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Interactive Brokers LLC v. Saroop

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

December 18, 2018

INTERACTIVE BROKERS LLC, Plaintiff,
v.
ROHIT SAROOP, PREYA SAROOP, and GEORGE SOFIS, Defendant.

          MEMORANDUM OPINION

          Robert E. Payne Senior United States District Judge

         This 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 counterclaims.

         BACKGROUND

         This 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.[1] 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) .

         A. Factual Background

         The factual background is set out fully in the Remand Opinion (ECF No. 50) and is incorporated here.

         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. 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, [2] 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.

         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[3] and "margin" trading.[4] 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[5] 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.[6]

         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.[7] 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, 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 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 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.

         B. The First Arbitration Decision

         In 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 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 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. 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 monies owed. In their entirety, the "ARBITRATOR'S REPORT" and "AWARD" state:

ARBITRATOR'S REPORT
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.
AWARD
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 entirety.
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) .

         C. The Remand Opinion (ECF No. 50)

         After 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. 50.

         The 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 warranted.

         First, 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."[8] Id. at 17.

         Second, 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.

         In sum, 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 ...


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