Hu v. Regal Securities Inc

— 1 — — 2 — — 3 — 4 UNITED STATES DISTRICT COURT 5 DISTRICT OF NEVADA 6 * * * 7 JAY HU, Case No. 2:19-CV-1930-KJD-NJK 8 Petitioner, ORDER 9 v. 10 REGAL SECURITIES, INC., 11 Respondent. 12 Presently before the Court is Petitioner’s Motion to Vacate Arbitration Award (#1). 13 Respondent filed a response in opposition (#11) to which Petitioner replied (#14). Also before 14 the Court is Respondent’s Motion to Confirm Arbitration Award (#9-2/11). 15 I. Background 16 In August 2017, Hu, a long-time statistician1 and owner of a statistical analysis company, 17 opened an individual trading account at eOption, an online discount trading division of Regal. As 18 such, the account was self-directed by Hu, and all trades were unsolicited—which means that Hu 19 made all of his investment decisions entirely of his own accord with no recommendations from 20 eOption. There was no broker or investment advisor associated with his account, and Hu entered 21 all orders himself through eOption's online web-based platform. 22 In Hu's new account paperwork, he marked “10+ years” for Stocks, and “10+ years” for 23 Options. Additionally, Hu indicated that his annual income is “$100,000 -$249,999,” that his net 24 worth (exclusive of his residence) is $1,000,000 - $3,000,000 and that his liquid net worth is 25 $500,000 - $999,999. Hu also indicated that “the investments in this account will be 1/3 of [his] — 26 — — 27 — 1 Hu complains that he provided three years of tax returns which show dwindling income to Respondent — 28 — when he opened his account. His dwindling income is blamed on outsourcing of his type of job. He argues that Respondent should have treated him with kid gloves because of this. 1 financial portfolio,” which indicated to Regal that his investments did not represent his “life 2 savings,” as he now claims in his motion. Hu also indicated “[m]arket speculation” was his 3 investment objective and that his risk tolerance was “[h]igh,” both of which are the highest and 4 most aggressive categories on the application. 5 Hu's option account application also supports his years of investment experience and 6 desire for speculation. In doing so, Hu again requested the highest level of options trading 7 available at eOption, and further indicated his high income, net worth, years of investment 8 experience, and desire for speculation. Indeed, Hu again marked the most speculative and 9 aggressive trading boxes. Under Investment Objective, Hu marked the most aggressive objective, 10 “[s]peculation,” and when indicating what his “[p]rior [o]ption [a]ctivity [h]as [b]een,” he 11 marked “[u]ncovered (sales),” again, the most speculative category, and for “[p]rior [o]ption 12 [t]rading [f]requency,” Hu indicated he was “[a]ctive,” the highest category. Under “[p]rior 13 [o]ption [t]rading [o]ccurred in [w]hat [a]ccount [t]ype,” Hu indicated he had traded options 14 using “[b]oth” cash and margin. Out of eight possible boxes he could mark for the category “I 15 plan to use this account for the following (Check all that apply),” Hu marked only one box, again 16 for the most aggressive category, “[m]arket speculation.” Additionally, under “[c)ustomer 17 [f]inancial [i]nformation,” Hu indicated he had “10+ years” of investment experience with stocks 18 and “10+ years” with options. Finally, not only did Hu mark the most speculative category on 19 every entry on his option application, he also applied for “Level 4” options trading permission, 20 which is the highest, most speculative level of option trading available at eOption.2 21 Hu also signed paperwork to open a margin account at eOption. The margin disclosure 22 statement states the risks of purchasing securities on margin and provides, in relevant part: 23 This statement is being furnished to you to provide some basic facts about purchasing securities on margin, and to alert you to the risks 24 involved with trading securities in a margin account. Before trading stocks in a margin account, you should carefully review the Margin 25 Agreement provided by [Regal] . . .. 26 When you purchase securities, you may pay for the securities in full or you may borrow part of the purchase price from [Regal's clearing — 27 — 28 2 Hu also utilized this strategy at other brokerages, including Charles Schwab, that also resulted in Hu incurring massive debts to those brokerages. 1 firm]. If you choose to borrow funds, a margin account will be opened. The securities purchased are collateral for the loan to you. 2 If the securities in your account decline in value, so does the value of the collateral supporting your loan, and, as a result, [Regal's 3 clearing firm] or [Regal] can take action, such as issue a margin call and/or sell securities or other assets in any of your accounts held 4 with [Regal's clearing firm], in order to maintain the required equity in the account It is important that you fully understand the risks 5 involved in trading securities on margin. — 6 — (emphasis added). — 7 — The margin disclosure statement explicitly provides the client with a list of potential — 8 — risks, including: — 9 — • You can lose more funds than you deposit in the margin account. 10 A decline in the value of securities that are purchased on margin may require you to provide additional funds to [Regal's clearing 11 firm] to avoid the forced sale of those securities or other securities or assets in your account(s). — 12 — • [Regal] . . . can force the sale of securities or other assets in your 13 account(s). If the equity in your account falls below the maintenance margin requirements or [Regal's clearing firm]'s 14 higher “house” requirements . . . [Regal] can sell the securities or other assets in any of your accounts held at [Regal’s clearing firm] 15 to cover the margin deficiency. You also will be responsible for any shortfall in the account after such sale — 16 — • Your securities or other assets may be sold without contacting 17 you . . . if this is not the case . . . the firm can still take necessary steps to protect their financial interests, including immediately 18 selling the securities without notice to the customer. 19 • You are not entitled to choose which securities or other assets in your accounts) are liquidated or sold to meet a margin call. 20 Because the securities are collateral for the margin loan . . . [Regal] has the right to decide which security to sell in order to protect 21 [Regal's clearing firm]'s interests. 22 • “House” maintenance margin requirements may be increased at any time without advance written notice. These changes in 23 [Regal’s clearing firm]'s policy often take effect immediately and may result in the issuance of a maintenance margin call. Your 24 failure to satisfy the call may cause [Regal's clearing firm] or [Regal] to liquidate or sell securities in your account(s). — 25 — • You are not entitled to an extension of time on a margin call. 26 While an extension of time to meet margin requirements may be available to customers under certain conditions, a customer does 27 not have a right to the extension. — 28 — Thus, the margin disclosure statement put Hu on notice of the risks of trading on margin. 1 The margin disclosure statement warns that, as occurred here, “[y]ou can lose more funds than 2 you deposit in the margin account.” Further, the margin disclosure statement clearly states that 3 Regal can force the sale of securities or other assets in Hu's accounts if the account falls below 4 the higher maintenance “house” requirements to cover any margin deficiency. The language also 5 states that Hu will be responsible for any shortfall in the account after such a forced sale. 6 Hu also received a special statement for uncovered option writers when he opened his 7 option trading account at eOption. The disclosure clearly states that “the risk of writing 8 uncovered put options is substantial,” and that eOption may request “significant additional 9 margin payments” if “the value of the underlying instrument moves against an uncovered writer's 10 options position.” Further, the disclosure warns that “[i]f an investor will not make” these 11 additional payments, then eOption has the right to liquidate the positions in his account. 12 Not only were the risks of selling naked puts on margin outlined in Regal's option 13 account application and margin agreement, but, on August 24, 2017, Hu also received a 18814 page options disclosure document entitled “Characteristics and Risks of Standardized Options” 15 when he opened his option trading account at eOption, which detailed many of the risks of 16 trading various option strategies. The options disclosure document has an entire section entitled 17 “Principal Risks of Option Holders” which has 30 pages describing risks and examples of 18 various option trading positions. 19 The options disclosure document also informs the option writer of his obligations when, 20 as would soon be the case with Hu, a trading market becomes unavailable or there is a sudden 21 development that causes a sharp downward spike in the value of the underlying stock: “If a 22 trading market in an option should become unavailable, or if the writers of the option are 23 otherwise unavailable to engage in closing transactions, the writers of that option would remain 24 obligated until expiration or assignment.” Additionally, the options disclosure document 25 provides that “[a] sudden development may cause a sharp upward or downward spike in the 26 value of the interest underlying a capped option. Such a spike could cause the capped option to 27 be automatically exercised, and writers of the option to become obligated to pay the cash 28 settlement amount.” In such an event, “[w]hen trading in an option is halted or suspended, 1 holders and writers of that option will be unable to close out their positions until trading resumes, 2 and they may be faced with substantial losses if the value of the underlying interest moves 3 adversely during; that time.” 4 eOption has a standard process for reviewing and approving option trading requests. Each 5 option application is carefully reviewed to determine if the client has the necessary 6 qualifications, experience and resources to trade options, and at what level. Factors that are 7 considered are age, income, employment, investment objectives, investment experience, and 8 financial assets. After reviewing Hu's new account paperwork and option application, the firm 9 determined that Hu had the adequate high income, high net worth of over a million dollars, over 10 a decade of options trading experience, the highest risk tolerance, and the most speculative 11 trading objective to engage in a “Level 4” trading strategy in his self-directed, unsolicited trading 12 account at eOption. 13 As an experienced, high-net-worth trader, Hu engaged in a very speculative strategy of 14 selling uncovered puts. This strategy involves selling put options for cash premiums with limited 15 reserved cash on hand to purchase the underlying stock if it became necessary. Importantly, Hu's 16 strategy also relies on a steady or rising stock price—as opposed to a declining stock price—that 17 causes the option to expire worthless. This is considered a highly speculative strategy, and an 18 unfavorable market move downward could cause the investor to have to post additional margin 19 or liquidate their position at a substantial loss. Hu utilized this strategy, apparently successfully 20 for a period of time, until the market went significantly against him in early February 2018. 21 Hu engaged in a high risk, speculative pattern of option trading that took advantage of a 22 low volatility market environment that worked successfully for him from 2017 through early 23 February 2018. He was most likely utilizing the same strategy at several other discount 24 brokerage firms, including, among others, Charles Schwab. 25 Specifically, as to Hu's strategy, he was engaging in a “Level 4” speculative options 26 strategy, which involved selling uncovered puts on the underlying security, SVXY, to collect 27 premium, but which also obligates him to buy SVXY shares at the strike price he sold the 28 options at (if the market price of SVXY falls below the strike price). SVXY is an exchange 1 traded fund (ETF) that seeks daily investment results, before fees and expenses, that correspond 2 to one times the inverse (-lx) of the daily performance of the S&P 500 VIX Short-Term Futures 3 Index. Hu's maximum gain was the premium earned when he initially sold the option, and his 4 maximum loss would occur if SVXY shares fell to zero. 5 By selling uncovered puts on SVXY, Hu's goal was to have the options expire worthless 6 while he kept the put sale proceeds and enjoyed a stream of income. For the five months his 7 trading account was at eOption—from September 2017 through early February 2018—Hu 8 earned $64,306.47 in option premiums by selling these uncovered puts. He also was doing this 9 exact same strategy at his previous brokerage firm, OptionsHouse. Hu was profitable in the low 10 volatility market that existed for quite some time by engaging in this strategy at various discount 11 brokerage firms. 12 By selling uncovered puts on SVXY, Hu was predicting that the underlying security, 13 SVXY, would either remain flat or go up. On January 31, 2018, SVXY closed at a price of 14 $118.11. By February 2, the security closed at $105.60. On Monday, February 5, the overall 15 market declined even more and SVXY closed at $71.82. During market hours on February 5, Hu 16 continued to sell more uncovered puts on SVXY to collect even more premium. In the after17 hours market on February 5, the market experienced a tremendous volatility spike that resulted in 18 the underlying security, SVXY, substantially falling in value. When SVXY closed on February 5 19 at a price of $71.82, Hu was not in a margin call situation at the market close. A margin call 20 would have been triggered in Hu's account when SVXY reached a price of approximately 21 $47.05. However, in after-hours trading that day, due to extreme market volatility, the stock 22 plunged to as low as $11.00, which placed Hu in a substantial margin call that required 23 additional funds to be deposited. eOption's risk manager phoned Hu after the close on Monday, 24 February 5 to inform him of the after-hours drop in price. 25 Hu was short a total of 102 uncovered puts on SVXY, and unfortunately, options do not 26 trade in the after-hours market, and thus there was no opportunity for Hu to cover (i.e. buy back) 27 his option positions on SVXY. When the price of SVXY fell below $47.05 in the after-hours 28 market, Hu was in a margin call. 1 When the market opened on February 6, 2018, trading of SVXY was temporarily halted 2 and opened hours after most stocks that day, at a price of $11.70 (which was down more than 3 80%, or $60.12 from the previous close of $71.82/share). eOption's Risk Management 4 Department bought to cover 64 short puts on SVXY and covered a small position on VXX6 at a 5 total cost of $457,605.96—which was the amount of cash that Hu had in his account. In 6 accordance with the Margin Agreement, the firm's Risk Management Department used this 7 balance to cover a portion of the amount he owed, but there was still a remaining amount due. 8 Also, 5 puts were assigned to Hu that evening on February 6 that were “deep in the 9 money.” A “deep in the money” option has an exercise, or strike price, significantly above (for a 10 put option) the market price of the underlying security, SVXY. Thus, since Hu was assigned 5 11 “deep in the money” puts that day, he had to purchase 500 shares of SVXY at $70/share, for a 12 total cost of $35,009.00. On the evening of Wednesday, February 7, Hu was assigned another 26 13 puts (where he had to buy 2600 shares of SVXY) at an expenditure of $228,027.00 (for the 14 breakdown, he bought 1,300 shares at $85, 1200 shares at $90, and 100 shares at $95). This still 15 left Hu's account with a long position of 3,100 shares of SVXY and short 7 SVXY naked puts. 16 On Thursday, February 15, eOption's Risk Management Department ultimately liquidated 17 the remaining positions. At that time, eOption sold 3,100 shares of SVXY for approximately 18 $39,990.00 and bought to cover the remaining 7 short puts for approximately $40,044.00. 19 However, there was not enough to cover his entire balance, resulting in a shortfall in Hu's 20 account of -$264,603.77. Hu did not and has not paid this amount. 21 After the close on February 5, when eOption's Risk Management Department saw the 22 tremendous volatility spike in SVXY in the after-hours market, they communicated with Hu on a 23 continual basis during this period. Hu asked that eOption not liquidate his positions since he 24 thought the price decline was temporary. Hu said he needed a week or two to come up with 25 funds to deposit to meet any shortfall, which eOption took as a clear message that he was not 26 going to meet his margin call in a timely manner. eOption informed Hu that the firm was unable 27 to wait that long and may need to act by the following morning. The Risk Management 28 Department weighed the risks and made the evaluation that they could not wait to cover the 1 positions in the account. After extensive discussions with Hu about the state of his account on 2 February 5th and 6th, the Risk Management Department determined that Hu was unable to 3 deliver funds in a timely fashion to maintain the positions as he requested. 4 On February 6, 2018, in accordance with the Margin Agreement, the Risk Management 5 Department used the cash in Hu's account to cover a portion of his debt; however, there were not 6 enough funds to cover the entire amount he owed. Because Hu was now long SVXY stock, the 7 Risk Management Department started selling the stock positions to generate more cash. Because 8 there were not enough funds in his account to buy all the shares that Hu was obligated to pay for, 9 eOption told Hu that his account was still underwater by approximately $265,338.43, and he had 10 to promptly send these funds to eOption in accordance with the Margin Agreement he previously 11 signed. However, Hu has refused to send in any additional funds to cover his debt. 12 Instead, Hu filed an arbitration complaint with FINRA against Regal alleging, as he does 13 here, that his own financial missteps were actually Regal's fault. Regal responded and asserted a 14 counterclaim for breach of contract against Hu for the shortfall in his account, seeking the 15 $265,338.43, plus attorney fees, that Hu owed Regal. 16 During the arbitration, Hu was, pursuant to FINRA Code of Arbitration Procedure for 17 Customers § 12400(a), given an opportunity to strike and rank the proposed arbitrators for 18 selection, which Hu admits he did. Further, early in the arbitration process, Regal subpoenaed 19 Hu's complete personal and business tax returns. Hu fought this disclosure but was, eventually, 20 ordered by the FINRA panel to provide his complete personal and business tax returns. Hu 21 repeatedly refused to comp1y. Instead, Hu provided only the first two pages of his personal tax 22 returns for 2015-2017, which were unsigned and appeared to be edited. There were no required 23 schedules attached, and Hu still refused to provide his corporate tax return for his business. 24 When the FINRA panel then ordered Hu to send a form to the IRS requesting complete 25 copies of his personal and corporate tax returns for 2015-2018, and provide a copy to Regal and 26 the panel so all parties could see that it was done, Hu alleged that he sent it to the IRS, but he 27 “forgot” to make a copy for Regal and the panel. — 28 — 1 Then, in direct violation of various FINRA arbitration rules and the FINRA panel's 2 orders, Hu refused to disclose documents and information concerning other firms where he had 3 brokerage accounts, or provide statements as required in the FINRA discovery rules. As a result, 4 Regal requested that the FINRA arbitration chair execute orders of production directed at these 5 non-party entities. As a result of those orders of production, Regal discovered that Hu was 6 trading the same exact investment product at issue in this case at several other brokerage firms, 7 including Charles Schwab. More critically, through this discovery, Regal discovered Hu's other, 8 ongoing FINRA arbitration against Charles Schwab, based on that same exact product, during 9 the same exact time-frame, and alleging the same exact allegations against Schwab that Hu 10 asserts now. 11 Hu seemed to think that this discovery was improper. Hu first went to the head of FINRA 12 arbitration and asked that the entire FINRA panel be thrown out due to “bias” and that a new 13 arbitration date be awarded. About two weeks later, FINRA notified all parties that the FINRA 14 Director of the Office of Dispute Resolution, Rick Berry, denied Hu's application. Berry 15 informed the parties that the panel would not be removed, nor would the FINRA arbitration 16 (scheduled to start in four days) be postponed. The same day, Hu sent individual letters to each 17 panelist, asking them to recuse themselves for “extreme bias.” After Regal opposed these 18 attempts to disqualify the panelists, each panelist responded separately, indicating that the 19 arbitrators would not recuse themselves and would continue with the arbitration as planned on 20 July 23, 2019. 21 On July 23 and 24, 2019, the arbitration took place in Las Vegas. Hu presented his case 22 for nearly five hours before the panel on the first day. He had ample time to present his case, 23 bring any witnesses and experts (Hu chose not to), and cross examine Regal's witnesses. The 24 panel took care to ensure that Hu had time to present all of his facts and arguments. At the end of 25 the hearing, Regal's counsel, asked Hu on the record if he has had a “full and fair hearing.” Hu 26 responded “yes.” On August 8, 2019, the FINRA panel unanimously awarded Regal the full 27 amount it was seeking in its counterclaim, including interest, attorneys' fees, and a monetary 28 sanction (“the Award”) against Hu. 1 III. Standard for vacating an arbitration award 2 The Court's review of an arbitration award is highly deferential. PowerAgent Inc. v. Elec. 3 Data Sys. Corp., 358 F.3d 1187, 1193 (9th Cir. 2004). The Federal Arbitration Act sets forth the 4 limited circumstances under which a court may vacate an arbitration award: 5 (1) where the award was procured by corruption, fraud, or undue means; — 6 — (2) where there was evident partiality or corruption in the arbitrators, 7 or either of them; 8 (3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to 9 hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been 10 prejudiced; or 11 (4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the 12 subject matter submitted was not made. — 13 — 9 U.S.C. § 10 (a); see also Wall Street Assocs., L.P. v. Becker Paribas Inc., 27 F.3d 845 , 848 (2d — 14 — Cir. 1994) (noting “the FAA's strong presumption in favor of enforcing arbitration awards.”). — 15 — The party moving to vacate the award bears the burden of proof. 9 U.S.C. § 10 (a); see also D.H. — 16 — Blair & Co. v. Gottdiener, 462 F.3d 95, 110 (2d Cir. 2006). — 17 — IV. Analysis — 18 — The Court construes Petitioner’s pro se pleadings liberally. It appears that Hu argues that — 19 — the arbitration award should be vacated for each of the four circumstances noted above. — 20 — However, an extensive review of the record demonstrates that Hu merely disagrees with rulings — 21 — that went against him and has not met the limited circumstances in which the Court can vacate — 22 — the arbitration award. — 23 — A. Failure to State a Reason for their Decision — 24 — Hu argues that the arbitrators did not give sufficient rationale behind their arbitration — 25 — award. However, arbitrators are not required to state the reasons for their decisions. United — 26 — Steelworkers of America v. Enterprise Wheel &Car Corp., 363 U.S. 593, 598 (1960); Kaiser — 27 — Cement Corp. v. Fischbach and Moose, Inc., 793 F.2d 1100 , 1102 n.6 (9th Cir.1986). The Court — 28 — presumes the arbitrators took a permissible route to the award where one exists. A.G. Edwards & 1 Sons, Inc. v. McCollough, 967 F.2d 1401, 1403 (9th Cir. 1992). As a result, the Court should 2 confirm an award if “a ground for the arbitrator's decision can be inferred from the facts of the 3 case.” Partner Weekly, LLC v. Viable Mktg. Corp., 2:09-CV-02120-PMP, 2012 WL 1185673 , at 4 *3 (D. Nev. Apr. 9, 2012) (citing Gottdiener, 462 F.3d at 110 ). 5 Based on the Court’s extensive and detailed review of the record in this case, it concludes 6 that the arbitrator’s decision can easily be inferred from the facts of this case: Hu, as an 7 experienced trader, took a position that could move against him if the price of SVXY went 8 down. As a result of the volatile market, Hu's position moved against him. Hu did not have 9 sufficient capital to cover his position and, even after Regal's actions to stem his losses, Hu owed 10 Regal $265,338.43. Hu then violated the margin agreement by failing to repay that amount. 11 Thus, the arbitrator's $265,338.43 principal award is easily inferred from the facts before the 12 arbitrators. 13 Further, the arbitrators found that Hu intentionally violated their discovery orders and, as 14 a result, assessed against him a monetary sanction, which is within the purview of FINRA 15 arbitrators. While the Court is always initially alerted to potential injustice when pro se parties 16 are sanctioned, the record is clear that the arbitrator’s gave Hu ample opportunity to comply with 17 their well-explained discovery orders. Hu’s disagreement with them does not give him the right 18 to violate them. Nor does an adverse ruling demonstrate bias on the part of the arbitrators. The 19 mere fact that the arbitrators find in favor of the opposing party does not establish partiality. See 20 Polin v. Kellwood Co., 103 F. Supp. 2d 238, 259-60 (S.D.N.Y. 2000). 21 Further, the FINRA panel assessed attorney fees against Hu, as provided by his contract. 22 Thus, because the entirety of the FINRA arbitration award can be inferred from the record, the 23 Court rejects Hu's argument regarding the sufficiency of the rationale behind the arbitration 24 award. 25 B. Undue Influence 26 Hu asserts that the Award was procured by undue means appearing to assert that Regal 27 defrauded the panel. In order to justify vacating an award because of fraud, the party seeking 28 vacation must show that the fraud was (1) not discoverable upon the exercise of due diligence 1 prior to the arbitration, (2) materially related to an issue in the arbitration, and (3) established by 2 clear and convincing evidence. See McCollough, 967 F.2d at 1404 . Hu has failed to present any 3 actual evidence of fraud. His parsing of their words and rulings to mean something other than 4 what they said or stated is not evidence of fraud. The Court denies the motion to vacate based on 5 these claims. 6 C. Evident Partiality 7 Hu presents a litany of baseless arguments regarding the FINRA panel's purported 8 partiality. ECF No. 1 at 8-21. However, none of the arguments demonstrate evident partiality 9 because Hu simply presents frequently-rejected arguments that arbitration is generally unfair; 10 that arbitrators appointed by FINRA are institutionally biased in favor of the securities industry; 11 or that the panel's evidentiary decisions somehow demonstrate bias. Because Hu presents no 12 evidence of evident partiality, the Court denies his motion based on evident partiality as follows. 13 1. Evident Partiality Prior to the Hearing 14 On this point, Hu claims that the arbitration award should be vacated because 15 either arbitration is generally unfair or because arbitrators appointed by FINRA are 16 institutionally biased in favor of the securities industry. See ECF No. 1 at 3-14. Generalized 17 attacks on arbitration “res[t] on suspicion of arbitration as a method of weakening the protections 18 afforded in the substantive law to would-be complainants,” and as such, they are “far out of step 19 with [the Supreme Court's] current strong endorsement of the federal statutes favoring this 20 method of resolving disputes.” Rodriguez de Quijas v. Shearson/Am. Exp., Inc., 490 U.S. 477 , 21 480 (1989); see also Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 30 (1991) 22 (“declin[ing] to indulge the presumption that the parties and arbitral body conducting a 23 proceeding will be unable or unwilling to retain competent, conscientious and impartial 24 arbitrators.”) 25 Hu's claim is not based on any specific facts relating to this case, nor is it based 26 on any admissible or judicially noticeable evidence; rather, Hu relies entirely on conjecture and 27 unrelated news articles. ECF No. 1 at 3-8. Courts have repeatedly rejected the very same 28 argument that Hu makes here—that arbitrators appointed by securities self-regulatory 1 organizations are institutionally biased in favor of the securities industry. See Ruei-Chan v. 2 Merrill Lynch Pierce, Fenner & Smith, Inc. (In re N. Y. Stock Exch.), 2004 WL 2072460 , at *5 3 (S.D.N.Y. Sept. 8, 2004) (denying motion to vacate and finding that evidence was inadequate to 4 raise a serious question as to the existence of an institutional bias); Alberti v. Morgan Stanley, 97 5 CIV. 9385 (RO), 1998 WL 438667 , at *1 (S.D.N.Y. July 31, 1998), aff'd sub nom. Alberti v. 6 Dean Witter Reynolds Inc., 205 F.3d 1321 , 2000 WL 19090 (2d Cir. 2000) (rejecting allegations 7 that arbitrators appointed by the New York Stock Exchange were institutionally biased because 8 they treated Morgan Stanley deferentially due to the size, volume and stature of its dealings on 9 the New York Stock Exchange and stating that “allegations of bias must be specific; the 10 appearance of bias is insufficient and mere speculation is not enough.”). In the absence of any 11 specific facts that point to any arbitrator's improper motive, Hu's motion to vacate the award is 12 denied. 13 2. Evident Partiality During the Hearing 14 Hu then attempts to assert that evident partiality occurred during the hearing 15 because he was sanctioned for failing to comply with the panel's discovery orders, ECF No. 1 at 16 11-14, and because the panel “refuse[d] to admit critical evidences against Regal” while 17 “admit[ting] unlawful evidences for Regal by manifestly disregarding laws.” ECF No. 1 at 1718 21. While it is unclear whether Hu makes these challenges under 9 U.S.C. § 10 (a)(2) (evident 19 partiality) or under 9 U.S.C. § 10 (a)(3) (arbitrators “guilty of misconduct in refusing . . . to hear 20 evidence pertinent and material to the controversy”), the result is the same. In reviewing the 21 Award, the Court “cannot revisit [the panels'] evidentiary rulings.” Aramark Facility Services v. 22 Serv. Employees Intl Union, Local 1877, AFL CIO, 530 F.3d 817 , 828 & n.6 (9th Cir. 2008); see 23 also United Paperworkers Intl Union, AFL-CIO v. Misco, Inc., 484 U.S. 29, 40 (1987) (“[W]hen 24 the subject matter of a dispute is arbitrable, ‘procedural’ questions which grow out of the dispute 25 and bear on its final disposition are to be left to the arbitrator.”). Further, as already held by the 26 Court adverse rulings alone, are not evidence of partiality. 27 Even if the Court were to review the evidentiary rulings, however, the Court would deny 28 Hu’s motion: because rulings—even “repeated rulings”—against one party to the arbitration 1 “will not establish bias absent some evidence of improper motivation,” Hu has not established 2 any improper motivations behind the arbitrators' evidentiary rulings. Sheet Metal Workers Intl. 3 Ass 'n Local Union No. 420 v. Kinney Air Conditioning Co., 756 F.2d 742, 746 (9th Cir. 1985); 4 see also Bell Aerospace Co. Div. of Textron, Inc. v. Local 516, Intl. Union, United Auto., 5 Aerospace & Agr. Implement Workers of Am. (UAW), 500 F.2d 921 , 923 (2d Cir. 1974) (claim 6 that arbitrator consistently relied on evidence and reached conclusions favorable to one side did 7 not establish “evident partiality”); Eagle Jet Aviation Inc. v. Woods, 403 P.3d 684 , 2017 WL 8 2813985, at *4 (Nev. 2017) (unpublished) (denying motion to vacate arbitration based on claim 9 that arbitrators punished plaintiff for alleged “discovery abuse” while allowing the defendant's 10 allegedly “much greater discovery abuse” to go unpunished). 11 Perhaps more importantly, it is well established that arbitrators are not bound by the rules 12 of evidence. Gilmer, 500 U.S. at 31 (noting that an important counterweight to the reduced 13 discovery in NYSE arbitration is that arbitrators are not bound by the rules of evidence); see also 14 Bell Aerospace, 500 F.2d at 923 (arbitrators may admit and rely on evidence that would be 15 inadmissible under the formal rules of evidence). Courts also give great deference to the 16 arbitrators' decision to control the order, procedure and presentation of evidence at the hearing, 17 because when parties have agreed upon a particular method of dispute resolution, it should 18 generally be presumed fair. Kinney Air Conditioning Co., 756 F.2d at 746 . 19 For example, Hu complains that audio recordings of phone calls between himself and 20 Charles Schwab (described by Hu as “Company S” in his complaint and briefs) were improperly 21 and illegally admitted. However, Hu had contractually agreed to arbitration and admitting the 22 recordings was an authorized exercise of the arbitrators' authority under FINRA Code of 23 Arbitration Procedure § 12604(a). Further, because the panel was not required to follow state or 24 local rules of evidence, Hu's objection to the two-party-consent recordation requirements of 25 Nevada are irrelevant. Therefore, the Court denies Hu’s motion to vacate on these grounds. 26 D. Arbitrators Exceeded their Powers 27 Further, Hu’s assertion that the Award is irrational and completely unjustified is not 28 evidence that the arbitrators exceeded their powers. The Ninth Circuit has clarified that 1 arbitrators “exceed their powers” only when the award is (1) “completely irrational” or (2) 2 exhibits a “manifest disregard of the law.” Kyocera Corp. v. Prudential-Bache Trade Services, 3 Inc., 341 F.3d 987, 997 (9th Cir. 2003). With regard to demonstrating a manifest disregard of the 4 law, “the moving party must show that the arbitrator ‘underst[oo]d and correctly state[d] the law, 5 but proceeded] to disregard the same.’” Collins v. D.R. Horton, Inc., 505 F.3d 874, 879 (9th Cir. 6 2007) (quoting De Navegacion San Maritzme Compania, S.A. v. Saguenay Terminals Ltd., 293 7 F.2d 796, 801 (9th Cir. 1961)). “[T]here must be some evidence in the record, other than the 8 result, that the arbitrators were aware of the law and intentionally disregarded it.” Bosack v. 9 Soward, 586 F.3d 1096, 1104 (9th Cir. 2009) (quoting Lincoln Nat'l Life Ins. Co. v. Payne, 374 10 F.3d 672, 675 (8th Cir. 2004)). 11 1. Award is not Completely Irrational 12 “An award is completely irrational only where the arbitration decision fails to 13 draw its essence from the agreement [requiring arbitration].” Lagstein v. Certain Underwriters at 14 Lloyd's, London, 607 F.3d 634, 642 (9th Cir. 2010) (quoting Comedy Club, Inc. v. Improv W. 15 Assocs., 553 F.3d 1277, 1288 (9th Cir. 2009)). “The question is whether the award is ‘irrational 16 with respect to the contract, not whether the panel's findings of fact are correct. Whether or not 17 the panels' findings are supported by the evidence in the record is beyond the scope of [this 18 Court].’” Id. at 641. Here, Hu never challenges the panel's authority under the [contractual 19 agreement] or that the panel reached their conclusions in anything resembling an irrational 20 manner. [The contractual agreement] between Regal and Hu clearly mandates arbitration in the 21 event of a dispute. Hu does not assert anything to the contrary, nor could he; Hu only disagrees 22 with the findings and the outcome. This is the exact type of review not permitted by the Court. 23 Thus, because the Award was not completely irrational, this Court denies Hu’s petition. 24 2. Panel does not Manifestly Disregard the Law 25 Manifest disregard of the law means “something more than just an error in the law 26 or a failure on the part of the arbitrators to understand or apply the law. To vacate an arbitration 27 award on this ground, it must be clear from the record that the arbitrators recognized the 28 applicable law and then ignored it.” Id. at 641 (internal quotations and citations omitted). “There 1 must be some evidence in the record, other than the result, that the arbitrators were aware of the 2 | law and intentionally disregarded it.” Bosack, 586 F.3d at 1104-1105 . 3 Here, Hu points to no evidence that the panel was “aware of the law and intentionally disregarded it.” Rather, Hu points only to the result of the arbitration and evidentiary rulings to 5 | demonstrate that the FINRA panel purportedly disregarded the law, see generally ECF No. 1 at 6 | 21-36, which does not justify vacatur under 9 U.S.C. § 10 (a)(4). And because Hu has the burden 7 | of demonstrating any purported error warranting vacatur, see Gottdiener, 462 F.3d at 110 , Hu's 8 | failure to identify any error requires the Court to deny his petition. \N.Attorney’s Fees 10 Having prevailed on Petitioner’s Motion to Vacate Arbitration Award and Respondent’ 11 | removed Motion to Confirm Arbitration Award, the Court awards Respondent attorney’s fees 12 | and costs in accordance with Nev. Rev. Stat. § 38.243 (2). Respondent shall file an application in 13 | accordance with Local Rule 54-14. 14| VI. Conclusion 15 Accordingly, IT IS HEREBY ORDERED that Petitioner’s Motion to Vacate Arbitration Award (#1) is DENIED; 17 IT IS FURTHER ORDERED that Movant’s Motion to Confirm Arbitration Award (#92/11) GRANTED; 19 IT IS FURTHER ORDERED that the Clerk of the Court enter JUDGMENT for 20 | Respondent and against Petitioner in the amount of $331, 338.43. 21 | Dated this 30th day of September 2020. — 22 — Ld 24 Kent J. Dawson 25 United States District Judge — 26 — — 27 — — 28 — -16-