United States District Court, S.D. New York
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
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.
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
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 cross-petition were
marked fully submitted on February 25, 2004.
Petitioners assert that this Court has jurisdiction pursuant to Section
10 of the FAA. See 9 U.S.C. § 10. Section 10, however,
"does not confer upon federal district courts subject matter
jurisdiction." Perpetual Sec., Inc. v. Tang, 290 F.3d 132, 136
(2d Cir. 2002) (collecting cases). There must be an "`independent basis of jurisdiction before the district court may
entertain petitions under the Act.'" Id. at 136 (quoting
Harry Hoffman Printing v. Graphic Communications, Int'l Union, Local
261, 912 F.2d 608, 611 (2d Cir. 1990)).
Petitioners' alternate proposed grounds for jurisdiction,
28 U.S.C. § 1332, provides an independent basis of jurisdiction here, as the
parties appear to be diverse*fn2 and MMLISI has not challenged
Petitioners' allegation concerning the amount in controversy.
Compare North Am. Thought Combine, Inc. v. Kelly, 249 F. Supp.2d 283,
286 (S.D.N.Y. 2003) (dismissing a petition to confirm an
arbitration award for lack of subject matter jurisdiction where
jurisdiction was challenged and petitioner had failed to establish the
necessary elements for jurisdiction, suggesting that when an arbitration
respondent prevails at arbitration "a court should look to the value of
the relief requested in the arbitration complaint" in determining the
amount in controversy).
Discussion Petitioners claim that MMLISI's payment of money to the material
fact witness Farr was improper and that Petitioners' motion to strike the
testimony of all of MMLISI's witnesses should have been granted by the
Panel. Petitioners assert that the Panel manifestly disregarded the law
when it denied Petitioners' motion and thus the Award should be vacated.
Petitioners further argue that where the record discloses no rational
basis for an award, it must be vacated. MMLISI opposes Petitioners'
petition to vacate and argue that the Award should be confirmed because
an arbitration must be enforced "if there is even `a barely colorable
justification for the outcome reached.'" Josephthal & Co. v.
Cruttenden Roth Inc., 177 F. Supp.2d 232, 236 (S.D.N.Y. 2001)
(quoting Landy, Michaels Realty v. Local 32B-32J, 954 F.2d 794,
797 (2d Cir. 1992)). MMLISI also argues that the Award should be
confirmed because all of Petitioners' claims were time-barred by the
applicable statutes of limitations at the time they were filed and should
have been dismissed.
Standard of Review
The review of arbitration awards is generally governed by the FAA.
See Halligan v. Piper Jaffray, Inc., 148 F.3d 197,
201 (2d Cir. 1998), cert. denied, 526 U.S. 1034 (1999). The FAA
provides that an arbitration award may be vacated if: (1) the award was
procured by corruption, fraud, or undue means; (2) the arbitrators
exhibited "evident partiality" or "corruption"; (3) the arbitrators were guilty of misconduct; or (4) the arbitrators
exceeded their power. See 9 U.S.C. § 10(a).
In addition, the Second Circuit has recognized that an arbitration
award may be vacated "if it is in `manifest disregard of the law.'"
Halligan, 148 F.3d at 202 (citing Carte Blanche
(Singapore) Pte., Ltd, v. Carte Blanche Int'l, Ltd., 888 F.2d 260,
265 (2d Cir. 1989); Merrill Lynch, Pierce, Fenner & Smith, Inc.
v. Bobker, 808 F.2d 930, 933 (2d Cir. 1986)). Manifest disregard
"`clearly means more than error or misunderstanding with respect to the
law.'" Hallicran, 148 F.3d at 202 (quoting Bobker,
808 F.2d at 933). Furthermore, review of arbitration awards for manifest
disregard is "severely limited." Greenberq v. Bear, Stearns &
Co., 220 F.3d 22, 28 (2d Cir. 2000), cert. denied,
531 U.S. 1075 (2001) (citing Dirussa v. Dean Witter Reynolds Inc.,
121 F.3d 818, 821 (2d Cir. 1997)). "In order to vacate an award on these
grounds, a reviewing court must find `both that (1) the arbitrators knew
of a governing legal principle yet refused to apply it or ignored it
altogether, and (2) the law ignored by the arbitrators was well-defined,
explicit, and clearly applicable to the case.'" Id. (quoting
Dirussa, 121 F.3d at 821); see also GMS Group LLC v.
Benderson, 326 F.3d 75, 77-78 (2d Cir. 2003).
Where, as here, arbitrators decline to provide a full explanation for
their decision, the court, nevertheless, must confirm the award "if a
ground for the arbitrators' decision can be inferred from the facts of the case[,] . . . even if the ground
for their decision is based on an error of fact or an error of law."
Willemijn Houdstermaatschappij, BV v. Standard Microsystems
Corp., 103 F.3d 9, 13 (2d Cir. 1997); see also Benderson,
326 F.3d at 78. On the other hand, "when a reviewing court is inclined to
hold that an arbitration panel manifestly disregarded the law, the
failure of the arbitrators to explain the award can be taken into
account." Halligan, 148 F.3d at 204. The party seeking vacatur
bears the burden of proving manifest disregard. See Westerbeke Corp.
v. Daihatsu Motor Co., 304 F.3d 200, 209 (2d Cir. 2002);
Willemiin Houdstermaatschappij, 103 F.3d at 12.
The Panel's Failure to Explain the Grounds for the Dismissal
of Petitioners' Claims Does Not Require Vacatur of the Award
Petitioners argue that where the record discloses no rational basis for
an award, it must be vacated.
Arbitrators are not required to provide an explanation for their
arbitration award. See, e.g., Halligan, 148 F.3d at 204;
Max Marx Color & Chem. Co. Employees' Profit Sharing Plan v.
Barnes, 37 F. Supp.2d 248, 254 (S.D.N.Y. 1999). Accordingly, and
contrary to Petitioners' contention, the Panel's failure to state the
reasons for the Award does not require vacatur if any ground for the
Panel's decision can be gleaned from the factual record. See Sobel
v. Hertz, Warner & Co., 469 F.2d 1211, 1215-16 (2d Cir. 1972). Here, sufficient grounds for the Panel's decision denying Petitioners'
claims are evident upon review of the factual record. Evidence in the
record suggests that Petitioners knew that Compuacct was an outside
business venture undertaken by Thyagarajan unrelated to MMLISI and that
Petitioners were not relying on MMLISI's involvement in loaning money to
Compuacct,*fn3 thus belying the respondeat superior theory of liability
on which Petitioners' claims are premised. Moreover, the record
demonstrates that Petitioners' purported beliefs that Compuacct was a
MMLISI-approved product and that Thyagarajan continued to be employed by
MMLISI long after his employment ceased, and their credibility generally,
were placed in doubt when Petitioners were questioned with regard to
conflicting statements given in previous deposition testimony during
other proceedings. (See, e.g., Tr. at 3092-149
(summarizing conflicting testimony and facts).) These portions of the
record, along with the testimony of MMLISI's own witnesses, provide more than "`a barely colorable justification for the outcome reached'"
by the Panel. Josephthal, 177 F. Supp.2d at 236 (quoting
Landy, Michaels Realty, 954 F.2d at 797). Accordingly, the
Panel's failure to state the grounds for dismissing Petitioners' claim
does not require the Award's vacatur.
Petitioners Have Not Established Grounds for Vacatur Based on
MMLISI's Reimbursements to Farr
Petitioners claim that MMLISI's payment of money to the fact witness
Farr was improper in view of the principles set forth in Hamilton v.
General Motors Corporation, 490 F.2d 223 (7th Cir. 1973) and other
federal caselaw drawing on common law principles, ethical considerations
and the Federal Anti-Gratuity Statute.
Petitioners present no argument that the invoiced reimbursements for
Farr's time and out-of-pocket expenses for travel were unreasonable or
that Farr received payments unrelated to either his time or expenses.
Rather, they argue that it is the payment to a fact witness for
participating in the preparation of other witnesses that is improper.
They further argue that it is "troubling" that MMLISI failed to disclose
the fact of Farr's compensation or the extent of his services to MMLISI
until well into the arbitration, when, following the cross-examination of
Farr, "Petitioners realized the importance of reviewing Mr. Farr's notes
and invoices." (Pet. Br. at 8.) While Hamilton "is instructive as to the strong policy
against payments to fact witnesses," there is "nevertheless a great
difference between questionable payments to witnesses and subornation of
perjury." Fund of Funds, Ltd, v. Arthur Andersen & Co.,
545 F. Supp. 1314, 1369 & n.28 (S.D.N.Y. 1982) (noting that, "[a]s a
substantive matter, we are not convinced that the mere fact of payments,
even seemingly large payments, warrants any explicit reference to [the
Federal Anti-Gratuity Statute]"). The Federal Anti-Gratuity Statute,
18 U.S.C. § 201, itself explicitly creates an exception to the
prohibition on non-expert witnesses receiving compensation for
testifying. This exception provides that the prohibition on bribery of a
shall not be construed to prohibit the payment or
receipt of witness fees provided by law, or the
payment, by the party upon whose behalf a witness
is called and receipt by a witness, of the
reasonable cost of travel and subsistence incurred
and the reasonable value of time lost in
attendance at any such trial, hearing, or
proceeding. . . .
18 U.S.C. § 201(d).
Although the federal courts have reached varying conclusions as to the
circumstances in which payments to a fact witness will be deemed
improper, they are generally in agreement that a witness may properly
receive payment related to the witness' expenses and reimbursement for
time lost associated with the litigation. See, e.g., Hamilton,
490 F.3d at 229 ("Inasmuch as the kinds and amounts of reimbursement to which [non-expert] witnesses
are entitled are so severely circumscribed, the only contract that the
law could imply would be for `reasonable cost of travel and subsistence
incurred and the reasonable value of time lost in attendance.'") (quoting
18 U.S.C. § 201); New York v. Solvent Chemical Co.,
166 F.R.D. 284, 289 (W.D.N.Y. 1996) ("The payment of a sum of money to a
witness to `tell the truth' is as clearly subversive of the proper
administration of justice as to pay him to testify to what is not true.
Of course, the court finds nothing improper in the reimbursement of
expenses incurred by [the witness] in travelling to New York to provide
[a party] factual information, or in the payment of a reasonable hourly
fee for [his] time.") (internal quotation marks and citations omitted);
Golden Door Jewelry Creations, Inc. v. Lloyds Underwriters
Non-Marine, Ass'n, 865 F. Supp. 1516, 1526 n.11 (S.D. Fla. 1994)
(finding that payments to a fact witness were improper, but acknowledging
that "[p]ayments made to fact witnesses as actual expenses as permitted
by law will not be disturbed or set aside"). See generally NLRB v.
Thermon Heat Tracing Svcs., Inc., 143 F.3d 181, 190-91 & n.4
(5th Cir. 1998) (Garza, C.J., dissenting) (providing an overview of
statutory and common law views on witness compensation and noting that
improper compensation to fact witnesses is typically defined to exclude
the payment of reasonable expenses and compensation for lost time);
Jeffrey S. Kinsler & Gary S. Colton, Jr., Compensating Fact
Witnesses, 184 F.R.D. 425 (1999) (describing ethics opinions and
case-law treating the compensation of fact witnesses). A witness may be compensated for the time spent preparing to testify or
otherwise consulting on a litigation matter in addition to the time spent
providing testimony in a deposition or at trial. See,
e.g.,. Centennial Mgmt. Servs., Inc. v. Axa Re Vie,
193 F.R.D. 671, 679-80 (D. Ran. 2000) (concluding that a fact witness was
properly and reasonably compensated "for the time he lost in order to
give testimony in the litigation, review documents produced in the
litigation, and otherwise consult with [a party] and its counsel on
matters related to the litigation"); Solvent Chemical,
166 F.R.D. at 289 (finding nothing improper in payments made to a consultant
fact witness compensating him for time and travel expenses related to
meetings where the witness provided factual information to a party);
see also ABA Comm. on Ethics & Prof'l
Responsibility, Formal Op. 96-402 (1996) ("ABA Ethics Op. 96-402") ("The
Committee also sees no reason to draw a distinction between (a)
compensating a witness for time spent in actually attending a deposition
or a trial and (b) compensating the witness for time spent in pretrial
interviews with the lawyer in preparation for testifying. . . . The
Committee is further of the view that the witness may also be compensated
for time spent in reviewing and researching records that are germane to
his or her testimony, provided, of course, that such compensation is not
barred by local law."); New York State Bar Ass'n, Comm. of Prof'l Ethics,
Op. 68 (1994) ("NY Ethics Op. 68") (stating that a witness may be
provided reasonable compensation for lost time "in testifying or in
otherwise attending court proceedings and preparing therefor") (internal quotation marks and citation
omitted). But see In re Complaint of PMD Enterprises Inc.,
215 F. Supp.2d 519, 530 (D.N.J. 2002) (holding that compensation to an
adverse fact witness for time spent reviewing documents apart from time
"lost physically attending trial and testifying" was improper).
That a fact witness has been retained to act as a litigation consultant
does not, in and of itself, appear to be improper, absent some indication
that the retention was designed as a financial inducement or as a method
to secure the cooperation of a hostile witness, or was otherwise
improper. Compare Barrett Industrial Trucks, Inc. v. Old Republic
Ins. Co., 129 F.R.D. 515, 517 (N.D. Ill. 1990) (seemingly accepting,
without comment, the propriety of a party hiring a former employee who
was also a fact witness in the litigation as a litigation consultant)
and In re Gulf Oil/Cities Serv. Tender Offer Litiq., Nos. 82
Civ. 5253 (MBM) & 87 Civ. 8982 (MBM), 1990 WL 108352, at *1 (S.D.N.Y.
July 20, 1990) (same), with Solvent Chemical, 166 F.R.D. at
290-91 (distinguishing the preceding cases from a situation where a
hostile former employee was approached after being served with a subpoena
by the opposing party and induced to cooperate with his former employer
through the settlement of legal claims against him and his lucrative
retention as a litigation consultant). Although Farr was retained by
MMLISI after he was approached by Petitioners to testify as a witness
(see Tr. at 2536-37), that fact alone is insufficient to establish that MMLISI's retention of his services
as a consultant was improper as a matter of law, particularly in view of
Farr's testimony that he was initially contacted by MMLISI's counsel
regarding Petitioners' claims in the summer or fall of 2002, long before
he was approached by Petitioners. (See id. at
Accordingly, Petitioners have not established that the fact that Farr
was reimbursed for his time and travel expenses is contrary to any
governing legal principles. Moreover, given that the compensation rate of
$125 per hour is the rate Farr generally charges for his training and
investigative services as a self-employed compliance consultant
(see id. at 2473-75), the rate does not appear excessive or
unreasonable. Cf. Centennial Mgmt. Svcs., 193 F.R.D. at 680
(concluding that rates of $125 to 200 were reasonable to compensate a
witness in view of the witness' years of experience in the relevant
industry and his first-hand experience with the agreements at issue in
the litigation); see generally ABA Ethics Op. 96-402 ("What is
a reasonable amount is relatively easy to determine in situations where
the witness can demonstrate to the lawyer that he has sustained a direct
loss of income because of his time away from work as, for
example, loss of hourly wages or professional fees."); N.Y. Ethics Op. 68
("The amount of compensation that is to be considered `reasonable' will
be determined by the market value of the testifying witness. For example,
if in the ordinary course of [the] individual's profession or business,
he or she could expect to be paid the equivalent of $150/hour, he or she
may be reimbursed at the same rate.").
Although situations where neither counsel nor the witness him
or herself undertakes to disclose that a witness has been retained as a
consultant either before or during a deposition may indeed be
"troubling," Solvent Chemical, 166 F.R.D. at 290, this does not
appear to be such a situation. Contrary to Petitioners' suggestion that
the nature of Farr's relationship with MMLISI only came to light on
cross-examination, Farr testified on direct examination on May 5, 2003
that, at the request of MMLISI's counsel, he had located and interviewed
a number of potential witnesses. (See Tr. at 1611.) Both Farr
and MMLISI's counsel made clear that Farr was being compensated for his
time. (See id. at 1594, 1616.)*fn4
Petitioners have failed to present any caselaw or authority in this
Circuit or elsewhere that suggests that counsel is prohibited from
meeting with multiple witnesses at the same time. They have similarly failed to establish any facts to support
allegations of witness tampering.
In light of the foregoing, Petitioners have failed to sustain their
burden of establishing that the Panel's decision with regard to Farr's
compensation was in manifest disregard of the law.
The Award Is Confirmed
MMLISI seeks confirmation of the Award pursuant to the FAA,
9 U.S.C. § 9, or, in the alternative, on the grounds that all of Petitioners'
claims were barred by the applicable statutes of limitations at the time
Petitioners filed their Statements of Claim with the NASD and should have
Under Section 9 of the FAA, district courts must confirm an arbitration
award unless a statutory basis for modification or vacatur exists.
See Ottley v. Schwartzberg, 819 F.2d 373, 375 (2d Cir. 1987).
The court's authority to review an award is limited to determining
whether the arbitrators acted within the scope of their authority in
rendering the decision at issue. See Local 1199, Drug, Hosp. &
Health Care Employees Union v. Brooks Drug Co., 956 F.2d 22, 24-25
(2d Cir. 1992); In re Arbitration Between Carina Int'l Shipping
Corp. & Adam Maritime Corp., 961 F. Supp. 559, 563 (S.D.N.Y.
1997). This Court finds no basis for modifying or vacating the award.
Accordingly, MMLISI's cross-petition to confirm the award is granted and the alternate grounds for
confirmation need not be reached.
For the reasons set forth, Petitioners' petition to vacate the Award is
denied and MMLISI's cross-petition to confirm the Award is granted.
It is so ordered.