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Interactive Brokers LLC v. Saroop

United States District Court, E.D. Virginia, Richmond Division

August 31, 2017



          Robert E. Payne, Senior United States District Judge

         This matter is before the Court on the PETITION (ECF No. 1) filed by Plaintiff Interactive Brokers, LLC ("Interactive") and the DEFENDANTS' CROSS-MOTION TO CONFIRM ARBITRATION AWARD (ECF No. 18) filed by Defendants George Sofis and Rohit and Preya Saroop. For the reasons set forth below, both motions will be DENIED, and this matter will be remanded to the arbitration panel for clarification. To the extent that the Defendants' Cross-Motion and subsequent memoranda can also be construed as a motion for sanctions, that motion will be DENIED.


         Although styled as a "petition, " this matter comes before the Court as a motion to vacate the arbitration award that was rendered against Interactive Brokers, LLC ("Interactive") by a Financial Industry Regulatory Authority (FINRA) arbitration panel on January 5, 2017. (ECF No. 1, Ex. 1). The Award (ECF No. 1-2) was rendered in favor of Claimants George Sofis and Rohit and Preya Saroop (hereinafter, "Claimants"), and included awards of both "compensatory damages" and "attorneys' fees pursuant to the parties' agreement." Interactive seeks to vacate the arbitrators' decision, while the Claimants have filed a motion to confirm it. Faced with an inscrutable award, the Court can do neither in good faith, and instead will remand the matter to the arbitrators for clarification.

         A. Factual Background

         Interactive is an online brokerage firm that provides a web-based platform for sophisticated investors to purchase and sell securities and other products on various exchanges throughout the world. (Pet. 6) . Interactive offers these services to its customers without any accompanying financial advice. It merely executes the trades that its customers (or its customers' own investment advisors) request. Id. Consequently, Interactive's contracts with its customers include, among other things, [1] waivers of liability for any and all losses sustained through the market. (ECF No. 1-2, Ex. B, C). The Claimants in this case were three such customers.

         The Saroops opened an account with Interactive on June 18, 2012 with an initial deposit of $25, 000. They deposited an additional $75, 000 in 2013, and another $50, 000 in 2014. Sofis opened his account with Interactive on October 15, 2012 with a deposit of $100, 000. Both the Saroops and Sofis hired an independent financial advisor, Vikas Brar of Brar Capital LLC, to run their accounts with Interactive and to make trades on their behalf. The parties appear to agree that neither Brar nor his company has ever been employed by or affiliated with Interactive, and that the decision to hire Brar was made solely by the Claimants themselves.

         Over the course of their contractual relationship with Interactive, the Claimants (through Brar) engaged in a high risk trading strategy that relied on the sale of so called "naked short call" options[2] and "margin" trading.[3] These strategies initially resulted in large profits for the Claimants, but that changed in 2015.

         On January 15, 2015, at Brar's request, the Saroops converted their account with Interactive from a Regulation T[4]margin account to a portfolio margin account. Sofis did the same in July of 2015. This change in account type allowed Brar to engage in still riskier transactions on behalf of the Claimants: under Regulation T's margin requirements, investors may borrow up to fifty percent of the purchase price of a security using a loan from the broker; under Portfolio Margin, investors can (usually) achieve far greater leverage.[5]

         By the time the Claimants' accounts were converted to portfolio margin accounts in 2015, Brar was exclusively (or nearly exclusively) relying on a strategy of selling naked call options of iPath S&P 500 VIX Short-Term Futures (VXX), an exchange traded note ("ETN") designed to give investors exposure to the so called "fear index." In doing so, Brar was essentially betting (on behalf of the Claimants) that the market would remain stable. Brar continued to rely upon and execute these trades after the Claimants converted their accounts to portfolio margin.

         The parties dispute whether, and to what extent, FINRA Regulations (specifically, Rule 4210 and regulatory notice 08-09) permitted such trades to be executed using the portfolio margin. It is undisputed, however, that such trades were executed using the portfolio margin, and that they resulted in profits for the Claimants until late August of 2015.[6] Indeed, by the close of markets on August 19, 2015, Sofis' account had a net asset value ("NAV") of $500, 529.48 and the Saroops had a NAV of $520, 450.40.

         On Thursday, August 20, 2017 Brar continued this same strategy, selling hundreds of naked VXX call options. Over the next several days, however, the market experienced a spike in volatility, culminating on August 24, 2015, when the Dow experienced the largest one day decline in its history. The parties dispute the cause of this volatility and decline: while Interactive attributes the loss to the market generally, the Claimants argue (as they did before the arbitrators) that the losses occurred, at least in part, because of the unreasonable "auto-liquidation" procedures deployed by Interactive.

         Notwithstanding this factual dispute, both sides agree that by the time the market opened on August 24, the value of the Claimants' accounts had decreased by 80 percent. This precipitous drop caused the Claimants' accounts to fall into so-called "margin deficiency"-the equity remaining in the accounts had fallen below the minimum maintenance requirements. This margin deficiency, in turn, triggered Interactive's "auto-liquidation" procedures, which, in a period of about thirty minutes, wiped out the remaining balance in the Claimants' accounts (and left them with a still-large margin deficiency). The Claimants responded by bringing an arbitration claim against Interactive.

         B. The Arbitration Decision

         In December of 2015, the Claimants filed an arbitration claim with FINRA, as required by their contracts with Interactive. Their Statement of Claim ("SC") (ECF No. 1-10) asserted multiple claims, including: breach of contract, promissory estoppel, violation of state securities statutes, commercially unreasonable disposition of collateral, negligent and intentional misrepresentation, unjust enrichment, and vicarious liability. (SC ¶¶ 46-61). Interactive filed an answer and counterclaim in response, seeking an award equal to the amount of the Claimants' debt remaining after their accounts had been liquidated. (ECF No. 1-11) . Both sides also sought attorneys' fees, and signed FINRA Uniform Submission Agreements, in which they agreed to submit the matters pled in the Statement of Claim for resolution by a FINRA arbitration panel. Although they had a right to do so under FINRA rules, neither side requested a reasoned award from the arbitrators.

         An arbitration hearing was held from December 5, 2016 to December 9, 2016. Both sides presented fact and opinion testimony, including experts. Ultimately, on January 10, 2017, the panel rendered a monetary award in favor of the Claimants, including an award of attorneys' fees and a denial of Interactive's counter-claim. (ECF No. 1-2). The arbitrators summarized the case as follows:

Claimants asserted the following causes of action: breach of contract and promissory estoppel, violation of state securities statutes, commercially unreasonable disposition of collateral, vicarious liability, and common law fraud. The causes of action relate to unspecified securities.
Unless specifically admitted in the Statement of Answer, Respondent denied the allegations made in the Statement of Claim and asserted various affirmative defenses.
In its Counterclaim, Respondent asserted the following causes of action: failure to mitigate and pay a debt.

Id. The panel also noted that the Claimants withdrew their claim for allowing a non-registered broker to make trades at the close of the arbitration hearing. Id.

         Because neither side requested a reasoned award, the arbitrators provided little explanation for their decision. The "Arbitrator's Report" consists of just three sentences, followed by details of the moneys owed. In their entirety, the "ARBITRATOR'S REPORT" and "AWARD" state:

         ARBITRATOR'S ...

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