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July 28, 1998

In the Matter of the Arbitration between ZAHID HUSSAIN ASHRAF and SHAHIDA ZAHID, Petitioners, and REPUBLIC NEW YORK SECURITIES CORPORATION, Respondent.


The opinion of the court was delivered by: CARTER


ROBERT L. CARTER, District Judge

 I. Introduction

 Republic New York Securities Corp. ("RNYSC"), a registered broker/dealer in securities and a futures commission merchant ("FCM") registered with the National Futures Association ("NFA"), moves pursuant to the Federal Arbitration Act, 9 USC § 1 et seq., to vacate an arbitration award of $ 12,993,750 issued on December 29, 1997, by an NFA arbitration panel in favor of Zahid Hussain Ashraf and Shahida Zahid, husband and wife (hereafter collectively "Hussain"), citizens of Pakistan and residents of Dubai, United Arab Emirates. Hussain cross moves to confirm the award.

 The controversy arose over the handling of Hussain's account by RNYSC. Since August 1994, Hussain had a commodities futures trading account with RNYSC in which Hussain traded almost exclusively in foreign currencies, particularly British pounds. In March, 1995, RNYSC doubled Hussain's margin requirements. On March 1 and 2, RNYSC executed one half of Hussain's trading orders and then liquidated the account.

 The customer agreement provided for arbitration of any controversy arising from or relating to the account (Hussain Mem. at 4). Hussain filed a demand for arbitration on February 23, 1996. (Id.) A three member panel was appointed by NFA (id. at 5); the parties submitted a Joint Hearing Plan on March 11, 1997 (RNYSC Mem. at 9); the panel heard ten days of testimony commencing on March 24, 1997, with closing arguments on September 11, 1997 (id.); post-hearing briefs were filed simultaneously on November 14, 1997. (Id. at 10).

 On December 29, 1997, the panel issued its award. As is not unusual, the panel issued no opinion explaining its decision. However, aside from the award at issue here, the panel explicitly denied Hussain's claims against RNYSC for punitive damages, treble damages, interest, attorneys fees and other costs.

 RNYSC argues that a damages theory based upon the exchange of short British pounds forwards contracts into an equivalent quantity of short British pounds futures contracts (exchange of physicals, hereafter "EFP"), presumably how the award was formulated, was not addressed at the hearing; that no evidence was presented to support an award for damages relating to EFP (RNYSC Mem. at 3); that Hussain's first damages calculation failed to mention or identify any damages resulting from failure to execute the EFP ordered on March 1, 1995 (id. at 8); that neither Hussain's revised damages calculation nor his final damage calculation identified any EFP damages, (id.); that there was no mention of EFP in the Joint Hearing Plan, which serves a function similar to a pre-trial brief or order (id. at 9); that no mention of EFP damages was testified to or mentioned by any witness or attorney during the ten days of hearings before the panel (id.); that in three pages of his fifty page post-hearing brief, Hussain for the first time raised the issue of RNYSC's failure to execute the EFP ordered on March 1, 1995, and identified $ 12,993,750 as damages resulting from that failure (id. at 10); that prior to the post-hearing brief, "Hussain had never argued [entitlement] to damages [based on] any theory other than Close-Out Damages" (id. at 11); that since RNYSC had no advance notice of the EFP damages claim, it did not address the issue in its own post-hearing memorandum served at the same time; and being barred by the arbitration panel from filing additional memorandum, it could not address the issue as without merit and unfair in being raised by Hussain in circumstances when the argument could not have been challenged. (Id. at 12).

 Hussain takes issue with these contentions. He asserts that RNYSC was instructed to convert his short British pounds forwards contracts into an equivalent quantity of short British pounds futures contracts. He complained that this EFP order was not fully executed; that RNYSC liquidated Hussain's cash positions on the interbank market rather than on the futures exchange, where the liquidation would have taken place if the EFP of the cash positions into futures contracts had been executed as requested. (Hussain Mem. at 6-7). Hussain argues that the record supports the panel's award. He relies on Exhibit 35 introduced at the arbitration hearing and filed here as Appendix E to Affidavit of Daniel J. Brooks in support of Hussain's cross motion. That document shows cancellation on March 2, 1995 at 10:50 A.M. of a purchase of 437.5 million British pounds at a price of $ 1.5881 per pound for a total cost of $ 694,793,750, and three purchases of British pounds on the same day at $ 1.6178 per pound - 62.5 million at 1:52 PM for a total cost of $ 101,112, 500; 125 million at 1:02 P.M for a total cost of $ 202,225,000; 250 million at 1:56 P.M. for a total cost of $ 404,450,000. The difference in costs to Hussain between what the document labels as a canceled transaction and the three purchases is $ 12,993,750, the amount of the award.

 RNYSC contends that what Exhibit 35 lists as a March 2 cancellation was a failure to convert forwards into futures and was not a cancellation of an outright buy order (RNYSC Mem. at 18), and that Hussain misled the panel by confusing "the EFP transaction with an outright buy," and that the 0.0297 price differential between the so-called canceled order and the three subsequent purchases was the exchange rate rise in the British pound between March 1 and March 2. (Id. at 18-19).


 One of the bases for vacating an award provided under § 10(c) of the Federal Arbitration Act is when the arbitrators are guilty of misconduct "or any other misbehavior by which the rights of any party have been prejudiced." RNYSC invokes this provision claiming that it was subjected to fundamental unfairness in the arbitration process when Hussain's EFP theory of damages surfaced for the first time in his post-hearing submission, catching RNYSC by surprise, with no opportunity to establish that the claim was without merit. It argues that the process imposed by the panel in permitting RNYSC to be put in this position was fundamentally unfair and denied RNYSC a fair hearing.

 All parties are entitled to notice and an opportunity to be heard. Totem Marine Tug & Barge, Inc. v. North Am. Towing, Inc., 607 F.2d 649, 651 (5th Cir. 1979). However, defendant can prevail only if no "ground for the arbitrator[s'] decision can be inferred from the facts of the case." Sobel v. Hertz, Warner & Co, 469 F.2d 1211, 1216 (2d Cir. 1972).

 Arbitration panels' determinations are generally accorded great deference, and there is a strong presumption in favor of enforcing arbitration awards. See, e.g., Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp, 460 U.S. 1, 24-25, 74 L. Ed. 2d 765, 103 S. Ct. 927 (1983). A party seeking to vacate an arbitration award has the burden of proof, see, Matter of Andros Compania Maritima, S.A. of Kissavos (Marc Rich & Co.,A.G.), 579 F.2d 691, 700 (2d Cir. 1978), and the level that must be reached to prevail is extremely high. Ottley v. Schwartzberg, 819 F.2d 373, 376 (2d Cir. 1987). Wall Street Associates, L.P. v. Becker Paribas Inc., 27 F.3d 845, 848 (2d Cir. 1994) (In an action to vacate an arbitrators' award the burden is on the moving party to establish any of the grounds enumerated under § 10(a) of the Federal Arbitration Act which includes misconduct prejudicing the rights of a party.)

 Under Second Circuit jurisprudence in this area court review is very narrowly circumscribed to avoid undermining the raison d'etre of arbitration - settling disputes efficiently and avoiding the long and expensive litigation process. Folkways Music Publishers v. Weiss, 989 F.2d 108, 111 (2d Cir. 1993). An award must be upheld on "even a barely colorable justification for the outcome reached." Houdstermaatschappij, BV v. Standard Microsystems Corp, 103 F.3d 9, 13 (2d Cir. 1997) (quoting from Matter of Andros Compania Maritima, S.A., 579 F.2d at 704). If the ground for the arbitrators' decision can be inferred from the facts, even if based on an error of law or fact, it must be confirmed. Fahnestock & Co. v. Waltman, 935 F.2d 512, 516 (2d Cir. 1991); Siegel v. Titan Indus. Corp., 779 F.2d 891, 892-93 (2d Cir. 1985) (Neither an erroneous application of the law or an erroneous determination of the facts suffices to justify vacating an arbitration award). There is no need to explain the rationale underlying the award, and all ambiguities must be resolved in favor of confirmation of the award. Pompano-Windy City Partners, LTD. v. Bear Stearns & Co., Inc., 794 F. Supp. 1265, 1275 (S.D.N.Y. 1992) (Leisure, J). "Only the most egregious error adversely affecting the rights of a party would justify" invalidating an award. Id. at 1277 (quoting from Hunt v. Mobil Oil Corp., 654 F. Supp. 1487, 1512 (S.D.N.Y. 1987) ( Weinfeld, J.)).

 While judicial review is narrowly limited, Tempo Shain Corp. v. Bertek, Inc., 120 F.3d 16, 19 (2d Cir. 1997), where fundamental fairness is violated, the panel's determination becomes open to judicial review. Id. at 20. Although misconduct jeopardizes an award, it "must amount to a denial of fundamental fairness of the arbitration proceeding" for the movant to prevail. Transit Cas. Co. v. Trenwick Reins Co., 659 F. Supp. 1346, 1354 (S.D.N.Y. 1987) (Ward, J.), aff'd, 841 F.2d 1117 (2d Cir. 1988). Manifest disregard of the law, a judicially created ground for vacating an award, requires "something beyond and different from mere error in the law or failure on the part of the arbitrators to understand or apply the law." Siegel, 779 F.2d at 899; Trans- Asiatic Oil LTD., S.A. M/VSilver Lady v. UCO Marine Int'l LTD., 618 F. Supp. 132, 135 (S.D.N.Y. 1985) (Leisure, J.) (award confirmed absent showing arbitrators deliberately ignoring the law). A misapplication is not enough, and the arbitrators' conclusions must be given deference even when erroneous. American Postal Workers Union v. US Postal Service, 682 F.2d 1280, 1285 (9th Cir. 1982), cert. denied, 459 U.S. 1200, 75 L. Ed. 2d 431, 103 S. Ct. 1183 (1983). Even an ambiguity in the decision which may infer that the arbitrators exceeded their authority does not warrant refusing to enforce the award. United Steelworkers of America v. Enterprise & Car Corp., 363 U.S. 593, 598, 4 L. Ed. 2d 1424, 80 S. Ct. 1358 (1960). Nonetheless, when proof at the hearing fails to support the award, it should be vacated. Totem Marine Tug & Barge, Inc, 607 F.2d at 651.

 While defendants argue that the panel could only have based the award on the new theory surfacing for the first time in Hussain's post-hearing brief, the evidence presented in support of that contention is not conclusive, as it must be. Wall Street Associates, L.P., 27 F.3d at 849. RNYSC must show that no proper basis for the award can be inferred from the facts of the case, id., which it cannot do.

 Exhibit 35 introduced at the hearing appears to be the basis for the award. That document was prepared by RNYSC's expert witness, a Dr. Robert J. Mackay, from information supplied by RNYSC's counsel. *fn1" During the hearing it was the subject of inquiry by counsel for Hussain and significant colloquy between the chairman of the panel and RNYSC's expert:

Q. Let me ask you this. If you're trying to establish the time of liquidation****what would be ...

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