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STRATTON OAKMONT, INC. v. NICHOLSON

November 11, 1994

STRATTON OAKMONT, INC. and JEFFREY HONIGMAN, Plaintiffs, against PHILLIP R. NICHOLSON, Defendant.


The opinion of the court was delivered by: ARTHUR D. SPATT

 SPATT, District Judge:

 The plaintiffs, Stratton Oakmont, Inc. ("Stratton") and Jeffrey Honigman ("Honigman"), move pursuant to Section 10(a)(4) of the Federal Arbitration Act ("FAA"), 9 U.S.C. ยง 10(a)(4), to vacate an arbitration award issued on March 15, 1994 in the arbitration entitled: "In the Matter of the Arbitration Between Phillip R. Nicholson, Claimant and Stratton Oakmont, Inc. and Jeffrey Honigman, Respondents", NASD Arbitration No. 92-01316. The ground for the plaintiffs' motion is that the arbitrators exceeded their powers and acted in manifest disregard of New York law in awarding punitive damages against Stratton and Honigman.

 BACKGROUND

 The plaintiff Stratton is a securities broker-dealer, located in New York. The plaintiff Honigman is a registered securities representative who works for Stratton. The defendant Phillip R. Nicholson ("Nicholson") is an attorney who resides and works in Los Angeles, California.

 According to the plaintiffs, in January 1991 Honigman called Nicholson to ask whether he was interested in purchasing stocks through Stratton. After several such solicitations, Nicholson agreed and eventually invested $ 193,500 in securities with Stratton. The customer agreement necessary for Nicholson to maintain his account with Stratton, entered into by Nicholson and Bear, Stearns & Co., Inc., Stratton's clearing agent, provided in relevant part as follows:

 
NEW YORK LAW TO GOVERN. THIS AGREEMENT . . . SHALL BE CONSTRUED, AND THE RIGHTS AND LIABILITIES OF THE PARTIES DETERMINED, IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK.
 
. . .
 
YOU AGREE, AND BY MAINTAINING AN ACCOUNT FOR YOU BEAR STEARNS AGREES, THAT CONTROVERSIES ARISING BETWEEN YOU AND BEAR STEARNS CONCERNING YOUR ACCOUNTS OR THIS OR ANY OTHER AGREEMENT BETWEEN YOU AND BEAR STEARNS, WHETHER ENTERED INTO PRIOR TO, ON OR SUBSEQUENT TO THE DATE HEREOF, SHALL BE DETERMINED BY ARBITRATION. ANY ARBITRATION UNDER THIS AGREEMENT SHALL BE HELD UNDER THE RULES AND AUSPICES OF THE NEW YORK STOCK EXCHANGE, INC., THE AMERICAN STOCK EXCHANGE, INC., OR THE NATIONAL ASSOCIATION OF SECURITY DEALERS, INC.

 Nicholson alleges that at the time Honigman made the solicitations, he was recovering from heart surgery and that through manipulative and deceptive tactics Honigman induced him to invest in high-risk securities. Moreover, Nicholson alleges that Honigman effected a number of trades for Nicholson's account without his permission. As a result of Honigman's conduct, Nicholson contends he lost approximately $ 95,000.

 In April 1992, Nicholson commenced an arbitration before the National Association of Security Dealers ("NASD"). Nicholson's Statement of Claim sought compensatory, punitive and treble damages for, among other things, fraud, deceit, breach of fiduciary duty, breach of contract, violation of the NASD's rules, theft, conversion, engagement in a pattern of racketeering and an illegal enterprise, and breach of the covenant of good faith and fair dealing.

 The arbitration was convened on February 2, 1994 before a panel of three arbitrators appointed by the NASD, and lasted for two full hearing days comprising four sessions. At the conclusion of the hearing, the arbitrators rendered a unanimous decision in favor of Nicholson, and issued their award on March 15, 1994. The arbitration panel awarded $ 66,000 plus interest in compensatory damages to Nicholson, to be paid jointly and severally by Stratton and Honigman. The panel also awarded a total of $ 50,000 in punitive damages to Nicholson, half to be paid by Stratton and half by Honigman.

 Stratton and Honigman presently move to vacate the entire award on the ground that the arbitrators exceeded their powers by awarding punitive damages. Nicholson does not oppose the motion, and in fact has signed a ...


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