third-party claim against Winters. The Randles cross-move to confirm the
The party moving to vacate an arbitration award has the burden of
proof. Willemijn Houdstermaatschappij, BV v. Standard Microsystems
Corporation, 103 F.3d 9, 12 (2d Cir. 1997). Under federal law, a court's
review of arbitration awards is "very limited . . . in order to avoid
undermining the twin goals of arbitration, namely, settling disputes
efficiently and avoiding long and expensive litigation." Yusuf Ahmed
Alyhanim & Sons, W.L.L. v. Toys "R" Us, Inc., 126 F.3d 15, 23 (2d Cir.
1997); Folkways Music Publishers, Inc. v. Weiss, 989 F.2d 108, 111 (2d
Cir. 1993). Accordingly, the burden on the burden seeking to vacate the
award is a heavy one. Id.; citing Ottley v. Schwartzberg, 819 F.2d 373,
376 (2d Cir. 1987). An arbitrator's decision may be vacated, however,
where the award is in "manifest disregard of the law." Id.; Merrill
Lynch, Pierce, Fenner & Smith, Inc. v. Bobker, 808 F.2d 930, 933-34 (2d
Proving "manifest disregard" means more than simply showing that the
arbitrator made an error or misunderstood the law. Bobker, 808 F.2d at
933. A person seeking to vacate an award for manifest disregard must show
that the error was obvious and capable of being readily and instantly
perceived by the average person qualified to serve as an arbitrator.
DiRussa v. Dean Witter Reynolds, Inc., 121 F.3d 818, 821 (2d Cir. 1997).
Moreover, the term "disregard" implies I that the arbitrator appreciates
the existence of a clearly governing legal principle but decides to
ignore or pay no attention to it. Id. Thus, to modify or vacate an award
on this ground, a court must find both that (1) the "arbitrators knew of
a governing legal principle yet refused to apply it or ignored it
altogether," and (2) the "law ignored by the arbitrators [was] `well
defined, explicit, and clearly applicable'" to the case. Id.; citing
Folkways, 989 F.2d at 112.
Where, as here, an arbitrator has not set forth the specific rationale
supporting the decision, the Court may confirm an award if "a ground for
the arbitrator[s] decision can be inferred from the facts of the case."
Standard Microsystems, 103 F.3d at 13. If there is "even a barely
colorable justification for the outcome reached," or even if the award is
tainted by errors of fact or law that do not rise to the level of
manifest disregard, the court must confirm the arbitration award. Id. at
Here, the Petitioners contend that the arbitration panel deliberately
overlooked the law that generally insulates officers of a brokerage from
vicarious liability for their agents' acts; failed to apply the proper
statute of limitations; and incorrectly attributed damages to them that
they did not cause. The Petitioners' efforts to argue that the panel
disregarded a "clearly governing legal principle" are substantially
hampered by their failure to supply the Court with a transcript of the
tape recorded proceedings. Other than the panel's award, the Petitioners
have only supplied the Court with the Petitioners' counsel's self-serving
summary of the testimony in his supporting affidavit. The lack of a
sufficiently complete record alone is enough to require rejection of the
Petitioners' position. It is the Petitioners' burden to demonstrate
manifest disregard of the law, and the failure to offer the entire record
leaves the Court unable to exclude the possibility that the award is
supported by evidence that the Petitioner has not supplied. See
Commonwealth Associates v. Letsos, 40 F. Supp.2d 170, 174 (S.D.N Y
Nevertheless, the Court finds that, on the face of the limited record
before it, the Petitioners have failed to carry their burden of showing
any "manifest disregard."
A. As to the finding of individual liability
The Petitioners contend that they cannot be held liable for Winters'
actions involving the Randles' account because "a person's status as an
officer, director, or shareholder, absent more, is not enough to trigger
liability," citing Hemming v. Alfin Fragrances, Inc., 690 F. Supp. 239,
245 (S.D.N.Y. 1988), and because the Randles did not show that the
Petitioners had a direct involvement with Winters' acts. Their argument
derives from the "control person" defense in Section 20(a) of the
Securities and Exchange Act, 15 U.S.C. § 78t(a), which states that
every person who, directly or indirectly, controls any
person liable under any provision of this chapter
. . . shall also be jointly and severally liable with
and to the same extent as such controlled person to
any person to whom such controlled person is liable,
unless the controlling person acted in good faith and
did not directly or indirectly induce the act or acts
constituting the violation or cause of action.
Even in the absence of a transcript, it is clear from the panel's
decision that there was a sufficient basis to hold Neuhaus liable to the
Randles, since the evidence shows that he was directly involved in their
loss. According to the Randles' complaint, they informed Neuhaus of
Winters' actions, and Neuhaus promised to take personal oversight of
their account and recover their money, but never took any action on his
promises. Based upon Neuhaus' assurances, the Randles left their money
with Lew Lieberbaum & Co., where Winters eventually squandered it. This
would certainly suffice to establish Neuhaus' meaningful participation in
the events that caused the Randles' losses, or, at the very least,
prevent Neuhaus from proving the essential element of "good faith" to
establish a "control person" defense.
As for Petitioners Lew and Lieberbaum, the Court agrees that the bare
assertions in the Randles' complaint do not demonstrate their personal
participation. However, as discussed above, the absence of a transcript
prevents the Court from definitively finding that, at the hearing, Lew and
Lieberbaum carried their burden of establishing a "control person"
defense to joint and several liability. Moreover, the Court finds that
the "control person" defense would only protect Lew and Lieberbaum from
liability from claims under the Securities and Exchange Act, not from
tort claims for fraud, negligent misrepresentation, and similar claims
that are governed by different standards of joint or vicarious
liability. As stated above, where the arbitrator does not set forth the
basis for his findings, the court may infer whether any colorable claim
can be supported by the evidence. See e.g. Westmoreland Capital Corp. v.
Findlay, 916 F. Supp. 242, 247 (W.D.N.Y. 1996) ("the NASD Code provides
for arbitration of `any dispute, claim or controversy . . . .'" not just
disputes arising under securities laws) (emphasis added).
Here, the Randles apparently introduced into evidence an administrative
finding by the State of Florida, which found the all of the Petitioners
guilty of market manipulation, sale of unsuitable securities, concealment
of facts, and failure to adequately supervise their employees in the
Florida branch office from 1991 to 1992. Without knowing anything more
about the testimony that was adduced at the hearing, the arbitration
panel might have relied upon this evidence to support a finding that all
of the Petitioners were actively involved in a scheme to promote
unsuitable stocks like Action Products to clients in Florida, including
the Randles. Such active participation would defeat the "control person"
defense under the Securities and Exchange Act, and could constitute a
separate, actionable tort for fraud or negligent misrepresentation. At
the least, the Florida administrative finding would support a cause of
action for negligent supervision
against Petitioners Lew and Lieberbaum, as the administrative citation
clearly establishes that Lew and Lieberbaum were aware of the fraudulent
acts taking place in the Florida office. New York Islanders Hockey Club
LLP v. Comerica Bank, 71 F. Supp.2d 108, 119 (E.D.N.Y. 1999). These tort
actions would expose Lew and Lieberman to joint and several liability
regardless of whether their "control person" defense was valid. U.S. v.
Alcan Aluminum Corp., 990 F.2d 711 (2d Cir. 1993) (finding joint and
several liability for joint tortfeasors).
Therefore, the Petitioners have failed to carry their heavy burden of
showing manifest disregard of the "control person" defense.
B. As to the statute of limitations defense
The Petitioners contend that the Randles' allegations are untimely,
given the hybrid one-year/three-year statute of limitations applying to
Securities and Exchange Act claims. Lampf Pleva, Lipkind; Prupis &
Petigrow v. Gilbertson, 501 U.S. 350, 111 S.Ct. 2773, 115 L.Ed.2d 321
(1991). The Randles began incurring losses when Winters sold their Action
Products stock at a loss in the Spring of 1992, and eventually filed
their demand for arbitration nearly six years later in December 1997.
While the Petitioners' argument might be sufficient to defeat claims
under the Securities Act as untimely, they fail to address the timeliness
of any of the other potential claims that the facts could have
supported. For example, a claim for fraud under New York State law is
governed by a six-year statute of limitations. N Y CPLR § 213(8). It
is possible to infer from the scant evidence in the record before this
Court that the arbitration panel found that the Randles had presented a
timely claim for fraud under New York State law, and decided the case in
their favor on that ground or on some other timely cause of action.
Moreover, the Petitioners' motion to dismiss before the arbitration
panel contains no discussion of any statute of limitations defense. While
the Petitioners cite the arbitration panel's failure to discuss the
statute of limitations issue in their decision as evidence of the panel's
manifest disregard of the issue, the absence of any indication in the
record that the Petitioners expressly presented any arguments on the
timeliness defense actually works against them. In DiRussa, 121 F.3d at
822, the Second Circuit refused to vacate an arbitral decision that
failed to award attorney's fees to a prevailing plaintiff in an age
discrimination case. Although the court found that the governing law was
clear that the plaintiff was entitled to a fee award, the fact that the
plaintiff had not brought that governing law to the attention of the
arbitrator prevented the court from finding that the arbitrator
knowingly disregarded the law. Id. The same rationale applies here; in
the absence of evidence that the Petitioners argued a statute of
limitations defense to the arbitration panel, this Court cannot find that
the panel knowingly disregarded the applicable law of the statute of
Therefore, the Court finds that the Petitioners have not established
that the panel's decision that the claims were timely evidences a
manifest disregard of that law.
C. As to the calculation of damages
Next, the Petitioners argue that the award of $53,352 in actual damages
was improper, because it reflected losses from trades made after Winters
transferred the Randles' money into an account at an entirely different
The Petitioners' arguments here suffer from two crippling flaws. The
first is their failure to point to any "governing legal principle" that
the arbitration panel disregarded. The Petitioners' brief on this point
cites a single case for the proposition that the court must be able to
infer a basis for the award from the arbitrator's
decision. See e.g. Standard Microsystems, supra. Even accepting the
Petitioners' argument that a brokerage cannot be liable for trades made
after the brokerage's agent transferred a client's account to a different
brokerage, the Court cannot find that this principle is "clearly
applicable" to this case. The panel could easily have found the
Petitioners to have been negligent in supervising Winters, and thus, they
may be held liable for all of the damages reasonably forseeable and
proximately caused by that negligence, including Winters' piracy of the
Randles' money. See e.g. Woodling v. Garrett Corp., 813 F.2d 543, 555-56
(2d Cir. 1987) (original tortfeasor is liable for acts proximately caused
by his negligence despite intervening tort by a third party if third
party's acts were foreseeable). Here, the Randles' complaint indicates
that they informed Neuhaus, and Neuhaus informed Lew and Lieberman, of
the improprieties going on in the Florida office. The Court here cannot
say that it would not be foreseeable to the Petitioners that, a member of
the Florida office might engage in this kind of fraudulent conduct with a
In addition, there is no reason to necessarily conclude that the
panel's award to the Randles included damages for trades made after the
funds were transferred from Lew Lieberbaum & Co. The Randles' complaint
sought $22,687 in losses from the Action Products trades, and interest at
a rate of 18%. Nothing in the record before this Court indicates that the
Petitioners objected to the arbitration panel's consideration of
pre-award interest or the rate demanded by the Randles. Assuming the
arbitrators awarded the damages requested in full on the Action Products
transactions only, the amount of $22,687 in damages from the Action
Products trades would be increased by approximately $29,215 in simple
interest over the five year period from the time Winters sold the Action
Products stock to the hearing date, yielding a total sum of $51,902.
Given the deference to arbitration awards by the courts, this figure is
sufficiently close to the $53,352 actually awarded by the panel so as to
defeat any claim by the Petitioners that the panel must necessarily have
included the non-Lew Lieberbaum & Co. trades in fixing the damage award.
As such, the Petitioners have failed to show that the panel disregarded
any controlling law in calculating the Randles' damages. The Court finds
that the Petitioners have failed to carry their burden of showing that
the award to the Randles was the result of manifest disregard of any
controlling law. Having failed to carry their burden of proof to vacate
the award, the Petitioners' motion to vacate is denied, and the Randles'
cross-petition to confirm the award is granted.
D. As to the third-party claim against Winters
The Petitioners' final argument is that the panel erred in dismissing
their third-party complaint against Winters. That complaint alleged that
Winters' wrongful acts took place in violation of Lew Lieberbaum & Co.
policies, and were thus outside the scope of his employment.
Once again, the lack of any record showing the evidence adduced at the
hearing prevents the Court from finding that the panel disregarded any
governing law in dismissing the third-party complaint. Nothing in the
record before this Court demonstrates that Winters violated any Lew
Lieberbaum & Co. policies in any way; indeed, the record before this
Court contains no indication that any policies whatsoever exist at Lew
Lieberbaum & Co.
Moreover, it is significant that the Florida administrative citation
found that the Petitioners were part of a scheme with the Florida branch
office-the office where Winters worked-to fraudulently manipulate the
market price of a stock that Lew Lieberbaum & Co. was selling to its
clients. If the panel found the the Petitioners had fraudulently
manipulated the market value of the Action Products stock, as did the
State of Florida, it clearly could have found that the Randles' losses
due entirely to the Petitioners' actions, or that Winters undertook his
wrongful acts only at the Petitioners' directions. In the absence of any
evidentiary record or any reasoning by the arbitration panel, this Court
need merely come up with a barely colorable rationale for the arbitration
panel's decision in this regard. The scenario described above is
Thus, the Petitioners' motion to vacate the dismissal of their
third-party complaint is denied.
For the foregoing reasons, the Petitioners' motion to vacate the
arbitration award is DENIED, and the Respondents' crossmotion to confirm
the award is GRANTED. The award is confirmed in all respects. The Clerk
of the Court is directed to enter a judgment in favor of the Respondents
against the Petitioners in the amounts indicated in the arbitration
award. The Clerk is further directed to close this case.
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