United States District Court, E.D. Virginia, Richmond Division
E. Payne, Senior United States District Judge
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.
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.
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,  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.
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.
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 and "margin"
trading. These strategies initially resulted in
large profits for the Claimants, but that changed in 2015.
January 15, 2015, at Brar's request, the Saroops
converted their account with Interactive from a Regulation
Tmargin 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.
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.
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. 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.
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.
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
The Arbitration Decision
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.
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.
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