Facts

In 2008, claimant Move Inc., at Citigroup's recommendation, had approximately $130 million of its short-term corporate cash invested in Auction Rate Securities so that it would be safe and liquid. In February 2008, all of Move's ARS failed at auction and became illiquid. Move ultimately sold its ARS at a loss of $19.6 million.

In 2009, Move retained the law firm of Boies Schiller, tried the case before a panel of three FINRA arbitrators, and lost a unanimous decision.

In 2014, Move learned that one arbitrator, the chairperson James H. Frank, was a fraud. Frank's FINRA disclosures said he had a law degree from Southwestern University in 1975, was licensed to practice in California and Florida and New York, inactive, and had decades of experience as a lawyer, including as general counsel of an international insurer. None of that was true. Frank, in fact, had no law degree, no law license, and no legal experience whatsoever. Frank had the exact same name, including middle initial, of a licensed California attorney who Frank impersonated for years.

Move filed a federal complaint and motion to vacate the arbitration award based on Frank's fraud. The district court denied the motion and dismissed the complaint, noting that two other arbitrators found against Move. Move appealed to the Ninth Circuit and it reversed the district court and ordered the arbitration award vacated.

CLAIMANT'S CONTENTIONS: Move alleged that Citi sold student-loan-backed ARS to Move as safe, highly liquid investments - comparable to money market instruments when they were not. While money markets are regulated and transparent, the ARS market was dark and largely unregulated. In fact, Citi knew months before the February 2008 failures that all production of ARS had stopped, ARS were being converted to other instruments, student-loan-backed ARS's liquidity depended entirely upon Citi, that Citi soon would no longer support those ARS, and Citi told corporate customers the opposite (that student-loan-backed ARS were the best place to be) and traded against its own corporate customers, effectively dumping those ARS off its own inventory so that corporate customers like Move would suffer the resulting losses, not Citi. After causing the illiquidity, Citi misrepresented what happened and why to conceal what it had done - e.g., falsely saying the whole ARS market failed (when only about half did), that lack of buyers caused auction failures (when Citi caused the failures by pulling support), and misrepresenting the primary difference between the ARS that succeeded (high-max-rates that paid more) and those that failed (low-max-rates like student-loans).

Move alleged that Citi made the ARS market dark and complex so that it could mislead its own salespeople so that they, in turn, could mislead its corporate customers, like Move, to buy ARS. In fact, the Citi broker on Move's account was so misled he bought the same student-loan-backed ARS for himself that became illiquid. ARS were far more profitable to Citi (e.g., than money market funds) and Citi paid its salespeople substantially higher commissions for ARS, and made commissions security-specific to effectively control the trading in customers' accounts to serve Citi's interests of managing its ARS inventory and reducing the use of its regulatory capital, e.g., Citi tripled commissions for two of the worst ARS that were in greatest amount on Citi's inventory just before the February 2008 auction failures, which successfully reduced Citi's inventory of those specific securities to zero.
Move filed an amended statement of claim with FINRA asserting claims of breach of fiduciary duty; breach of contract and breach of the contractual duty of good faith and fair dealing; purchase of unsuitable investments (violation of SEC Rule 10b-5); misrepresentations and misleading statements (violation of SEC Rule 10b-5); violation of SEC Rule 15c1-2; fraud and concealment; negligent misrepresentation; negligent supervision; and violation of California Corporations Code Sections 25401, 25501. All claims related to Move's ARS investments.

RESPONDENT'S CONTENTIONS: Citi denied all wrongdoing, and contended its disclosures were fair and appropriate, that there were no material misstatements or omissions, that Move was a sophisticated investor experienced in buying and selling ARS, and that Move's board of directors understood the risks of ARS and instructed its CFO to sell them all before they became illiquid in February 2008 such that Move's losses were caused by its CFO's refusal to follow the board's directive.

Damages

Move sought $19.6 million in compensatory damages, plus pre-judgment interest, punitive, and other damages. Citi claimed that Move's out-of-pocket loss was not only zero, but also that Move gained $6.9 million by investing in ARS. Citi said no pre-judgment interest, punitive, or other damages should be awarded.

Result

The arbitrators found in favor of Move and awarded $8,319,233 in damages.

Other Information

ARBITRATORS: Adam M. Porter, presiding chairperson, Mary M. O'Neil, Hiro N. Aragaki.