Broker Says FINRA Can't Hold Arbitration Hearing On Zoom

By Reenat Sinay
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Law360 (August 11, 2020, 4:33 PM EDT) -- An Illinois broker facing a Financial Industry Regulatory Authority arbitration sued the regulator Tuesday for alleged breach of contract, claiming that its decision to conduct the hearing via Zoom is "unworkable" due to the need for a translator in the proceeding and the complexity of the issues.

Carlos Legaspy, his brokerage Insight Securities Inc., and Insight's clearing house are set for an evidentiary hearing on Aug. 17 in the arbitration brought by two former Insight customers, according to the complaint filed in Illinois federal court. The former clients are Argentine citizens who speak no English and require an interpreter for the proceedings. They are seeking nearly $2.8 million, the suit said.

But Legaspy alleges that a virtual hearing, which FINRA says is necessitated by the COVID-19 pandemic, is unfair and would damage his defense.

He is bringing breach of contract and violation of due process claims, and he asked the court Tuesday to block the upcoming virtual hearing.

"The language of FINRA Arb. Rule 12213(a) is clear and unambiguous: the hearing will be conducted in a physical location," Legaspy said. "Nowhere, in FINRA's Code of Arbitration, is there any mention of, or authority for, a virtual hearing."

Legaspy said that FINRA decided to postpone all in-person hearings in June, but shortly afterward, the agency notified him that it would in fact conduct the hearing in his arbitration over Zoom on its original August date. In a logistics teleconference in July, Legaspy objected to the upcoming Zoom hearing, citing complex issues, large numbers of witnesses, hundreds of exhibits and the need for an interpreter.

The panel also admitted at the teleconference that the hearing would not be finished within the allotted time due to these various elements and would need to continue sometime next year, Legaspy added.

"There is no reason, whatsoever, to force Legaspy to participate in an unauthorized virtual hearing where he cannot effectively defend himself only to have the remainder of the hearing continued to some, as yet undetermined time, in 2021," he added.

While the advent of virtual hearings has helped ease the pandemic's interruption of litigation and arbitration, it has also introduced some logistical and practical problems generally avoided at in-person hearings.

In May, Wunderlich Securities Inc. asked a New York federal judge to vacate an $11.4 million FINRA arbitration award allegedly handed down with threadbare justification by an arbitration panel that didn't appear to be paying attention during a final hearing held on Zoom. That action is pending.

The U.S. District Court for the Eastern District of Michigan suspended three journalists in June for violating photography rules by posting screenshots from a Zoom hearing, and in July, prominent white collar defense attorney Abbe Lowell was chastised by a Massachusetts federal judge for repeatedly interrupting her during a Zoom hearing, prompting the lawyer to apologize and blame delays caused by the videoconference platform.

Legaspy claims that FINRA "has exceeded their authority" and has also violated his due process rights by choosing to conduct a virtual hearing when it has no power to do so.

"By acting without authority to force Legaspy to participate in a Zoom hearing in violation of FINRA's Code of Arbitration and beyond the scope of the authority granted them by that code, FINRA has violated Legaspy's right to due process," he said.

In a July 31 letter to the arbitration panel attached to the complaint, Legaspy's attorneys note that the regulator's recent guide for virtual arbitration hearings states that one should not be held if it is deemed "unfair" to either party.

"While FINRA's recent guidance on Zoom has not offered guidance for when virtual hearing may be appropriate (assuming it is even allowed at all), FINRA's recent 'Arbitrator Resource Guide for Virtual Hearings' does make the critical point that a virtual hearing should not proceed if it would be 'unfair' to any party: 'The panel must postpone the virtual hearing until further notice if the panel believes the virtual hearing will result in unfairness to any party,'" Legaspy's counsel wrote.

A FINRA spokesman declined to comment on pending litigation.

Counsel for Legaspy did not immediately respond Tuesday to requests for comment.

Legaspy is represented by Nicholas P. Iavarone of The Iavarone Firm PC and Sean Gifford Rohan of O'Hagan Meyer LLC.

Counsel information for FINRA was not available.

The case is Legaspy v. FINRA, case number 1:20-cv-04700, in the U.S. District Court for the Northern District of Illinois.

--Additional reporting by Dean Seal, Emma Cueto and Brian Dowling. Editing by Haylee Pearl.

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