United States District Court, E.D. Virginia, Richmond Division
E. Payne Senior United States District Judge
matter is before the Court on the PLAINTIFF'S MOTION TO
VACATE MODIFIED ARBITRATION AWARD (ECF No. 79) and
DEFENDANT'S MOTION TO CONFIRM THE MODIFIED ARBITRATION
AWARD (ECF No. 80) . For the reasons set forth below, the
PLAINTIFF'S MOTION TO VACATE MODIFIED ARBITRATION AWARD
(ECF No. 79) will be granted and the DEFENDANT'S MOTION
TO CONFIRM THE MODIFIED ARBITRATION AWARD (ECF No. 80) will
be denied. Further, the Court will remand the matter to a new
panel of arbitrators to consider the Plaintiff's
matter is a familiar one to the Court. In January 2017, a
Financial Industry Regulatory Authority ("FINRA")
arbitration panel rendered an arbitration award (the *first
arbitration decision") in favor of Claimants George
Sofis and Rohit and Preya Saroop ("Claimants") and
against Interactive Brokers, LLC (*Interactive") (ECF
No. 1-2). Interactive moved to vacate that award (ECF No. 1)
and Claimants moved to confirm it (ECF No. 18). Faced with an
inscrutable award, this Court remanded the first arbitration
decision back to the same panel of arbitrators for
clarification. ECF No. 50 (hereinafter, the "Remand
Opinion"). Fully aware of the Court's instructions
in the Remand Opinion, the arbitrators issued a modified
award (the "second arbitration decision") in
January 2018, again in favor of the Claimants. ECF No. 71-1.
Once again, Interactive moved to vacate the award (ECF No.
79) and Claimants moved to confirm it (ECF No. 80) .
factual background is set out fully in the Remand Opinion
(ECF No. 50) and is incorporated here.
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. ECF No. 1 at 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. 1-3, 1-4.
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
January 15, 2015, at Brar's request, the Saroops
converted their account with Interactive from a Regulation
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
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, 2015, 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 that the losses occurred, at
least in part, because of the unreasonable
"auto-liquidation" procedures deployed by
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 wauto-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.
The First Arbitration Decision
December 2015, the Claimants filed an arbitration claim with
FINRA, as required by their contracts with Interactive, Their
Statement of Claim (WSC") 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. S.C. ¶¶ 46-61 (ECF No. 1-10).
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 attorneys7 fees, and signed
FINRA Uniform Submission Agreements, in which they agreed to
submit the matters pled in the Statement of Claim, answer,
and counterclaims for resolution by a FINRA arbitration panel
(ECF No. 1-12). Although they had a right to do so under
FINRA rules, neither side requested a reasoned award from the
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 counterclaim. ECF No. 1-2. The
arbitrators summarized the claims in 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. at 3. 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.
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 monies owed. In their
entirety, the "ARBITRATOR'S REPORT" and
The Claimants are awarded the value of their accounts on
August 19, 2015 ($520, 450.40 to the Saroops and $500, 529.48
to Sofis). Respondents Counterclaim was dismissed based on
Respondents violation of FINRA Rule 4210 as further explained
in regulatory notice 08-09. The securities placed in the
portfolio margin account were not eligible for that account
based on these rules and regulations.
After considering the pleadings, the testimony and evidence
presented at the hearing, and the post-hearing submissions,
the Panel has decided in full and final resolution of the
issues submitted for determination as follows:
1. Respondent is liable for and shall pay to Claimants Rohit
and Preya Saroop compensatory damages in the amount of $520,
450.40 plus interest at the rate of 8% per annum from 30 days
of the date of the award until payment.
2. Respondent is liable for and shall pay to Claimants Rohit
and Preya Saroop attorneys1 fees representing 40% of the
compensatory damages and 30% of the net claimed by Respondent
for a total of $274, 006.16. The Panel granted attorneys1
fees pursuant to the parties1agreement.
3. Respondent is liable for and shall pay to Claimant George
Sofis compensatory damages in the amount of $500, 529.48 plus
interest at the rate of 8% per annum from 3 0 days of the
date of the award until payment.
4. Respondent is liable for and shall pay to Claimant George
Sofis attorneys1 fees representing 40% of the compensatory
damages and 3 0% of the net claimed by Respondent for a total
of $249, 858.49. The Panel granted attorneys* fees pursuant
to the parties' agreement.
5. Claimants1 claim for witness fees is denied.
6. Respondent is liable for and shall pay to Claimants
$600.00 as reimbursement of the non-refundable portion of the
filing fee previously paid.
7. Respondent's Counterclaims are denied in their
8. Respondent's request for attorneys1 fees is denied.
9. Any and all claims for relief not specifically addressed
herein, including punitive damages, are denied.
Id. at 4. The remainder of the decision contained
non-relevant information on arbitration fees. Id. at
5. Interactive moved for this Court to vacate the first
arbitration decision (ECF No. 1), while the Claimants sought
to confirm it (ECF No. 18) .
The Remand Opinion (ECF No. 50)
considering the parties' motions to confirm and vacate
the first arbitration decision, the Court did neither.
Rather, it denied both motions, and remanded the matter to
the original arbitrators to clarify their opinion. ECF No.
Court recognized the extreme deference owed to
arbitrators' decisions. Id. at 11-14. However,
it also noted that *[w]hen an arbitrator does
provide reasons for a decision and when those reasons are so
ambiguous as to make it impossible for a reviewing court to
decide whether an award draws its essence from the agreement,
the court may remand the case to the arbitrator for
clarification." Cannelton Indus., Inc. v. Dist. 17,
United Mine Workers of Am., 951 F.2d 591, 594 (4th Cir.
1991); ECF No. 50 at 14. The Court found the first
arbitration decision to be a situation where remand was
the Court could not "concoct a scenario where the amount
of compensatory damages awarded in this case makes
sense." ECF No. 50 at 16. Nor could the Court determine
what the arbitrators considered to be the predicate for
liability. Id. The first arbitration decision was
especially perplexing because it stated that *[a]ny and all
claims for relief not specifically addressed herein,
including punitive damages, are denied." ECF No. 1-2 at
4. But, the award was in no way clear about which claims had
been "specifically addressed," ECF No. 50 at 17.
Further still, the damages awarded to the Claimants did
"not correspond to any theory of liability that the
Court can apprehend, much less the two principal theories of
liability articulated by the Claimants at the
arbitration." Id. at 17.
the award of attorney's fees was also quite perplexing.
Id. at 19. The Court found a possible legal basis
for the award of such fees (in the parties' agreement),
but nothing supported a finding of percentage fees.
Id. Accordingly, the Court concluded that the fee
awarded also needed to be clarified.
the Court simply could not reconcile the first arbitration
decision with any legal theories with which it was familiar.
The Court refused to rubber stamp a decision it could not
understand. Id. While "the arbitrators need not
give a full opinion, a brief explanation for the basis of the
amount of damages awarded is necessary before any semblance
of judicial review can be accomplished." Id. at
20. Accordingly, the Court remanded the matter to the same
panel of arbitrators for ...