Raiford v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 89-8051
| Decision Date | 22 June 1990 |
| Docket Number | No. 89-8051,89-8051 |
| Parties | Fed. Sec. L. Rep. P 95,760 Morgan B. RAIFORD, Plaintiff-Appellant, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Thomas F. Morris, Defendants-Appellees. Bernice B. RAIFORD, Plaintiff-Appellant, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., Thomas F. Morris, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Eleventh Circuit |
James A. Parker, Parker and Day, Atlanta, Ga., for plaintiff-appellant.
Paul W. Stivers, Rogers & Hardin, Dan F. Laney, III, Atlanta, Ga., for defendants-appellees.
Appeal from the United States District Court for the Northern District of Georgia.
Before TJOFLAT, Chief Judge, VANCE *, Circuit Judge, and ALLGOOD **, Senior District Judge.
On April 8, 1983, appellants, Morgan and Bernice Raiford (the Raifords), filed separate but identical complaints in federal district court alleging that appellees Merrill Lynch, Pierce, Fenner & Smith, Inc. and Thomas Morris (Merrill Lynch) 1 had defrauded the Raifords in violation of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b) (1988), Rule 10b-5, 17 C.F.R. Sec. 240.10b-5 (1988), and Georgia laws. According to the Raifords, Merrill Lynch had improperly managed their individual accounts by engaging in transactions that "were excessive in number and amount and were unsuitable in light of the investment objectives and needs" of the Raifords; furthermore, this excessive activity in the Raifords' accounts resulted in substantial, unwarranted commissions, fees, taxes, interest on margin debt, and principal losses.
In May 1985, the district court granted Merrill Lynch's motion to stay proceedings pending arbitration of the state and federal claims. The Raifords, who had separate individual accounts with Merrill Lynch, subsequently filed separate claims with the Arbitration Department of the National Association of Securities Dealers (NASD), and the two proceedings were consolidated for purposes of hearing and award. In their claims, the Raifords alleged that Thomas Morris had engaged in excessive unauthorized transactions with the Raiford accounts (churning), had used margin debt when expressly instructed not to do so, and had ignored the Raifords' investment objectives of preserving their capital and earning an income commensurate with income derived from investment in high quality securities.
Based on this conduct, the Raifords proposed two theories of liability: (1) Merrill Lynch's conduct "constituted a device, scheme, practice and course of business used to defraud the [Raifords] in violation of Section 10(b) of the Securities Exchange Act of 1934, ... Rule 10b-5, ... and Article III of the Rules of Practice of the NASD"; and (2) Merrill Lynch's conduct "constituted ... a breach of fiduciary duty and a fraud under the laws of the State of Georgia." The Raifords requested actual damages based on their federal law claim and actual and punitive damages based on their state law claim.
The NASD arbitration panel heard the controversy and awarded the Raifords $10,000. The panel's award gave no legal or evidentiary justification for the award: it simply stated that Merrill Lynch and Thomas Morris would be jointly and severally liable to the Raifords in the amount of $10,000. The Raifords moved the district court to reactivate and consolidate the cases and to vacate or modify the panel's award. The Raifords argued that their claims were primarily for damages resulting from the churning of their accounts in violation of the federal securities laws. Damages from churning typically include the amount of commissions, margin interest, and trading losses incurred during the churning period. Since this sum greatly exceeded the amount awarded, the Raifords claimed that the award should be set aside. Merrill Lynch responded by moving for confirmation of the award pursuant to 9 U.S.C. Sec. 9 (1988) and for imposition of sanctions under Fed.R.Civ.P. 11.
In a single order, the district court reactivated and consolidated the cases, confirmed the award, and denied the motion for Rule 11 sanctions. In confirming the $10,000 award, the district court noted that it had extremely limited power of review over an arbitrator's award, that none of the statutory bases for vacating an award were present, and that, even if the manifest-disregard-of-the-law standard were part of this circuit's law, the record did not reveal that the arbitrators had manifestly disregarded the law. We agree.
Although the Supreme Court has held that the grounds for vacating an arbitrator's award are limited to five statutory categories, see 9 U.S.C. Sec. 10; Wilko v. Swan, 346 U.S. 427, 436 & n. 22, 74 S.Ct. 182, 187 & n. 22, 98 L.Ed. 168 (1953), several federal courts have found other grounds, derived from the statutory list, for vacating such awards. Specifically, some courts have held that an award should be vacated when the record indicates that the arbitrator manifestly disregarded the law. See, e.g., Jenkins v. Prudential-Bache Secs., Inc., 847 F.2d 631 (10th Cir.1988); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Bobker, 808 F.2d 930 (2d Cir.1986). Also, some courts, including this court, have held that an award may be vacated if it is "arbitrary or capricious." See United States Postal Serv. v. National Assoc. of Letter Carriers, 847 F.2d 775, 778 (11th Cir.1988) (). The Raifords maintain that the district court abused its discretion in confirming the award 2 in this case because the arbitrators manifestly disregarded the law and because the award is arbitrary and capricious. We reject both arguments.
Manifest disregard of the law "means more than error or misunderstanding with respect to the law." Bobker, 808 F.2d at 933. To prove that an arbitrator manifestly disregarded the law, a party must show (1) that the error is so obvious that it would be "readily and instantly perceived" by a typical arbitrator, and (2) that the arbitrator was subjectively aware of the proper legal standard but proceeded to disregard it in fashioning the award. Id. Furthermore, the knowing disregard of the law must be apparent on the face of the record. See O.R. Secs., Inc. v. Professional Planning Assocs., 857 F.2d 742, 747 (11th Cir.1988).
This court has never adopted the manifest-disregard-of-the-law standard; indeed, we have expressed some doubt as to whether it should be adopted since the standard would likely never be met when...
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