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Goldman v. Citigroup Global Markets Inc.

United States District Court, E.D. Pennsylvania

May 19, 2015

JUDITH GOLDMAN and KENNETH B. GOLDMAN Plaintiffs,
v.
CITIGROUP GLOBAL MARKETS INC.; BARRY GUARIGLIA; FINRA; and FREDERICK PIERONI, Defendants.

MEMORANDUM

ANITA B. BRODY, J.

Plaintiffs Judith and Kenneth Goldman move to vacate an arbitration award rendered by defendant Financial Industry Regulatory Authority (“FINRA”) in favor of defendants Citigroup Global Markets, Inc. (“CGMI”) and Barry Guariglia. CGMI and Guariglia move to dismiss for lack of subject matter jurisdiction. A district court has subject matter jurisdiction over a motion to vacate pursuant to the Federal Arbitration Act (“FAA”) if the motion discloses a federal question on its face. See Luong v. Circuit City Stores, Inc., 368 F.3d 1109, 1111 (9th Cir. 2004); Minor v. Prudential Sec., Inc., 94 F.3d 1103, 1106-07 (7th Cir. 1996), as amended (Oct. 1, 1996). Because there is no subject matter jurisdiction, I will dismiss this case.

I. BACKGROUND

In their motion to vacate the arbitration, Plaintiffs Judith and Kenneth Goldman allege that they began a financial advisory relationship with Defendant Barry Guariglia in the 1990s. See Refiled Mot. to Vacate ¶ 2 n.3, ECF No. 42. At the time, Guariglia worked for Merrill Lynch, Pierce, Fenner & Smith Inc. (“Merrill Lynch”). Id. In November 2008, Guariglia transferred from Merrill Lynch to CGMI. He convinced the Goldmans to transfer their accounts with him to CGMI. See Id. ¶ 3 n.4 The Goldmans contend that this transfer allegedly triggered a “margin call” that liquidated their retirement savings. See id. They claim that Guariglia and CGMI knew or should have known that the transfer of the Goldmans’ accounts would trigger a margin call, and knew or should have known that a margin call would harm the Goldmans’ accounts. The Goldmans claim that CGMI and Guariglia had a duty to warn the Goldmans of these risks. See Id. ¶¶ 3 n.4, 47-50.

In September 2010, the Goldmans brought an action before FINRA against CGMI, Guariglia, and Merrill Lynch.[1] See Arbitration Award at 1, ECF No. 42-2. They alleged violations of the federal securities laws, including Rule 10b-5, as well as breach of contract and a variety of other claims. Id. at 2. Before arbitration commenced, the Goldmans settled their claims against Merrill Lynch in mediation with FINRA before Frederick Pieroni.[2] See Id. at 3; Refiled Mot. to Vacate ¶ 16. The claims against CGMI and Guariglia[3] proceeded to arbitration and a hearing. The arbitration panel ultimately dismissed all of the Goldmans’ remaining claims. See Arbitration Award at 4. As part of its determination, the panel found that no margin call took place. See id. at 5 (noting that “[the panel] remain[s] satisfied there was no margin call ordered”).

On October 30, 2014, the Goldmans filed a motion in this Court to vacate FINRA’s determination pursuant to the Federal Arbitration Act, 9 U.S.C. § 10.[4] The Goldmans contend that the arbitration process involved numerous procedural deficiencies in violation of FINRA rules. For example, they claim the arbitration panel allowed CGMI and Guariglia to harass the Goldmans by demanding discovery of irrelevant materials. They also allege that the arbitration panel denied the Goldmans access to important discovery materials from CGMI and Guariglia. Refiled Mot. to Vacate ¶¶ 11(a)-(c), 12-15. They also contend that mediator Pieroni allowed CGMI to attend mediation sessions even though CGMI refused to negotiate with the Goldmans. CGMI’s presence during mediation allegedly breached FINRA’s confidentiality requirements. Id. ¶¶ 16-24. As a result, CGMI allegedly had access to information that proved beneficial to its defense at the arbitration hearing. The Goldmans also allege that the panel chair had an undisclosed relationship with mediator Pieroni. The Goldmans claim that this relationship was a breach of FINRA ethics rules. Id. ¶¶ 25-28.

In addition to these procedural defects, the Goldmans argue that the panel erred in determining that no margin call occurred. Id. ¶¶ 3 n.4, 45-46. The Goldmans assert that, taken together, these errors show that their arbitrators were “blatantly partial” and acted with manifest disregard of federal law. Id. ¶ 11(d), 46(a). Defendants CGMI and Guariglia move to dismiss, claiming that this Court has no jurisdiction to vacate the arbitration award. See Mot. to Dismiss, ECF No. 43.

II. DISCUSSION

When determining jurisdiction over a motion to vacate an arbitration award, a district court must look to the allegations presented in the motion to vacate itself. Luong, 368 F.3d at 1111; Minor, 94 F.3d at 1106-07. In this action, subject matter jurisdiction only exists if the claims in the motion to vacate “aris[e] under the Constitution, laws, or treaties of the United States.”[5] 28 U.S.C. § 1331. An action arises under the laws of the United States when “federal law creates the cause of action or [] the plaintiff’s right to relief necessarily depends on resolution of a substantial question of federal law.” Franchise Tax Bd. of Cal. v. Constr. Laborers Vacation Trust for S. Cal., 463 U.S. 1, 27-28 (1983).

Federal law does not create the cause of action in this case. Despite being a federal law, the Federal Arbitration Act is “something of an anomaly” in that “it does not create any independent federal-question jurisdiction under 28 U.S.C. § 1331 [] or otherwise.” Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 25 n.32 (1983). The FAA “does not supply federal jurisdiction where it does not otherwise exist.” V.I. Hous. Auth. v. Coastal Gen. Constr. Servs. Corp., 27 F.3d 911, 915 (3d Cir. 1994).

Because the Goldmans have not brought a federal cause of action, they must prove that their right to relief necessarily depends on resolution of a substantial question of federal law. The Supreme Court has recently enumerated four factors to consider when determining whether an action presents a substantial question of federal law. A federal issue must be: “(1) necessarily raised, (2) actually disputed, (3) substantial, and (4) capable of resolution in federal court without disrupting the federal-state balance approved by Congress.” Gunn v. Minton, 133 S.Ct. 1059, 1065 (2013). The Supreme Court has emphasized that few cases satisfy these factors. See Empire Healthchoice Assurance, Inc. v. McVeigh, 547 U.S. 677, 699 (2006) (noting only a “special and small” category of claims present substantial federal questions even though federal law creates no cause of action).

The Goldmans argue that this case presents a substantial federal question because: (1) their claims in the underlying arbitration were based on the federal securities laws, see Am. Resp. to Mot. to Dismiss at 4-5, ECF No. 46, (2) the arbitration panel allegedly acted in manifest disregard of the federal securities and banking laws, see Id. at 8-19, and (3) the arbitration panel allegedly acted in violation of FINRA’s internal rules, which are subject to extensive federal regulation. See Mot. to File Supplemental Authority ¶¶ 3-12, ECF No. 56. Each argument is insufficient to confer jurisdiction.[6]

a. Presence of Federal Claims in an Underlying Arbitration Proceeding

The Goldmans first argue that subject matter jurisdiction exists because their claims in the underlying arbitration were based on the federal securities laws. To determine subject matter jurisdiction, however, a district court must look to the motion to vacate itself.[7]Luong, 368 F.3d at 1111; Minor, 94 F.3d at 1106-07. Because ยง10 of the Federal Arbitration Act permits only limited review of arbitration awards, federal ...


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