The opinion of the court was delivered by: Shira A. Scheindlin, United States District Judge.
Bear Stearns & Co., Inc. ("Bear Stearns"), a New York investment bank,
offers clearing services for other broker-dealers through its subsidiary
Bear Stearns Securities Corporation ("BSSC"). BSSC served as the clearing
firm for broker-dealer A.R. Baron ("Baron") at a time when Baron engaged
in criminal and fraudulent conduct. Petitioners Bernard and Maureen
McDaniel ("Claimants") were Baron customers during this time.
On July 31, 2001, an arbitration panel (the "Panel") found Bear Stearns
and BSCC (collectively "Bear") jointly and severally liable to Claimants
for breach of contract and for aiding and abetting Baron's fraud. The
arbitrators issued a thirty-six page arbitration award (the "Award")
which offered detailed findings of fact and explained their conclusions
of law. In this motion to vacate that Award, Bear has attacked the
Panel's decision on numerous grounds. As discussed below, none of the
issues raised by Bear show that the Panel exceeded its power or
manifestly disregarded the law or evidence so as to require vacating the
The Supreme Court has more than once told lower courts that the Federal
Arbitration Act ("FAA") establishes a strong federal policy favoring
arbitration. See e.g., Mastrobuono v. Shearson Lehman Hutton, Inc.,
514 U.S. 52, 62(1995); Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220,
226(1987). This policy reflects a desire to enforce arbitration
agreements into which parties have entered as well as to encourage swift
and efficient dispute resolution. See Dean Witter Reynolds Inc. v.
Beard, 470 U.S. 213, 220(1987); Willemijn Houdstermaatschappit, BV v.
Standard Microsystems Corp., 103 F.3d 9, 12 (2d Cir. 1997). "Undue
judicial intervention would inevitably judicialize the arbitration
process, thus defeating the objective of providing an alternative to
judicial dispute resolution." Tempo Shane Corp. v. Bertek Inc.,
120 F.3d 16, 19 (2d Cir. 1997) (quotation marks omitted). For these
reasons, arbitration decisions are accorded "great deference." Id.
An investment bank such as Bear that has repeatedly agreed to
arbitration — and, in fact, drafted the contract requiring these
parties to arbitrate — was well-aware of the binding nature of
arbitration and the deference that courts must afford to arbitration
awards. Bear knows that a motion to vacate is not an appeal; federal
courts are not supposed to "superintend arbitration proceedings." Id.
(quotation marks omitted). It also knows that district courts do not hear
appeals from decisions of arbitration panels which, by definition, are
final and binding.
Bear has payed lip service to the vacatur standards of "exceed[ing] its
power" and "manifest disregard" in asking this Court, sub silentio, to
substitute its judgment for that of the Panel. If I had that authority, I
might indeed have decided the case differently.*fn1 However, the Court's
review of an arbitration award is rigidly narrow. Given these
constraints, Bear's motion undermines the concept of swift and efficient
For the reasons stated below, Bear's motion to vacate the Award is
denied and Claimants' cross-motion to confirm the Award is granted.
A. The Role of Clearing Firms and the Applicable Regulatory Scheme
In a typical clearing arrangement, a clearing firm provides many
backroom and administrative functions for another broker-dealer's
customer accounts. See Gerald B. Cline and Raymond L. Moss, Liability of
Clearing Firms: Traditional and Developing Perspectives, 1062 PLI/Corp.
139, 143(1998) Generally, the clearing firm is responsible for
maintaining records and mailing customer account documentation, as well
as receiving, maintaining and delivering customers' securities and
funds. See id. Henry F. Minnerop, The Role and Regulations of Clearing
Brokers, 48 Bus. Law. 841, 841(1993). The clearing firm may also extend
credit in order to finance customer transactions in margin accounts or,
in some cases, may execute transactions on exchanges or on the
over-the-counter markets. See id. Meanwhile the broker-dealer, referred
to as the `introductory broker', maintains many of the functions that
require direct personal contact with customers, such as soliciting
customers, providing investment advice, and accepting customer orders for
the purchase or sale of securities. See id.
According to Rule 382 of the New York Stock Exchange ("NYSE"), as
amended in 1982, a clearing agreement must "specifically identify and
allocate the respective functions and responsibilities of the introducing
and carrying organizations . . ." Ross v. Bolton, 904 F.2d 819, 825 (2d
Cir. 1990) (quoting Rule 382, reprinted in NYSE Guide (CCH) ¶
2382). The Rule also requires that a customer whose account has been
"introduced" to a clearing firm receive notice of the existence of the
clearing agreement introductory broker and clearing firm, and a notice of
the allocation of responsibilities between them. See NYSE Rule 382.
B. The Parties and Relevant Non-Parties
In June or early July 1995, Bear and Baron entered into an Agreement
for Securities Clearing Services (the "Clearing Agreement").*fn2 See
Award, Ex. A to Declaration of Michael D. Schissel, attorney for
defendants ("Schissel Dec."), at 16. At that time, Richard Harrington was
President of BSSC and in charge of its clearing business, Peter Murphy
was a Managing Director of BSSC and Andrew Bressman was President of
Baron. In September, 1995, claimant Bernard McDaniel opened a brokerage
account with Baron. See Statement of Claim, Ex. B to Schissel Dec.,
¶ 3. He opened another account with Baron in late April 1996, this
time with his wife, Maureen McDaniel. See Exs. C-2, R-18.*fn3 Roman 0kin
eventually became Claimants' broker at Baron.
During the time when Claimants maintained their accounts with Baron,
Baron engaged in criminal activity, securities laws violations and
fraudulent activity, some of which affected Claimants' accounts. See
Award at 14; Respondents' Memorandum of Law in Support of Their Motion to
Vacate and in Opposition to the Petition to Confirm the Arbitration Award
("Def. Mem.") at 20. On May 29, 1996, the Securities and Exchange
Commission ("SEC") issued an emergency temporary cease-and-desist order
against Baron, Bressman and 0kin to halt Baron's fraudulent trading
practices. Baron ceased doing business at the end of June 1996, and filed
a Chapter 11 bankruptcy petition on July 3, 1996. See Statement of
Claim, ¶¶ 21-22. On July 11, 1996, upon the application of the
Securities Investor Protection Corporation ("SIPC"), Baron was placed
into liquidation under the control of an independent trustee. See Def.
Mem. at 15; SEC Order Instituting Proceedings ("Bear's OIP"), Ex. C-7 at
21 n. 1. On May 13, 1997, Baron and thirteen of its officers and
employees were indicted on charges of criminal securities fraud. See
Bear's OIP at 21 n. 3. With the exception of John McAndris, Baron's
former Chief Financial Officer, all of the defendants pled guilty to
enterprise corruption and grand larceny. See id. McAndris was tried and,
on February 26, 1998, he was found guilty on twenty-five charges. See
The Baron investigation led to an investigation of Bear's relationship
with Baron. See Def. Mem. at 20. On August 5, 1999, Bear consented to the
SEC's entry of an Order Instituting Proceedings (the "OIP"), without
admitting or denying the SEC's findings.*fn5 See Bear's OIP at 20 n. 1;
SEC Order Instituting Proceedings ("Harrison's OIP"), Ex. C-6, at 2;
Respondents' Reply Memorandum in Support of Their Motion to Vacate and In
Opposition to the Motion to Confirm the Arbitration Award ("Def. Repl.")
at 6. Pursuant to the settlement agreement, Bear was required to pay a $5
million civil penalty and $30 million to a fund to satisfy the claims of
Baron's customers. See Def. Mem. at 36; Ex. C-7 at 20. In addition, Bear
was required to retain an Independent Consultant to recommend supervisory
and compliance policies which BSSC was required to adopt. See Def. Mem.
at 36-37; Ex. C-7 at 19-20.
C. Claimants' Allegations Against Bear
On January 27, 1997, Claimants filed a Statement of Claim with the
Association of Securities Dealers ("NASD") against Bear
Stearns, BSSC and Michael Davis, a Baron employee who helped handle
Claimants' account. See Statement of Claim. Claimants alleged that Bear
caused them to suffer losses of not less than $900,000 during the period
from the Fall of 1995 to the Summer of 1996. They alleged that Bear was
liable to them under the following theories: control person liability,
failure to register Baron as an `approved person' pursuant to NYSE
requirements, violations of NYSE Rule 382, issuance of false and
misleading confirmations and statements in violation of SEC Rule 10b-10
and NASD Rule 2230, breach of duty of fair dealing in violation of NASD
Rule IM 2310-2(a)(1) and IM 2310-2(d) violations of credit requirements
and Regulation T [12 C.F.R. § 220.8(d)], breach of contract,
negligence, fraud, alter-ego liability for Baron's wrongful acts, aiding
and abetting Baron's conversion and fraud, and refusal to honor transfer
instructions. See id. ¶¶ 70-94. They sought compensatory damages,
punitive damages of three times compensatory damages, and all costs of the
proceeding. See id. ¶¶ 95-96. In its Answer, Bear asserted the
following affirmative defenses: failure to state a claim, failure to
investigate, notice of Baron's misconduct and ratification of that
misconduct, loss causation on the part of Claimants, assumption of risk,
waiver, and estoppel. See Amended Answer, Ex. D. to Schissel Dec.,
D. Arbitration Proceedings
Arbitration hearings took place in Boston on April 25, 26, 27, and 30
and May 1, 2001.*fn6 See Petition ¶ 9. On April 25, Claimants filed
a Motion in Limine seeking to offer into evidence the OIPs relating to
Bear and Harrington. See Award at 9. After considering the submissions
and the oral arguments of the parties, the Panel granted Claimants'
motion subject to various conditions. See Award at 10; see also infra
Part I.E.2 (discussing conditions). On April 26, 2001, Bear made an oral
motion to admit as evidence the "Wells Submission," a memorandum Bear had
submitted in connection with the SEC's administrative proceedings
relating to the Bear-Baron relationship. See Award at 10; Ex. R-27. After
hearing oral argument, the Panel granted Bear's motion. See id. at
10-11. The Panel admitted the body of the Wells Submission and most of
the exhibits to that document, but did not accept into evidence the
attached trial testimony and deposition transcripts. See id. at 11.
The presentation of evidence concluded on May 1, 2001. See id. at 12.
The parties declined the opportunity to present oral closing arguments
and opted instead to file post-hearing briefs. See id.; see also
Claimants' Post-Hearing Brief ("Pl. Post-Hear. Mem."), Ex. G to Schissel
Dec.; Respondents' Post-Hearing Memorandum ("Def. Post-Hear. Mem."), Ex.
H to Schissel Dec. Proceedings ended on June 12, 2001, upon the filing of
the post-hearing briefs. See Award at 13.
The Panel awarded Claimants $600,000 in compensatory damages and
$211,571.60 in prejudgement interest on those damages. See id. at 26,
28-31. It explained that, although Claimants had suffered $788,988 in
damages, those damages would be reduced to $600,000 because Claimants had
contributed to and compounded their own losses. See id. at 26. The Panel
also awarded Claimants $1 million in punitive damages, $25,000 as a
sanction for delay caused by Bear, and $75,000 in attorney's fees as a
sanction against Bear for failure to cooperate with discovery. See id. at
29, 31. It also held that Bear should be responsible for two-thirds of
the forum fees. See id. at 28. All of the compensatory award and all but
$68,135.60 of the prejudgment interest was offset by the $743,436 that
Claimants had already received from the restitution fund financed by
Bear. See id. at 27-28.
"Arbitration awards are subject to very limited review in order to
avoid undermining the twin goals of arbitration, namely, settling
disputes efficiently and avoiding long and expensive litigation."
Willemijn Houdstermaatschappit, 103 F.3d at 12 (quotation marks
omitted). The Federal Arbitration Act (the "FAA") lists specific
instances where an award may be vacated. See 9 U.S.C. § 10(a). of
relevance to this action are the provisions permitting vacatur when "the
arbitrators exceeded their powers, or so imperfectly executed them that a
mutual, final, and definite award upon the . . . matter submitted was not
made," or where the arbitrators were guilty of "misconduct in . . .
refusing to hear evidence pertinent and material to the controversy."*fn7
9 U.S.C. § 10(a). Where arbitrators are accused of exceeding their
powers, a court must ask "whether the arbitrators had the power, based on
the parties' submissions or the arbitration agreement, to reach a certain
issue, not whether the arbitrators correctly decided that issue." DiRusso
v. Dean Witter Reynolds Inc., 121 F.3d 818, 824 (2d Cir. 1997).
Arbitrators' determinations regarding admission of evidence are not open
to review "except where fundamental fairness is violated." Polin v.
Kellwood Co., 103 F. Supp.2d 238, 261 (S.D.N.Y. 2000) (quoting Tempo
Shain Corp. v. Bertek, 120 F.3d 16, 20 (2d Cir. 1997)). Arbitrators are
only required to hear proffered evidence that is "pertinent and
material," and their determination of what is "pertinent and material"
will only be deemed erroneous if it "deprives a party of a fundamentally
fair arbitration process." Id. (quoting Bell
Aerospace Co. Div. of
Textron, Inc. v. Local 516, Int'l Union, United Automobile, Aerospace and
Agric. Implement Workers of Am., 500 F.2d 921, 923 (2d Cir. 1974).
The Second Circuit has also recognized that a court may vacate an
arbitration award that was rendered in "manifest disregard of the law."
Greenberg v. Bear, Stearns & Co., 220 F.3d 22, 28 (2d Cir. 2000);
Halligan v. Piper Jafray, Inc., 148 F.3d 197, 202 (2d Cir. 1998).
However, "[r]eview for manifest error is `severely limited'." Greenberg,
220 F.3d at 28 (quoting DiRusso, 121 F.3d at 821). The Second Circuit has
cautioned that "manifest disregard clearly means more than error or
misunderstanding with respect to the law." Halligan, 148 F.3d at 202
(quotation marks omitted). Specifically, a court may not vacate an
arbitration award unless it finds 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." Greenberg, 220 F.3d at 28
(citing DiRusso, 121 F.3d at 821).
In very limited situations, a court may vacate an award because
arbitrators have manifestly disregarded the evidence. See Halligan, 148
F.3d at 202 (vacating an award where arbitrators "manifestly disregarded
the law or the evidence or both"); Beth Israel Med. Ctr. v. Local 814,
No. 99 Civ. 9828, 2000 WL 1364367, at *6 (S.D.N.Y. Sept. 20, 2000); Green
v. Progressive Mgmt. Inc., No. 00 Civ. 2539, 2000 WL 1229755, at *2
(S.D.N.Y. Aug. 29, 2000) (noting that Halligan extends "manifest
disregard" standard to review of the evidence); News, L.P. v. Newspaper &
Mail Deliverers' Union of New York and Vicinity, No. 99 Civ. 5165, 1999
WL 1095613, at *7 (S.D.N.Y. Dec. 2, 1999) (same). "[J]udicial review of
an arbitrator's factual determinations is quite limited." Beth Israel
Med. Ctr., 2000 WL 1364367, at *6. A court may only vacate an
arbitrator's award for manifest disregard of the evidence if "there is
`strong evidence' contrary to the findings of the arbitrator and the
arbitrator has not provided an explanation of his decision." Id. (citing
Halligan, 148 F.3d at 204; Daily News, 1999 WL 1095613, at *7;
Greenberg, 1999 WL 642859, at *1). A court may not review the weight the
arbitration panel accorded conflicting evidence. Id. (citing Campbell v.
Cantor Fitzgerald & Co., 21 F. Supp.2d 341, 349 (S.D.N.Y. 1998), aff'd,
205 F.3d 1321 (2d Cir. 1999)); Sobol v. Kidder, Peabody & Co., Inc.,
49 F. Supp.2d 208, 216 (S.D.N.Y. 1999) (citing Chisholm v. Kidder,
Peabody, 966 F. Supp. 218, 229 (S.D.N.Y. 1997), aff'd, No. 97-7828, 1998
WL 695041 (2d Cir. 1998)). Nor may a court question the credibility
findings of the arbitrator. See Beth Israel Med. Ctr., 2000 WL 1364367,
at *6 (citing Campbell, 21 F. Supp.2d at 349); Greenberg, 1999 WL
642859, at *1 ("The Court will not second-guess the credibility findings
of the arbitration panel.")
The party seeking vacatur of an arbitration award bears the burden of
proving manifest disregard. See Greenberg, 220 F.3d at 28 (citing
Willemijn Houdstermaatschappit, 103 F.3d at 12). But, even if that party
proves that the arbitrators' decision is based on a manifest error of fact
or law, a court must nevertheless confirm the award if grounds for the
decision can be inferred from the facts of the case. See Willemijn
Houdstermaatschappit, 103 F.3d at 13; Green, 2000 WL 1229755, at *2.
A. Aiding and Abetting Award
1. Manifest Disregard for the Law*fn8
a. The Law on Clearing Firm Liability
Under New York law, the elements for a claim of aiding and abetting
fraud are: (1) an existing fraud, (2) knowledge of the fraud, and (3)
substantial assistance to advance the fraud's commission. See Cromer v.
Berger, 137 F. Supp.2d 452, 470 (S.D.N.Y. 2001) (citing Wight v.
BankAmerica Corp., 219 F.3d 79, 91 (2d Cir. 2000)). Generally,
"substantial assistance" exists where: (1) a defendant "affirmatively
assists, helps conceal, or by virtue of failing to act when required to
do so enables the fraud to proceed," and (2) "the actions of the
aider/abettor proximately caused the harm on which the primary liability
is predicated." Id. (citing Diduck v. Kaszycki & Sons Contractors, Inc.,
974 F.2d 270, 284 (2d Cir. 1992); Nigerian Nat'l Petroleum Corp. v.
Citibank, N.A., No. 98 Civ. 4960, 1999 WL 558141, at *8 (S.D.N.Y. July
30, 1999); Kolbeck v. LIT Am., Inc., 939 F. Supp. 240, 249 (S.D.N.Y.
1996)). Where defendant does not owe a fiduciary duty directly to the
plaintiffs, however, mere "inaction" by the defendant cannot constitute
"actionable participation." Id. (citing Kolbeck, 939 F. Supp. at 247);
see also Stander v. Fin. Clearing & Svcs., 730 F. Supp. 1282, 1287
(S.D.N.Y. 1990). Indeed, "the `scienter' requirement scales upward," and
plaintiffs have the additional burden of showing that the assistance
rendered is "both substantial and knowing;" in other words, there must be
"something close to ...