The opinion of the court was delivered by: KAPLAN
LEWIS A. KAPLAN, District Judge.
This case calls upon the Court to determine whether an arbitration award was rendered in manifest disregard of law and therefore should be vacated.
In April 1995, William B. Kimberly commenced an arbitration before the National Association of Securities Dealers seeking damages that allegedly resulted from losses in his securities account at Alex. Brown & Sons, Inc. ("ABS"). The claim named both ABS and Mark C. Branigan, the ABS stock broker who handled Kimberly's account. Whether in the statement of claim, at the hearing or both, Kimberly contended that Branigan ignored his direction to adopt a conservative investment posture and that he inappropriately recommended as a "sure thing" an investment in Citadel Holding Corporation; he asserted also that ABS ignored his entreaties for help. In consequence, Kimberly claimed that the respondents were liable on the theories, among others, that they had churned his account, violated state and federal securities laws, and violated suitability requirements. In due course, Kimberly dropped the claim against Branigan and proceeded against ABS. ABS in turn filed a third party claim against Branigan.
At the hearing, ABS took the position that neither ABS nor Branigan had done anything wrong, that ABS had properly supervised Branigan's activities, and that Branigan had acted properly with respect to Kimberly's account. After requesting and accepting briefs on the question whether ABS could recover over against Branigan under agency law, the panel issued an award which found ABS liable to Kimberly for $ 167,014 plus interest and found that Branigan was liable to ABS on the third party claim in the amount of $ 83,507 plus interest. Branigan moves to vacate or modify the award on the ground that it was rendered in manifest disregard of the law. ABS crossmoves to confirm it.
The parties agree on the legal standard that governs this matter. The "standard of review for scrutinizing an arbitration award is extremely narrow."
In order to overturn an award on the basis of manifest disregard of law, one must show "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. Moreover, the term 'disregard' implies that the arbitrator appreciates the existence of a clearly governing legal principle but decides to ignore or pay no attention to it."
Branigan's position is simply stated. ABS's witnesses at the arbitration hearing testified that Branigan had acted properly, that ABS had supervised Branigan as required, and that Branigan had done nothing wrong. Following the hearing, both sides briefed the issue whether ABS could recover from Branigan on the third-party claim as a matter of the law of agency. Branigan contends that the law on this point is indisputably in his favor, given the ABS hearing testimony, and that the arbitrators therefore must have acted in manifest disregard of law in making an award against him.
The fact that ABS defended Branigan's actions at the arbitration hearing lends some appeal to Branigan's contention that the arbitrators must have disregarded the law in making an award on the third-party claim. If one does not think too deeply about it, it indeed seems unreasonable to say that ABS should have a recovery over against Branigan given its protestations at the hearing that Branigan had done nothing wrong and so on. But the appeal of Branigan's position is strictly superficial.
To begin with, Branigan ignores the fact that the arbitration panel found that ABS was liable to Kimberly for $ 167,014 with respect to an account for which Branigan was responsible. The panel quite clearly rejected ABS's contention that no one had done anything wrong. Thus, the simplistic argument that Branigan advances -- how can I be liable to ABS if ABS said I did nothing wrong? -- is frivolous.
Moving to a slightly more sophisticated plane, Branigan argues that ABS's testimony that it supervised Branigan's activities properly precludes liability. The theory is that ABS necessarily authorized any misconduct by Branigan. Branigan points to comment d to Section 401 of the agency restatement, which provides in relevant part that "if the principal authorizes a tort, either advertently or inadvertently, he cannot recover for harm resulting to him from it."
There are at least three fundamental problems with Branigan's argument.
First, there can be an enormous difference between a registered broker-dealer properly discharging its statutory responsibility to supervise its registered representatives, on the one hand, and authorizing a tort, on the other. Section 15(b) of the Securities Exchange Act of 1934 (the "Exchange Act")
permits the Securities and Exchange Commission to sanction those persons associated with a broker-dealer who "fail reasonably to supervise, with a view to preventing [securities] violations . . . another person who commits such a violation, if such person is subject to his supervision." No such charge will lie, however, where the person "reasonably discharged the duties and obligations incumbent upon him by reason of the [firm's] procedures" and reasonably believed those procedures were being followed.
The statute thus creates three central foci for evaluating supervisory liability: the firm's compliance procedures, the reasonableness of the putative supervisor's actions, and the meaning of "subject to his ...