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