6

Attorneys for Respondent

7 CITIGROUP GLOBAL MARKETS, INC.

8 SUPERIOR COURT OF THE STATE OF CALIFORNIA

9 COUNTY OF LOS ANGELES - CENTRAL DIVISION

10

MARC T.G. DWORSKY (State BarNo. 157413) PAUL J. WATFORD (State Bar No. 183283)

2 T AMERLIN J. GODLEY (State Bar No. 194507) JOEL M. PURLES (State Bar No. 266208)

3 MUNGER, TOLLES & OLSON LLP 355 South Grand Avenue

4 Thirty-Fifth Floor

Los Angeles, CA 90071-1560

5 Telephone: (213)683-9100

Facsimile: (213) 687-3702

11 LARRY HAGMAN INDIVIDUALLY and as trustee of the LARRY HAGMAN &

12 MAJ 1. HAGMAN REV TRUST U/A/D 1/28/91 and on behalf of the LARRY

13 HAGMAN IRA CGM IRA CUSTODIAN and on behalf of the LARRY HAGMAN

14 ROLLOVER IRA CGM IRA ROLLOVER CUSTODIAN and on behalf of The

15 Hagman Insurance Trust UAD 03/2112006, and MAJ 1. HAGMAN as trustee of the

16 LARRY HAGMAN & MAJ I. HAGMAN REV TRUST U/A/D 1/28/91,

17 18 19 20 21 22 23 24 25 26 27 28

Petitioners,

vs.

CITIGROUP GLOBAL MARKETS, INC.,

Respondent.

CASE NO. BS 128800

NOTICE OF HEARING ON PETITION TO VACATE ARBITRATION AWARD; MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT THEREOF

[Petition to Vacate Arbitration Award; Declaration of William Hohauser; Appendix of Non-California Authorities; and [Proposed] Order Filed Concurrently Herewith]

Date:

Time:

Dept.:

December 17, 2010 8:30 a.m.

40

12205989.1

Petition to Confirm Award Filed:

October 7, 2010

NOTICE OF HEARING ON PETITION TO VACATE ARBITRATION AWARD

10 Steinbroner, failed to disclose his personal involvement-as a plaintiff-in two separate lawsuits 11 involving the same claims and the same subject matter involved in this arbitration proceeding. In

12 this action, the Hagmans accused Citigroup of fraud and breach of fiduciary duty as a basis for 13 recovering investment losses they allegedly suffered after trusting and relying on the advice of

14 their former financial advisor. Just two years earlier, Steinbroner himself had sued his real estate

15 investment partner for fraud and breach of fiduciary duty, seeking to recover investment losses

16 Steinbroner allegedly suffered after trusting and relying on the investment advice of his former

17 partner. Steinbroner also had filed a financial "elder abuse" lawsuit against his sister relating to

18 the treatment of his elderly mother's finances, seeking punitive damages and attorneys' fees under 19 California's elder abuse statute. In this action, the Hagmans asserted this same statute as the basis

20 for their claimed entitlement to an award of punitive damages and attorneys' fees against

21 Citigroup. And the panel, in an award authored by Chairman Steinbroner, relied on that very

22 statute in ordering Citigroup to pay $10 million in punitive damages (according to press reports,

23 the ninth largest award ever in an individual-investor FINRA arbitration) and more than $400,000

24 in attorneys' fees.

25 California law requires potential arbitrators to disclose all information "that could cause a

26 person aware of the facts to reasonably entertain a doubt" about the arbitrator's impartiality. Cal.

27 Civ. Proc. Code § 1281.9. The Financial Industry Regulatory Authority ("FINRA") rules likewise

TO ALL PARTIES AND THEIR COUNSEL OF RECORD:

2 PLEASE TAKE NOTICE that on December 17,2010 at 8:30 a.m. in Department 40 of the

3 above-entitled Court, located at 111 N. Hill Street, Los Angeles, California, Respondent/Petittioner 4 Citigroup Global Markets, Inc. ("Citigroup") will move this Court for an order granting its petition

5 to vacate the arbitration award issued in The Matter of the Arbitration Between Larry Hagman, et

6 al. v. Citigroup Global Markets, Inc. (FINRA Case No. 09-03251) (the "Award") pursuant to

7 California Code of Civil Procedure Sections 1285 et seq. The Award must be vacated on two

8 separate grounds.

9 First, the award must be vacated because the chairman of the arbitration panel, Peter D.

28 require potential arbitrators to disclose "any circumstances which might preclude the arbitrator

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NOTICE OF HEARING ON PETITION TO VACATE ARBITRATION AWARD

12205989.1

from rendering an objective and impartial determination." FINRA Rule 12408. Whether

2 deliberate or inadvertent, an arbitrator's failure to disclose such facts requires vacatur of the

3 arbitration award. Cal. Civ. Proc. Code § 1286.2(a)(6). Here, Chairman Steinbroner's own prior

4 involvement, as a plaintiff, in lawsuits involving the same claims and seeking the same damages

5 the Hagmans were pursuing unquestionably constitutes a circumstance that might preclude him

6 from rendering an impartial determination, and could cause an objective observer to entertain

7 reasonable doubts about his ability to remain neutral in deciding the dispute. His failure to

8 disclose this plainly material information mandates vacatur of the resulting award.

9 Second, the award should be vacated for the independent reason that the arbitrators refused

10 to postpone the hearing to allow Citigroup's key witness-the Hagmans' financial advisor-to

11 testify during the scheduled proceedings and assist in Citigroup's defense. See Cal. Civ. Proc.

12 Code § 1286.2(a)(5). The Hagmans' financial advisor, Lisa Detanna, required medically

13 necessary, non-elective surgery during the scheduled hearing dates and thus was unable to attend.

14 Although Ms. Detanna was the prime focus of the Hagmans' allegations of wrongdoing, and

15 figured centrally in virtually every exchange of communications between the Hagmans and

16 Citigroup, the panel refused to continue the hearing by even a few weeks so that she could

17 participate. Instead, the panel begrudgingly allowed Ms. Detanna to give testimony a month after 18 the arbitration hearing had been completed-but only after the arbitrators had heard all of the other

19 evidence as well as closing arguments, and post-hearing briefs had been submitted on punitive

20 damages and attorneys' fees. For all intents and purposes, the arbitration had occurred and

21 concluded without Ms. Detanna's input, and the testimony of the Hagmans' witnesses had been 22 received without her timely ability to refute it. Citigroup's right to a fair hearing was substantially

23 prejudiced as a consequence, requiring vacatur of the resulting award on this ground as well.

24 25 26 27 28

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NOTICE OF HEARING ON PETITION TO VACATE ARBITRATION AWARD

12205989.1

4 DATED: November 5, 2010

5

6

7

8

9

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

This petition is based on this notice, the accompanying memorandum of points and

2 authorities, the concurrently filed declaration of William Hohauser, the pleadings and records on

3 file in this action, and any other oral and documentary evidence as the Court may consider.

Munger, Tolles & Olson LLP

Attorneys for Respondent

CITIGROUP GLOBAL MARKETS, INC.

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NOTICE OF I-IEARING ON PETITION TO VACATE ARBITRATION AWARD

12205989.1

2 3 4 5 6 7 8 9

10 11 12 13 14 15 16 17 18 19 20 21 22

23

24 25 26 27 28

T ABLE OF CONTENTS

I. II.

Page

INTRODUCTION 1

FACTUAL AND PROCEDURAL BACKGROUND 3

The Hagmans Initiate Arbitration And A Panel Is Selected 3

The Panel Refuses to Continue the Dates of the Arbitration Hearing To

Allow The Hagmans' Financial Advisor To Participate 5

The Arbitration Hearing Is Completed 6

The Panel Makes A Belated And Hollow Gesture To Repair The

Procedural Record As To Ms. Detanna's Testimony 6

The Panel Awards the Hagmans Just Over $1 Million In Compensatory

Damages, Attorneys Fees, And $10 Million In Punitive Damages 6

After The Hearing, Citigroup Learns That Chairman Steinbroner Failed To

Disclose Highly Material Information , 7

1. Chairman Steinbroner Failed To Disclose His 2007 Suit Seeking

Damages For His Investment Losses 7

2. Chairman Steinbroner Also Failed To Disclose His Suit Against

His Sister For Elder Abuse 8

III. ARGUMENT 9

A. B.

C.

D.

E.

F.

A.

Chairman Steinbroner's Failure To Disclose Information That Could Call

Into Doubt His Impartiality Requires Vacatur Of The Award 9

1. California's Strict Disclosure Rules For Arbitrators Are Essential To The Fair And Proper Functioning Of The Private Arbitration

Process 9

B.

California's Disclosure Statute Requires Disclosure oflnformation

Re lating To The S ubj ect Matter Or Claims Of The Arbitration 10

Steinbroner's Failure To Disclose His Own Prior Litigation As

Plaintiff Requires Vacatur Of The Award 11

The Arbitrators' Failure To Postpone The Arbitration Hearing Requires

Vacatur Of The A ward 12

2.

3.

IV.

The Arbitration Panel Abused Its Discretion In Not Postponing the

Arbitration Hearing For The Short Time Requested By Citigroup 12

Citigroup Suffered Substantial Prejudice As A Result Of The

Arbitrators' Decision 13

3. None Of The Egregious Delay Tactics-Often Found In Cases Refusing To Vacate An Award For Failure To Postpone The

Hearing-Are At Issue Here 15

CONCLUSION 15

1.

2.

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MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF PETITION TO VACATE ARBITRATION AWARD

12205989.1

Wheeler v. Sf. Joseph Hospital,

15 63 Cal. App. 3d 345 (1976) 9

16

17

26 CALIFORNIA STATUTES

27 Cal. Civ. Proc. Code § 1281.9 1

28

2 3 4 5 6 7 8 9

10 11 12 13 14

18 19 20 21 22 23 24 25

TABLE OF AUTHORITIES

CALIFORNIA CASES

Benjamin, Weill & Mazer v. Kors,

No. A125732, 2010 WL 3965139 (Cal. Ct. App. Oct. 12,2010) 9,10,11

Guseinov v. Burns,

145 Cal. App. 4th 944 (2006) 9

Haworth v. Superior Court,

50 Cal. 4th 372 (2010) 9, 10

Kaiser Found. Hospitals, Inc. v. Superior Court,

19 Cal. App. 4th 513 (1994) 9

Ovitz v. Schulman,

133 Cal. App. 4th 830 (2005) 9

SWAB Financial v. E*Trade Securities,

150 Cal. App. 4th 1181 (2007) 12, 15

NON-CALIFORNIA CASES

Bordonaro v. Merrill Lynch, et al.,

805 N.E.2d 1138 (Ohio App. 2004) 15

Commonwealth Coatings Corp. v. Casualty Co.,

393 U.S. 145 (1968) 10

Tempo Shain Corp. v. Bertek, Inc.,

120 F.3d 16 (2d Cir. 1997) 12, 14

Wilde v. 0 'Leary,

866 A.2d 205 (N.J. Super. 2005) 14, 15

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12205989.1

6 7 8 9

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

2 3

12205989.1

TABLE OF AUTHORITIES ( continued)

Page

Cal. Civ. Proc. Code § 1281.9(a) 9

4 5

Cal. Civ. Proc. Code § 1286.2(a)(5) 3,4,5, 12

Cal. Civ. Proc. Code § 1286.2(a)(6) 9

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MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF PETITION TO VACATE ARBITRATION AWARD

2

I.

MEMORANDUM OF POINTS AND AUTHORITIES INTRODUCTION

3 Citigroup Global Markets Inc. ("Citigroup") respectfully petitions this Court to vacate the

4 arbitration award issued in The Matter of the Arbitration Between Larry Hagman, et al. v.

5 Citigroup Global Markets, Inc. (FINRA Case No. 09-03251). Citigroup is well aware that this

6 Court cannot review the substantive merits of the award and that the bases for vacating any award

7 have been narrowly delineated by statute. However, two separate statutory grounds-focusing on 8 the fairness of the arbitral process-require vacatur of the award here.

9 First, the award must be vacated because the chairman of the arbitration panel failed to

10 make disclosures mandated by the Financial Industry Regulatory Authority ("FINRA") Disclosure

11 Rules, the California Arbitration Act, and the FINRA disclosure questionnaire that the chairman 12 was required to complete (but completed inaccurately). Specifically, the chairman failed to

13 disclose his own personal involvement, as a plaintiff, in two lawsuits in recent years asserting the

14 same claims and seeking damages for the same grievances at issue in this arbitration.

15 Under California law, a potential arbitrator must disclose "all matters that could cause a

16 person aware of the facts to reasonably entertain a doubt that the proposed neutral arbitrator would

17 be able to be impartial." Cal. Civ. Proc. Code § 1281.9. Likewise, FINRA's rules require a

18 potential arbitrator to disclose "any circumstances which might preclude the arbitrator from

19 rendering an objective and impartial determination." FINRA Rule 12408. An arbitrator's failure

20 to make the required disclosures mandates vacatur of the arbitration award. Indeed, as courts

21 repeatedly have emphasized, precisely because the merits of an arbitration award are not subject to

22 searching judicial review, the parties are entitled to receive full disclosure of all matters that

23 reasonably bear on the impartiality of the arbitrators selected to resolve their dispute.

24 Here, Larry Hagman, his wife and related trusts (the "Hagmans") initiated an arbitration

25 against Citigroup in 2009. This arbitration related to accounts opened by the Hagmans in 2004 26 with Smith Barney, then a division ofCitigroup. During the recent stock market collapse, the

27 Hagmans suffered losses on their investment accounts like virtually every other investor in the

28 world. Nevertheless, the Hagmans sued Citigroup to recover their losses, alleging that they had

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MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF PETITION TO VACATE ARBITRATION AWARD

12205989.1

"trusted and relied" upon their Citigroup financial advisor-Lisa Detanna-but that she had

2 committed fraud and breached her fiduciary duty, resulting in their investment losses.

3 Once designated as a potential arbitrator, it was Chairman Steinbroner's obligation to

4 comply with the mandatory disclosure requirements. In fact, he provided information about his

5 employment, education and prior cases he had arbitrated, but then inexplicably failed to disclose 6 information far more critical. Most significantly, he did not disclose that he had sued his former

7 real estate investment partner two years earlier for fraud and breach of fiduciary duty to recover

8 claimed investment losses-the same claims the Hagmans were pursuing in the arbitration. In that

9 litigation, Chairman Steinbroner alleged that he and his wife had "trusted and relied upon" the

10 investment advice of their former real estate partner with respect to "almost all their life savings,"

11 but that this partner had "breached [his] fiduciary duty to [Steinbroner], and committed fraud in the

12 process causing [Steinbroner and his wife] to suffer significant financial losses."

13 Chairman Steinbroner should have disclosed this information because it constituted a

14 circumstance that might preclude him from rendering an impartial determination in the Hagmans'

15 arbitration. That arbitration, like Steinbroner's suit, involved claims for fraud and breach of

16 fiduciary duty brought by investors who alleged that they had relied on the advice of their financial

17 advisor and suffered investment losses as a result. Worse still, Chairman Steinbroner not only

18 failed to disclose this information; he affirmatively assured the parties, in response to a question on

19 FINRA' s arbitrator disclosure checklist, that he had not "been involved in the last five years in a

20 dispute involving the same subject matter" as the arbitration at hand. Had Chairman Steinbroner

21 disclosed his own pursuit of investment losses on the same legal theories pursued by the Hagmans,

22 Citigroup-like any other rational defendant-would have moved to disqualify him from serving

23 on the panel.

24 Nor was this the only prior litigation that Chairman Steinbroner failed to disclose. During

25 the arbitration, the Hagmans asserted that Citigroup's conduct constituted financial "elder abuse"

26 of the Hagmans, entitling them to an award of punitive damages and attorneys' fees under

27 California's elder abuse statute. When this issue arose, Chairman Steinbroner once again failed to

28 disclose that he, too, had been a plaintiff in a lawsuit claiming financial "elder abuse" of his

12205989.1

AUTHORITIES IN SUPPORT OF PETITION TO VACATE ARBITRATION A WARD

mother in 2003 and 2004, in which he asserted the same California elder abuse statute as a basis

2 for recovering punitive damages and attorneys' fees. Again, Chairman Steinbroner's prior

3 undisclosed litigation raises doubts about his ability to be fair and neutral in evaluating the claims

4 against Citigroup in this case--doubts only reinforced when he invoked California's elder abuse 5 statute as a basis for awarding $10 million in punitive damages against Citigroup in a run-of-the-

6 mill investor dispute.

7 Second, the award must be vacated because the panel unjustifiably refused to postpone the

8 arbitration hearing for a short time upon a showing of sufficient cause from Citigroup. California

10 the refusal of the arbitrators to postpone the hearing." Cal. Civ. Proc. Code § 1286.2(a)(5).

9 law requires vacatur of an arbitration award where a party has been "substantially prejudiced by

11 Citigroup asked for only one continuance of the hearing after learning that its key witness, Ms.

12 Detanna, required medically necessary, non-elective surgery during the scheduled dates of the

13 arbitration. Citigroup presented communications from Ms. Detanna's doctor explaining the need

14 for the surgery and the urgency of the procedure. Nevertheless, the panel refused to continue the

15 hearing so that Ms. Detanna could be present to assist in Citigroup' s defense and provide

16 testimony during the scheduled proceedings. Belatedly, the panel made a token gesture at "curing" 17 this fundamental defect in the fairness of the proceedings by permitting Ms. Detanna to testify a

18 month after the arbitration hearing had been completed-after the arbitrators had heard all of the

19 other evidence as well as closing arguments, and briefing on punitive damages and attorneys' fees

20 had been concluded. By that time, the damage had been done: the arbitration had gone forward

21 without Ms. Detanna's input and the claimants' testimony had been received without her timely

22 ability to refute it, substantially prejudicing Citigroup's ability to present its defense. The award 23 should be vacated on this independent ground as well.

24 II.

25

FACTUAL AND PROCEDURAL BACKGROUND

A.

The Hagmans Initiate Arbitration And A Panel Is Selected

26 In late 2004, the Hagmans moved $9 million of their investment portfolio to Smith Barney,

27 where Lisa Detanna served as their primary financial advisor. Declaration of William Hohauser

28 ("Hohauser Decl."), ~ 3. While Ms. Detanna acted as their financial advisor, the Hagmans also

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12205989.1

4 5 6 7 8 9

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

2

12205989.1

purchased a special life insurance policy, generally unavailable for people of their age (now 79 and

82 respectively), to provide certain distributions to their children in the event of the Hagmans'

3

death. Id. For four years the relationship went well, but in the market crash of2008, not

surprisingly, the Hagmans suffered losses in their investments. Id.

On May 29, 2009, the Hagmans instituted a FINRA arbitration proceeding against Citigroup, alleging that Citigroup had breached its fiduciary duty, breached its written contracts,

and committed fraud in managing the Hagmans' investments, thus causing the Hagmans'

investment losses. Id., ~ 4, Ex. A. Specifically, the Hagmans alleged that, contrary to their stated

investment objectives, Ms. Detanna allowed their portfolio to become over-concentrated in

equities, exposing them to greater losses than they otherwise would have incurred when the stock

market crashed in 2008. On September 11,2009, Citigroup filed its answer in response, explaining why Citigroup was not liable for the Hagmans' claimed investment losses. Id., ~ 5, Ex. B. Among other things, Citigroup noted that the shift in asset allocation toward equities occurred largely as a result of the Hagmans' own decisions (their need to make large withdrawals and their insistence that fixed-income positions be liquidated to fund those withdrawals), and that all of the

investment decisions recommended by Citigroup were vetted by the Hagmans' own independent

money managers and financial advisors.

Thereafter, the parties participated in the FINRA arbitrator selection process and three

arbitrators were designated for the arbitration: Peter D. Steinbroner (chairman); Kenneth Kreh;

and Michael W. Delaney. Id., ~ 6. In October 2009, FINRA provided an "Arbitrator Disclosure Report" for each proposed arbitrator. Id., ~ 8, Ex. D. The FINRA rules require a potential

arbitrator to disclose "any circumstances which might preclude the arbitrator from rendering an

objective and impartial determination .... " Id., Ex. C. As the FINRA Arbitrators' Manual

explains:

All arbitrators in securities controversies must qualify as impartial, neutral arbitrators .... When in doubt, disclosure should be the rule .... The arbitrator should disclose any circumstances that might hinder the rendering of an objective determination. The obligation to disclose circumstances that might give rise to a conflict or appearance of conflict is a continuing obligation.

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3 4 5 6 7 8 9

10

2

12205989.1

Id., ~ 7, Ex. C (emphasis added). Chairman Steinbroner, nevertheless, failed to disclose that he

had been a plaintiff in lawsuits involving the same claims and subject matter as the Hagman

arbitration.

Further, on October 27,2009, Chairman Steinbroner submitted his "Arbitrator Disclosure

Checklist," which asked, among other questions, the following:

Have you, any member of your immediate family, close social or business associate, been involved in the last five years in a dispute involving the same subject matter as contained in the case to which you are assigned?

Chairman Steinbroner inaccurately responded by checking the "NO" box. Id., ~ 9, Ex. E.

B.

The Panel Refuses To Continue The Dates Of The Arbitration Hearing To Allow The Hagmans' Financial Advisor To Participate

11 The Hagmans' allegations were aimed largely at the conduct of their primary financial

12 advisor-Lisa Detanna. Ms. Detanna, however, was not able to participate in any way in the

13 arbitration hearing on the dates scheduled because she had to undergo a serious medical procedure.

14 Despite Citigroup's timely request for a postponement, the panel refused to continue the arbitration 15 hearing even for a short time to allow Ms. Detanna to participate.

16 By way of background, in 2003, Ms. Detanna had been the victim of a hit and run accident

17 that broke her leg, ankle and foot; severed her knee ligaments; and left her confined to a wheel

18 chair for more than a year. Id., ~ 17, Ex. J. After she recovered and ultimately was able to walk

19 again, in 2009, Ms. Detanna developed an infection in her legs that hospitalized her three times.

20 Id. Among other problems, the devices implanted to stabilize her knee, ankle and foot had failed

21 and her leg and foot had to be reconstructed. Id. A team of eight orthopedic surgeons was

22 assembled and developed a treatment plan. Id. The initial treatments failed in late June 2010, at

23 which point knee replacement surgery was scheduled for August 17, 201 O-the only date available

24 given the schedules of all of the doctors necessary to complete the surgery. Id. At that point, the

25 arbitration hearing had been set for August 16-20, 2010. Id., ~ 10.

26 As soon as Citigroup knew in late June that Ms. Detanna would need to undergo knee

27 replacement surgery during the scheduled hearing, it contacted opposing counsel to see if a

28 cooperative resolution could be reached. Id., ~ 12. Ultimately, the Hagmans would not agree to

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MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF PETITION TO VACATE ARBITRATION AWARD

10 provide explanation. 1d. ~~ 18-19 During closing arguments, counsel for the Hagmans quoted at 11 length from the testimony of these witnesses. See id., Ex. Kat 1503:9-1575:1. Citigroup had no 12 testimony from its primary witness on which to rely in presenting its closing argument. 1d., ~ 22.

13 During closing argument, counsel for the Hagmans also asserted that the Hagmans were

14 entitled to attorneys' fees because Citigroup's conduct constituted financial "elder abuse" against

15 the Hagmans. 1d., Ex. Kat 1579:25-1583:5. In post-hearing briefs, they reiterated that argument 16 and also asserted California's elder abuse statute as a basis for punitive damages. 1d., Exs. L & M.

17

18 19 20 21 22 23 24 25 26 27 28

7

12205989.1

the continuance, forcing Citigroup to file a motion to continue, which it did on July 29, 2010. 1d.,

2 ~~ 12-13, Ex. F. The panel denied the motion. 1d., ~ 15.

3 On the first day of the hearing, Citigroup raised the issue again and had Ms. Detanna's

4 counsel present to explain further the gravity of the situation and the need for the surgery. 1d., ~ 17

5 and Ex. Kat 6:5-17, 11 :21-13: 10, 19: 14-22,21:9-27:6,30: 18-36: 11. The panel again refused the

6 request to continue the hearing. 1d., Ex. Kat 40:3-41 :6.

C.

The Arbitration Hearing Is Completed

8 Over the five-day hearing, witness after witness gave testimony about what Ms. Detanna

9 said and did as the Hagmans' financial advisor, without Ms. Detanna present to contradict or

The Panel Makes A Belated And Hollow Gesture To Repair The Procedural Record As To Ms. Detanna's Testimony

On September 17, 2010, nearly a month after the close of the arbitration hearing, and after

D.

the panel had solicited and received post-hearing briefs, the panel belatedly allowed Ms. Detanna

to testify. 1d., ~ 24. The panel did so only after Citigroup sent a letter brief to FINRA's Director of Arbitration notifying him of the situation. 1d., ~ 24, Ex. N.

The Panel Awards the Hagmans Just Over $1 Million In Compensatory Damages, Attorneys Fees, And $10 Million In Punitive Damages

On October 5, 2010, the panel issued its award. 1d., ~ 25. The award, authored by

E.

Chairman Steinbroner pursuant to FINRA rules (see id., ~ 26, Ex. P), gave the Hagmans $1,098,386.00 in compensatory damages and $439,354 in attorneys' fees under California's elder

abuse statute. 1d., Ex. O. Again relying on California's elder abuse statute, the panel also assessed

Citigroup $10 million in punitive damages to be paid to a charity of the Hagmans' choice, unheard

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MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF PETITION TO VACATE ARBITRATION A WARD

2 3 4

of in a garden-variety investor dispute like this arbitration. Id.

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MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF PETITION TO VACATE ARBITRATION AWARD

F.

After The Hearing, Citigroup Learns That Chairman Steinbroner Failed To Disclose Highly Material Information

1.

Chairman Steinbroner Failed To Disclose His 2007 Suit Seeking Damages For His Investment Losses

5 Chairman Steinbroner failed to disclose his involvement, as plaintiff, in two separate

6 litigations that are acutely relevant here. First and most significantly, Chairman Steinbroner failed 7 to disclose that in 2007 he and his wife had pursued litigation in Texas against his former real

8 estate investment partner, Cameron McDonald, seeking to recover alleged investment losses. Id., 9 Ex. Q. In that suit, Chairman Steinbroner asserted claims for breach of fiduciary duty and fraud,

10 just as the Hagmans did in the arbitration against Citigroup. Id.

11 Specifically, Steinbroner claimed "[0 ]ver the course of several years, Cameron [McDonald] 12 represented himself as an experienced and knowledgeable investor in the real estate business." Id., 13 ~ 2. In contrast, Steinbroner described himself and his wife as "novices to the real estate

14 investment world" who "placed their trust in the hands of the McDonalds" for direction and 15 advice. Id., ~~ 3, 5. Steinbroner explained that his "investment goal was to have additional

16 income combined with long-term appreciation" and that "[tjhese goals were repeatedly expressed 17 and stressed to [McDonald]." Id., ~ 3. The Complaint also alleged:

18 Cameron McDonald represented himself as knowledgeable and experienced in real estate. Believing this to be true, the

19 Steinbroners trusted and relied upon Cameron McDonald's assertions, thereby inducing the Steinbroners to invest almost all

20 their life savings into this real estate venture.

21 Id., ~ 9. Likewise, Chairman Steinbroner alleged:

22 The McDonalds developed and recommended a real estate

investment strategy which the Steinbroners relied upon as sound

23 financial investment.

24 Id., ~ 13. See also id., ~ 31 ("[Chairman Steinbroner] trusted and relied upon Cameron that his

25 assurances were indeed true.").

26 Chairman Steinbroner further alleged that his former real estate investment partner

27 "breached [his] fiduciary duty to [Chairman Steinbroner], and committed fraud and in the process 28 caused [Chairman Steinbroner] to suffer significant financial losses." Id., ~ 46. In the end,

12205989.1

16 17 18 19 20 21

12205989.1

1 Chairman Steinbroner and his wife secured a judgment against the McDonalds for $191,591.70

2 and a determination that the debt was nondischargeable in the McDonalds' bankruptcy.

3 These allegations could have been plucked verbatim from this case. Like Chairman

4 Steinbroner, the Hagmans alleged they trusted and relied on Citigroup:

5 Claimants trusted and relied upon Respondent to make sure that the investments in the securities were suitable for Claimants and in

6 accordance with their investment goals for the money invested.

7 ld., Ex. A, ~ 4.

Like Chairman Steinbroner, the Hagmans alleged they made their goals clear to Citigroup:

Claimants told Respondent that they needed income producing investments that protect[ ed] their principal. ...

And like Chairman Steinbroner, the Hagmans claimed that Citigroup betrayed that trust:

By leading Claimants to believe that the investments in the securities were safe, secure, and low-risk, Respondent betrayed that trust.

Finally, just like Chairman Steinbroner, the Hagmans brought claims for fraud and breach of fiduciary duty, seeking damages for their claimed investment losses. ld., ~~ 8-23.

Notwithstanding his obligation to do so, both under FINRA Rules and California law,

Chairman Steinbroner never disclosed this recent litigation to the parties. Indeed, when asked

directly whether he had ever been involved in litigation with the same subject matter, Chairman

Steinbroner affirmatively represented that he had not. ld., Ex. E.

2.

Chairman Steinbroner Also Failed To Disclose His Suit Against His Sister For Elder Abuse

22 In 2003, Steinbroner also brought suit in Los Angeles Superior Court against his sister and

23 others claiming elder abuse, for allegedly taking financial advantage of their mother. ld., ~~ 30-

24 31, Ex. S. In that action, relying on the same elder abuse statute that the Hagmans would later

25 invoke, Steinbroner asserted entitlement to an award of punitive damages and attorneys' fees.

26 (The case was eventually settled and dismissed. ld., Ex. T.) Even after the Hagmans asserted

27 elder abuse as a basis for awarding them punitive damages and attorneys' fees, Chairman

28 Steinbroner failed to disclose his own role as plaintiff in an elder abuse lawsuit, instead

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affirmatively asserting that he "[did] not have any further disclosures." Id., Ex. Kat 1590:8-9.

ARGUMENT

2 III. 3

4

5

A.

Chairman Stein broner's Failure To Disclose Information That Might Preclude Him From Being Impartial Requires Vacatur Of The Award

1.

Strict Compliance With Disclosure Rules Is Essential To The Fair And Proper Functioning Of The Private Arbitration Process

6 The California Arbitration Act requires a potential arbitrator to disclose "all matters that 7 could cause a person aware of the facts to reasonably entertain a doubt that the proposed neutral

8 arbitrator would be able to be impartial." Cal. Civ. Proc. Code § 1281.9(a). Likewise, FINRA's

9 rules require a potential arbitrator to disclose "any circumstances which might preclude the 10 arbitrator from rendering an objective and impartial determination." Hohauser Decl., Ex. C

11 (FINRA Rule 12408). Under Cal. Civ. Proc. Code § 1286.2(a)(6), an arbitrator's failure to

12 disclose facts as required mandates vacatur of the arbitration award. Benjamin, Weill & Mazer v.

13 Kors, No. A125732, 2010 WL 3965139, *15 (Cal. Ct. App. Oct. 12,2010); see also Ovitz v.

14 Schulman, 133 Cal. App. 4th 830 (2005) (vacating award for arbitrator's failure to comply with 15 disclosure requirements); Kaiser Found. Hospitals, Inc. v. Superior Court, 19 Cal. App. 4th 513

16 (1994) (same); Wheeler v. St. Joseph Hospital, 63 Cal. App. 3d 345 (1976) (same).

17 Both FINRA' s rules and the California disclosure statute specify the types of information

18 that must be disclosed, including relationships with the parties or counsel, financial stake in the 19 outcome, and awards in past arbitration matters. This list of topics, however, is not exclusive.

20 Under FINRA Rule 12408, any circumstance that might preclude the arbitrator from rendering an 21 impartial decision must be disclosed, and under California law "any matter that reasonably could 22 create the appearance of partiality" must be disclosed. Haworth v. Superior Court, 50 Cal. 4th

23 372,384-385 (2010) (emphasis added). Further, an arbitrator's disclosure duty is an "ongoing

24 obligation" throughout the course of the arbitration. See Guseinov v. Burns, 145 Cal. App. 4th

25 944,956 (2006); see also Hohauser Decl., Ex. C (FINRA Arbitrators' Manual) ("The obligation to

26 disclose circumstances that might give rise to a conflict or appearance of conflict is a continuing

27 obligation.").

28 This disclosure requirement is critical to the proper functioning of the private arbitration

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process. As courts have emphasized, precisely because an arbitration award otherwise is not

subject to close judicial scrutiny, it is essential that all steps are taken to insure the impartiality and fairness of the arbitrator. See, e.g., Benjamin, Weill, supra, at *8. A statement of the U.S.

Supreme Court repeatedly quoted by California courts underscores this important principle:

[We] should, if anything, be even more scrupulous to safeguard the impartiality of arbitrators than judges, since the former have completely free rein to decide the law as well as the facts and are not subject to appellate review. We can perceive no way in which the effectiveness of the arbitration process will be hampered by the simple requirement that arbitrators disclose to the parties any dealings that might create an impression of possible bias.

Commonwealth Coatings Corp. v. Casualty Co., 393 U.S. 145, 149 (1968); quoted in Haworth,

supra, 50 Cal. 4th at 393; see also Benjamin, Weill, supra, at *9.

Steinbroner Was Required To Disclose Information Relating To The Subject Matter Or Claims Of The Arbitration

The California Supreme Court has confirmed the importance of disclosing facts relating to

2.

the subject matter and issues in controversy in the arbitration. Haworth, supra, 50 Cal. 4th at 388-

392. In Haworth, the claimant sought damages against her plastic surgeon for allegedly negligent

cosmetic surgery. The arbitrator found for the doctor and the claimant sought to vacate the award

because the arbitrator, a former judge, had failed to disclose that he had been censured 10 years

earlier for creating an overall courtroom environment that was hostile to women. While the

Supreme Court held that the subject matter link between the gender bias censure and the plastic

surgery malpractice was not sufficient to vacate the award, it reaffirmed the importance of

disclosing information that does relate to the subject matter and issues in contention in the

arbitration:

[T]he subject matter of this arbitration was not such that the

23 circumstance of gender was material, or that gender stereotyping was likely to enter into the decision made by the arbitrators ....

24 Had the subject of the arbitration in the present case involved, for example, workplace sexual harassment, we might have come to a

25 different conclusion concerning [the arbitrator's] obligation to disclose the public censure. Arbitrating such a case might have

26 required [the arbitrator] to pass judgment on allegations of misconduct similar to the acts he himself was found to have

27 committed.

28 Id. at 392 and n.13.

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Where the failure to disclose relates to the subject matter and issues in contention, the

2 award must be vacated. For example, in Benjamin, Weill, a law firm initiated an arbitration against

3 a former client for unpaid fees. The arbitration panel found for the law firm and ordered payment

4 of the fees. After the award was issued, the client discovered that the chairman of the arbitration

5 panel had failed to disclose that his litigation practice was focused on representing law firms in

6 client fee disputes and that he was currently litigating a case for a law firm relating to a fee dispute

7 in the California Supreme Court. The client petitioned to vacate the award. The trial court held

8 that disclosure of this information was required and granted the petition to vacate, which the

9 appellate court upheld. The court found that "representation of clients in the same position as one

10 of the parties to the current arbitration in matters involving the same subject matter" should have

11 been disclosed because it raised reasonable questions about the impartiality of the arbitrator. ld. at

12 * 14.

13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

Steinbroner's Failure To Disclose His Own Prior Litigation As Plaintiff Requires Vacatur Of The Award

Here, Chairman Steinbroner did not simply represent a party in a dispute involving the

3.

same claims and same subject matter at issue in the Hagman arbitration. He was the party-

indeed, the plaintiff-in a fraud and breach of fiduciary duty lawsuit in which he alleged that he

had relied on the investment advice of his former real estate investment partner and sought to

recover as damages his investment losses-the same claims to be arbitrated against Citigroup.

This information constitutes a circumstance that might preclude Chairman Steinbroner from

rendering an objective and impartial determination in an arbitration brought by an investor against

a financial advisor seeking damages for investment losses. Steinbroner's further failure to disclose

his involvement as a plaintiff in an elder abuse lawsuit after the Hagmans asserted California's

elder abuse statute as a basis for awarding them punitive damages and attorneys' fees only further

compounds the potential for lack of objectivity.

Indeed, Steinbroner not only failed to disclose his prior litigation, he affirmatively asserted

that he had not "been involved in the last five years in a dispute involving the same subject matter"

as the arbitration (Hohauser Decl., Ex. E), which representation was not true. Even a quick

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comparison of the allegations made by Steinbroner in his Texas complaint with those made by the

2 Hagmans in the arbitration demand makes plain the similarity of the subject matter of the

3 litigation. See supra, at 7-8.

4 In sum, notwithstanding applicable disclosure rules and FINRA's clear directive to err on

5 the side of disclosure, Chairman Steinbroner failed to disclose (even in response to a direct

6 question) his own involvement in litigation asserting similar claims and seeking like damages as

7 the Hagmans, raising serious doubts about Chairman Steinbroner's ability to render an impartial

8 determination. The award must be vacated on this ground alone.

B.

The Arbitrators' Failure To Postpone The Arbitration Hearing Requires Vacatur Of The Award

A court must also vacate an arbitration award if "[t]he rights of the party were substantially prejudiced by the refusal of the arbitrators to postpone the hearing upon sufficient cause being

shown therefor .... " Cal. Civ. Proc. Code § 1286.2(a)(5). Vacatur under this provision requires a

two step analysis. First, the court must determine whether the arbitrators abused their discretion in

denying the request. SWAB Financial v. E*Trade Securities, 150 Cal. App. 4th 1181, 1198 (2007).1 Second, if the arbitrators abused their discretion, the court must determine whether the moving party suffered substantial prejudice as a result. Id. 2

The Arbitration Panel Abused Its Discretion In Not Postponing the Arbitration Hearing For The Short Time Requested By Citigroup

Failure to postpone a hearing to allow a key witness to testify, where there is sufficient

1.

cause and no delay tactics, can be an abuse of the arbitrator's discretion. Tempo Shain Corp. v.

Bertek, Inc., 120 F .3d 16 (2d Cir. 1997). There is no question that Ms. Detanna was Citigroup's

key witness. See Hohauser Decl., ~~ 20-22. Her conduct was at the center of the arbitration dispute and her first-hand knowledge was critical for Citigroup's defense. Id. As soon as

Citigroup became aware that she had to undergo necessary surgery for a serious medical condition,

Citigroup contacted opposing counsel to discuss a continuance. Id., ~ 12. When opposing counsel

1 Under FINRA rules, the arbitrators have discretion to postpone a hearing upon a motion from one of the parties. Hohauser Decl., ~ 13, Exh. G.

2 Because the Federal Arbitration Act authorizes vacatur in similar circumstances, California courts often look to applicable federal case law for guidance on this point. Id. at 1197.

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refused to agree to a continuance, Citigroup promptly filed a motion with the panel to continue the

2 hearing date. Id., ~ 13. Citigroup's request was timely and based on Ms. Detanna's serious

3 medical condition. Id. Further, Citigroup requested only a modest postponement and had not

4 requested any prior postponements. Id. In FINRA arbitrations, first requests on reasonable

5 grounds are generally agreed to by the opposing party and, when refused, are virtually always 6 granted by the panel. See id., ~ 15.3 The arbitrators' refusal to postpone the hearing in these

7 circumstances abused their discretion.

8 Such refusal was particularly egregious given the negative impact such arbitration

9 decisions can have on financial advisors like Ms. Detanna, which include having the award remain

10 permanently on their public record and, as occurred here, being subjected to damaging adverse

13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

11 publicity, Such harmful consequences only further underscore the importance of ensuring the

12 robust participation of the advisor in the hearing.

2.

Citigroup Suffered Substantial Prejudice As A Result Of The Arbitrators' . Decision

The arbitrators' failure to grant Citigroup's request to postpone the hearing also denied

Citigroup the opportunity to have its primary witness (and principal target of the Hagmans'

allegations) actively participate in the arbitration hearing. She was unable to provide counsel with

important insight and contradicting evidence in real time during the arbitration proceedings. She was unable to give testimony prior to closing arguments, the filing of briefs on punitive damages

and attorneys' fees, and the arbitrators' initial consideration of the issues. Likewise, the Hagmans

did not have to testify with Ms. Detanna present in the hearing room and available to assist

Citigroup's counsel in rebutting their allegations. In multiple ways, Citigroup suffered substantial prejudice. By way of example only:

• Without Ms. Detanna's participation, Citigroup had no witnesses to contradict Mr.

Hagman's self-serving testimony regarding their discussions of risk, asset

3 In fact, at the same time he was opposing Citigroup's request for a continuance, counsel for the Hagmans requested-and received-a continuance in another arbitration he was prosecuting against Citigroup because his expert (not even his key fact witness) could not attend the hearing due to a scheduling conflict. Id., ~ 16, Exh. I.

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10

allocation, the liquidation of assets to pay for the Hagmans' other ventures, or the

involvement of the Hagmans' other personal advisors, among many other critical

topics. See, e.g., id., Ex. Kat 822:22-824:6,833:14-836:13,838:1-10,867:19-24, 869:18-22,873:8-874:14,883:19-884:19, 950:8-11,1002:3-1003:11.

•

Because Ms. Detanna was the only person present at every meeting with the

Hagmans from the outset, witnesses often testified only to what they thought, but

were not sure, Ms. Detanna might have said at these meetings-leaving a

significant hole in the proceedings and the distinct impression that these important

conversations may not have taken place. See, e.g., id., at 128: 11-18.

•

When counsel for the Hagmans tried to introduce complaints against Ms. Detanna

11 unrelated to the Hagmans, including negative testimony from the Hagmans'

12 assistant about her personal accounts with Ms. Detanna, Citigroup's counsel had no

13 way to rebut or explain these charges. Id. at 479:2-6, 1029: 18-1030: 12.

14 The Second Circuit's opinion in Tempo Shain Corp. v. Bertek, Inc., 120 F.3d 16 (2d Cir.

15 1997), is instructive. In that case, the claimant (a Tempo Shain affiliate) entered into an agreement 16 with the respondent (Bertek), which arrangement fell apart. Tempo Shain initiated an arbitration 17 against Bertek bringing claims for breach of contract and fraudulent inducement. A Bertek

18 executive, Wayne Pollock, had handled the lion's share of the negotiation of the parties'

19 agreement. Pollock's wife was diagnosed with cancer during the arbitration and Bertek asked for a 20 postponement of the hearing so that Pollock could attend to his wife and then participate in the

21 hearing. The arbitrators refused and, ultimately, rendered an award in favor of Tempo Shain. The 22 district court denied Bertek's motion to vacate the award. The Second Circuit reversed. It held

23 that the arbitrators erred by refusing to postpone the hearing to allow for Mr. Pollock's

24 participation, and vacated the award on that basis.

25 State courts with standards similar to California's have also vacated arbitration awards

26 where the arbitrators failed to postpone the hearing to allow for participation of key witnesses. In

27 Wilde v. 0 'Leary, 866 A.2d 205 (N.l Super. 2005), for example, an investor initiated an

28 arbitration against his broker. The arbitrators excluded the investor's expert, finding that the

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expert was not qualified as an expert in the brokerage business. When that occurred, the investor

promptly moved to postpone the arbitration hearing to obtain a new expert. The arbitrators denied

3

the request and proceeded with the hearing, rendering an award for the broker. The court vacated

the award, holding that the investor was entitled to have an expert participate in the proceedings:

[It] is incumbent upon the arbitrators to provide a fair forum .... The refusal of the arbitrators to allow plaintiff a reasonable period of time to present expert testimony rises to the level of "misconduct" where the accused brokers were permitted to serve as their own "experts" and plaintiff was seriously prejudiced by preclusion of her expert.

Jd. at 587; see also Bordonaro v. Merrill Lynch, et al., 805 N.E.2d 1138, 1143-44 (Ohio App.

2004) (vacating arbitration award on similar ground).

12

None Of The Egregious Delay Tactics-Often Found In Cases Refusing To Vacate An Award For Failure To Postpone The Hearing-Are At Issue Here

When vacatur has been refused on this ground, the cases most often involve a

3.

determination that the request for postponement was a ploy in a long string of delay tactics. For example, the court in SWAB Financial, supra, 150 Cal. App 4th 1181, held that the arbitrators did

not abuse their discretion by denying a motion to postpone the hearing when the plaintiffs

"continuance request carne: more than three years after it first initiated the arbitration; more than

one year beyond the original arbitration date; after plaintiff had already once refused to appear at

the arbitration hearing; and after plaintiff had twice brought legal actions against defendant[s] [to

delay the arbitration proceedings] ... and twice been ordered to arbitrate the dispute." Jd. at 1 199.

No such delaying conduct occurred here: Citigroup requested a single short continuance for a

demonstrably bona fide purpose. The Court should vacate the award on this additional ground.

IV. CONCLUSION

For the foregoing reasons, Citigroup respectfully requests that the Court vacate the

arbitration award in its entirety.

DATED: November 5, 2010

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