220 F.3d 22 (2nd Cir. 2000), 99-9041, Greenberg v Bear, Stearns & Co.

Docket NºDocket No. 99-9041
Citation220 F.3d 22
Party NameHOWARD GREENBERG, Petitioner-Appellant, v. BEAR, STEARNS & CO., BEAR, STEARNS & CO., INC., and BEAR, STEARNS SECURITIES CORP., Respondents-Appellees.
Case DateAugust 07, 2000
CourtUnited States Courts of Appeals, Court of Appeals for the Second Circuit

Page 22

220 F.3d 22 (2nd Cir. 2000)

HOWARD GREENBERG, Petitioner-Appellant,

v.

BEAR, STEARNS & CO., BEAR, STEARNS & CO., INC., and BEAR, STEARNS SECURITIES CORP., Respondents-Appellees.

Docket No. 99-9041

United States Court of Appeals, Second Circuit

August 7, 2000

(Argued: March 31, 2000)

)

Page 23

LESLIE TRAGER, Morley and Trager, New York, NY for Petitioner-Appellant

JACK P. LEVIN (P. Benjamin Duke, on the brief), Covington & Burling, New York, NY for Respondents-Appellees.

Page 24

Before: OAKES, WALKER, and KEITH,[*] Circuit Judges.

Appeal from the judgment of the United States District Court for the Southern District of New York (John S. Martin, Jr., District Judge), denying the motion by the petitioner-appellant to vacate an arbitration award.

Affirmed.

JOHN M. WALKER, JR., Circuit Judge:

Petitioner-appellant Howard Greenberg appeals from the August 25, 1999 judgment of the United States District Court for the Southern District of New York (John S. Martin, Jr., District Judge), denying his petition to vacate an arbitration award that dismissed his securities fraud claims against respondents-appellees Bear, Stearns & Co., Inc., and Bear, Stearns Securities Corp. (collectively, "Bear Stearns"). On appeal, Greenberg argues that the district court's judgment should be reversed and the arbitration award against him vacated because the arbitrators manifestly disregarded federal law in rendering the award. Bear Stearns responds that there was no basis for federal subject matter jurisdiction in this case and that, in any event, the arbitral award easily withstands review.

This appeal squarely presents the question of whether and under what circumstances federal courts have jurisdiction to hear motions to vacate arbitration awards. We conclude that the district court had jurisdiction in this case because Greenberg challenged the award primarily on the grounds of manifest disregard of federal law. Nevertheless, Greenberg has not met the very stringent burden of demonstrating the sort of manifest disregard required to vacate the award. Therefore, we affirm the judgment of the district court.

BACKGROUND

At the time of the events underlying Greenberg's claim, Bear Stearns (a "clearing broker") provided securities clearing services to Greenberg's primary broker, Sterling Foster (an "introducing broker"). According to Greenberg, Bear Stearns violated federal and state securities laws because it knew of and participated in a fraudulent scheme perpetrated by Sterling Foster; sent false and misleading confirmations in connection with this scheme; and failed to send out a required prospectus. We briefly discuss the facts and allegations pertinent to the appeal.

In 1996, Sterling Foster organized the initial public offering ("IPO") for a company called ML Direct. Under an agreement between Bear Stearns and Sterling Foster, the latter requested permission from the former to underwrite this sale. According to Sterling Foster's plan, ML Direct would make a public sale of 1.1 million shares, and Sterling Foster would sell short an additional 2.3 million shares, to be covered by shares it would obtain from existing shareholders. This scheme was fraudulent, alleged the plaintiff, because the prospectus distributed to purchasers of ML Direct stock stated that shares from the selling shareholders were subject to a lock-up agreement for 12 months and that there were "no agreements or understandings . . . with respect to release of the securities prior to [this time]." Bear Stearns employees admitted having seen the prospectus, but did not recall reading the sentences about the lock-up. Bear Stearns agreed to clear the transaction.

In September 1996, the IPO and stock sales proceeded as planned. Sterling Foster allegedly reaped an enormous profit at the expense of the selling shareholders by selling shares short and purchasing shares from those shareholders at a significantly lower price. Bear Stearns sent out confirmations to purchasers of ML Direct stock that stated: "Your broker makes a market in this security and acted as principal." The confirmations did not disclose Sterling Foster's short sales or its large profit, nor was a prospectus sent to those who purchased shares.

Page 25

In May 1997, the petitioner filed a claim with the National Association of Security Dealers ("NASD") against Bear Stearns alleging, among other things, fraud and market manipulation in connection with Bear Stearns's provision of securities clearing services to Sterling Foster. A panel of three arbitrators heard arguments and testimony through extensive briefing and seven days of hearings. The arbitrators first dismissed Greenberg's claim based on Bear Stearns's purported failure to send him a prospectus and thereafter dismissed his remaining claims. On March 9, 1999, the arbitrators issued a written award confirming their decision to dismiss.

On January 18, 1999, Greenberg moved in federal district court to vacate the award on the basis that it "violated public policy and manifestly disregarded the law." In an opinion and award dated August 23, 1999, the district court denied the motion on the grounds that the petitioner had failed to demonstrate manifest disregard of the law in the arbitrators' treatment of his claims. This appeal followed.

DISCUSSION

I. Federal Jurisdiction

The principal question presented in this appeal is whether the district court had federal question jurisdiction over Greenberg's motion to vacate the arbitration award. Jurisdiction would plainly lie if, among other things, the parties were diverse, see 28 U.S.C. § 1332, the claim arose in admiralty, see 28 U.S.C. § 1333, or the dispute concerned the interpretation of a collective bargaining agreement, see 29 U.S.C. § 185(a). Cf. Drexel Burnham Lambert, Inc. v. Valenzuela Bock, 696 F.Supp. 957, 964-65 (S.D.N.Y. 1988) (Leval, J.) (listing some circumstances under which federal courts plainly have jurisdiction to hear a petition to compel arbitration). However, we must decide whether and under what circumstances a federal court may entertain a motion to vacate an award where, as in this case, alternative bases for jurisdiction are absent. We conclude that: (1) the fact that the arbitration itself concerns issues of federal law does not, on its own, confer subject matter jurisdiction on a federal district court to review the award; but (2) federal jurisdiction may lie where the petitioner seeks to vacate the award primarily on the ground of manifest disregard of federal law.

Federal courts have jurisdiction over "all civil actions arising under the . . . laws . . . of the United States." 28 U.S.C. § 1331. Federal question jurisdiction exists where a well-pleaded complaint "establishes either that federal law creates the cause of action or that the plaintiff's right to relief necessarily depends on resolution of a substantial question of federal law." Franchise Tax Bd. v. Construction Laborers Vacation Trust, 463 U.S. 1, 27-28 (1983).

Federal law plainly does not create the cause of action in this case. Greenberg filed his petition under § 10 of the Federal Arbitration Act ("FAA"), which authorizes "the United States court in and for the district wherein the [arbitration] award was made" to "make an order vacating the award" under certain circumstances. 9 U.S.C. § 10(a). However, it is well-settled that the FAA does not confer subject matter jurisdiction on the federal courts even though it creates federal substantive law. See Southland Corp. v. Keating, 465 U.S. 1, 16 n.9 (1984); Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 25 n.32 (1983). Therefore, federal question jurisdiction does not arise simply because a petitioner brings a claim under § 10 of the FAA; there must be "an independent basis of jurisdiction" before district courts may entertain petitions to vacate. Harry Hoffman Printing, Inc. v. Graphic Communications, Int'l Union, Local 261, 912 F.2d 608, 611 (2d Cir. 1990).

Page 26

Simply raising federal-law claims in the underlying arbitration is insufficient to supply this "independent basis." In the context of a motion to compel arbitration under § 4 of the FAA, see 9 U.S.C. § 4, we have specifically held that there is no federal subject matter jurisdiction "merely because the underlying claim raises a federal question." Westmoreland Capital Corp. v. Findlay, 100 F.3d 263, 268 (2d Cir. 1996). Petitions to compel...

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144 practice notes
  • Royal Bank America v. Kirkpatrick, 092911 PAEDC, 11-1058
    • United States
    • Federal Cases United States District Courts 3th Circuit Eastern District of Pennsylvania
    • September 29, 2011
    ...to the general rule that the FAA does not alone provide subject matter jurisdiction. See, e.g., Greenberg v. Bear, Stearns & Co., 220 F.3d 22, 27 (2d Cir. 2000). These courts held that a claim that the arbitrator manifestly disregarded federal law "so immerses the federal court in ......
  • Sonic Automotive, Inc. v. Price, 081211 NCWDC, 3:10-CV-382
    • United States
    • Federal Cases United States District Courts 4th Circuit Western District of North Carolina
    • August 12, 2011
    ...controversy on the issue of federal question subject matter jurisdiction in this case is Greenberg v. Bear, Stearns & Co., 220 F.3d 22 (2d Cir. 2000), in which the Second Circuit Court of Appeals squarely addressed "whether the district court had federal question jurisdiction over ......
  • 38 Misc.3d 1220(A), 2013-50158, Schwimmer v. Malinas
    • United States
    • January 30, 2013
    ...findings of the arbitrator" ], Greenberg v. Bear Stearns & Co., Inc., Fed Sec L Rep P 90696 [SDNY Aug. 23, 1999] affd, sub nom, 220 F.3d 22 [2d Cir.2000][" The Court will not second-guess the credibility findings of the arbitral panel" ] ). Thus, in light of the Beth Din'......
  • Cardinale v. 267 Sixth Street LLC, 092614 NYSDC, 13 Civ. 4845 (JFK)
    • United States
    • Federal Cases United States District Courts 2nd Circuit Southern District of New York
    • September 26, 2014
    ...Arbitrator manifestly disregarded certain Treasury Regulations and the Internal Revenue Code. See Greenberg v. Bear, Stearns & Co. , 220 F.3d 22, 27 (2d Cir. 2000) (holding that subject matter jurisdiction is present where "petitioner complains principally and in good faith that th......
  • Request a trial to view additional results
140 cases
  • Royal Bank America v. Kirkpatrick, 092911 PAEDC, 11-1058
    • United States
    • Federal Cases United States District Courts 3th Circuit Eastern District of Pennsylvania
    • September 29, 2011
    ...to the general rule that the FAA does not alone provide subject matter jurisdiction. See, e.g., Greenberg v. Bear, Stearns & Co., 220 F.3d 22, 27 (2d Cir. 2000). These courts held that a claim that the arbitrator manifestly disregarded federal law "so immerses the federal court in ......
  • Sonic Automotive, Inc. v. Price, 081211 NCWDC, 3:10-CV-382
    • United States
    • Federal Cases United States District Courts 4th Circuit Western District of North Carolina
    • August 12, 2011
    ...controversy on the issue of federal question subject matter jurisdiction in this case is Greenberg v. Bear, Stearns & Co., 220 F.3d 22 (2d Cir. 2000), in which the Second Circuit Court of Appeals squarely addressed "whether the district court had federal question jurisdiction over ......
  • 38 Misc.3d 1220(A), 2013-50158, Schwimmer v. Malinas
    • United States
    • January 30, 2013
    ...findings of the arbitrator" ], Greenberg v. Bear Stearns & Co., Inc., Fed Sec L Rep P 90696 [SDNY Aug. 23, 1999] affd, sub nom, 220 F.3d 22 [2d Cir.2000][" The Court will not second-guess the credibility findings of the arbitral panel" ] ). Thus, in light of the Beth Din'......
  • Cardinale v. 267 Sixth Street LLC, 092614 NYSDC, 13 Civ. 4845 (JFK)
    • United States
    • Federal Cases United States District Courts 2nd Circuit Southern District of New York
    • September 26, 2014
    ...Arbitrator manifestly disregarded certain Treasury Regulations and the Internal Revenue Code. See Greenberg v. Bear, Stearns & Co. , 220 F.3d 22, 27 (2d Cir. 2000) (holding that subject matter jurisdiction is present where "petitioner complains principally and in good faith that th......
  • Request a trial to view additional results
3 firm's commentaries
2 books & journal articles
  • The Brave New World of Arbitration
    • United States
    • Capital University Law Review Nbr. 31-3, June 2003
    • June 1, 2003
    ...arbitrator impartiality. If a judge similarly situated to the challenged arbitrator would not have to recuse herself, then it is clear that the arbitrator did not have the kind of "evident partiality" that would require disqualification. Id .at 622. It is the converse that is not true: under
  • The specificity of international arbitration: the case for FAA reform.
    • United States
    • Vanderbilt Journal of Transnational Law Vol. 36 Nbr. 4, October 2003
    • October 1, 2003
    ...in an allegation that the arbitrator "manifestly disregarded" federal securities law. See Greenberg v. Bear, Stearns & Co., 220 F. 3d 22, 25 (2d Cir. 2000). For a recent case on giving broad scope to the concept of actions that "relate to" the New York Convention, se......