Pompano-Windy City Partners v. Bear Stearns & Co.

• Decision Date: 04 June 1992
• Docket Number: No. 87 Civ. 7560 (PKL),88 Civ. 7159 (PKL).,87 Civ. 7560 (PKL)
• Citation: 794 F. Supp. 1265
• Parties: POMPANO-WINDY CITY PARTNERS, LTD., East Wind Associates, LTD. and Steven J. Lawrence, Plaintiffs, v. BEAR STEARNS & CO., INC., Options Clearing Corp., Chicago Board Options Exchange, Inc., Jerry Canning, Richard Harriton and William Gangi, Defendants.
• Court: U.S. District Court — Southern District of New York

794 F. Supp. 1265

POMPANO-WINDY CITY PARTNERS, LTD., East Wind Associates, LTD. and Steven J. Lawrence, Plaintiffs, v. BEAR STEARNS & CO., INC., Options Clearing Corp., Chicago Board Options Exchange, Inc., Jerry Canning, Richard Harriton and William Gangi, Defendants.

Nos. 87 Civ. 7560 (PKL), 88 Civ. 7159 (PKL).

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

June 4, 1992.

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Baker & Hostetler, Washington, D.C. (Mark A. Cymrot, Roger A. Colaizzi, Thomas O. Gorman, Steven H. Levin, James McNamara, Kathleen Milton, Pedro R. Pierluisi, Cole Corette & Abrutyn, Goodman, Phillips & Vineberg, of counsel), for plaintiffs.

Rosenman & Colin, New York City (Stephen L. Ratner, Emily A. Eiselman, Howard Wilson, of counsel), for defendant Bear Stearns & Co., Inc.

Schiff Hardin & Waite, Chicago, Ill. (Paul E. Dengel, L. William Munno, Jeanne L. Nowaczewski, Roger Pascal, Jay Williams, Seward & Kissel, of counsel), for defendants Chicago Bd. Options Exchange, Inc. and Options Clearing Corp.

OPINION AND ORDER

LEISURE, District Judge.

This is an action arising under the Securities Act of 1933 ("Securities Act"), the Securities Exchange Act of 1934 ("Exchange Act") and principles of state common law. In broad strokes, the litigation focuses on the seizure and liquidation by Bear Stearns & Co., Inc. (hereinafter referred to as "Bear Stearns" or "defendant") of the accounts of the plaintiffs, Pompano-Windy City Partners, Ltd. ("Pompano"), East Wind Associates, Ltd. ("East Wind") and Stephen J. Lawrence ("Lawrence"), a principal of both of these entities, in the aftermath of the stock market crash of October 1987, when the Dow Jones Industrial Average lost over 500 points, eliminating vast sums of apparent wealth in the virtual blink of an eye. Options Clearing Corp. ("OCC"), which issues Standard and Poors Index options ("OEX options"), and Chicago Board Options Exchange, Inc. ("CBOE"), on which OEX options are traded, also are named as defendants.¹

By Opinion and Order dated October 27, 1988 ("October 1988 Order"), reported at 698 F.Supp. 504, this Court ordered that the dispute between the plaintiffs and Bear Stearns be heard by an arbitration panel chosen under the auspices of the NASD. In March 1991, the Arbitrators reached a decision (the "Arbitration Award" or the "Award"), awarding $20,412,115 in damages to Bear Stearns, and the parties subsequently filed cross-motions to confirm and vacate the Award. Concurrently, CBOE and OCC moved to dismiss the claims raised against them. After a motion to dismiss plaintiffs' Second Amended Complaint became fully submitted in November 1988, plaintiffs filed a Third Amended Complaint, dated December 9, 1988 ("Third Amended Complaint"). Defendants again moved to dismiss, and the motions became fully submitted on May 17, 1989. The Court postponed consideration of the merits of the motions to dismiss pending resolution of the arbitration proceedings, and received three supplemental briefs from the parties in the summer of 1991. The Court turns to consider the merits of the motions seriatim.

I. The Arbitration Award

A. Background

Pursuant to the October 1988 Order and a Stipulation and Order dated May 22, 1989, the dispute between the plaintiffs and Bear Stearns was submitted to a panel of five arbitrators chosen under the auspices of the NASD, two of whom were industry arbitrators and three of whom were public arbitrators not employed in the securities industry. See Arbitration Award, at 1, 9. During the arbitration, which involved 42 evidentiary hearing sessions over a period of some 21 months from April 13, 1989 to January 7, 1991, and produced a transcript of 4,876 pages, the arbitrators heard 23 witnesses, 17 of whom were called by Lawrence, and admitted 241 exhibits, 162 of which were offered into evidence by Lawrence. The Award was duly executed by the arbitrators, and was delivered to the parties on March 14, 1991.

The Arbitration Award sets forth the following facts and conclusions. At all times relevant to this action, Pompano and East Wind were limited partnerships that acted as market makers, with accounts clearing through Bear Stearns. Lawrence, an experienced and sophisticated trader, was a general partner of both Pompano and East Wind, and assumed liability for Pompano's obligations in a Partnership Account Agreement. Further, Lawrence had outstanding loans from Bear Stearns, totaling $7,500,000, that were guaranteed by Pompano and East Wind. See id. at 1-4.

Going into the market crash of Friday, October 16 and Monday, October 19, 1987, Pompano had substantial exposure in OEX options and other securities. In fact, as the market fell, Pompano's exposure mushroomed, leaving its account at Bear Stearns $36,138,000 in deficit by the end of business on October 19. Despite this enormous deficit position, no money was deposited into the Pompano account, and, on the morning of October 20, Bear Stearns took control of the account, such that Pompano was not permitted to make any further trades. Moreover, Bear Stearns also seized the East Wind account on October 20, even though the market decline had not forced it into deficit. Id.

After the seizure of the Pompano and East Wind accounts, Bear Stearns made "a good faith effort to reduce the risk in the Pompano account," id., including adding positions that ultimately resulted in further losses to Pompano exceeding $4 million. However, these losses were deducted from Bear Stearns' ultimate recovery by the arbitrators. See id. at 6. In addition, market action reduced the deficit in the Pompano account to $18,804,072 at the close of the market on October 22. Thereafter, the Pompano and East Wind accounts were transferred to an omnibus account at Bear Stearns in a private sale on the morning of October 23, for consolidation with other accounts that had experienced similar difficulties during the crash. Further, on October 26, Bear Stearns called its two loans to Lawrence, which represented a total debt of $7,883,017, and the proceeds from the liquidation of the East Wind account and from the sale of other collateral were applied to cover this debt. Totaling these figures, the arbitrators determined that Pompano, East Wind and Lawrence were liable to Bear Stearns for $15,801,895, plus $4,602,301 in interest, for a total liability of $20,412,115. See id. at 6-7. Pompano and Lawrence were found to be jointly and severally liable for the total amount of the Award, while East Wind was held to be liable for only $5,555,644 of this amount. Id.

B. Scope of Review of Arbitration Award

"It is beyond cavil that the scope of a district court's review of an arbitration award is limited." Sperry International Trade, Inc. v. Government of Israel, 689 F.2d 301, 304 (2d Cir.1982); accord Local 1199, Drug, Hospital and Health Care Employees Union v. Brooks Drug Co., 956 F.2d 22, 24 (2d Cir.1992) ("Our review of an arbitration award is quite limited."). The sole statutory bases for vacatur of an arbitration award are found in Section 10 of the Federal Arbitration Act, 9 U.S.C. § 10. A motion to vacate an arbitration award also can be based on the judicially created defense of "manifest disregard of the law." See Wilko v. Swan, 346 U.S. 427, 436-37, 74 S.Ct. 182, 187, 98 L.Ed. 168 (1953); Fahnestock & Co. v. Waltman, 935 F.2d 512, 516 (2d Cir.1991), cert. denied, ___ U.S. ___, 112 S.Ct. 1241, 117 L.Ed.2d 474 (1992); Merrill, Lynch, Pierce, Fenner & Smith, Inc. v. Bobker, 808 F.2d 930, 933-34 (2d Cir.1986).

"Judicial inquiry under the manifest disregard standard ... is extremely limited." Fahnestock, supra, 935 F.2d at 516. Manifest disregard "means more than error or misunderstanding with respect to the law. The error must have been obvious and capable of being readily and instantly perceived by the average person qualified to serve as an arbitrator." Bobker, supra, 808 F.2d at 933 (citations omitted). "Illustrative of the degree of `disregard' necessary to support vacatur under this standard is the finding that an `arbitrator "understood and correctly stated the law but proceeded to ignore it."'" Fahnestock, supra, 935 F.2d at 516 (quoting Siegel v. Titan Industrial Corp., 779 F.2d 891, 893 (2d Cir.1985) (per curiam) (citation omitted)).

In the absence of one or more of these grounds for vacatur, a district court must confirm an arbitration award. 9 U.S.C. § 9; Local 1199, supra, 956 F.2d at 25; Interpetrol Bermuda Ltd. v. Stinnes Interoil Inc., 1990 WL 250169, at *2, 1990 U.S.Dist. LEXIS 17376, at *5 (S.D.N.Y. Dec. 26, 1990) (Leisure, J.); Carte Blanche (Singapore) Pte., Ltd. v. Carte Blanche International, Ltd., 683 F.Supp. 945, 948 (S.D.N.Y.1988) (Leisure, J.), aff'd, 888 F.2d 260 (2d Cir.1989). Even the fact "`"that a court is convinced that the arbitrator committed serious error does not suffice to overturn the arbitrator's decision."'" Local 1199, supra, 956 F.2d at 25 (quoting United Paperworkers International Union v. Misco, Inc., 484 U.S. 29, 38, 108 S.Ct. 364, 371, 98 L.Ed.2d 286 (1987) (citation omitted)). Thus, when an arbitral award is challenged on one of the grounds enumerated above, a district court must be guided by the principle that "the arbitrator need only explicate his reasoning ... `in terms that offer even a barely colorable justification for the outcome reached' in order to withstand judicial scrutiny." In re Marine Pollution Service, Inc., 857 F.2d 91, 95 (2d Cir.1988) (quoting Andros Compania Maritima S.A. v. Marc Rich & Co. A.G., 579 F.2d 691, 704 (2d Cir.1978)). In fact, the Supreme Court decision in United Steelworkers of America v. Enterprise Wheel & Car Corp., 363 U.S. 593, 598, 80 S.Ct. 1358, 1361, 4 L.Ed.2d 1424 (1960), "stands for the proposition that an arbitrator is not required to explain the rationale for his award, and that any ambiguity in the award must be resolved, if possible, in a manner...