options he was trading; he would then relay this information to Gialames who, in turn, would contact Niren for instructions on how to execute specific option trades. N.T., Arbitration Hearing, Vol. VII, 4/6/03, at 1572. During this interval of time, Gialames brought in broker Edward Lewis for assistance in servicing the Main Account and the Option Account.

¶ 6 From April of 1999 through March of 2000, appellants utilized Niren's strategy and enjoyed high profits. The Option Account alone had a cumulative gain of $264,981 during that time period. Id. at 1738. Trombetta utilized the collateral value of securities held in the Main Account to fund his option trading. N.T., Arbitration Hearing, Vol. I, 9/22/03, at 226-229. In March of 2000, the stock market began a historical decline. An expert testified, however, that the Main Account remained profitable through August of 2000 and the Option Account remained profitable through January of 2001. N.T., Arbitration Hearing, Vol. VII, 4/7/03, at 1739, 1744. After sustaining substantial losses to both accounts during the following months, appellants transferred the remaining securities in both the Main Account and the Option Account to Merrill Lynch. Id. at 2134-2135.

¶ 7 On December 3, 2001, appellants commenced this litigation by filing a Statement of Claim with the National Association of Securities Dealers ("NASD") against Raymond James, Peter Gialames, and Edward Lewis. The claim raised causes of action for breach of fiduciary duty, fraud, misrepresentation, negligence, gross negligence, and failure to supervise in connection with various stock transactions, investments on the margins, and option trades. Appellants sought $2 million in compensatory damages coupled with $2 million in punitive damages.

¶ 8 On February 11, 2002, Raymond James, Gialames, and Lewis answered by denying all material allegations and raising the defenses of waiver, estoppel and laches, authorization/ratification, failure to mitigate, statute of limitations, and assumption of risk. They also issued a Joinder Statement of Claim, dated January 14 2003, which raised a claim for contribution and indemnification against Niren.

¶ 9 In turn, on February 28, 2003, Niren answered by denying the Raymond James allegations. He also filed a Counter Statement of Claims for abuse of process against Raymond James and causes of action for contribution and indemnification against both Gialames and Lewis.

¶ 10 On November 25, 2003, Raymond James, Gialames, and Lewis filed an Amended Joinder Statement of Claims asserting a counter-claim against Trombetta for contribution and indemnification.3

¶ 11 The NASD arbitration panel conducted a hearing spanning nine days from the fall of 2003 until the spring of 2004. On June 14, 2004, the NASD arbitrators issued an award denying all of the parties' claims, counter-claims, and third-party claims in their entirety. The NASD panel, however, did not issue a written memorandum outlining their rationale for denying these claims.

¶ 12 On July 13, 2004, appellants filed a petition for vacatur in the Court of Common Pleas of Allegheny County. On August 17, 2004, Raymond James and Lewis filed a joint cross-petition to add Niren and Trombetta as co-respondents. They also sought confirmation of the NASD panel's ruling. By Order of September 17, 2004, the Honorable Stanton Wettick granted a motion filed by Raymond James and Lewis requesting the litigation be designated as complex.

¶ 13 At oral argument on November 16, 2004, appellants asserted the Client Agreement they had signed before originally transferring their account to Raymond James in May of 1998 provided they were entitled to factual and legal de novo review of the NASD arbitration panel ruling. In support of this assertion, appellants pointed to the following passage in the Client Agreement:

A court of competent jurisdiction may enter judgment based on the award rendered by the arbitrators. We agree that both parties will have a right to appeal the decision of the arbitrators if the arbitrators award damages that exceed $100,000; the arbitrators do not award damages and the amount of my loss of principal exceeds $100,000; or the arbitrators award punitive damages. In each of the foregoing cases, a court having jurisdiction shall conduct a "de novo" review of the transcript and exhibits of the arbitration hearing.

Record, No. 7, Petition for Rule to Show Cause Why De Novo Review of Arbitration Award Should Not Be Granted or, in the Alternative, Why Arbitration Award Should Not Be Vacated, Exhibit B, Client Agreement (emphasis added).

¶ 14 On March 4, 2005, the court below issued an Order and Opinion denying de novo review. On June 28, 2005 a second Order and Opinion denying appellants' petition for vacatur and granting cross-appellants' petition were issued, thereby confirming the NASD panel's decision. In doing so, the court utilized a "manifest disregard for the law" standard of review and cited as authority GMS Group, LLC v. Benderson, 326 F.3d 75 (2d Cir.2003), for the proposition that the "manifest disregard for the law" standard was appropriate for reviewing arbitration awards without accompanying written opinions under the Federal Arbitration Act.4

¶ 15 On July 19, 2005, appellants filed a notice of appeal with this Court and on August 2, 2005, Raymond James and Lewis filed a notice of cross-appeal. Appellants raise one complex and novel issue for our review:

Is an agreement between parties that disputes between them will be resolved by arbitration and that, in the event of certain decisions of the arbitrators, either party is entitled to seek a de novo review by a court of the transcript and exhibits of the arbitration hearing enforceable?

Appellants' brief at 5.

¶ 16 This issue presents our Court with two questions of first impression in the Commonwealth. First, we must decide whether standards of review outlined in the Federal Arbitration Act ("FAA") pre-empt the standards of review outlined in the Pennsylvania Arbitration Act, thereby binding us by federal judicial interpretation of the FAA standards. Second, if we conclude state law applies, we are required to resolve whether an arbitration clause providing for de novo review by the trial court of an arbitration award is enforceable as a...

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