The opinion of the court was delivered by: John T. Curtin, United States District Judge.
Plaintiffs bring this action pursuant to the Federal Arbitration Act,
9 U.S.C. § 1, et seq., seeking judicial review of an arbitration
award rendered by the National Association of Securities Dealers ("NASD")
Dispute Resolution, Inc., on April 6, 2001, in the claim titled Benderson
v. The GMS Group, LLC and Joseph Costa, NASD Arbitration No. 98-02618.
Plaintiffs have moved for an order vacating the award pursuant to
9 U.S.C. § 10. Oral argument of the motion was heard by the court on
October 26, 2001. For the following reasons, plaintiffs' motion is
The factual and procedural background of the underlying dispute is set
forth at length in the pleadings and supporting affidavit of Lionel G.
Hest, plaintiffs' arbitration counsel (Item 3), and the responding
affidavit of Patrick J. Finegan, Jr., defendant's arbitration counsel
(Item 14). Plaintiff GMS Group, LLC, is a securities dealer/broker
registered with the United States Securities and Exchange Commission
("SEC"), and is a member of NASD. GMS is a limited liability corporation
with its principal place of business in Livingston, New Jersey. Plaintiff
Joseph Costa is an employee and registered representative of GMS.
Defendant Nathan Benderson is a resident of Orchard Park, New York, and
is owner, president, and chief executive officer of the Benderson
According to Mr. Benderson's Statement of Claim, filed with the NASD on
June 6, 1998, Benderson had been doing a "fixed income" investment
business with GMS and Costa for several years prior to December 1996,
when he discussed with Costa the availability of investment alternatives
"to perhaps extract something" from the generally reported advances in
the stock markets (Item 3, Ex. B, p. 4). Costa suggested index options,
which involve contracts (referred to as "puts" or "calls") to buy or sell
a specified number of shares or commodities within a set time period and
at a predetermined price, based on the rise and fall of the various
securities indices. Between December 1996 and May 1997, Benderson
(through GMS and Costa) executed several index option transactions, which
resulted in a net loss of $1,513,340.00 (id., pp. 5-11). Benderson sought
restitution of this amount, as well as loss of opportunity costs,
punitive damages, and attorneys' fees, based on the following causes of
1. Common law fraud, based on alleged violations of
SEC, NASD, and New York Stock Exchange ("NYSE")
rules prohibiting fraudulent practices in
2. Common law fraud, based on alleged violations of
NASD and NYSE rules requiring a broker to have
reasonable grounds for recommending securities
transactions suitable for the customer.
3. Common law fraud, based on alleged
misrepresentations by Costa as to the soundness of
4. Breach of contract, based on Costa's alleged
failure to adhere to the underlying brokerage
agreement to make investment recommendations for
the customer's benefit.
5. Breach of fiduciary duty, based on Costa's alleged
failure to act in accordance with his solicited
professional obligation of financial
6. Negligence, based on the foreseeable harm
proximately caused by Costa's alleged failure to
meet the standards set forth in the SEC, NASD and
NYSE suitability and supervision rules.
7. Securities law violations, based on several federal
and state statutory and regulatory provisions.
On December 1, 1998, GMS and Costa filed their answer to the claim,
denying all allegations of wrongdoing and setting forth several
affirmative defenses (see Item 3, Ex. C). GMS and Costa contended that
Benderson himself initiated the index option transactions at issue by
contacting Costa to inquire about an investment device he had heard about
whereby he could "place a bet" that the stock market would decline in
According to the answer, Benderson directed Costa to execute the
transactions despite Costa's several unsuccessful attempts to dissuade
him and repeated oral and written warnings about the risks of index
options trading (see id., p. 2).
A hearing was commenced on February 24, 2000, before a panel of three
NASD arbitrators. The hearing concluded on March 1, 2001, after a total
of eleven days of testimony and argument.*fn1 At the conclusion of the
hearing, counsel for GMS and Costa requested a written opinion explaining
the panel's rationale for its disposition of each claim. On April 6,
2001, the panel issued its award, finding as follows:
After considering the pleadings, the testimony and
evidence presented at the hearing, the Panel has
decided in full and final resolution of the issues
submitted for determination as follows:
1. [GMS and Costa] be and hereby are jointly and
severally liable for and shall pay to [Benderson]
the sum of $150,000.00 as compensatory damages.
2. [Benderson]'s request for punitive damages is ...