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WEDBUSH MORGAN SECURITIES, INC. v. BAIRD

May 31, 2004.

WEDBUSH MORGAN SECURITIES, INC., Petitioner, -against- ROBERT W. BAIRD & CO., Respondent


The opinion of the court was delivered by: JOHN KOELTL, District Judge

OPINION and ORDER

Wedbush Morgan Securities, Inc. ("Wedbush") has filed a petition to vacate an award entered by a New York Stock Exchange ("NYSE") Arbitration Panel in favor of the respondent Robert W. Baird & Co. ("Baird"). See Robert W. Baird & Co. vs. Wedbush Morgan Sec., Inc., No. 2001-009432 (NYSE July 14, 2003) (Decision) (attached as Ex. A to Petition to Vacate Arbitration Award ("Petition")). Baird opposes the petition and has cross-petitioned for confirmation of the award. The petition and cross-petition have been brought pursuant to the Federal Arbitration Act ("FAA"), 9 U.S.C. § 9, 10.*fn1

I.

  The following facts are undisputed unless otherwise noted. The dispute arises out of a chain of stock loan transactions involving shares of Genesis Intermedia, Inc. ("GENI"). On June 18, 2001, Baird loaned to Wedbush 885,000 shares of GENI stock, and Wedbush transferred to Baird $15,930,000 in cash collateral, which reflected a market value of $18 per share of GENI stock. (Petition ¶ 58.) Baird obtained the GENI shares by entering simultaneously into a separate transaction with MJK Clearing, Inc. ("MJK"), in which MJK loaned to Baird 885,000 GENI shares in exchange for $15,930,000 in cash collateral. (Id.)*fn2

  The parties to the MJK-to-Baird-to-Wedbush transactions (the "June 18 Loan") followed the practice of marking the collateral to the market based on a daily determination of the GENI stock price. (Id. ¶ 50.) Through the "marking to market" parameters, when the stock price would fall or rise, a corresponding amount of cash collateral would be returned to or provided by the borrower. Marking to the market ensures that the stock loan position remains collateralized at the agreed-upon rate.

  In September 2001, the GENI stock price fell substantially, causing Baird's collateral from Wedbush to be marked down to $7,965,000. (See id. ¶¶ 64-67.) The collapse of the GENI stock price caused MJK to be put into receivership and prevented MJK from being able to return Baird's cash collateral on its portion of the June 18 Loan. (Id. ¶¶ 64-65.) On September 26, 2001, Wedbush attempted to remit the 885,000 GENI shares to Baird, but Baird refused to accept the shares and refused to return to Wedbush the remaining $7,965,000 in cash collateral. (Id. ¶ 67.)

  On September 28, 2001, Baird filed a claim against Wedbush with the NYSE Department of Arbitration, seeking declaratory and injunctive relief that it was not required to return the $7,965,000 to Wedbush. (Id. ¶ 70.) Wedbush counterclaimed for the return of its collateral, arguing that Baird breached the ("MSLA") Master Securities Loan Agreement between Baird and Wedbush that allegedly applied to the June 18 Loan. (Id. ¶ 71.)

  The basis for Baird's claim and its primary defense was that Wedbush allegedly knowingly and recklessly participated in a fraudulent scheme involving GENI stock masterminded by convicted felon Kenneth D'Angelo. Baird argued that the June 18 Loan was one of the chain transactions D'Angelo structured to manipulate the market price of GENI shares. When the scheme collapsed, it forced MJK into receivership, and, as MJK's immediate downstream lender, Baird would have been forced to bear the loss of MJK's collapse. Baird thus asserted against Wedbush a fraud claim and affirmative fraud-related defenses on the grounds that Wedbush participated in and concealed the GENI stock scheme and was not entitled to reclaim the $7,965,000. Baird presented two other defenses to Wedbush's breach of contract claim. Baird argued that Wedbush could not recover because Baird was merely acting as the agent of MJK, and not a principal, in the June 18 Loan. Baird also argued that the MSLA did not apply to the June 18 Loan because there were no communications of any kind between Baird and Wedbush.

  A highly distinguished panel of three arbitrators (the "Panel") was selected pursuant to NYSE Arbitration Rules. It included William J. Crowe, Frank W. Giordano, and Joseph L. Gitterman. The Panel held a twelve-day evidentiary hearing that included the testimony of numerous witnesses, over three hundred exhibits, and audio-taped telephone calls, followed by substantial post-hearing briefing. The evidence was mostly directed at the allegations that Wedbush facilitated and concealed the GENI scheme in relation to the June 18 Loan.

  On July 14, 2003, the Panel issued a unanimous decision in favor of Baird that "it does not have to accept delivery of the Geni shares from respondent and does not have to pay respondent $7.965 million." (See Petition ¶ 11 (quoting Decision).) The Panel also granted "a permanent injunction prohibiting Wedbush from attempting to deliver the Geni shares to Baird," and it otherwise denied all other claims by Baird and Wedbush. (Id.) The Panel, however, did not explain the bases for its decision, and merely summarized Baird's position as "claiming, inter alia fraud." (Id.) This petition followed on September 15, 2003.

  II.

  The task for a party seeking to vacate an arbitration award is a formidable one. The party challenging an arbitration award generally bears a heavy burden of proof, and limited review of arbitration decisions is necessary both to effectuate the parties' agreement to submit their disputes to arbitration and to avoid costly and protracted litigation about issues the arbitrators have already decided. See, e.g., DiRussa v. Dean Witter Reynolds Inc., 121 F.3d 818, 821 (2d Cir. 1997); Willemjin Houdstermaatschappij, BV v. Standard Microsys. Corp., 103 F.3d 9, 12 (2d Cir. 1997); In re Arbitration Between Space Sys./Loral, Inc. and Yuzhnoye Design Office, 164 F. Supp.2d 397, 403 (S.D.N.Y. 2001).

  Wedbush argues that the arbitration award should be vacated because the Panel manifestly disregarded the law in reaching its decision. See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Bobker, 808 F.2d 930, 933 (2d Cir. 1986) (explaining judicially created doctrine of manifest disregard of the law).*fn3 The Court of Appeals for the Second Circuit has repeatedly emphasized that review of an arbitration award for manifest disregard of the law is "severely limited," and "to modify or vacate an award on this ground, a 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." Halligan v. Piper Jaffray, Inc., 148 F.3d 197, 202 (2d Cir. 1998) (internal quotations omitted)); see also Duferco Int'l Steel Trading v. T. Klaveness Shipping A/S, 333 F.3d 383, 389-91 (2d Cir. 2003); DiRussa, 121 F.3d at 821.

  Review under the doctrine of manifest disregard of the law is not an inquiry into the correctness of the decision, and the "erroneous application of rules of law is not a ground for vacating an arbitrator's award, nor is the fact that an arbitrator erroneously decided the facts." Siegel v. Titan Indus. Corp., 779 F.2d 891, 892-93 (2d Cir. 1985) (citations omitted); see Bobker, 808 F.2d at 933-34 (explaining that court is "not at liberty to set aside an arbitration panel's award because of an arguable difference regarding the meaning or applicability of laws urged upon it"). Instead, the error must be "plainly evident from the arbitration record," Duferco, 333 ...


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