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IN THE MATTER OF ARBITRATION BEFORE NEW YORK STOCK EXCHANGE

In the Matter of the Arbitration Before the New York Stock Exchange, Inc. CHANG RUEI-CHAN, Petitioner-Respondent,
v.
MERRILL LYNCH PIERCE, FENNER & SMITH, INC., Respondent-Claimant, NYSE DOCKET NO. 2002-0103616.



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

OPINION

Petitioner-respondent Chang Ruei-Chan ("Chang") has moved pursuant to Section 10 of the Federal Arbitration Act (the "FAA"), 9 U.S.C. § 1 et seq., to vacate the arbitration award rendered by an arbitration panel of the New York Stock Exchange ("NYSE") on October 15, 2003 (the "Award") in favor of respondent-claimant Merrill Lynch Pierce, Fenner & Smith, Inc. ("Merrill"). Merrill has cross-moved to confirm the Award, and both parties have requested attorney's fees. For the reasons that follow, the Award is confirmed and Merrill's application for attorney's fees is granted.

Background

  The following facts are taken from the parties' motion papers and do not represent findings of fact.

  Chang was the co-founder and chief executive officer of GigaMedia Limited ("GigaMedia"), a Taiwan-based Internet company. (See Transcript of the Arbitration Hearing ("Tr."), Exhibit 7 of the Affirmation of Sean F. O'Shea, dated Jan. 21, 2004 ("O'Shea Aff.",*fn1 at 297-98, 303-04.) At the time of the GigaMedia initial public offering in February 2000, Chang held approximately 800,000 GigaMedia shares, which were maintained in a securities account at Merrill. (See Tr. at 305-06, 343-44.) By October 2003, Chang had sold all but 4,000 to 5,000 of his GigaMedia shares. (See Tr. at 357-58.)

  On December 18, 2001, GigaMedia announced its intention to seek shareholder approval of a $2.00 per share return of capital dividend. (See O'Shea Aff., Exh. 4, at ML 1096.) On March 5, 2002, GigaMedia announced the $2.00 per share return of capital dividend, a record date of March 15, 2002 and a payment date of March 29, 2002. (See id., at ML 1099.) The ex-dividend date set by GigaMedia in conjunction with the announced capital dividend was April 1, 2002. (See Tr. at 45; see also Tr. at 378-79.) On March 5, 2002, the day the dividend was announced, the bid and low price for GigaMedia shares was approximately $2.50 per share, which price dropped to approximately $0.50 per share on the ex-dividend date, April 1, 2002. (See Exhibit C to the Affidavit of Spencer L. Schneider, dated Mar. 10, 2004 ("Schneider Aff."); see also Tr. at 51-53.)

  On the evening of March 19, 2002, Chang placed a telephone order from Taiwan to his Merrill broker in Singapore, Ginny Huang, to sell 150,000 shares of GigaMedia stock. (See Tr. at 311-12.) Later that evening, at 9:59 p.m., Singapore local time, Chang called Merrill's night trader in Singapore to lower the sell price on part of this order. (See Tr. at 139-40; Schneider Aff., Exh. F, at ML 1125-26.) At 11:06 p.m., Singapore local time, Chang again called Merrill's night trader in Singapore. (See Tr. at 140-42; Schneider Aff., Exh. E.) In this call, Chang first inquired as to whether the trade had been executed yet. (See Schneider Aff., Exh. F, at ML 1128.) After being informed that the trade had yet to be executed, Chang lowered the price to market for the entire order and then directed the trader to sell all of the remaining 170,950 shares of GigaMedia stock in his account. (See Tr. at 140-42; Schneider Aff., Exh. F, at ML 1128-30.) The trades were executed that evening, March 19, at prices averaging approximately $2.30 per share. (See Schneider Aff., Exh. G, at ML 1063; Tr. at 140-43.) The proceeds from the sale of Chang's GigaMedia shares totaled $384,479.02. (See Schneider Aff., Exh. G, at ML 1063.) At no time during any of these calls did Chang inquire about his entitlement to any dividend. The parties dispute whether Merrill was the purchaser of the shares sold by Chang.

  On the following day, March 20, 2002, at 2:08 p.m., Singapore local time, Chang called Ecia Tan ("Tan"), his broker's assistant, to inquire whether his shares had been sold. (See Tr. at 228-29; Schneider Aff., Exh. E.) Tan confirmed that all the shares had been sold and promised to send Chang a summary via e-mail. (See Tr. at 228-29; Schneider Aff., Exh. H, at ML 1115-16.) Chang did not inquire about any entitlement to a dividend during this call with Tan. (See Tr. at 393.)

  At 3:23 p.m., Singapore local time, Chang called Tan again and inquired whether he would be entitled to the dividend on the shares he had sold the prior day. (See Tr. at 229-31, 393; Schneider Aff., Exh. E; Schneider Aff., Exh. H, at ML 1116-17.) Tan informed Chang that she believed he would be entitled to the dividend and Chang asked her to "double check this" for him. (See Schneider Aff., Exh. H, at ML 1117.) Tan and Chang spoke twice more that day and she repeated her belief to him and later confirmed her statement to Chang in an e-mail. (See Tr. at 234-238, 313-15; Schneider Aff., Exh. E; Schneider Aff., Exh. H, at ML 1117-19; O'Shea Aff., Exh. 8.) The e-mail sent by Tan to Chang contained a disclaimer as to accuracy. (See O'Shea Aff., Exh. 8.)

  Like the rules of the NYSE, Merrill's internal rules also provide that the buyer of shares prior to the ex-dividend date is entitled to the dividend. (See Tr. at 55-57.) Because the GigaMedia shares at issue here were registered in Chang's name as of the record date, he was mailed the dividend checks from GigaMedia's transfer agent, although under the rules of both Merrill and the NYSE he was required to pay Merrill the amount of the dividend. See Tr. at 57-60, 63-65, 70-72; NYSE Rules 255 & 257, Schneider Aff., Exh. D; NASD Notice 00-54, Schneider Aff. Exh. B.) Chang received the dividend checks, totaling $321,000. (See Tr. at 144.)

  Merrill subsequently requested that Chang return the GigaMedia dividend to Merrill. (See Tr. at 146, 149, 198, 213, 214, 231-37, 323, 325; O'Shea Aff., Exh. 10.) Chang declined to return the GigaMedia dividend to Merrill (see Tr. at 323, 325-28), and on May 14, 2002, Merrill commenced an arbitration proceeding before the NYSE pursuant to the parties' brokerage agreement. (See Schneider Aff., Exh. I, at ML 1012; O'Shea Aff., Exh. 11). The Statement of Claim submitted by Merrill sought return of the dividend, interest on the amount of the dividend, and Merrill's attorney's fees and costs incurred in collecting the debit balance. (See O'Shea Aff., Exh. 11.) Chang executed a uniform submission agreement consenting to the proceeding (see Schneider Aff., Exh. J) and answered the Statement of Claim. (See O'Shea Aff., Exh. 12). In his answer, Chang requested an award of attorney's fees and costs. (See id.)

  An arbitration hearing was held on October 14 and 15, 2003 at NYSE's office in Manhattan. (See Tr. at 1, 262.) The chairwoman of the NYSE arbitration panel presiding at the hearing (the "Panel") was Marguerite B. Filson, Esq., and the panelists were Stephen J. Bury, Esq., and Kevin J. Hughes. (See id.)

  In his answer submitted prior to the hearing, Chang asserted that Tan had told him prior to the trade that he was entitled to the dividend in question. (See O'Shea Aff., Exh. 12, at 2.) At the hearing, however, the audio recordings of Chang's conversations with Tan established that those conversations occurred the day after the trades were placed. (See, e.g., Tr. at 9, 12.) Chang argued at the hearing that Chang and Merrill, the latter acting through Tan, had therefore "otherwise agreed" that Chang was entitled to the dividend.*fn2 (Tr. at 28; see also Tr. at 23-24, 26.)

  At the hearing, Tan openly admitted that she had answered Chang's question wrong. She stated that she had wrongly assumed that the GigaMedia dividend was like the "normal" case where the ex-dividend date precedes the record date and she had not known that in this transaction the ex-dividend date followed the record date. (See Tr. at 231-32, 251-56.)

  Chang testified that before he placed the trade he had held a pre-existing belief that he would be entitled to both the dividend and the sale proceeds, and that he later inquired after the trade to confirm or "double-check" his prior-held belief. (Tr. at 309-11, 313-14, 393.) Chang further testified that, if Tan had given him the correct information, he would have repurchased GigaMedia shares from the market in order to receive the dividend. (See Tr. at 394.) He also stated that when he met with Merrill representatives two weeks after the trade to try to resolve the dispute regarding the dividend he did not consider asking Merrill to restore his position in the shares (see Tr. at 398-400), and acknowledged that, with the exception of the purchase of a few thousand shares over the previous two years, he had been liquidating his GigaMedia holdings. (See Tr. at 396-97).

  On the first day of the hearing, Merrill called Francis Liu ("Liu"), Associate Director in Merrill's Singapore office in charge of the Taiwan market at the time of the relevant events. Liu testified that Merrill made a mistake in agreeing with Chang that he, not Merrill, was entitled to the GigaMedia dividend. (See Tr. at 146, 198-99.) Liu further testified that Merrill had made several settlement offers to Chang in an effort to settle the matter shortly after Chang collected his GigaMedia dividend. (See Tr. at 146, 154-55, 157-58, 201-02, 207-08, 327.) According to Liu, among the offers made by Merrill was an offer to reinstate Chang's GigaMedia position so that he would be the holder of record of GigaMedia shares. (See Tr. at 154-55, 157-58, 201-02.) To do so, Merrill offered to "buy back from the market whatever shares that ...


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