United States District Court, S.D. New York
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
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 NASD panel. See Tempo Shain Corp. v. Bertek, Inc.,
120 F.3d 16,20 (2d Cir. 1997) (citing Hoteles Condado Beach v. Union
de Tronquistas Local 901, 763 F.2d 34, 39 (1st Cir. 1985)).
The petitioner seeking vacatur of an arbitration award on the ground
that it is "in manifest disregard of the law" bears the burden of showing
"more than error or misunderstanding with respect to the law." See
Hoeft v. MVL Group, Inc., 343 F.3d 57, 69 (2d Cir. 2003)
(quoting Merrill Lynch, Pierce. Fenner & Smith, Inc. v.
Bobker, 808 F.2d 930, 933 (2d Cir. 1986)). An award is in "manifest
disregard of the law" where "a governing legal principle is well defined,
explicit, and clearly applicable to the case, and where the arbitrator
ignored it after it was brought to the arbitrator's attention in a way
that assures that the arbitrator knew its controlling nature. `"
Atherton, 274 F. Supp.2d at 595 (quoting GMS Group, LLC
v. Benderson, 326 F.3d 75, 78 (2d Cir. 2003)). "A legal principle
clearly governs the resolution of an issue before the arbitrator if its
applicability is `obvious and capable of being readily and instantly
perceived by the average person qualified to serve as an arbitrator.'" Id.
(quoting Westerbeke Corporation v. Daihatsu Motor Co.,
304 F.3d 200,209 (2d Cir. 2002)),
A. The Failure of the NASD Panel to Admit the SIPC Trustee Report
Does Not Require the Award to Be Vacated
Although the NASD panel denied Ontario's motion to admit the SIPC
Trustee Report, that denial was not only without prejudice, but it wrote
specifically that Ontario "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 June 3, 2003
Order at 2 (attached at Exhibit 22 to Ontario's Motion to Vacate).
Ontario chose not to renew its motion at the hearing. Clearly, then,
Ontario was not deprived of "an adequate opportunity to present its
evidence," see Tempo Shain Corp., 120 F.3d at 20, and the
without prejudice exclusion of the SIPC Trustee Report did not render the
arbitration fundamentally unfair.
B. The Panel's Exclusion of Legal Discussion and Conclusions
Contained in OIPs Does Not Require the Award to Be Vacated
Ontario contends the panel's exclusion of the legal discussion and
conclusions contained in the OIPs was in manifest disregard of the law
and therefore requires that the award be vacated. It is incorrect.
Rule 408 of the Federal Rules of Evidence provides for exclusion of otherwise
admissible evidence where: 1) that evidence is of a specific character,
namely "of furnishing or offering or promising to furnish, or accepting
or offering or promising to accept, a valuable consideration in
compromising or attempting to compromise a claim which was disputed as
to either validity or amount . . . [or] of conduct or statements made
in compromise negotiations;" and 2) if that evidence is offered "to prove liability for or
invalidity of the claim or its amount." See Fed.R.Evid. 408:
see also Starter Corp. v. Converse. Inc., 170 F.3d 286,293 (2d
Cir. 1999) (holding that Rule 408 exclusion does not apply to evidence of
a settlement agreement "if it is offered for `another purpose,' i.e., for
a purpose other than to prove or disprove the validity of the claims that
[the agreement was] meant to settle").
First, the discussion and conclusions contained in the Offs were made
as part of the settlement by the SEC and Bear Stearns and Harriton in
their dispute over whether securities violations occurred.*fn2 Moreover,
the legal discussion and conclusions contained in the two Offs were
offered by Ontario at the arbitration for the precise purpose of proving
its prima facie case, i.e. Bear Stearn's liability for aiding
and abetting Baron's fraudulent scheme, in the NASD arbitration.
Therefore, those findings of the SEC directly pertained to the issue
raised in the SEC's dispute with Bear Stearns and Harriton. Thus, the
NASD panel assuredly did not ignore a governing legal principle that was
brought to its attention. Indeed, the NASD panel correctly applied
Rule 408 of the Federal Rules of Evidence in excluding specific sections of
the OIPs. See In re. Blech Securities Litigation, 94 Civ. 7696,
2003 WL 1610775 at *11 (Mar. 26, 2003) (excluding SEC consent orders
pursuant to Fed.R.Evid. 408); McDaniel, 196 F. Supp.2d. at
C. The Panel's Order Denying Application of Collateral Estoppel
Does Not Require the Award to Be Vacated The panel's denial of Ontario's motion to preclude Bear Stearns from
contesting the issue of breach of contract and the issue of aiding and
abetting Baron's fraud on the basis of the arbitration decision in
McDaniel was not in manifest disregard of the law. Ontario
requested the application of the doctrine of collateral estoppel to the
McDaniel arbitration award. That concept may be properly
applied to preclude relitigation of an issue where "(1) the identical
issue was raised in a previous proceeding; (2) the issue was `actually
litigated and decided ` in the previous proceeding; (3) the party had a
`full and fair opportunity' to litigate the issue; and (4) the resolution
of the issue was `necessary to support a valid and final judgment on the
merits.'" See Interoceanica Corp. v. Sound Pilots,
107 F.3d 86, 91 (2d Cir. 1997). An arbitration decision can have a preclusive
effect on a subsequent litigation or arbitration if the same issues are
raised in both proceedings. See Postlewaite v. McGraw-Hill
Inc., 333 F.3d 42, 48 (2d Cir. 2003); May Ship Repair
Contracting Corp. v. Barge Columbia New York, 160 F. Supp.2d 594,
599 (S.D.N.Y. 2001).
However, a number of factors counsel caution in assigning preclusive
effect to arbitration decisions, including the fact that arbitrators are
not required to provide explanations for their decisions and the fact
that arbitration decisions are only subject to, as described
supra, circumscribed and heavily deferential judicial review.
See Postlewaite, 333 F.3d at 49. Accordingly, as the Second
Circuit recently recognized, the party seeking preclusion "bears the
burden of showing with clarity and certainty what was determined
by the prior judgment." Id.(emphasis in original). Furthermore,
interests of efficiency and consistency that are promoted by the use of
collateral estoppel in this context must be balanced against the demands
of fairness. See Remington Rand Corp. v. Amsterdam-Rotterdam Bank,
N.V., 68 F.3d 1478, 1486 (2d Cir. 1995) (collateral estoppel "is not to be mechanically applied, for
it is capable of producing extraordinarily harsh and unfair results").
Accordingly, broad discretion is accorded to a trial court or an
arbitration panel to determine, in light of the unique circumstances
present, whether to apply offensive collateral estoppel. See
id. (citing Parklane Hosiery Co. v. Shore,
439 U.S. 322,331(1979)).
Here, the panel's denial of Ontario's motion was not incorrect. First,
with respect to its breach of contract claim, Ontario failed to show with
any certainty or clarity the identity between that issue and the
contractual issue presented to the arbitration panel in
McDaniel. As noted above, the claimants in McDaniel
specifically alleged that Bear Stearns refused to honor a request to
transfer their brokerage account. No such allegation appears in Ontario's
claims. Accordingly, collateral estoppel has no application to that
issue. See May Ship Repair Contracting Corp., 160 F. Supp.2d.
Unlike the contractual issue, the issue of Bear Stearn's aiding and
abetting Baron's securities fraud is present both in Ontario's NASD
arbitration and in the McDaniel arbitration. Moreover, this
issue was fully contested in the McDaniel arbitration and was
also essential to the determination of that panel. Accordingly, the
necessary conditions for application of collateral estoppel are met.
See Interoceanica Corp., 107 F.3d at 91. However, as Bear
Stearns asserted in its opposition to Ontario's motion to preclude, two
other NASD arbitration panels arrived at the opposite conclusion on the
issue of Bear Stearns's liability for aiding and abetting Baron's
securities fraud. See Award in Meere v. Bear Stearns &
Co., Inc., and Award in Holubwich v. Bear Stearns & Co.,
Inc. (attached at Exhibit 20 to Ontario's Motion to Vacate). Those
inconsistent outcomes further highlight the tension between efficiency
and fairness associated with the application of collateral estoppel to arbitration decisions identified in
Remington Rand Corp. and in Postlewaite. That
inconsistency counsels strongly against giving preclusive effect to the
McDaniel decision. See Prudential Securities Inc. v.
Arain, 930 F. Supp. 151,157 (S.D.N.Y. 1996).
In light of those considerations, it was within the NASD panel's
discretion to determine whether to give preclusive weight to the
McDaniel arbitration decision. Contrary to Ontario's
assertions, there is no well-defined, explicit, governing legal principle
that mandated the panel to grant Ontario's motion to preclude.
Accordingly, the NASD panel's determination not to apply collateral
estoppel was assuredly not in manifest disregard of the law.
For the reasons set forth above, Bear Stearns's motion to confirm the
arbitration award is granted and Ontario's cross-motion to vacate the
award is denied.