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BEAR STEARNS & CO., INC. v. 1109580 ONTARIO

May 18, 2004.

BEAR STEARNS & CO., INC., BEAR STEARNS SECURITIES CORP., and RICHARD HARRITON Respondent-Petitioners, -against- 1109580 ONTARIO, INC. Claimant-Respondent


The opinion of the court was delivered by: SIDNEY STEIN, District Judge

OPINION AND ORDER

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 fees.

  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 the arbitration.

  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 McDaniel.

 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 ...


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