The opinion of the court was delivered by: Robert W. Sweet, United States District Judge
Petitioners David Jacaruso ("Jacaruso"), Joseph Scotti ("Scotti") and Michael E. Wallace ("Wallace") (collectively the "Petitioners") have moved in these actions to vacate an arbitration award issued in favor of respondents Daljit S. Buttar and Paramit Buttar (the "Buttars"). The Buttars have cross-moved to confirm the award. For the reasons set forth below, the motion to vacate is granted, and the cross-motion denied.
These actions by Jacaruso and Scotti (02 Civ. 4286) and Wallace (02 Civ. 4297) were filed on June 7, 2002 and followed in time an action filed by the Buttars in the United States District Court for the Eastern District of North Carolina on June 3, 2002.
The motions to vacate in these actions were filed at the time the actions were commenced, and the Buttars had not accomplished service in the North Carolina action which was then discontinued. The motions to vacate and the cross-motion of the Buttars to confirm the award were heard and marked fully submitted on September 25, 2002.
On September 11, 2000, the Buttars, residents of Raleigh, North Carolina, began an arbitration before the National Association of Securities Dealers, Inc. ("NASD") by filing their original statement of claim against Montrose Capital Management Ltd. ("Montrose"), a brokerage firm, and Robert Winston, one of its brokers.
The arbitration was conducted under the auspices of the NASD before Murray E. Bovarnich, Chairman, G. Lewis Nichols, and Harold G. Koger, arbitrators. The final arbitration hearing was conducted in Raleigh, North Carolina from November 27-30, 2001. On December 7, 2001, a stay of all proceedings against Montrose was entered by the United States Bankruptcy Court for the Southern District of New York.
The testimony and exhibits in the arbitration concern the losses of $1,192,171.89 suffered by the Buttars as a result of being fraudulently induced to purchase large blocks of stock in CNF Technologies and Skynet Holdings, Inc., two stocks for which Montrose served as the placement agent. At the arbitration hearing, the Buttars limited their claims to the transactions in CNFT and Skynet. Because of that limitation, the facts surrounding the CNFT Bridge Loan and Private Placement and the Skynet Holdings purchases were the central focus of the hearing, and the subject of extended testimony over the four days of hearing. Robert Winston was the broker at Montrose who dealt with the Buttars and made the representations with respect to the securities which they purchased.
Wallace was the president of Montrose and signed Montrose Capital Form BD Amendments under oath, stating that he, Jacaruso and Scotti were control persons of Montrose and that Jacaruso and Scotti were the only directors of Montrose and that Robert Winston had no ownership interest in Montrose. While Wallace was president, Montrose served as the placement agent for Skynet and CNFT.
In the arbitration, Jacaruso and Scotti were characterized as the "investment bankers" for Montrose and brought the CNFT and Skynet transaction to Montrose.
The Private Placement Memorandum ("PPM") for CNFT reveals that it was a "best efforts all or nothing" offering and that once the initial 1,000,000 shares were subscribed to, another 1,000,000 shares could be sold on a "best efforts" basis and for its participation in the offering as placement agent, Montrose would receive $390,000. In addition, the PPM disclosed that Montrose also received warrants and that "[t]he Placement Agent and its principals own 395,000 shares of restricted Common Stock."
Montrose also acted as placement agent for an April 1999 Skynet offering that generated $4,508,000 in gross proceeds, of which Montrose received "sales commissions and non-accountable expenses equal to $586,040" or 13% of the gross proceeds.
Montrose's supervisory functions were vested in John Telfer as chief compliance officer. Wallace, who had an unblemished thirty-year record in the industry, attended one meeting when Winston misrepresented his role at Winston, met the Buttars in passing and did not exercise any supervisory authority. ...