The opinion of the court was delivered by: SIDNEY STEIN, District Judge
In February of 1997,1109580 Ontario, Inc., a Canadian corporation,
commenced an arbitration under the auspices of the National Association
of Securities Dealers, Inc. (the "NASD") against Bear Stearns & Co,
Inc., its subsidiary Bear Steams Securities Corp., (collectively, "Bear
Stearns") and Richard Harriton, a Bear Stearns Securities Corp.
executive, seeking damages relating to losses Ontario sustained allegedly
due to Bear Stearns's actions. On December 11, 2003, the arbitral panel
issued an award in favor of Bear Stearns and dismissed all of Ontario's
claims with prejudice. The next day, Bear Stearns filed a petition in
this Court to confirm the award and Ontario then cross-moved to vacate
that award. Federal subject matter jurisdiction is present due to the
diversity of citizenship of the parties.
Because the decisions by the arbitration panel that are challenged by
Ontario do not rise to the level of "manifest disregard of the law," Bear
Stearns's motion to confirm the award is granted and Ontario's
cross-motion to vacate it is denied. BACKGROUND
This action arose from securities frauds perpetrated by A. R. Baron
& Co. ("Baron") in the 1990s. The pertinent facts regarding that
scheme, including Bear Stearn's role as Baron's clearing broker, have
been elucidated at length in previous litigations and will not be
repeated here. See e.g. Fezzani v. Bear, Stearns & Co.,
Inc., 99 Civ.0793, 2004 WL 744594 (S.D.N. Y., Apr. 06, 2004);
McDaniel v. Bear Stearns & Co., Inc., 196 F. Supp.2d 343
(S.D.N. Y. 2002); Goldberger v. Bear, Stearns & Co., Inc.,
98 Civ. 8677, 2000 WL 1886605 (S.D.N.Y., Dec. 28, 2000); Berwecky v.
Bear, Stearns & Co., 197 F.R.D. 65 (S.D.N.Y. 2000); see
also. Schwarz v. Bear Steams Co., Inc., 266 A.D.2d 133, 698 N.Y.S.2d 855
(1st Dept. 1999). The facts directly relevant to the resolution of
this proceeding are as follows:
According to Ontario, it was "a substantial client" of Baron's and was
induced to invest $5 million in Baron's parent corporation and to provide
Baron with a $4 million loan in 1996. See Ontario's Statement
of Claim at ¶¶ 11, 21-24 (attached at Exhibit 4 to Ontario's Motion to
Vacate). Ontario further alleges that Baron improperly conducted a
transaction in warrants of Videlolan Corp. for Ontario's account and then
post-dated that transaction to enrich itself at Ontario's expense.
See id. at ¶¶ 43-45. In the NASD arbitration at
issue here, Ontario asserted five claims, denominated control person
liability, fraud, aiding and abetting common law fraud and conversion,
breach of contract, and negligence. See Ontario's Statement of
Claim at ¶¶ 113-137. Ontario sought $22 million in compensatory
damages and $75 million in punitive damages, as well as interest and
After the NASD arbitration began, Bear Stearns was investigated by the
New York County District Attorney's Office and the Securities and
Exchange Commission (the "SEC") in connection with its role as Baron's clearing broker. That
investigation resulted in a settlement between the SEC and Bear Stearns,
which included the imposition of a fine and the entry of two Orders
Instituting Proceedings (the "OIPs") by the SEC, one against Bear Stearns
and the other against Richard Harriton. See Order Instituting
Proceedings In the Matter of Bear Stearns Securities Corp., 1999 SEC
LEXIS 1551 (Aug. 5, 1999); Order Instituting Proceedings In the Matter of
Richard Harriton, 2000 SEC LEXIS 779 (Apr. 20, 2000). In January of 2002,
Ontario moved to admit those two OIPs into evidence in their entirety in
After extensive briefing on that evidentiary issue, the NASD panel
decided to admit the "findings of fact" contained in the OIPs but
excluded `the legal discussions or conclusions" contained therein.
See Order Regarding Claimant's Motion No. 1 In Limine (attached
at Exhibit 9 to Ontario's Motion to Vacate). The NASD panel held,
moreover, that the SEC's findings of facts were only "admitted as some
evidence of the actions and omissions [Bear Stearns] and Richard Harriton
with respect to A. R. Baron," and do not "establish a prima
facie case for Claimant, [or] change the burden of proof as to
liability." Id. at 2.
Also during this arbitration proceeding, the court-appointed trustee
for Baron's liquidation in bankruptcy issued a report regarding the
circumstances of and the causes for Baron's collapse.*fn1 (the "SEPC
Trustee Report") That report presented the results of the trustee's
investigations into Baron's fraudulent scheme as well as the trustee's
"understanding of how this fringe segment of the securities industry
[which included Baron's activities] operates." See SIPC Trustee
Report at 5 (attached at Exhibit 23 to Ontario's Motion to Vacate).
Ontario moved to admit the SIPC Trustee Report into evidence in its NASD
arbitration. The NASD panel denied that motion without prejudice and
informed Ontario that it may "offer the SIPC Trustee Report at the
hearing provided that Claimant also makes the SIPC Trustee available to
testify at the hearing prior to the offer." See Order at 2
(attached at Exhibit 22 to Ontario's Motion to Vacate).
In July of 2001, another NASD arbitration panel issued its decision in
McDaniel v. Davis (Bear Stearns) and awarded the claimants in
excess of $1 million in compensatory and punitive damages for Bear
Stearn's aiding and abetting Baron's fraud and for breach of contract.
That panel specifically found that Bear Stearns rendered "active
participation, substantial assistance" and aiding and abetting" to
Baron's securities fraud scheme. See McDaniel v. Davis (Bear
Steams) Award at 24 (attached at Exhibit 15 to Ontario's Motion to
Vacate). It also found that Bear Stearns breached its duty of good faith
when it refused to honor the McDaniels' request to transfer their account
to a broker other than Baron. See id. at 19. Bear
Stearns's ensuing motion to vacate was denied by Judge Scheindlin of this
Court in McDaniel v. Bear Stearns & Co., Inc. See
196 F. Supp.2d at 346 ("[I]f I had that authority, I might indeed have
decided the case differently. However, the Court's review of an
arbitration award is rigidly narrow").
In April of 2003, Ontario moved the NASD panel to preclude Bear Stearns
from contesting two issues: its liability for "(a) having aided and
abetted Baron's massive criminal fraud and (b) for having breached the
Customer Agreement with Ontario," in light of the McDaniel
arbitration award. See Claimant's Motion to Preclude at 2
(attached at Exhibit 15 to Ontario's Motion to Vacate). In that motion,
Ontario conclusorily asserted that "the claims at issue here for aiding
and abetting and breach of contract are identical to those at issue in
McDaniel and arise out of the same set of operative -and
governing-facts." See id at 2. In its June 3, 2003 Order, the NASD panel denied Ontario's motion to
preclude. See Order at 1 (attached at Exhibit 22 to Ontario's
Motion to Vacate).
Ontario's cross-motion to vacate the arbitration award rests
principally on three grounds. First, Ontario asserts that it was
prejudiced by the NASD panel's refusal to admit the SEPC Trustee Report
into evidence. Second, Ontario asserts that the NASD panel acted "in
manifest disregard of the law" when it failed to admit into evidence the
legal discussion and conclusions contained in the Bear Stearns and
Harriton OIPs. Third, Ontario asserts that the NASD panel acted "in
manifest disregard of the law" because it did not give preclusive weight,
as Ontario had requested, to the arbitration decision in
STANDARD FOR JUDICIAL REVIEW OF AN ARBITRATION AWARD
The Federal Arbitration Act, 9 U.S.C. § 1, et
seq., sets forth the statutory grounds for vacating an
arbitration award, including "where the arbitrators were guilty of
misconduct . . . in refusing to hear evidence pertinent and material to
the controversy . . ." See 9 U.S.C. § 10(a)(3). In addition,
an arbitration award may also be vacated if an arbitration panel acted
"in manifest disregard of the law." See Banco. de Seguros del Estado
v. Mutual Marine Office, Inc., 344 F.3d 255, 263 (2d Cir. 2003);
Atherton v. Online Video Network. Inc., 274 F. Supp.2d 592,
594 (S.D.N. Y. 2003). As the Court of Appeals for the Second Circuit has
consistently held, in reviewing an arbitration award a district court
"must grant an arbitrator panel's decision great deference." See
Duferco. Int. Steel Trading v. T. Klaveness Shipping A/S.
333 F.3d 383, 388 (2d Cir. 2003). Furthermore, "[A]n arbitration award
should be enforced, despite a court's disagreement with it on the
merits, if there is a `barely colorable justification for the outcome reached.'" Banco. de Seguros del Estado, 344 F.3d at 260
(quoting Landy Michaels Realty Corp. v. Local 32B-32J, Serv.
Employees Int'l Union, AFL-CIO. 954 F.2d 794, 797 (2d Cir. 1992)).
An arbitration panel's handling of the evidence "need not follow all
the niceties observed by the federal courts." See Bell Aerospace Co.
Div. of Textron v. Local 516, 500 F.2d 921, 923 (1974).
Consequently, judicial review of evidentiary decisions made during
arbitrations is confined to ensuring that those decisions have not
violated the fundamental fairness of the dispute resolution process. As
Ontario has alleged an improper exclusion of evidence in the arbitration,
the cynosure of this Court's review is to determine whether that
exclusion rendered' the arbitration fundamentally unfair by depriving
Ontario of an "adequate opportunity to present its evidence and argument"
before the ...