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Nosbaum v. J.P. Morgan Securities LLC

United States District Court, N.D. Illinois, Eastern Division

July 30, 2018

BRITTA NOSBAUM, individually and as Trustee for the FINN G. NOSBAUM TRUST and the LILLIAN NOSBAUM TRUST, Petitioner,


          Virginia M. Kendall United States District Judge

         On July 26, 2017, Petitioner Britta Nosbaum, individually and as Trustee for the Finn G. Nosbaum Trust and the Lillian Nosbaum Trust, filed a petition to vacate a Financial Industry Regulatory Authority ("FINRA") arbitration award in the Circuit Court of Cook County, Illinois. (Dkts. 1-1, 9). On August 25, 2017, Respondent J.P. Morgan Securities LLC ("JPMS") removed the action and it later filed a cross-petition to confirm the arbitration award and for final judgment. (Dkts. 1, 21). For the reasons set forth below, the Court denies Nosbaum's petition to vacate (Dkt. 1-1) and grants JPMS's cross-petition (Dkt. 21) to confirm the arbitration award. The Court hereby converts the arbitration award into a final judgment in favor of JPMS and, pursuant to FINRA Rule 2080, directss the Central Registration Depository ("CRD") system to expunge the information related to FINRA Arbitration No. 15-02672 for broker Christopher D. Nield.


         A. Facts

         At some point before 2012, Nosbaum received stock in her uncle's business, VirnetX Holding Corporation ("VHC"). VHC's business is patent-enforcement and, accordingly, its stock is volatile. With this stock, Nosbaum opened a margin account for herself and created trust accounts for her two children with LPL Financial ("LPL"). In 2012, Nosbaum met with Christopher Nield, then a J.P. Morgan Executive Director, to discuss moving her assets. At the time, Nosbaum owned 84, 891 shares of VHC, and each trust owned 47, 114 shares; this stock predominated the three account portfolios. See (Dkt. 1-1) at ¶¶ 1-2. At their meeting, Nield explained that Nosbaum would qualify as a "private client," and therefore she would be provided with financial advice, including supervision of her portfolio, regular contact regarding her VHC stock, and investment advice. According to Nosbaum, at this meeting she described her and her husband's limited income and conveyed her desire to diversify her portfolio and to receive advice on how much stock to sell and when. Id. at ¶¶ 3, 5.

         The new accounts were created in January 2013, and the assets were moved from LPL to JPMS in February. Notably, Nosbaum requested financial planning advice with regard to the assets in the three accounts, but she ultimately chose when to sell and how much to sell-that is, the accounts were non-managed. See, e.g., (Dkt. 9) at 83-85 (J.P. Morgan Personal Account Application). Also in February, Nosbaum signed a Promissory Note and Collateral Agreement, providing her with a 1.25% line of credit[1] for $1, 000, 000 using her VHC stock as collateral, which Nosbaum alleges Nield recommended. The documents indicated that the collateral value of her stock would be $0 if at any time the trading price or bid price of the stock dropped below $18 per share. Nosbaum alleges that Nield recommended the line of credit, which he described to her as "free money." See (Dkt. 1-1) at ¶¶ 6-9. As relevant, Nosbaum used the line of credit in part to pay off an outstanding loan she had with her prior margin account with LPL.

         Throughout 2013 and 2014, the VHC stock rapidly lost value. Nosbaum claims that instead of advising that she diversify her holdings at any point, JPMS employees repeatedly advised her to lower the price floor of her collateral line of credit (and thereby reduce the amount of her line of credit) instead. (Dkt. 1-1) at ¶¶ 10-14. Eventually, Nosbaum sold all of the VHC stock in late September 2014 for between $5.36 and $4.97 per share. Id. at ¶ 15. The losses in Nosbaum's three JPMS accounts totaled $5, 007, 664.

         B. Procedural History

         A little more than one year later, Nosbaum filed a seven-count arbitration claim against JPMS with FINRA, In the Matter of the Arbitration Between Britta Nosbaum, Individually and on behalf of the Finn G. Nosbaum Trust and the Lillian R. Nosbaum Trust vs. J. P. Morgan Securities, LLC (FINRA Arbitration No. 15-02672), alleging that it was responsible for investment losses totaling $6, 638, 553-the amount Nosbaum believed her accounts would have been worth if they had been "properly allocated with a 60/40 portfolio." Id. at ¶¶ 16-17. Specifically, Nosbaum brought claims for negligence; violation of FINRA Rule 3110-Failure to Supervise; breach of fiduciary duty; violation of the Illinois Consumer Fraud and Deceptive Practices Act, 815 ILCS 505/1 et seq.\ violation of FINRA Rule 2111-Unsuitability; breach of contract; and fraud. See (Dkt. 9) at 1-6 (Statement of Claim). The core underlying complaint in the Statement of Claim regards the alleged recommendation by JPMS that Nosbaum "hold the VHC stock instead of diversifying." See, e.g., Id. at ¶¶2l, 42, 49. JPMS filed a 25-page "Answer" and affirmative defenses on January 13, 2016, which was in large part a legal brief in opposition to Nosbaum's Statement of Claim. See (Dkt. 9) at 58-82 (Answer). As a result, Nosbaum moved for leave to file a response to the legal arguments contained in the Answer; JPMS opposed the motion. After pre-hearing conferences with the arbitration panel on April 8 and 11, 2016, Nosbaum's motion was denied. See (Dkt. 9) at 87 (April 11, 2016 Order). Nosbaum later filed a 17-page Hearing Brief, which contained legal arguments in response to those set forth by JPMS in its Answer, on March 7, 2017. (Dkt. 1-1) at 7-8; see also (Dkt. 9) at 88-104 (Claimants' Hearing Brief).

         Eight days of hearing (broken into sixteen separate hearing sessions) ensued before a three-member panel of arbitrators in Chicago, Illinois in March and April 2017, and the parties appeared through counsel and presented witnesses, experts, and documentary evidence. As relevant here, when Nosbaum began to introduce evidence regarding the line of credit, JMPS objected, arguing that arbitration did not encompass the line of credit, which was issued by J.P. Morgan Chase Bank, N.A. (the "Bank"), and the Bank was not a party to the suit or subject to FINRA jurisdiction. The panel heard argument regarding the line-of-credit evidence and ultimately allowed it to be admitted "for the limited purposes of substituting [Nosbaum's] position from LPL to JP Morgan," that is, testimony and evidence that Nosbaum used the Bank credit to pay off the margin-loan debt she had incurred at LPL. See (Dkt. 23), Ex. A (March 27, 2017 Hearing Tr.) at 103-20. JPMS later withdrew its objection to the admission of the promissory note and collateral agreement into evidence, and they were admitted. Id. at 129. As the hearing proceeded, Nosbaum's expert Jeffrey Schaff gave opinions that involved the line of credit and Nosbaum's "funding" or "liquidity" "distribution needs," and the panel again limited their consideration of the testimony on that topic. Id., Ex. D (March 9, 2017 Hearing Tr.) at 75-92. Nosbaum later moved for reconsideration of the panel's evidentiary ruling, arguing that although she was not alleging violations of banking laws or regulations, the loan evidence was relevant to the case "because it relates to the solicitation and the activity in [Nosbaum's] accounts." After hearing argument, the panel stated:

[W]e duly noted your motion for reconsideration and at this point have denied it. As you understand, we've heard a lot of-there's been a lot of leeway here in what we're considering in this case in regard to the numbers and the processes. And the statement of claim as parties have conceded is-is not a claim about the loan. We're going to consider all the facts and circumstances and evidence that comes in, and you're more than welcome to put your arguments into the closing argument.

Id., Ex. E (March 30, 2017 Hearing Tr.) at 4-9, 14. After Nosbaum rested her case, JPMS moved for a directed verdict and the parties offered lengthy arguments. The panel ultimately granted the motion as to five of Nosbaum's seven counts, allowing her negligence and suitability claims to proceed. See (Dkt. 24), Ex. H (April 11, 2017 Hearing Tr.) at 17-55; see also (Dkt. 9) at 9-10 (Award). The arbitration continued for two more days, concluding with fulsome closing arguments by both sides. (Dkt. 24), Ex. I (April 12, 2017 Hearing Tr.) at 79-151.

         On May 4, 2017, the panel issued a written ruling in favor of JPMS (the "Award"). The Award contains two parts:

(1) "Claimant's claims are denied in their entirety," and
(2) "The Panel recommends the expungement of all references to the above-captioned arbitration from registration records maintained by the [Central Registration Depository] for non-party Christopher D. Nield (CRD# 5197534), with the understanding that, pursuant to Notice to Members 04-16, non-party Christopher D. Nield must obtain confirmation from a court of competent jurisdiction before the CRD will execute the expungement directive."

(Dkt. 9) at 10 (Award, FINRA Office of Dispute Resolution). On account of the expungement, pursuant to FINRA Code of Arbitration Procedure Rule 12805 and FINRA Rule 2080, the Award provided the following affirmative finding of fact: "The claim, allegation, or information is factually impossible or clearly erroneous." This is supported by a further recitation of reasons, including that "Mr. Nield always made suitable and appropriate investment recommendations to Ms. Nosbaum, both individually and as trustee for the separate trusts of her two children" and that "[n]either Mr. Nield nor anyone at JP Morgan Securities ever recommended maintaining or holding a concentrated position in this security." Id. at 10-12. As relevant, the ...

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