United States District Court, D. Arizona
ROBERT M. JOHNSTON, JANICE M. JOHNSTON, and ROBERT F. JOHNSTON AND JANICE M. JOHNSTON REVOCABLE TRUST, Plaintiffs,
CALTON & ASSOCIATES, INC., a Florida corporation; DARYL CALTON; VIRGINIA CALTON, a/k/a GINNY CALTON; and DWAYNE CALTON; Defendants.
Motion to Modify or Correct Arbitration Award; Cross-Motion to Confirm Arbitration Award
H. RUSSEL HOLLAND, District Judge.
Plaintiffs move to modify or correct an arbitration award, or in the alternative, to vacate the arbitration award. Defendants oppose this motion and cross-move to confirm the arbitration award. Defendants' cross-motion is opposed. Oral argument was requested but is not deemed necessary.
Plaintiffs are Robert and Janice Johnston and the Robert F. and Janice M. Johnston Revocable Trust. Defendants are Calton & Associates, Inc.; Daryl Calton; Virginia Calton, a/k/a Ginny Calton; and Dwayne Calton.
Dwayne Calton is the president of Calton & Associates and Daryl Calton works as a securities broker for Calton & Associates. Plaintiffs invested in several real estate related securities which were offered and sold by Calton & Associates and for which Daryl Calton acted as their purchaser representative. Plaintiffs contend that all of these investments "were complex; all of them were speculative; and all of them failed to perform." Plaintiffs contend that they "lost in excess of $1, 000, 000 in connection with" these investments.
On March 29, 2013, plaintiffs commenced a Financial Industry Regulatory Authority (FINRA) arbitration proceeding against defendants. In their Submission Agreement, plaintiffs stated that they were "submit[ting] the present matter in controversy, as set forth in the attached statement of claim, answers, and all related cross claims, counterclaims and/or third-party claims which may be asserted, to arbitration in accordance with the FINRA By-laws, Rules, and Code of Arbitration Procedure." Plaintiffs "agree[d] to abide by and perform any award(s) rendered pursuant to this Submission Agreement."
In the FINRA arbitration, plaintiffs asserted numerous claims for relief, including Arizona securities fraud, negligence, control person liability, and respondeat superior. Plaintiffs contended that the investments they made through defendants were ultra risky and that Daryl Calton compounded the risk "by pushing the Johnstons into an improper overconcentration in the real estate financing sector." Plaintiffs' negligence claim was based, in part, on their allegations of overconcentration. They alleged that the Caltons were negligent because Daryl Calton "recommended an improper concentration of Investments in the real estate financing sector" and that "Dwayne Calton signed off' on the improper concentration."
At the evidentiary hearing before the FINRA arbitration panel, Daryl and Dwayne Calton made a motion for expungement. "Under the Securities Exchange Act, one of FINRA's duties is to establish and maintain a system for collecting and retaining registration information' about registered representatives such" as the Caltons. In re Lickiss, Case No. C-11-1986 EMC, 2011 WL 2471022, at *1 (N.D. Cal. June 22, 2011) (quoting 15 U.S.C. § 78o-3(i)(1)(A)). "Registration information' includes information about disciplinary actions, regulatory, judicial, and arbitration proceedings.'" Id . (quoting 15 U.S.C. § 78o-3(i)(5)). "CRD [Central Registration Depository] is the database that FINRA and the securities commissions of the 50 states developed to store, among other information, information about regulatory, enforcement and arbitration actions taken against registered representatives and other securities personnel in accordance with [the above] obligation." Id . In their motion for expungement, the Caltons moved to expunge any reference to plaintiffs' arbitration from the CRD. Expungement may be granted if 1) "the claim, allegation or information is factually impossible or clearly erroneous;" 2) "the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds;" or 3) "the claim, allegation or information is false."
On March 6, 2014, the arbitration panel entered its award. The panel "denied in their entirety" plaintiffs' claims. The panel also recommended the expungement of all references to the Johnstons' arbitration as to Dwayne Calton and the majority of the panel recommended expungement as to Daryl Calton. The panel made two findings of fact as to its expungement recommendations:
1) "The registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds; and"
2) "The claim, allegation, or information is false."
The panel explained its findings of facts and in doing so addressed the issue of concentration:
As for concentration, the evidence did reflect a concentration in real estate development private offerings and there was no evidence that Daryl Ray Calton warned Claimants about this risk. However, the Panel didn't feel as though Claimants were babes in the woods about risks surrounding these types of investments. Claimant Janice M. ...