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MAX MARX COLOR & CHEM. EMPLOYEES' PROFIT v. BARNES

January 21, 1999

MAX MARX COLOR & CHEMICAL CO. EMPLOYEES' PROFIT SHARING PLAN, AND WALTER SICHEL, PETITIONERS,
v.
MILTON R. BARNES, KEMPER SECURITIES GROUP, INC., BATEMAN EICHLER, HILL RICHARDS, JOHN G. KINNARD & COMPANY, AND TEXAS CAPITAL SECURITIES, RESPONDENTS.



The opinion of the court was delivered by: Kaplan, District Judge.

MEMORANDUM OPINION

This case calls upon the Court to determine whether an arbitration award should be vacated due to alleged misconduct and manifest disregard of the law by a National Association of Securities Dealers, Inc. ("NASD") arbitration panel.

Facts

In March 1997, Max Marx Color & Chemical Co. Employees Profit Sharing Plan (the "Plan")*fn1 commenced an arbitration before the NASD seeking damages that allegedly resulted from losses in its securities account handled by Milton R. Barnes. The claim named Barnes along with the various brokerage firms at which Barnes was employed and the Plan maintained its account.*fn2 Also named as claimants were Max Marx Color & Chemical Co. ("Max Co."), the Plan's sponsor, and Walter M. Sichel in his capacity as trustee and participant of the Plan and as president and shareholder of Max Co.*fn3

In the statement of claim, petitioners claimed that the respondents were liable on a number of theories, including breach of ERISA's fiduciary duties of prudence and diversification. unauthorized and excessive trading amounting to fraud, fraudulent concealment, negligent misrepresentation, constructive fraud, and violation of NASD rules of fair conduct. Petitioners claimed also that each of the respondent firms failed adequately to supervise Barnes's activities. The respondent securities firms in turn answered the complaint and filed various other claims. In particular, Kinnard filed a cross-claim against Barnes and a counterclaim against Sichel. EVEREN filed counterclaims against Sichel and Max Co. and a motion to dismiss. Paine Webber filed a counterclaim against Sichel. Texas Capital counterclaimed against both Sichel and Max Co.*fn4 The counterclaims, in essence, asserted claims for contribution against Max Co. as the Plan sponsor and against Sichel in his capacity as the Plan trustee with responsibility for authorizing all investment transactions. In addition, EVEREN moved to dismiss, arguing that petitioners' ERISA claims were barred by ERISA's statute of limitations and that their other claims were preempted by ERISA.

In a memorandum dated July 14, 1997, the NASD informed the parties that, absent voluntary submission to the jurisdiction of the NASD, Sichel and Max Co. had no standing to require the respondents to submit to NASD arbitration inasmuch as those claimants were not public customers of the respondent NASD member firms.*fn5 Respondents denounced the decision to remove Sichel and Max Co. from the action arguing, in part, that they had submitted to the NASD's jurisdiction when Sichel filed his statement of claim in his capacity as President and shareholder of Max Co., as a participant in the Plan, and as trustee of the Plan. Sichel and Max Co., however, took advantage of their immediate good fortune and declined the invitation voluntarily to submit to the NASD's jurisdiction.*fn6 In consequence, the claims by and against Sichel and Max Co. were eliminated from the arbitration.*fn7

Subsequent to the removal of Max Co. and Sichel, EVEREN and Kinnard filed motions to dismiss the Plan's statement of claim, arguing in the main that (1) the Plan itself did not have standing under ERISA, and (2) ERISA preempted all of the Plan's other claims.*fn8 The parties allegedly were invited to submit memoranda and pertinent documents to the NASD arbitrators for consideration of the motions,*fn9 and oral argument on the respondents' motions to dismiss was set for May 15, 1998 before an arbitration panel (the "Panel"). The Panel allegedly ordered that no witnesses would be permitted to testify or to present evidence during the oral argument.*fn10

The arbitration panel rendered its award on July 30, 1998, dismissing the Plan's claim against all of the respondents. The award stated:

  "Having considered the Respondents' Motions to
  Dismiss and arguments with regard to statute of
  limitations, standing and preemption issues, the
  panel hereby

  grants the Motions of each Respondent to dismiss all
  claims."*fn11

Petitioners claim here that the arbitration award should be vacated pursuant to Section 10 of the Federal Arbitration Act ("FAA")*fn12 on the grounds that the Panel (1) was guilty of misconduct in failing to hear pertinent evidence and in failing to allow petitioners to amend their statement of claim; (2) was guilty of manifest disregard of law; and (3) failed to delineate the basis of the award.

Discussion

As an initial matter, a party moving to vacate an arbitration award faces a high threshold.*fn13 Arbitration awards generally are accorded great deference.*fn14 Judicial review of arbitration awards is necessarily narrowly limited in order to avoid "undermining the twin goals of arbitration, namely, settling disputes efficiently and avoiding long and expensive litigation."*fn15

Alleged Misconduct

Refusal to Hear ...


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