PaineWebber v. Zinsmeyer

Decision Date14 January 1999
Docket Number98-1741,No. 98-1649,98-1649
Citation187 F.3d 988
Parties(8th Cir. 1999) PaineWebber Group, Inc.; PaineWebber, Inc.; Mitchell Hutchins Asset Management, Inc.; William J. Reik, Jr.; William D. Witter, Inc., Plaintiffs - Appellants v. Zinsmeyer Trusts Partnership, Defendant - Appellee Submitted:
CourtU.S. Court of Appeals — Eighth Circuit

Appeals from the United States District Court for the Eastern,District of Missouri.

Before LOKEN, HANSEN, and MORRIS SHEPPARD ARNOLD, Circuit Judges.

LOKEN, Circuit Judge.

Zinsmeyer Trusts Partnership ("Zinsmeyer") submitted claims of securities fraud and market manipulation to an arbitration panel of the National Association of Securities Dealers ("NASD"). After a lengthy hearing, the arbitrators dismissed all of.-2- Zinsmeyer's claims. The appellants in this court -- PaineWebber Group, Inc.; PaineWebber, Inc.; Mitchell Hutchins Asset Management, Inc; William D. Witter, Inc.; and William J. Reik, Jr. -- commenced this action by filing motions to confirm the arbitration award. Zinsmeyer responded by moving to vacate the award. The district court vacated the award in favor of appellants on the ground that it was procured by undue means within the meaning of the Federal Arbitration Act, 9 U.S.C. 10(a)(1), because PaineWebber withheld four allegedly privileged documents from discovery during the arbitration. Appellants challenge that ruling on appeal. We reverse.

I.

Zinsmeyer is a family partnership that invests the assets of various trusts. In 1986, Zinsmeyer entered into an investment advisory agreement with Mitchell Hutchins Asset Management, Inc. ("Mitchell Hutchins"), giving William J. Reik, Jr., a Mitchell Hutchins managing director, discretion to invest a portion of Zinsmeyer's total assets. Mitchell Hutchins is a subsidiary of PaineWebber, Inc., which in turn is a subsidiary of PaineWebber Group, Inc. We will refer to the three companies collectively as "PaineWebber." In February 1991, after Reik resigned from Mitchell Hutchins and took a position with William D. Witter, Inc. ("Witter"), Zinsmeyer retained Witter as investment advisor for the assets previously managed by Mitchell Hutchins. Dissatisfied with his performance, Zinsmeyer fired Reik in August 1993.

In February 1994, Zinsmeyer filed an arbitration claim with the NASD against PaineWebber, Witter, Reik, and others, alleging federal securities law violations, common law fraud, breach of fiduciary duty, breach of contract, and negligence. A panel of three arbitrators held thirty-eight sessions between March and November 1995, hearing evidence regarding Zinsmeyer's claims that Reik engaged in illegal market manipulation and other wrongdoing that caused large losses in Zinsmeyer's accounts controlled by Reik. The panel entered a final order dismissing all of Zinsmeyer's claims on November 30, 1995.

The arbitration proceedings included a major document discovery dispute over PaineWebber's claims of attorney/client and work product privilege. In 1990, a senior PaineWebber compliance officer had conducted an internal investigation of Reik's trading activities at the direction of in-house PaineWebber attorneys. In response to Zinsmeyer's document production requests in the arbitration, PaineWebber produced thousands of documents but objected that documents generated during its internal investigation of Reik were privileged. PaineWebber provided Zinsmeyer a log describing each allegedly privileged document and identifying its unique "Bates stamp number." The 347-page privilege log contained nearly 2000 entries.

In December 1994, Zinsmeyer filed a motion challenging PaineWebber's assertions of privilege with respect to each document listed in the privilege log. The arbitrators initially ordered production of all the documents for in camera review, but when Zinsmeyer identified seventy that it wanted reviewed, the panel ordered those seventy produced, and they were reviewed in camera. After the arbitrators ruled that all but a few were privileged, PaineWebber produced those ruled not to be privileged.

In March 1995, PaineWebber produced an additional file created by the compliance officer during his internal investigation of Reik's trading activities. PaineWebber removed documents considered privileged and replaced each with a blue sheet containing the document's Bates stamp number. In May 1995, Zinsmeyer filed a motion to compel PaineWebber to produce all documents in this file that had been withheld as privileged, about seventy of which were not previously listed on the privilege log. Zinsmeyer later limited this request to twelve documents. The panel ordered those twelve produced for in camera review.

After the arbitration, Zinsmeyer's attorneys obtained many of the documents withheld as privileged when the district court rejected PaineWebber's claims of privilege in unrelated investor litigation. Zinsmeyer then argued that the arbitrators' award should be vacated because PaineWebber hid relevant documents through its. claims of privilege. The district court agreed. Without addressing the underlying issues of privilege, the court concluded that the arbitration award was "procured by . . . undue means" within the meaning of 9 U.S.C. 10(a)(1) because PaineWebber hid four documents from discovery by not fully or accurately describing them in its privilege log. The court further concluded that the documents were relevant to Zinsmeyer's claims and "their absence could certainly have impacted the decision making process of the arbitrators." Finally, the court vacated the award as to Witter, as well as PaineWebber and Reik, because "the integrity of the judicial process will not permit Witter to benefit from these actions of PaineWebber." These appeals followed.

II.

Judicial review of arbitration decisions is limited. For the most part, courts may vacate an arbitration award only for the reasons set forth in the Arbitration Act. See First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942 (1995). The statute provides that a reviewing court may vacate an award that was "procured by corruption, fraud, or undue means." 9 U.S.C. 10(a)(1). There was no corruption or fraud in this case. The issue is whether PaineWebber procured the favorable arbitration award by "undue means" given the manner in which it claimed that certain documents were privileged from discovery in the arbitration proceedings.

A. The term "undue means" must be read in conjunction with the words "fraud" and "corruption" that precede it in the statute. See Drayer v. Krasner, 572 F.2d 348, 352 (2d Cir.), cert. denied, 436 U.S. 948 (1978). Consistent with the plain meaning of fraud and corruption, and with the limited scope of judicial review of arbitration awards, other circuits have uniformly construed the term undue means as requiring proof of intentional misconduct. See American Postal Workers Union, AFL-CIO v. United States Postal Serv., 52 F.3d 359, 362 (D.C. Cir. 1995) (undue means limited to conduct "equivalent in gravity to corruption or fraud, such as a physical threat to an arbitrator"); A.G. Edwards & Sons, Inc. v. McCollough, 967 F.2d 1401, 1403 (9th Cir..-5- 1992) (undue means "connotes behavior that is immoral if not illegal"), cert. denied, 506 U.S. 1050 (1993); Shearson Hayden Stone, Inc. v. Liang, 493 F. Supp. 104, 108 (N.D. Ill. 1980) ("'undue means' requires some type of bad faith in the procurement of the award"), aff'd, 653 F.2d 310 (7th Cir. 1981). Undue means does not include "sloppy or overzealous lawyering." Edwards, 967 F.2d at 1403. In an unreported case, the Sixth Circuit applied this strict standard in rejecting a claim that a party used undue means to prevail in a discovery dispute before the arbitrators. See Pontiac Trail Medical Clinic, P.C. v. PaineWebber, Inc., 1 F.3d 1241, 1993 WL 288301 at *5 (6th Cir. July 29, 1993). We agree with those decisions.

B. To put the issue of undue means in this case in proper perspective, we must consider the nature of a discovery dispute over allegedly privileged documents. The attorney/client privilege is based upon the principle "that sound legal advice or advocacy . . . depends upon the lawyer's being fully informed by the client." Upjohn Co. v. United States, 449 U.S. 383, 389 (1981). Upjohn involved a corporate counsel's internal investigation of possible illegal payments to foreign government officials. The Supreme Court confirmed that the privilege applies broadly to communications made by corporate employees to counsel to secure legal advice from counsel. Id. at 394. We have likewise applied the privilege to communications to and from corporate attorneys investigating their client's possible violations of federal securities law. See Diversified Indus., Inc. v. Meredith, 572 F.2d 596, 600-01 (8th Cir. 1977), followed in In re Bieter Co., 16 F.3d 929, 935-36 (8th Cir. 1994). These cases confirm that PaineWebber had a reasonable basis for asserting that the attorney/client privilege, and perhaps the work product doctrine, protected from discovery in the arbitration at least some internal communications to and from the PaineWebber attorneys who conducted the investigation of Reik's trading activities.

The attorney/client privilege is waived by the voluntary disclosure of privileged communications, and courts typically apply such a waiver to all communications on the same subject matter. See United States v. Workman, 138 F.3d 1261, 1263 (8th Cir. 1998). Thus, a party wishing to invoke the privilege in responding to document discovery must assert it as to all documents to which it may apply. Whether a document is in fact privileged can be a difficult question, and if the parties engaging in discovery cannot resolve the issue informally, it must be decided by the tribunal conducting the proceeding in which the privilege has been asserted. The party seeking discovery cannot see the...

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