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PRASAD v. MML INVESTORS SERVICES

May 24, 2004.

SAM PRASAD, DR. PREMA PRASAD, BLOOMFIELD HEALTH SERVICES, INC., DR. T.S. SUDARSHAN, CHITRA SUDARSHAN and MATERIALS MODIFICATION, INC., Petitioners, -against- MML INVESTORS SERVICES, INC., Respondent


The opinion of the court was delivered by: ROBERT SWEET, Senior District Judge

OPINION

Petitioners Sam Prasad, Dr. Prema Prasad, Bloomfield Health Services, Inc., Dr. T.S. Sudarshan, Chitra Sudarshan, and Materials Modification, Inc. (collectively, "Petitioners"), have moved pursuant to Section 10 of the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq., to vacate the arbitration decision rendered by an arbitration panel of the National Association of Securities Dealers ("NASD") in favor of respondent MML Investor Services, Inc. ("MMLISI"). MMLISI has cross-moved to confirm the award. For the following reasons, the award is confirmed.

Background

  The following facts are taken from Petitioners' and MMLISI's motion papers and do not represent findings of fact.

  Petitioners claim to have been defrauded in 1996 by Natarajan Ramachandran ("Ramachandran") and Nagaraja Thyagarajan ("Thyagarajan") when Ramachandran and Thyagarajan persuaded them to loan money to Compuacct Consulting, Inc. ("Compuacct") with the promise that Compuacct would pay them high interest returns between 36 and 48 percent per year. Ramachandran and Thyagarajan provided promissory notes in which they personally guaranteed in writing both the interest payments and the repayment of the loans. The business relationship turned out to be a Ponzi scheme.*fn1

  On or about February 4, 2002, Petitioners Sam Prasad, his wife Dr. Prema Prasad (collectively, the "Prasads") and Dr. Prasad's company, Bloomfield Health Services, Inc., filed a Statement of Claim with the NASD, asserting claims against MMLISI for breach of contract, breach of fiduciary duty, fraud and negligent supervision. They sought to hold MMLISI liable for their losses because Thyagarajan was a registered representative of MMLISI for a period in 1996 when Petitioners first loaned money to Compuacct. According to Petitioners, MMLISI learned of Thyagarajan's activities on August 5, 1996, and on August 8, 1996, Thyagarajan was terminated for cause.

  On or about April 9, 2002, Petitioners Dr. T.S. Sudarshan, his wife, Chitra Sudarshan (collectively, the "Sudarshans") and their company, Materials Modification, Inc., filed their Statement of Claim with the NASD, asserting substantially the same claims as the Prasads against MMLISI.

  On or about August 21, 2002, the parties moved jointly to consolidate the cases. The NASD granted the motion to consolidate by letter dated August 27, 2002. The arbitration proceeding commenced on January 29, 2003 and concluded on November 25, 2003. During that time, the NASD Arbitration Panel (the "Panel") heard testimony on twelve separate hearing dates.

  One of the ten witnesses who testified at the hearings was Stanley Farr ("Farr"). Farr is a former MMLISI compliance officer who had investigated Thyagarajan's involvement in Compuacct and who had recommended that MMLISI terminate its relationship with Thyagarajan. Farr has spent several decades in the securities and insurance business and now operates his own compliance consulting business. He testified before the Panel on May 5, May 21, July 7 and November 20, 2003.

  On or about September 8, 2003, between hearing dates, Petitioners submitted a letter brief to the Panel claiming that the compensation of Farr by MMLISI was illegal compensation of a fact witness and that the time Farr spent in "witness prep" amounted to witness tampering and constituted subornation of perjury. On or about September 25, 2003, MMLISI submitted a letter brief in response to Petitioners' allegations.

  On or about October 7, 2003 the Panel announced that Petitioners would be allowed to recall Farr for additional questioning regarding his invoices to and payments from MMLISI. On November 20, 2003, Petitioners recalled Farr and cross-examined him at that time as well. Farr testified that he was not paid to testify in any particular manner and that MMLISI agreed to reimburse him at the rate of $125 per hour because he was self-employed and that was the rate he received in his consulting business. (See Transcript of Arbitration Proceedings ("Tr.") at 2540-41, 2195, 2473-75.) He also testified that he himself did not prepare witnesses for the arbitration hearing, but was present during witness preparation meetings when he was in town to testify. (See id. at 2501-05.) The invoices indicate that in addition to being compensated for his time, Farr was reimbursed for his travel expenses including air-fare, meals, car rental, and hotel. (Affidavit of Mitchell Cobert, dated Jan. 14, 2004 ("Cobert Aff."), Exs. E & F.)

  At the close of Farr's testimony, Petitioners moved to strike the testimony of all of MMLISI's witnesses on the grounds that MMLISI had improperly paid Farr for his testimony and to prepare the other witnesses. (See Tr. at 2569-73.) On November 20, 2003, the Panel met in executive session to consider Petitioners' motion and determined that it would hold the "motion in abeyance pending its deliberation toward the final decision." (Id. at 2574-75.)

  On December 17, 2003, the Panel issued its decision (the "Award") denying Petitioners' claims in their entirety, denying Petitioners' motion to strike the testimony of MMLISI's witnesses, and issuing an assessment of fees due to the Panel by both parties. The Panel did not explain the basis of the Award except to state that the arbitrators had considered "the pleadings, the testimony and evidence presented at the hearing" in reaching their decision. (Cobert Aff., Ex. G.)

  Petitioners filed a petition to vacate the Award on January 15, 2004. MMLISI filed a cross-petition to confirm the Award on February 19, 2004. No oral arguments were held, and the petition and ...


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