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.
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
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
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 ...