The opinion of the court was delivered by: POLLACK
Petitioner seeks to vacate an arbitration award, pursuant to Section 10 of the Federal Arbitration Act, 9 U.S.C. § 10 (1971), on the ground that the award completely disregards petitioner's rights under the applicable provisions of the federal securities laws. It is argued that the arbitration panel's dismissal of petitioner's claims against respondent was thus procured by "undue means", 9 U.S.C. § 10(a), and, additionally, is void because contrary to public policy.
When arbitrators undertake to determine a claim based on statutory law, the statutory rules set at least the boundaries within which they can act. A corollary of this duty to stay within the statute is a duty to include in the arbitration award some indication of the reasons for the decision, so that a Court may ascertain, if called upon to do so, that these boundaries were respected. In an arbitration of an issue touching on matters embraced within the federal securities laws, an award which fails to meet this minimum standard is for that reason alone subject to being set aside and resubmitted for clarification on the basis for the Award under §§ 10(d) and (e) of the Federal Arbitration Act.
Attempts to vitiate the substantive judgment of arbitrators are normally given a chilly reception by the Courts, in order to avoid weakening the vitality of arbitration as a valuable alternative to litigation. But when a claim of serious error is raised, it will not be dismissed out of hand. The Court has examined the record of the arbitration proceeding and the legal contentions proffered by the opposing parties, and, on the basis of its examination, it has concluded that the present state of the record is not sufficient to justify final determination of the issues petitioner has raised.
For the reasons discussed below, this matter is remanded to the arbitrators for an indication, now wholly lacking from the record, of the basis on which the petitioner's claim was dismissed.
This motion is one of a long series of attempts by disappointed arbitration claimants to persuade the federal courts to give substance to the statement by the Supreme Court in Wilko v. Swan, 346 U.S. 427, 436, 74 S. Ct. 182, 98 L. Ed. 168 (1953) that "manifest disregard" of the federal securities law by an arbitration panel could justify the vacating of that panel's award under the Arbitration Act. Petitioner's reliance on this language is heightened by the fact that the "law" with which the Court was concerned in Wilko was § 12(2) of the Securities Act of 1933, 15 U.S.C. § 77L(2) (1971), one of the bases for this proceeding.
The following seem to be the facts generating this controversy.
The petitioner, Herbert Sobel, was a customer of respondent, Hertz, Warner & Co.,
a stock brokerage firm which was a member of both the New York Stock Exchange and the American Stock Exchange. Sobel maintained a nondiscretionary margin account with Hertz, Warner from approximately mid-1965 to 1970.
Between December 7, 1965, and March 1, 1966, Sobel purchased 10,200 shares of the stock of Hercules Galion Products, Inc. ("Hercules"). The purchases were made by Edwin Wetzel, a registered representative and an Assistant Manager of the brokerage firm's Bronx branch office, at prices ranging from $10.00 to $14.50 per share; the total price of the stock, including commissions, was $132,961.
Sobel testified that he had "never heard of the company before these purchases were made." The first purchases, of 1,500 shares, were made with his approval. Thereafter, according to Sobel, Wetzel continued to acquire shares of the company without obtaining prior authorization from his client.
Sometime during late December or early January
Sobel learned of the growth of his Hercules holdings and questioned the advisability of this heavy an investment. He testified that he was told by Wetzel "that it was a very, very good situation", that Hertz, Warner was buying shares of Hercules for its own account, and "that there was a lot of buying in this particular stock in Hertz, Warner." Wetzel also allegedly advised Sobel to liquidate other securities in his portfolio in order to take a heavier position in Hercules.
Sobel did not object to the purchases. Moreover, he did not notify respondent that transactions had been made in his account without his approval.
During a visit to Hertz, Warner's offices made to deliver additional collateral for his margin account, Sobel was introduced to Michael Geier, another of respondent's representatives, whom Wetzel had previously identified as someone heavily involved in Hercules trading. It was apparently Geier who told Sobel of an "imminent merger" whereby Hercules would acquire the shares of Liquidonics Industries, Inc. ("Liquidonics"). Sobel also claimed to have been told by Geier that the merger was to be based on an exchange of one share of Hercules stock for two shares of Liquidonics stock.
After March, 1966, the price of Hercules began to decline, reaching $9 per share in April and $5 per share in December, 1966. When Sobel sought the advice of Wetzel and Geier he was told that he should continue to hold the stock. Additionally, he claims to have been told by Geier at some point after the drop in price began that the Hercules-Liquidonics merger was a fait accompli, that the parties had "shaken hands" on it.
Sobel asserted that this information about the possible merger and its terms was a factor in his decision to buy the shares. "That was one of the reasons I was so interested. The last purchase I think was 13 1/2 or 14 on Hercules Galion, but Liquidonics was trading at that point about 10, and I could see that what would have to happen here is that Hercules Galion stock would have to be raised to at least double the value.
Obviously, a lot of buying was going on and the price of the stock had been going up."
On August 23, 1967, Wetzel and Geier were indicted in United States v. Projansky, et al., S.D.N.Y., 44 F.R.D. 550. Included among the defendants were two directors of Hercules Galion. The indictment charged a conspiracy to create market activity in the Hercules shares and to induce the purchase of the security by others. Among acts in furtherance of the conspiracy, the government alleged sale of Hercules shares without disclosure of the facts (1) that secret compensation was being paid to securities salesmen in return for their reccommendation of the stock to customers and (2) that the price of the shares was in the process of being artificially raised. More specifically, Wetzel was charged with having been offered options to purchase Hercules shares below market price and with causing the purchase of 36,850 Hercules shares in furtherance of the plan to create market activity and stimulate purchase of the shares by others.
Geier and a third Hertz representative, Murray Peltz, were alleged to have accepted and received payments of $25,000 each in return for their assistance and to have persuaded their customers to purchase 42,500 shares. Geier was also charged with inducing other salesmen to persuade their customers to purchase an additional 80,000 shares "by describing the business and operations of Hercules Galion * * * in optimistic terms [and] by assuring them that Hercules Galion was in the process of acquiring another company."
On January 27, 1971, Wetzel pleaded guilty to the conspiracy charge. Geier was found guilty on all counts on June 5, 1971, after a jury trial.
Sobel discussed his transactions in Hercules with representatives of the New York Regional Office of the Securities and Exchange Commission during the summer of 1967 and answered a questionnaire from the Compliance Department of the American Stock Exchange on the same subject in May, 1967. He testified that it was not until the indictment was handed down that he "realized what had possibly happened" and contacted an ...