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June 4, 1992



The opinion of the court was delivered by: PETER K. LEISURE

LEISURE, District Judge,

 This is an action arising under the Securities Act of 1933 ("Securities Act"), the Securities Exchange Act of 1934 ("Exchange Act") and principles of state common law. In broad strokes, the litigation focuses on the seizure and liquidation by Bear Stearns & Co., Inc. (hereinafter referred to as "Bear Stearns" or "defendant") of the accounts of the plaintiffs, Pompano-Windy City Partners, Ltd. ("Pompano"), East Wind Associates, Ltd. ("East Wind") and Stephen J. Lawrence ("Lawrence"), a principal of both of these entities, in the aftermath of the stock market crash of October 1987, when the Dow Jones Industrial Average lost over 500 points, eliminating vast sums of apparent wealth in the virtual blink of an eye. Options Clearing Corp. ("OCC"), which issues Standard and Poors Index options ("OEX options"), and Chicago Board Options Exchange, Inc. ("CBOE"), on which OEX options are traded, also are named as defendants. *fn1"

 By Opinion and Order dated October 27, 1988 ("October 1988 Order"), reported at 698 F. Supp. 504, this Court ordered that the dispute between the plaintiffs and Bear Stearns be heard by an arbitration panel chosen under the auspices of the NASD. In March 1991, the Arbitrators reached a decision (the "Arbitration Award" or the "Award"), awarding $ 20,412,115 in damages to Bear Stearns, and the parties subsequently filed cross-motions to confirm and vacate the Award. Concurrently, CBOE and OCC moved to dismiss the claims raised against them. After a motion to dismiss plaintiffs' Second Amended Complaint became fully submitted in November 1988, plaintiffs filed a Third Amended Complaint, dated December 9, 1988 ("Third Amended Complaint"). Defendants again moved to dismiss, and the motions became fully submitted on May 17, 1989. The Court postponed consideration of the merits of the motions to dismiss pending resolution of the arbitration proceedings, and received three supplemental briefs from the parties in the summer of 1991. The Court turns to consider the merits of the motions seriatim.

 I. The Arbitration Award

 A. Background

 Pursuant to the October 1988 Order and a Stipulation and Order dated May 22, 1989, the dispute between the plaintiffs and Bear Stearns was submitted to a panel of five arbitrators chosen under the auspices of the NASD, two of whom were industry arbitrators and three of whom were public arbitrators not employed in the securities industry. See Arbitration Award, at 1, 9. During the arbitration, which involved 42 evidentiary hearing sessions over a period of some 21 months from April 13, 1989 to January 7, 1991, and produced a transcript of 4,876 pages, the arbitrators heard 23 witnesses, 17 of whom were called by Lawrence, and admitted 241 exhibits, 162 of which were offered into evidence by Lawrence. The Award was duly executed by the arbitrators, and was delivered to the parties on March 14, 1991.

 The Arbitration Award sets forth the following facts and conclusions. At all times relevant to this action, Pompano and East Wind were limited partnerships that acted as market makers, with accounts clearing through Bear Stearns. Lawrence, an experienced and sophisticated trader, was a general partner of both Pompano and East Wind, and assumed liability for Pompano's obligations in a Partnership Account Agreement. Further, Lawrence had outstanding loans from Bear Stearns, totaling $ 7,500,000, that were guaranteed by Pompano and East Wind. See id. at 1-4.

 Going into the market crash of Friday, October 16 and Monday, October 19, 1987, Pompano had substantial exposure in OEX options and other securities. In fact, as the market fell, Pompano's exposure mushroomed, leaving its account at Bear Stearns $ 36,138,000 in deficit by the end of business on October 19. Despite this enormous deficit position, no money was deposited into the Pompano account, and, on the morning of October 20, Bear Stearns took control of the account, such that Pompano was not permitted to make any further trades. Moreover, Bear Stearns also seized the East Wind account on October 20, even though the market decline had not forced it into deficit. Id.

 After the seizure of the Pompano and East Wind accounts, Bear Stearns made "a good faith effort to reduce the risk in the Pompano account," id., including adding positions that ultimately resulted in further losses to Pompano exceeding $ 4 million. However, these losses were deducted from Bear Stearns' ultimate recovery by the arbitrators. See id. at 6. In addition, market action reduced the deficit in the Pompano account to $ 18,804,072 at the close of the market on October 22. Thereafter, the Pompano and East Wind accounts were transferred to an omnibus account at Bear Stearns in a private sale on the morning of October 23, for consolidation with other accounts that had experienced similar difficulties during the crash. Further, on October 26, Bear Stearns called its two loans to Lawrence, which represented a total debt of $ 7,883,017, and the proceeds from the liquidation of the East Wind account and from the sale of other collateral were applied to cover this debt. Totaling these figures, the arbitrators determined that Pompano, East Wind and Lawrence were liable to Bear Stearns for $ 15,801,895, plus $ 4,602,301 in interest, for a total liability of $ 20,412,115. See id. at 6-7. Pompano and Lawrence were found to be jointly and severally liable for the total amount of the Award, while East Wind was held to be liable for only $ 5,555,644 of this amount. Id.

 "It is beyond cavil that the scope of [a] district court's review of an arbitration award is limited." Sperry International Trade, Inc. v. Government of Israel, 689 F.2d 301, 304 (2d Cir. 1982); accord Local 1199, Drug, Hospital and Health Care Employees Union v. Brooks Drug Co., 956 F.2d 22, 24 (2d Cir. 1992) ("Our review of an arbitration award is quite limited."). The sole statutory bases for vacatur of an arbitration award are found in Section 10 of the Federal Arbitration Act, 9 U.S.C. § 10. A motion to vacate an arbitration award also can be based on the judicially created defense of "manifest disregard of the law." See Wilko v. Swan, 346 U.S. 427, 436-37, 98 L. Ed. 168, 74 S. Ct. 182 (1953); Fahnestock & Co. v. Waltman, 935 F.2d 512, 516 (2d Cir. 1991), cert denied, 117 L. Ed. 2d 474, 112 S. Ct. 1241 (1992); Merrill, Lynch, Pierce, Fenner & Smith, Inc. v. Bobker, 808 F.2d 930, 933-34 (2d Cir. 1986).

 "Judicial inquiry under the manifest disregard standard . . . is extremely limited." Fahnestock, supra, 935 F.2d at 516. Manifest disregard "means more than error or misunderstanding with respect to the law. The error must have been obvious and capable of being readily and instantly perceived by the average person qualified to serve as an arbitrator." Bobker, supra, 808 F.2d at 933 (citations omitted). "Illustrative of the degree of 'disregard' necessary to support vacatur under this standard is [the finding that] an 'arbitrator "understood and correctly stated the law but proceeded to ignore it."'" Fahnestock, supra, 935 F.2d at 516 (quoting Siegel v. Titan Industrial Corp., 779 F.2d 891, 893 (2d Cir. 1985) (per curiam) (citation omitted)).

 In the absence of one or more of these grounds for vacatur, a district court must confirm an arbitration award. 9 U.S.C. § 9; Local 1199, supra, 956 F.2d at 25; Interpetrol Bermuda Ltd. v. Stinnes Interoil Inc., 1990 U.S. Dist LEXIS 17376, at *5 (S.D.N.Y. Dec. 26, 1990) (Leisure, J.); Carte Blanche (Singapore) Pte., Ltd. v. Carte Blanche International, Ltd., 683 F. Supp. 945, 948 (S.D.N.Y. 1988) (Leisure, J.), aff'd, 888 F.2d 260 (2d Cir. 1989). Even the fact "'"that a court is convinced [that the arbitrator] committed serious error does not suffice to overturn [the arbitrator's] decision."'" Local 1199, supra, 956 F.2d at 25 (quoting United Paperworkers International Union v. Misco, Inc., 484 U.S. 29, 38, 98 L. Ed. 2d 286, 108 S. Ct. 364 (1987) (citation omitted)). Thus, when an arbitral award is challenged on one of the grounds enumerated above, a district court must be guided by the principle that "the arbitrator need only explicate his reasoning . . . 'in terms that offer even a barely colorable justification for the outcome reached' in order to withstand judicial scrutiny." In re Marine Pollution Service, Inc., 857 F.2d 91, 95 (2d Cir. 1988) (quoting Andros Compania Maritima S.A. v. Marc Rich & Co. A.G., 579 F.2d 691, 704 (2d Cir. 1978)). In fact, the Supreme Court decision in United Steelworkers of America v. Enterprise Wheel & Car Corp., 363 U.S. 593, 598, 4 L. Ed. 2d 1424, 80 S. Ct. 1358 (1960), "stands for the proposition that an arbitrator is not required to explain the rationale for his award, and that any ambiguity in the award must be resolved, if possible, in a manner supporting confirmation of the award." Carte Blanche, supra, 683 F. Supp. at 951. It is with these principles in mind that the Court now turns to consider the cross-motions to confirm and vacate the Arbitration Award.

 C. Bases of Motion to Vacate Arbitration Award

 Plaintiffs have asserted six bases for their argument that the Arbitration Award must be vacated. First, plaintiffs argue that the arbitrators manifestly disregarded the law of private sales, and that no private sale of securities from Pompano to Bear Stearns ever occurred. Second, plaintiffs assert that the law of margin calls was ignored in the Arbitration Award, and that, without a margin call, Bear Stearns had no right to seize and liquidate Pompano's account. Third, it is claimed that the arbitrators had no basis for an award against East Wind, because its account was not in deficit. Fourth, plaintiffs contend that the panel refused to hear relevant evidence. Fifth, plaintiffs claim that the arbitrators displayed evident partiality.

 Before proceeding to address these claims, however, the Court pauses briefly to reject plaintiffs' sixth contention, that arbitration of this case was improper because there was no agreement to submit the securities law claims to arbitration. See Plaintiffs' Memorandum in Support of Their Motion to Vacate the NASD Arbitration Award and in Opposition to Bear Stearns' Motion for Entry of a Judgment ("Motion to Vacate"), at 64-67. This argument was squarely addressed and rejected by this Court in the December 26 Order. This ruling is the law of the case, and will not be revisited at this late date. See Liona Corp. v. PCH Associates (In re PCH Associates), 949 F.2d 585, 592 (2d Cir. 1991). Moreover, the Court already has denied plaintiffs' motion for reargument of the December 26 Order. See Memorandum Order, dated February 2, 1989. The Court therefore rejects, without further discussion, all arguments in the instant motion concerning the alleged impropriety of the arbitration of this dispute.

 1. The Private Sale

 Plaintiffs' first set of arguments in opposition to confirmation of the Arbitration Award focuses on the claim that a private sale of Pompano's position to Bear Stearns on October 23 never occurred. See Motion to Vacate, at 22-43; Plaintiffs' Reply Memorandum in Support of their Motion to Vacate the NASD Arbitration Award and in Opposition to Bear Stearns's Motion for an Entry of a Judgment ("Supplemental Motion to Vacate"), at 2-16. According to plaintiffs, "beneficial ownership of the options was never transferred, and Pompano should have been credited with the more than $ 16 million which Bear Stearns realized in liquidating Pompano's position in the marketplace." Supplemental Motion to Vacate, at 15. In fact, the plaintiffs contend that "the panel's ruling on this issue was the difference between Bear Stearns owing Pompano money and Pompano owing Bear Stearns money." Motion to Vacate, at 22.

 The arguments on this issue are premised on a number of distinct legal theories. First, plaintiffs contend that the alleged "trades" of the OEX options violated CBOE Rule 6.49, which addresses the mechanisms for conducting transactions off the exchange. Second, it is argued that both CBOE and OCC found that the "trades" never occurred, and that there was no legal basis for a finding that a lawful private sale occurred. Finally, the plaintiffs ascribe various insidious motives to Bear Stearns, contending that the transfer of the OEX options from the Pompano account to the omnibus account was done illegally for the purpose of appropriating the inherent profit associated with these securities. See Motion to Vacate, at 24-25. *fn2"

 In response, Bear Stearns asserts that, in light of the severe displacement caused by the market crash, CBOE specifically exempted Bear Stearns from the requirements of Rule 6.49, and that neither CBOE nor OCC have ever stated that a sale did not occur. See Memorandum of Law of Defendant Bear, Stearns & Co. in Further Support of Defendant's Motion to Confirm Arbitration Award and in Opposition to Plaintiffs' Motion to Vacate Arbitration Award ("Supplemental Motion to Confirm"), at 27-37. In addition, Bear Stearns rejects the contention that the transaction was prompted by improper motives. According to defendant, Pompano's account was $ 36 million in deficit on the morning of October 20, with an exposure exceeding $ 80 million. Id. at 7. In fact, defendant argues that its actions were an appropriate response to plaintiffs' failure to cover the exposure in their accounts and to the risk of vast losses to Bear Stearns if the market dropped further. Id. at 37-42. *fn3"

 CBOE Rule 6.49 provides that

(a) Except as otherwise provided by this Rule, no member acting as principal or agent may effect transactions in any class of option contracts listed on the Exchange for a premium in excess of $ 1.00 other than (i) on the Exchange, (ii) on another exchange on which such option contracts are listed and traded, or (iii) in the over-the-counter market . . . unless the member has attempted to execute the transaction on the floor of the Exchange and has reasonably ascertained that it may be executed at a better price off the floor.
(b) Notwithstanding the provisions of paragraph (a) of this Rule, a member acting as agent may execute a customer's order off the Exchange floor with any other person (except when such member also is acting as agent for such other person in such transaction) for the purchase or sale of an option contract listed on the Exchange.

 See Appendix E to Motion to Vacate, tab 13 (CBOE Constitution and Rules). In the face of Rule 6.49. defendants have produced a letter from CBOE to Bear Stearns, dated October 22, 1987 ("October 22 Letter"), which exempts Bear Stearns from the requirements of the Rule. In relevant part, the letter provides that

the Exchange will take no action against Bear Stearns or the transferring market-makers for these transfers under Exchange Rules 6.49 and 4.6 prohibiting transactions off the Exchange and adjustments, respectively. The . . . no-action position stated in this letter [has] been provided because of the emergency conditions prevailing on the date hereof, and apply only to the above described transfers occurring between the date hereof and the opening of business on Monday, October 26, 1987.

 See Appendix B to Supplemental Motion to Confirm, tab 19 (October 22 Letter).

 Plaintiffs argue at length that the October 22 Letter does not constitute an exemption from Rule 6.49 for the purposes of effecting a private sale from Pompano to Bear Stearns, and does not waive the price protections provided by Rule 6.49. Rather, claim plaintiffs, the October 22 Letter only authorized Bear Stearns to make mechanical adjustments and transfers between accounts. See Motion to Vacate, at 38-42; Supplemental Motion to Vacate, at 10-14. However, the textual context of the October 22 Letter and the testimony cited by the parties both support the contrary position, that a proper private sale occurred, and at best are subject to contrary inferences. Similarly, other evidence presented to the arbitrators also supports the conclusion that Bear Stearns acted properly and conducted a legitimate private sale, and at most can be said to support contrary inferences. *fn4"

 All of the evidence discussed above was submitted to and considered by the arbitrators, who made reasonable inferences based on the evidence before them. Moreover, on this motion, the role of the Court is not to substitute its view of the October 22 Letter and the inferences to be drawn from testimony and exhibits, but rather to accept the arbitrators' inferences when reasonable under the circumstances and to determine whether the result is in manifest disregard of controlling legal principles. See Local 1199, supra, 956 F.2d at 25; Fahnestock, supra, 935 F.2d at 516. Because plaintiffs' arguments with respect to the consummation of a private sale fail to demonstrate that the arbitrators manifestly disregarded applicable principles of controlling law, the motion to vacate the Arbitration Award on this basis must be denied.

 2. The Law of Margin Calls

 Plaintiffs' second argument focuses on the law of margin calls. According to the plaintiffs, the arbitrators manifestly disregarded the legal requirement that Bear Stearns make a margin call before seizing and liquidating Pompano's accounts. Moreover, plaintiffs contend that the absence of an explicit finding in the Arbitration Award that a margin call was made must be construed as a finding that no such call occurred. See Motion to Vacate, at 43-49; Supplemental Motion to Vacate, at 16-24. In response, Bear Stearns asserts that the Market Makers Agreement eliminated the need for a margin call as a condition precedent to the seizure of Pompano's account in the event that the account went into deficit. Further, defendant strenuously asserts that a margin call of $ 5 million was made on October 19, but that no funds were provided in response to this demand. Supplemental Motion to Confirm, at 42-49.

 Before scrutinizing the litigants' substantive arguments on this matter, the Court begins by rejecting plaintiffs' assertion that the absence of an explicit finding by the arbitrators that a margin call was made must be strictly construed, and serve as the basis for vacatur of the Arbitration Award. As the Court explained above, an arbitrator need do no more than present "a barely colorable justification for the outcome reached." Andros Compania Maritima, supra, 579 F.2d at 704. In addition, an arbitrator need not explain the rationale underlying an award, and all ambiguities must be resolved in favor of confirmation of the award. Carte Blanche, supra, 683 F. Supp. at 951. Thus, plaintiffs' assertion that the arbitrators "would have found a margin call if [they] could have stomached such a finding," Supplemental Motion to Vacate, at 23, and their contention that the Award must be vacated because the arbitrators did not explicitly state that a margin call was made, are rejected.

 Plaintiffs' margin call arguments begin by referring to 17 C.F.R. § 240.15c3-(a)(6)(iv), which provides that a broker or dealer carrying a market maker's account

(A) Shall mark the account to the market not less than daily and shall issue appropriate margin calls for additional equity which shall be met by noon of the following business day;
. . .
(C) Shall not extend further credit in the account if the equity in the account falls below the prescribed [level];
(D) Shall take steps to liquidate promptly existing positions in the account in the event of a failure to meet a call for equity.

 According to the plaintiffs, this Rule imposes a mandatory, nonwaivable obligation on the broker both to issue a margin call and to give the market maker sufficient time to meet the call before seizure and liquidation of an account. See Motion to Vacate, at 43, 45-46; Supplemental Motion to Vacate, at 16-18.

 However, plaintiffs' arguments must fail. The purpose of margin call rules is to protect brokers from the risks associated with insufficiently secured accounts, and to prevent customers from carrying vast exposure in their accounts without adequate capital to cover their positions. See, e.g., Sherman v. Sokoloff, 570 F. Supp. 1266, 1270 n.14 (S.D.N.Y. 1983) ("the central purpose of margin calls [is] to protect the broker, not to give notice to customers"). Moreover, it is clear that margin call notice requirements can be varied by contract. See Cauble v. Mabon Nugent & Co., 594 F. Supp. 985, 991 (S.D.N.Y. 1984) ("Margin call notice requirements may be altered or waived by contract . . . and this is done typically in customer agreements which authorize the broker to liquidate any customer property in its possession to satisfy account deficiencies whenever an account becomes undermargined."); see also Modern Settings, Inc. v. Prudential-Bache Securities, Inc., 936 F.2d 640, 645 (2d Cir. 1991) (discussing "contractual right to liquidate margin accounts without notice").

 In fact, under the terms of the Market Makers Agreement,

Whenever either Clearing Member or the Clearing Corporation considers it necessary for its protection, or in the event of the death or insolvency of any Member . . . or in the event any Member shall default in any obligation to Clearing Member or Clearing Corporation, Clearing Member and the Clearing Corporation are hereby severally authorized by Members to sell out or buy in any position or other asset in the Account, to cancel any open, uncleared transaction, to exercise any option, and to close out the Account in whole or in part. . . . Any exercise, sale, buy in, liquidation, or cancellation made under this Agreement, or the Account or any position or other asset therein may be ...

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