Kaminsky v. Segura, 2004 NY Slip Op 50963(U) (NY 7/6/2004)

• Court: New York Court of Appeals Court of Appeals
• Writing for the Court: Herman Cahn
• Citation: Kaminsky v. Segura, 2004 NY Slip Op 50963(U) (NY 7/6/2004), 2004 NY Slip Op 50963, 119675/03. (N.Y. Jul 06, 2004)
• Decision Date: 06 July 2004
• Docket Number: 119675/03.
• Parties: EDWARD A. KAMINSKY and JAMES AGATE, Petitioner, v. SPENCER SEGURA, Respondent.

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2004 NY Slip Op 50963(U)

EDWARD A. KAMINSKY and JAMES AGATE, Petitioner, v. SPENCER SEGURA, Respondent.

119675/03.

Supreme Court of the State of New York, New York County.

Decided July 6, 2004.

HERMAN CAHN, J.

Petitioners Edward A. Kaminsky and James Agate seek to vacate the damages portion of an arbitration award, dated August 28, 2003 on the ground that the arbitrators committed misconduct by failing to admit material and pertinent evidence on the issue of damages, CPLR 7511(b)(i). The Award was rendered by a panel of arbitrators of the National Association of Securities Dealers ("NASD") in the matter entitled Kaminsky and Agate v. Spencer Trask Securities, Inc. a/k/a Spencer Trask Ventures and Spencer Segura (NASD-DR No. 00-05628).¹

Respondent Spencer Segura contends that the Award was proper, and cross-moves to confirm the Award, and to direct the Clerk of the Court to enter judgment thereon, CPLR 7510.

For the reasons set forth herein, the Award is confirmed.

BACKGROUND

Kaminsky and Agate commenced two separate actions against Segura and Spencer Trask Securities, Inc. in this court.² Kaminsky, in his complaint, dated November 9, 1999, alleged that he entered into an oral agreement with Segura, wherein Kaminsky agreed to buy five percent of Segura's alleged $2 million interest in an entity known as NextLevel Communications, L.P. ("NextLevel") for $100,000. The complaint further alleged that Segura breached the contract on October 18, 1999. Kaminsky, sought damages of $5 million. On February 17, 2000, Agate filed a parallel complaint, alleging that he too had an oral agreement to purchase five percent of Segura's alleged $2 million interest.

In early 2000, defendants moved to dismiss the complaint in the Kaminsky Action. By decision and order, filed July 21, 2000, the motion was denied.

Thereafter, the parties consented to jointly arbitrate Kaminsky's and Agate's claims before the NASD. In January 2001, petitioners filed their Statements of Claim, each seeking $17 million in compensatory damages and $5 million in punitive damages.

Brief Synopsis of Facts

The underlying claims concern an investment in a company called NextLevel. At the time of the formation of the alleged contract, NextLevel was a private company. A public offering of its shares was planned. Petitioners believed that, pursuant to their oral agreements with Segura, they would be able to participate in the anticipated profits which technology stock IPOs were generating at that time. Nevertheless, just weeks before the public offering, on October 18, 1999, Segura allegedly informed Kaminsky (and sometime thereafter, Agate) that there was no contract to purchase five percent of his interest, and that petitioners would not be entitled to take part in the IPO. Petitioners treated this as a breach of contract.

Next Level's public offering occurred on November 10, 1999. An October 1999 prospectus estimated its pre-IPO value at $ 10 to $12 per share, but its stock prices skyrocketed after the IPO. NextLevel's stock price opened at $59 on its first day of trading, November 10, 1999, and rose as high as $202 within months thereafter.

Prior to the IPO, Segura was a minority member of KK Manager LLC (a predecessor of Spencer Trask Ventures) which was the operating general partner of NextLevel, a limited partnership. Pursuant to KK Manager's operating agreement, Segura's NextLevel securities were subject to a lock-up agreement that prohibited him, until after May 9, 2000, from selling any of his stock or warrants without the approval of Credit Suisse First Boston ("CSFB"), one of the underwriters of the IPO. Segura and some of his colleagues in fact received such approval from CSFB, and went on to effectuate various hedge transactions prior to the expiration of the lock-up. On May 10, 2000, the day after the lock-up expired, NextLevel shares closed at $65 per share.

The Arbitration Proceeding

Although the parties were in fundamental disagreement over whether a binding contract was formed in the first instance, they also took very different positions on the measure and calculation of petitioners' damages in the event a contract was determined to have been formed. The latter issue — pertaining to calculation of damages — is at the heart of the current dispute.

At the arbitration (and now), petitioners took the position that their damages should not be measured based on the value of their interest in NextLevel at the time of Segura's breach, which occurred prior to the issuance of the IPO, but, rather, should be based on certain alternative dates after the issuance of the IPO, when the value of NextLevel stock increased significantly. Petitioners further maintained that they would not have been hampered by the lock-up provision restricting the sale of NextLevel stock until May 9, 2000, because, like Segura and his colleagues, they would have sought and obtained permission to be released from this restriction. Petitioners argued that the Panel should award damages utilizing the opening price at which the NextLevel shares traded after the public offering because this was the best reflection of the fair market value of the company just before the IPO ($59 per share), or, alternatively, the price at which petitioners contend they would have locked-in their profits utilizing various hedging techniques ($124 per share).

During their case-in-chief, petitioners called Robert Connor of Thornapple Associates as an expert witness. According to petitioners, Conner's testimony covered the topic of hedging (including a description of hedging, different methods investors use to hedge, and the methods that would have been available to petitioners to hedge their NextLevel stock had Segura not breached their agreements), and the calculation of petitioners' damages (which Conners calculated based on two alternate prices — $ 59 per share price of NextLevel stock on May 10, 2000, the day the lock-up agreement governing the stock expired, arriving at roughly $10 million damages for each petitioner, or $124 per share price at which petitioners alleged they would have hedged their securities had Segura not breached their agreements, arriving at roughly $20 million damages for each petitioner).

Respondents, in turn, called Shad Stastney, the former head of the equity derivatives desk at CSFB, as their expert. Like Conner, Stastney discussed the concept of hedging. Stastney concluded that the various hedging methods would not be viable or possible for petitioners, due to, among other reasons, the lock-up restrictions, and the lack of a public market for the NextLevel options. Stastney also gave testimony on the damages issue, pressing respondents' position that, if an agreement was found to have been formed, petitioners' recovery should be calculated based on the value of the NextLevel stock at the time of the breach, which Stastney opined was between $ 10 and $12 per share, consistent with the share value stated in a "red herring" prospectus prepared in mid-to-late October 1999 in anticipation of the upcoming November 10th IPO.

Petitioners sought to call a rebuttal expert witness, David Krein, to give rebuttal testimony in response to Stastney's testimony. The Panel refused, explaining "[w]e feel that you have had your opportunity when you had your case in chief, and you had your opportunity on cross-examination of Mr. Stastney, and we feel it would be inappropriate at this time to allow you rebuttal."

In all, the Panel heard 24 days of testimony from 11 witnesses, beginning in March 2002 and lasting for 15 months until July 2003. The Panel found against Segura on liability, and awarded each petitioner $294,000 in compensatory damages, and $50,000 in punitive damages.³ Although the Award provides no explanation of how the arbitrators arrived at the $294,000 sum, or what that sum represented, the testimony and evidence suggest that the Award was based on the value of each petitioner's alleged interest at the time of the breach. In this regard, the parties generally agree that a date-of-breach calculation, yields approximately $294,000, based on the value of petitioners' respective interests in NextLevel at the time of the breach (approximately $500,000), less their basis of $100,000 each, less discounts to the value of pre-IPO stock.

In this proceeding, petitioners contend that the arbitrators, by refusing to allow petitioners to call a witness to give rebuttal testimony, engaged in misconduct by refusing to hear pertinent and material evidence. In this regard, petitioners claim that there was no way for them to anticipate the substance of the testimony given by respondents' expert witness, which came as a surprise, and, accordingly, petitioners were entitled to call a rebuttal expert witness to refute Stastney's allegedly new, surprising, unanticipated and even sometimes false, testimony.

DISCUSSION

A court may vacate an arbitration award only upon very limited grounds. As explained by the First Department:

Judicial authority to vacate an arbitration award is limited. Unless the arbitration agreement provides otherwise, an arbitrator is not bound by principles of substantive law or by rules of evidence but "may do justice as he sees it, applying his own sense of law and equity to the facts as he finds them to be" and his award will not be vacated "unless it is violative of a strong public policy, or is totally irrational, or exceeds a specifically enumerated limitation on his power" (Matter of Silverman [Benmor Coats], 61 NY2d 299, 308). A court is bound by an arbitrator's factual findings, interpretation of the contract and judgment concerning remedies, and "cannot examine the merits of an arbitration award and substitute its judgment for that of the arbitrator simply because it believes its interpretation would be the better one" (Matter of New York State Correctional Officers & Police Benevolent Assn. v. State of New York, 94 NY2d 321, 326)....