Third Circuit Adopts "Constructive Knowledge" Standard For Determining How Waiver Applies in the FINRA Arbitration Context

A recent precedential opinion by the Third Circuit Court of Appeals demonstrates the importance of timely investigating arbitrator disclosures and raising any objections during the FINRA[1] arbitration process. In Goldman, Sachs & Co., et al. v. Athena Venture Partners, L.P., No. 13-3461, 2015 WL 5692548 (3d Cir., September 29, 2015), Athena and Goldman Sachs participated in a FINRA arbitration to settle a $1.4 million investment-related dispute. During the course of the hearing, FINRA disclosed to the parties that one of three arbitrators had been charged with the unauthorized practice of law in connection with an appearance in a New Jersey municipal court. Neither party, nor FINRA, objected to the arbitrator’s continued participation on the panel, and neither party conducted further due diligence to follow up on this disclosure. The panel denied Athena’s claims and ruled in favor of Goldman Sachs.

After the ruling, Athena conducted a background check on the arbitrator, unearthing that the arbitrator failed to disclose significant additional legal troubles, postdating his unauthorized practice of law. Therefore, Athena filed a motion to vacate the arbitration award with the District Court, which was granted.