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FINE v. BEAR

May 30, 1991

MILTON FINE AND EDWARD A. PERLOW, PETITIONERS,
v.
BEAR, STEARNS & CO., INC., AND KENNETH SHASHOUA, RESPONDENTS.



The opinion of the court was delivered by: Sprizzo, District Judge:

MEMORANDUM OPINION AND ORDER

BACKGROUND

The evidence introduced at the arbitration established the following facts. In late 1985 or early 1986, petitioners opened an arbitrage account with Rooney Pace, Inc. ("Rooney Pace"), a broker-dealer. See Stipulation of Undisputed Facts ("Stip") at ¶ 4 (I Appendix ("App.") Ex. C). The Rooney Pace representative on their account was Kenneth Shashoua. See id. The funds were held by Bear Stearns, which as a "clearing broker" had the responsibility of clearing those funds upon appropriate instructions.*fn2 See id. at ¶ 5.

In connection with this account, petitioners executed a "Customer Agreement" with Bear Stearns, which provided in part as follows:

  8. Clearance Accounts. If Bear Stearns carries your
  account as clearing broker by arrangement with
  another broker through whose courtesy your account
  has been introduced, then unless Bear Stearns
  receives from you a written notice to the contrary,
  Bear Stearns shall accept from such other broker,
  without any inquiry or investigation by it (i)
  orders for the purchase or sale in account of
  securities and other property on margin or
  otherwise, and (ii) any other instructions
  concerning said account. You understand that Bear
  Stearns shall have no responsibility or liability
  to you for any acts or omissions of such other
  broker, its officers, employees or agents.

I App.Ex. C(3). Petitioners also received a "Correspondent Allocation of Responsibility Letter," which set forth the allocation of responsibilities between the petitioners' introducing firm, Rooney Pace, and the respondent. Although one of the respondent's responsibilities was "safeguarding funds and securities," the responsibilities for supervising and monitoring the account and the transactions made in connection therewith were placed squarely upon Rooney Pace. See I App.Ex. C(3). Moreover, Rooney Pace was also responsible for "selecting, investigating, training and supervising all personnel who open, approve or authorize transactions in your [petitioners'] account." Id.

On or about September 30, 1986, without the approval of the petitioners, Bear Stearns, acting upon what purported to be the instructions of petitioners, executed a transfer of $675,000 from the petitioners' account to the account of an unrelated foreign corporation with a mailing address in Switzerland. See Stip. at ¶ 10. Respondent's statement of account, see I App.Ex. C(12), and marginal activity report, see Supplemental Appendix of Respondent ("Supp.App.") Ex. K, reflect the September transaction as an "LOA" or a letter of authorization. See also Tr. at 77. Testimony at the arbitration hearing established that Rooney Pace's representative, Shashoua, forged petitioners' signatures on the documents which authorized the aforementioned transfer. See Transcript of Arbitration Proceeding ("Tr.") at 202, 227 (I App.Ex. D). A copy of that letter, which was obtained from Shashoua, was also admitted into evidence at the arbitration. See I App.Ex. C(2); Tr. 82-85. However, respondent was unable to locate the original letter of authorization in its files. See Tr. at 186-87.

In October of 1986 Bear Stearns received a letter, also forged by Shashoua, changing the address on petitioners' account so that all account information would go to Shashoua's home address.*fn3 See Stip. ¶ 12; Tr. at 202-05, 226-27. As a consequence, Fine and Perlow did not receive monthly statements of account which reflected the unauthorized transactions and transfers from their account.*fn4 Thereafter, Shashoua stole another $50,000 from petitioners' account by forging a second authorization for transfer on or about December 17, 1986.*fn5 See Stip. at ¶¶ 19-20. The parties stipulated to the identity and authenticity of the letter of authorization for this transaction which Bear Stearns produced. See Stip. at ¶¶ 19-20 & Ex. 9 (I App.Ex. C(9)).

Petitioners filed a claim with the New York Stock Exchange against Bear Stearns alleging breach of contract, negligence, conversion, and racketeering violations, 18 U.S.C. § 1961 (1988), in connection with the unauthorized transfers. After three days of arbitration hearings, the arbitration panel dismissed the claim in all respects.

DISCUSSION

Petitioners contend that the award must be vacated for the following reasons: (1) the arbitrators acted in manifest disregard of the law, see Wilko v. Swan, 346 U.S. 427, 436-437, 74 S.Ct. 182, 187-188, 98 L.Ed. 168 (1953); (2) the arbitration award is irrational because it is not supported by any evidence, see Swift Indus., Inc. v. Botany Indus., Inc., 466 F.2d 1125, 1134-35 (3d Cir. 1972); and (3) certain evidentiary rulings made by the arbitration panel constituted a "refusal to hear evidence pertinent and material to the controversy" under 9 U.S.C. § 10(c).

It is well-settled that a court's power to vacate an arbitration award must be extremely limited because an overly expansive judicial review of arbitration awards would undermine the litigation efficiencies which arbitration seeks to achieve. See Transit Casualty Co. v. Trenwick Reinsurance Co., Ltd., 659 F. Supp. 1346, 1350-51 (S.D.N.Y. 1987), aff'd, 841 F.2d 1117 (2d Cir. 1988); Tinaway v. Merrill Lynch & Co., 658 F. Supp. 576, 578 (S.D.N.Y. 1987); see also Andros Compania Maritima, S.A. v. Marc Rich & Co., A.G., 579 F.2d 691, 701, 703-04 (2d Cir. 1978). Tested by that standard, the award here must be confirmed.

Petitioners' argument that the arbitration panel "manifestly disregarded the law" must be rejected. "Manifest disregard of the law" by arbitrators is a judicially created standard for vacating an arbitration award, see Carte Blanche (Singapore) Pte. Ltd. v. Carte Blanche Int'l, Inc., 888 F.2d 260, 265 (2nd Cir. 1989) (quoting Merrill Lynch, Pierce, Fenner and Smith, Inc. v. Bobker, 808 F.2d 930, 933-34 (2d Cir. 1986)), which is applicable only where the law alleged to have been disregarded is "well defined, explicit, and clearly applicable," so that the error was ...


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