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March 12, 1999


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


Respondent James M. Letsos, III, was a retail stock brokerage customer of an account executive named Guy Clemente, who was employed by petitioner Commonwealth Associates ("Commonwealth"). In November 1996, he commenced an NASD arbitration against Clemente and Commonwealth, claiming that he sustained over $100,000 in damages as a result of Clemente's unauthorized purchases in Letsos' account and his failure to execute Letsos' sell orders and that his losses were the product also of Commonwealth's failure to supervise Clemente. He sought both actual and punitive damages against both.

An NASD arbitration panel conducted one prehearing session and a four day hearing in Houston, Texas, in 1998. On May 28, 1998, it rendered a unanimous award for Letsos, holding Clemente and Commonwealth jointly and severally liable for $75,000 in actual damages and holding each liable for $45,000 in punitive damages.

Commonwealth has petitioned this Court, pursuant to the Federal Arbitration Act,*fn1 to vacate the award against it, claiming that the arbitrators acted in manifest disregard of law and that the punitive damage award violated the Due Process Clause.*fn2 Letsos in turn has moved to enter judgment on the award and for Rule 11 sanctions against Commonwealth.

The Record

Before considering the contentions of the parties, it is important deficiencies of the record before the Court.

The arbitration hearing was tape recorded rather than taken down by a shorthand reporter. The tapes are not before the Court and, it appears, not entirely in the possession of the parties. In any case, neither side has had them transcribed by a certified reporter. The only "transcripts" in the record are transcriptions of tapes of Letsos' testimony made by secretaries for the opposing lawyers, and neither of those is certified as accurate*fn3 or complete. Petitioner's transcript admittedly omits "statements between and among the Arbitration Panel and the attorneys pursuant to objections and other matters" while respondent's version avowedly is only an excerpt from Letsos' testimony.*fn4 It appears from other materials submitted that Clemente also testified,*fn5 but the parties have not submitted any transcript of his testimony. Nor does the record before the Court indicate what, if any, other witnesses testified in the hearing or the substance of their testimony.

The situation is equally deficient with respect to exhibits before the arbitration panel. Letsos' counsel has submitted 19 exhibits that, he says, were presented to the arbitrators. He does not say that these 19 were the only exhibits presented. He acknowledges, moreover, that some of the 19 were not received in evidence at the hearing and states that the absence of a hearing transcript makes it impossible to determine which were received and which were not.*fn6 Commonwealth's counsel, for his part, claims that Exhibits 5 through 7 and 19 to the affidavit of respondent's counsel in this Court (which, he says, were marked Exhibits 17, 28, 13 and 14, respectively, in the arbitration hearing) were excluded by the arbitrators, thus implying that the other 15 exhibits submitted to this Court by Letsos were received by the arbitrators. But Commonwealth's counsel maintains that there were other, unspecified exhibits received in evidence in the arbitration hearing.*fn7

The Attack on the Award

As an initial matter, a party moving to vacate an arbitration award faces a high threshold.*fn8 Arbitration awards generally are accorded great deference.*fn9 Judicial review of arbitration awards necessarily is narrowly limited in order to avoid "undermining the twin goals of arbitration, namely, settling disputes efficiently and avoiding long and expensive litigation."*fn10 The burden of establishing grounds to vacate an award is on the party asserting its invalidity.*fn11 In order to overturn an award on the basis of manifest disregard of law, moreover, one must show "more than error or misunderstanding with respect to the law."*fn12 Instead,

  "[t]he 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
  principle but decides to ignore or pay no attention
  to it."*fn13

Actual Damages

Commonwealth first attacks the award of $75,000 in actual damages as having been rendered in manifest disregard of law. It contends that the arbitrators improperly rejected its defenses of waiver, estoppel, ratification and alleged failure to mitigate damages and erred in computing damages. In consequence, it is necessary to piece together whatever can be ...

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