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Vega Asset Recovery, LLC v. Newedge USA, LLC

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

June 7, 2019




         In August of 2007, plaintiff Vega Asset Recovery, LLC (“Vega”) sustained substantial losses while trading on the Russell 2000 Index. Years later, Vega initiated arbitration proceedings with the Financial Industry Regulatory Authority (“FINRA”) against defendant Newedge USA, LLC[1] n/k/a SG Americas Securities, LLC (“Newedge”). Following a four-day arbitration hearing, the arbitration panel denied Vega's claim and Newedge's counterclaims. Dissatisfied with the result, Vega filed an application to vacate the arbitration award with this Court. Newedge responded and filed a motion to confirm the award.

         Before the Court is Vega's application to vacate arbitration award of FINRA [1], as well as defendant Newedge's motion to confirm arbitration award [14]. For the reasons set forth below, the Court denies Vega's application, grants Newedge's motion, and confirms the arbitration award.


         In August of 2007, the trading market was experiencing a historic period of extreme volatility. On August 16, 2007, Vega lost approximately $26 million (75% of its trading capital) while trading options based on the Russell 2000 Index.

         On July 25, 2013, pursuant to an Account Agreement, [2] Vega initiated a claim with FINRA, alleging that Newedge had caused Vega to incur those losses. Newedge filed a counterclaim, alleging that it was entitled to indemnification and requested an award of costs and attorneys' fees.

         Shortly after the initiation of the arbitration process and after the parties had submitted their rankings from a list of arbitrators, FINRA appointed a panel of three arbitrators (the “Panel”). The Panel consisted of three FINRA members: Daniel R. Formeller (an attorney licensed since 1976, who was designated as the Chairperson), Jeffrey W. Finke (an attorney licensed since 1977), and Henry G. Nothnagel (a former broker and trader with 37 years of experience). Arbitrators in FINRA cases are classified as either “non-public” or “public.” See FINRA Rule 12100. Formeller and Finke were classified as “public” arbitrators, and Nothnagel was classified as a “non-public” arbitrator.

         In 2015, during the pendency of the underlying arbitration proceedings, the SEC amended the definitions for “non-public” and “public” arbitrators. The amendment became effective on June 26, 2015 and was not retroactive. See FINRA Reg. Notice 15-18 (“for cases in which FINRA sent lists prior to June 26, 2015, FINRA will not change the classification status of non-public and public arbitrators based on the new definitions, and will not grant challenges for cause based solely on an arbitrator's reclassification.”).

         In September 2016, the parties participated in a four-day arbitration hearing before the Panel in Chicago, Illinois. On October 3, 2016, the Panel ordered the parties to submit post-hearing briefing on certain issues by October 31, 2016. On October 18, 2016, a FINRA case administrator notified the parties that Arbitrator Finke was no longer classified as a “public arbitrator” under FINRA's revised arbitrator definition because Finke's firm derived $50, 000 or more, or at least 10 percent of its annual revenue from entities associated with the financial industry. (Dkt. 13-1, Ex. 18.) On November 8, 2016, the Panel formally closed the arbitration hearing.

         On December 21, 2016, [3] the Panel entered the Award of Arbitrators (the “Award”). The Award states that the claim involved a public customer dispute and that a majority-public panel decided the case. The Award notes that Vega asserted several causes of action[4] and that Newedge claimed indemnification. In issuing the Award, the Panel denied Vega's claims, denied Newedge's counterclaim, and ordered the parties to bear their own costs and expenses (other than forum fees) incurred in the matter. (Dkt. 1-1, Ex. 2.)

         Vega timely filed suit in the Circuit Court of Cook County, Illinois, seeking to vacate the Award pursuant to Section 12 of the Illinois Uniform Arbitration Act (“IUAA”), 710 ILCS 5/12 et seq. Vega alleges that the Award is invalid because (1) it was procured by fraud, corruption, or other undue means; (2) of evident partiality exhibited by Arbitrators Jeffrey W. Fink and Daniel R. Formeller; (3) the Arbitrators exceeded their powers; (4) the Arbitrators refused to hear evidence material to the controversy; (5) it is against the manifest weight of the law; and (6) the Arbitrators failed to render a decision on one of the claims. Newedge timely removed the action to this Court and filed an opposition to Vega's application to vacate the award as well as a motion to confirm the Award pursuant to Section 9 of the Federal Arbitration Act (“FAA”), 9 U.S.C. § 9, and 710 ILCS 5/12(d).


         The language under both the FAA and the IUAA is essentially the same. See Gillispie v. Vill. of Franklin Park, 405 F.Supp.2d 905, 909 (N.D. Ill.Dec. 13, 2005). “When a plaintiff's claim is covered by an arbitration agreement, the relevant body of law is the [FAA].” Vazquez v. Central States Joint Bd., 547 F.Supp.2d 833, 865 (N.D. Ill. 2008). The FAA “governs the enforcement, validity, and interpretation of arbitration clauses in commercial contracts in both state and federal courts.” Jain v. de Méré, 51 F.3d 686, 688 (7th Cir. 1995). “If there is an agreement to arbitrate, and the issues presented to the arbitrator fell within that agreement, courts may overturn the arbitrator's award only on very narrow grounds.” Flexible Mfg. Systems Pty. Ltd. v. Super Products Corp., 86 F.3d 96, 99 (7th Cir. 1996). Judicial review of arbitral awards is very limited. Courts may vacate an arbitral award in only four scenarios:

(1) where the award was procured by corruption, fraud, or undue means;
(2) where there was evident partiality or corruption in the arbitrators, or either of them;
(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or
(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the ...

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