United States District Court, N.D. Illinois, Eastern Division
BRITTA NOSBAUM, individually and as Trustee for the FINN G. NOSBAUM TRUST and the LILLIAN NOSBAUM TRUST, Petitioner,
J.P. MORGAN SECURITIES LLC, Respondent.
MEMORANDUM OPINION AND ORDER
Virginia M. Kendall United States District Judge
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.
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.
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 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.
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,
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).
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
[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.
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
(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 ...