Fine v. Bear, Stearns & Co., Inc.

• Decision Date: 30 May 1991
• Docket Number: No. 89 Civ. 8629 (JES).,89 Civ. 8629 (JES).
• Citation: 765 F. Supp. 824
• Parties: Milton FINE and Edward A. Perlow, Petitioners, v. BEAR, STEARNS & CO., INC., and Kenneth Shashoua, Respondents.
• Court: U.S. District Court — Southern District of New York

765 F. Supp. 824

Milton FINE and Edward A. Perlow, Petitioners, v. BEAR, STEARNS & CO., INC., and Kenneth Shashoua, Respondents.

No. 89 Civ. 8629 (JES).

United States District Court, S.D. New York.

May 30, 1991.

Dickie McCamey & Chilcote, P.C., Pittsburgh, Pa. (George E. McGrann, David J. Armstrong, David F. Horan, Burke, Horan & Macri, New York City, of counsel).

Parker Chapin Flattau & Klimpf, New York City (Katherine C. Ash, of counsel).

MEMORANDUM OPINION AND ORDER

SPRIZZO, District Judge:

Petitioners Milton Fine and Edward A. Perlow¹ move pursuant to Section 10 of the Federal Arbitration Act, 9 U.S.C. § 10, to vacate an arbitration award issued on March 6, 1989. Respondent Bear, Stearns & Co., Inc., ("Bear Stearns"), cross-moves for summary judgment confirming the award and for sanctions. For the reasons that follow, petitioners' motion to vacate is denied and respondent's cross-motion seeking confirmation of the award is granted. The cross-motion for sanctions is denied.

BACKGROUND

The evidence introduced at the arbitration established the following facts. In late 1985 or early 1986, petitioners opened an arbitrage account with Rooney Pace, Inc. ("Rooney Pace"), a broker-dealer. See Stipulation of Undisputed Facts ("Stip") at ¶ 4 (I Appendix ("App.") Ex. C). The Rooney Pace representative on their account was Kenneth Shashoua. See id. The funds were held by Bear Stearns, which as a "clearing broker" had the responsibility of clearing those funds upon appropriate instructions.² See id. at ¶ 5.

In connection with this account, petitioners executed a "Customer Agreement" with Bear Stearns, which provided in part as follows:

8. Clearance Accounts. If Bear Stearns carries your account as clearing broker by arrangement with another broker through whose courtesy your account has been introduced, then unless Bear Stearns receives from you a written notice to the contrary, Bear Stearns shall accept from such other broker, without any inquiry or investigation by it (i) orders for the purchase or sale in account of securities and other property on margin or otherwise, and (ii) any other instructions concerning said account. You understand that Bear Stearns shall have no responsibility or liability to you for any acts or omissions of such other broker, its officers, employees or agents.

I App.Ex. C(3). Petitioners also received a "Correspondent Allocation of Responsibility Letter," which set forth the allocation of responsibilities between the petitioners' introducing firm, Rooney Pace, and the respondent. Although one of the respondent's responsibilities was "safeguarding funds and securities," the responsibilities for supervising and monitoring the account and the transactions made in connection therewith were placed squarely upon Rooney Pace. See I App.Ex. C(3). Moreover, Rooney Pace was also responsible for "selecting, investigating, training and supervising all personnel who open, approve or authorize transactions in your petitioners' account." Id.

On or about September 30, 1986, without the approval of the petitioners, Bear Stearns, acting upon what purported to be the instructions of petitioners, executed a transfer of $675,000 from the petitioners' account to the account of an unrelated foreign corporation with a mailing address in Switzerland. See Stip. at ¶ 10. Respondent's statement of account, see I App.Ex. C(12), and marginal activity report, see Supplemental Appendix of Respondent ("Supp. App.") Ex. K, reflect the September transaction as an "LOA" or a letter of authorization. See also Tr. at 77. Testimony at the arbitration hearing established that Rooney Pace's representative, Shashoua, forged petitioners' signatures on the documents which authorized the aforementioned transfer. See Transcript of Arbitration Proceeding ("Tr.") at 202, 227 (I App.Ex. D). A copy of that letter, which was obtained from Shashoua, was also admitted into evidence at the arbitration. See I App.Ex. C(2); Tr. 82-85. However, respondent was unable to locate the original letter of authorization in its files. See Tr. at 186-87.

In October of 1986 Bear Stearns received a letter, also forged by Shashoua, changing the address on petitioners' account so that all account information would go to Shashoua's home address.³See Stip. ¶ 12; Tr. at 202-05, 226-27. As a consequence, Fine and Perlow did not receive monthly statements of account which reflected the unauthorized transactions and transfers from their account.⁴ Thereafter, Shashoua stole another $50,000 from petitioners' account by forging a second authorization for transfer on or about December 17, 1986.⁵See Stip. at ¶¶ 19-20. The parties stipulated to the identity and authenticity of the letter of authorization for this transaction which Bear Stearns produced. See Stip. at ¶¶ 19-20 & Ex. 9 (I App.Ex. C(9)).

Petitioners filed a claim with the New York Stock Exchange against Bear Stearns alleging breach of contract, negligence, conversion, and racketeering violations, 18 U.S.C. § 1961 (1988), in connection with the unauthorized transfers. After three days of arbitration hearings, the arbitration panel dismissed the claim in all respects.

DISCUSSION

Petitioners contend that the award must be vacated for the following reasons: (1) the arbitrators acted in manifest disregard of the law, see Wilko v. Swan, 346 U.S. 427, 436-437, 74 S.Ct. 182, 187-188, 98 L.Ed. 168 (1953); (2) the arbitration award is irrational because it is not supported by any evidence, see Swift Indus., Inc. v. Botany Indus., Inc., 466 F.2d 1125, 1134-35 (3d Cir.1972); and (3) certain evidentiary rulings made by the arbitration panel constituted a "refusal to hear evidence pertinent and material to the controversy" under 9 U.S.C. § 10(c).

It is well-settled that a court's power to vacate an arbitration award must be extremely limited because an overly expansive judicial review of arbitration awards would undermine the litigation efficiencies which arbitration seeks to achieve. See Transit Casualty Co. v. Trenwick Reinsurance Co., Ltd., 659 F.Supp. 1346, 1350-51 (S.D.N.Y.1987), aff'd, 841 F.2d 1117 (2d Cir.1988); Tinaway v. Merrill Lynch & Co., 658 F.Supp. 576, 578 (S.D.N.Y.1987); see also Andros Compania Maritima, S.A. v. Marc Rich & Co., A.G., 579 F.2d 691, 701, 703-04 (2d Cir.1978). Tested by that standard, the award here must be confirmed.

Petitioners' argument that the arbitration panel "manifestly disregarded the law" must be rejected. "Manifest disregard of the law" by arbitrators is a judicially created standard for vacating an arbitration award, see Carte Blanche (Singapore) Pte. Ltd. v. Carte Blanche Int'l, Inc., 888 F.2d 260, 265 (2nd Cir.1989) (quoting Merrill Lynch, Pierce, Fenner and Smith, Inc. v. Bobker, 808 F.2d 930, 933-34 (2d Cir.1986)), which is applicable only where the law alleged to have been disregarded is "well defined, explicit, and clearly applicable," so that the error was "capable of being readily and instantly perceived by the average person qualified to serve as an arbitrator." Merrill Lynch, supra, 808 F.2d at 933-934.

Petitioners allege that the arbitration panel disregarded: (1) New York Stock Exchange Rule 405 which requires members to use "due diligence to learn the essential facts" concerning customers and orders and (2) New York Stock Exchange practices regarding the maintenance of records and the transfer of funds to unknown and unrelated accounts. In making that argument petitioners rely upon the testimony of an expert witness, Daniel Steinberg, who stated that Bear Stearns had a fiduciary responsibility to safeguard Fine and Perlows' funds, see Tr. at 496-98, and that, in making the transfers from their account, Bear Stearns acted in total disregard of the rules and regulations relating to internal memoranda and good business practice. See Tr. at 507.

However, John Gabriel, another expert witness who testified on behalf of Bear Stearns, testified that New York Stock Exchange Rule 382 states that the clearing agreement determines the responsibilities assumed by the two parties to the agreement, see Tr. at 381, 408, and that in this case the clearing agreement placed account and supervisory obligations, including the Rule 405 "knowing your customer responsibilities," on the introducing broker, Rooney Pace. See Tr. 381-383. He therefore concluded that Bear Stearns had no duty to investigate the authorization letters it received. See id. at 387-89, 396-97. Moreover, Gabriel also testified that the procedures used by Bear Stearns in executing instructions received from its introducing brokers and their employees were reasonable and in accord with industry standards. See Tr. at 383-389, 395-396. Given the conflicting testimony on this issue, the Court cannot reasonably conclude that the arbitration panel "manifestly disregarded" applicable law by crediting one expert opinion rather than the other. See Carte Blanche, supra, 888 F.2d at 265 (quoting Merrill Lynch, supra, 808 F.2d at 933-34). This is especially so since the customer agreement with Bear Stearns supported Gabriel's testimony. See I App.Ex. C(3).

Petitioners also contend that the record contains no evidence to support respondents' affirmative defense that it relied on instructions received from Shashoua in effecting the wrongful transactions. Although an arbitration award may be vacated if it lacks any factual support, see Mutual Fire, Marine & Inland Ins. Co. v. Norad Reinsurance Co., Ltd., 868 F.2d 52, 56 (3d Cir.1989); Storer Broadcasting Co. v. American Federation of Television & Radio Artists, 600 F.2d 45, 47-48 (6th Cir. 1979); Swift, supra, 466 F.2d at 1134-35; Amoco Overseas Oil Co. v. Astir Navigation Co., 490 F.Supp. 32, 37 (S.D.N.Y.1979), the record here reflects that Shashoua admitted to one of petitioners' attorneys, Rodney Fink, that he sent the forged letters to Bear Stearns, see Tr. at 202, 220, 226-27; that respondent's business records indicate that respondents received...