Gms Group, LLC. v. Benderson, 01-CV-347C(SR).
| Decision Date | 29 November 2001 |
| Docket Number | No. 01-CV-347C(SR).,01-CV-347C(SR). |
| Citation | 191 F.Supp.2d 318 |
| Parties | THE GMS GROUP, LLC, and Joseph Costa, Plaintiffs, v. Nathan BENDERSON, Defendant. |
| Court | U.S. District Court — Western District of New York |
Fulbright & Jaworski, L.L.P. (Lionel G. Hest, Esq., of Counsel), New York, New York, for Plaintiffs.
Mattar & D'Agostino, LLP (Krista Gottlieb, Esq., of Counsel), Buffalo, New York, for Defendant.
Plaintiffs bring this action pursuant to the Federal Arbitration Act, 9 U.S.C. § 1, et seq., seeking judicial review of an arbitration award rendered by the National Association of Securities Dealers ("NASD") Dispute Resolution, Inc., on April 6, 2001, in the claim titled Benderson v. The GMS Group, LLC and Joseph Costa, NASD Arbitration No. 98-02618. Plaintiffs have moved for an order vacating the award pursuant to 9 U.S.C. § 10. Oral argument of the motion was heard by the court on October 26, 2001. For the following reasons, plaintiffs' motion is denied.
The factual and procedural background of the underlying dispute is set forth at length in the pleadings and supporting affidavit of Lionel G. Hest, plaintiffs' arbitration counsel (Item 3), and the responding affidavit of Patrick J. Finegan, Jr., defendant's arbitration counsel (Item 14). Plaintiff GMS Group, LLC, is a securities dealer/broker registered with the United States Securities and Exchange Commission ("SEC"), and is a member of NASD. GMS is a limited liability corporation with its principal place of business in Livingston, New Jersey. Plaintiff Joseph Costa is an employee and registered representative of GMS. Defendant Nathan Benderson is a resident of Orchard Park, New York, and is owner, president, and chief executive officer of the Benderson Development Company.
According to Mr. Benderson's Statement of Claim, filed with the NASD on June 6, 1998, Benderson had been doing a "fixed income" investment business with GMS and Costa for several years prior to December 1996, when he discussed with Costa the availability of investment alternatives "to perhaps extract something" from the generally reported advances in the stock markets (Item 3, Ex. B, p. 4). Costa suggested index options, which involve contracts (referred to as "puts" or "calls") to buy or sell a specified number of shares or commodities within a set time period and at a predetermined price, based on the rise and fall of the various securities indices. Between December 1996 and May 1997, Benderson (through GMS and Costa) executed several index option transactions, which resulted in a net loss of $1,513,340.00 (id., pp. 5-11). Benderson sought restitution of this amount, as well as loss of opportunity costs, punitive damages, and attorneys' fees, based on the following causes of action:
1. Common law fraud, based on alleged violations of SEC, NASD, and New York Stock Exchange ("NYSE") rules prohibiting fraudulent practices in securities transactions.
2. Common law fraud, based on alleged violations of NASD and NYSE rules requiring a broker to have reasonable grounds for recommending securities transactions suitable for the customer.
3. Common law fraud, based on alleged misrepresentations by Costa as to the soundness of the investments.
4. Breach of contract, based on Costa's alleged failure to adhere to the underlying brokerage agreement to make investment recommendations for the customer's benefit.
5. Breach of fiduciary duty, based on Costa's alleged failure to act in accordance with his solicited professional obligation of financial responsibility.
6. Negligence, based on the foreseeable harm proximately caused by Costa's alleged failure to meet the standards set forth in the SEC, NASD and NYSE suitability and supervision rules.
7. Securities law violations, based on several federal and state statutory and regulatory provisions.
On December 1, 1998, GMS and Costa filed their answer to the claim, denying all allegations of wrongdoing and setting forth several affirmative defenses (see Item 3, Ex. C). GMS and Costa contended that Benderson himself initiated the index option transactions at issue by contacting Costa to inquire about an investment device he had heard about whereby he could "place a bet" that the stock market would decline in value. According to the answer, Benderson directed Costa to execute the transactions despite Costa's several unsuccessful attempts to dissuade him and repeated oral and written warnings about the risks of index options trading (see id., p. 2).
A hearing was commenced on February 24, 2000, before a panel of three NASD arbitrators. The hearing concluded on March 1, 2001, after a total of eleven days of testimony and argument.1 At the conclusion of the hearing, counsel for GMS and Costa requested a written opinion explaining the panel's rationale for its disposition of each claim. On April 6, 2001, the panel issued its award, finding as follows:
After considering the pleadings, the testimony and evidence presented at the hearing, the Panel has decided in full and final resolution of the issues submitted for determination as follows:
1. [GMS and Costa] be and hereby are jointly and severally liable for and shall pay to [Benderson] the sum of $150,000.00 as compensatory damages.
2. [Benderson]'s request for punitive damages is hereby denied.
3. All other requests for relief are hereby denied.
(Item 3, Ex. A, p. 2.) The award also contained a brief case summary and other basic information about the claim, but it did not contain a written explanation of the arbitrators' rationale.
On May 11, 2001, GMS and Costa filed this action for judicial review under the Federal Arbitration Act, accompanied by an application for an order to show cause why the arbitration award should not be vacated and remanded to the NASD for further findings. Benderson has responded to the application. Upon consideration of the matters set forth in the pleadings and at oral argument, I find that plaintiffs have failed to meet the heavy burden of proof necessary to justify vacating the arbitration award, and the case must therefore be dismissed.
Federal court review of an arbitration award is governed by Section 10(a) of the Federal Arbitration Act, which provides:
(a) In any of the following cases the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration-
(1) Where the award was procured by corruption, fraud, or undue means.
(2) Where there was evident partiality or corruption in the arbitrators, or either of them.
(3) Where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced.
(4) Where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.
(5) Where an award is vacated and the time within which the agreement required the award to be made has not expired the court may, in its discretion, direct a rehearing by the arbitrators.
9 U.S.C. § 10(a).
In addition to these statutory grounds, the Second Circuit has also recognized that an arbitration award may be vacated if it is in "manifest disregard of the law." Halligan v. Piper Jaffray, Inc., 148 F.3d 197, 201-02 (2d Cir.1998) (citing cases), cert. denied, 526 U.S. 1034, 119 S.Ct. 1286, 143 L.Ed.2d 378 (1999). Application of this judicially created ground, which was introduced by the Supreme Court in Wilko v. Swan, 346 U.S. 427, 436-37, 74 S.Ct. 182, 98 L.Ed. 168 (1953), is "severely limited." Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Bobker, 808 F.2d 930, 933 (2d Cir.1986). In order to justify modifying or vacating an award on the ground of manifest disregard, 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. Dirussa v. Dean Witter Reynolds Inc., 121 F.3d 818, 821 (2d Cir.1997), cert. denied, 522 U.S. 1049, 118 S.Ct. 695, 139 L.Ed.2d 639 (1998). "To adopt a less strict standard of judicial review would be to undermine [the] well established deference to arbitration as a favored method of settling disputes when agreed to by the parties." Bobker, 808 F.2d at 933.
The burden of proving that the arbitrators acted in manifest disregard of the law rests with the party making the application. Willemijn Houdstermaat-schappij, BV v. Standard Microsystems Corp., 103 F.3d 9, 12 (2d Cir.1997). The burden is "an extremely high one, especially where, as here, numerous legal theories are presented to a panel, and the award is rendered without opinion." Wall Street Associates, L.P. v. Becker Paribas, Inc., 818 F.Supp. 679, 686 (S.D.N.Y.1993), aff'd, 27 F.3d 845 (2d Cir.1994).
The federal courts, including the Second Circuit, have repeatedly reaffirmed the principle that arbitrators are not required to provide written rationale for their awards. See, e.g., Wall Street Associates, 27 F.3d at 849. Indeed, "courts generally will not look beyond the lump sum award in an attempt to analyze the reasoning processes of the arbitrators." Barbier v. Shearson Lehman Hutton Inc., 948 F.2d 117, 121 (2d Cir.1991) (quotation and citation omitted).
When the arbitrators have not provided a specific explanation or rationale, the reviewing court Standard Microsystems, 103 F.3d at 12-13 (quoting Sobel v. Hertz, Warner & Co., 469 F.2d 1211, 1216 (2d Cir.1...
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