This very conspicuous defect is caused by the crown of the sleeve being too shallow for the armhole into which it is set. There are diagonal folds from the shoulder point towards the front and back balance points and the grain on the top arm line is curving up in the centre. The lower edge of a short sleeve would be pulled up at the centre.
Clip the tacking stitches across the top of the crown and allow the sleeve to drop into the correct position. Measure the amount of extra length needed at the centre of the sleeve and at each balance point and add these amounts to the pattern.
If there is insufficient seam allowance at the top of the crown to allow for re-cutting, the top arm line may be lowered as shown by the broken lines in the diagram, as this also has the effect of deepening the crown.
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