is absurd. Petitioners entered the securities business and accepted the burdens of NASD membership voluntarily. If they did not wish to abide by the rules of the NASD, they easily could have avoided such rules by not joining the association. See Geotech Lizenz AG v. Evergreen Systems, Inc., 697 F. Supp. 1248, 1253 (E.D.N.Y. 1988).
Petitioners argue also that the arbitrators misapplied the law and ignored relevant evidence However, errors of law and fact are not grounds for vacating an arbitral award. Siegel v. Titan Indus. Corp., 779 F.2d 891, 893 (2d Cir. 1985). An arbitral award may be vacated based on the judicially created doctrine of "manifest disregard of the law", Wilko v. Swan, 346 U.S. 427, 436-37, 98 L. Ed. 168, 74 S. Ct. 182 (1953), but that doctrine applies only where the "error . . . is obvious and capable of being readily and instantly perceived by the average person qualified to serve as an arbitrator." Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Bobker, 808 F.2d 930, 933 (2d Cir. 1986). Moreover, to vacate an award under the manifest disregard standard, the court must find that although the arbitrators were aware of a clearly governing legal principle they consciously decided to ignore it. Id.; Siegel, 779 F.2d at 893.
Petitioners have presented no evidence that the panel deliberately ignored the governing law. In fact, the evidence presented to the arbitrators suggests that their finding of derivative liability was reasonable. Marc Geman, executive vice-president of Stuart-James testified that the Board of Directors of Stuart-James consisted of himself, Padgett and Graff, and that Padgett, president of Stuart-James, and Graff, chairman of the board, together owned over 94% of the company's stock. According to Geman, petitioners managed the company, set policy and directed the activities of the various brokers. (July 24, 1991 Tr. at 142-43, 181-82; July 25, 1991 Tr. at 27-28, 30, 33, 65-67) As a result, the arbitrators may have found Padgett and Graff liable under § 20(a) of the Securities Exchange Act, 15 U.S.C. § 78t(a), which states:
Every person who, directly or indirectly, controls any person liable under any provision of this chapter . . . shall also be jointly and severally liable with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.
In Lanza v. Drexel & Co., 479 F.2d 1277, 1299 (2d Cir. 1973), the Court established a two-part test for control person liability under § 20(a). First, the court must determine whether the purported control person had the actual authority to direct the activity of the primary wrongdoer. Second, the control person must be a culpable participant in the fraud. See also Morse v. Weingarten, 777 F. Supp. 312, 318 (S.D.N.Y. 1991). The arbitrators could have concluded that based on their activities as directors of Stuart-James, Padgett and Graff controlled Neuhaus and managed the corporation in such a manner as to be culpable participants in the fraud perpetrated by Neuhaus. In any event, even assuming that § 20(a) was erroneously applied, based on Geman's testimony and the evidence regarding Neuhaus' activities, such an error was neither "obvious" nor "capable of being readily and instantly perceived." Merrill Lynch, 808 F.2d at 933.
Because petitioners have failed to establish a basis for vacating the award, their motion to vacate is denied and respondent's motion to confirm the award against petitioners is granted.
Respondent has moved for sanctions pursuant to Fed. R. Civ. P. 11. That rule makes the signature of an attorney or party on a submission to the court,
a certificate by the signer that the signer has read the [submission]; that to the best of the signer's knowledge, information and belief formed after reasonable inquiry it is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification or reversal of existing law, and that it is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation.
The legal standard underlying Rule 11 is an objective one, Norris v Grosvenor Marketing, Ltd., 803 F.2d 1281, 1288 (2d Cir. 1986), but "Rule 11 sanctions are not tied to the outcome of litigation; the relevant inquiry is whether a specific filing was, if not successful, at least well founded." Business Guides, Inc. v. Chromatic Communications Ent., Inc., 112 L. Ed. 2d 1140, 111 S. Ct. 922, 934 (1991). The Second Circuit has "stressed that [on a Rule 11 motion] 'any and all doubts must be resolved in favor of the signer [of a paper alleged to have been submitted in violation of the Rule].'" Stern v. Leucadia National Corp., 844 F.2d 997, 1005 (2d Cir. 1988) (quoting Eastway Constr. Corp. v. City of New York, 762 F.2d 243, 254 (2d Cir 1985)). By that standard, the award of sanctions in this case would be unwarranted. petitioners made arguments to distinguish certain existing law and extend other existing law pertaining to enforceability of an arbitral award and derivative liability under the Securities Exchange Act. That such arguments were not successful does not mean that they were objectively frivolous.
* * *
For the reasons stated above, petitioners' motion to vacate the award is denied; respondent's motion to join the third parties is granted; her motion to confirm the arbitral award against all parties is granted; and her motion for sanctions is denied.
Dated: New York, New York
May 19, 1992
Michael B. Mukasey,
U.S. District Judge
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