Stmicroelectronics v. –

• Decision Date: 02 June 2011
• Docket Number: Docket No. 10–3847–cv.
• Citation: 648 F.3d 68
• Parties: STMICROELECTRONICS, N.V., Petitioner–Appellee,v.CREDIT SUISSE SECURITIES (USA) LLC, Respondent–Appellant.
• Court: U.S. Court of Appeals — Second Circuit

648 F.3d 68

STMICROELECTRONICS, N.

v., Petitioner–Appellee,

v.CREDIT SUISSE SECURITIES (USA) LLC, Respondent–Appellant.

Docket No. 10–3847–cv.

United States Court of Appeals, Second Circuit.

Argued: March 28, 2011.Decided: June 2, 2011.

Andrew L. Frey (Philip Allen Lacovara, Mark G. Hanchet, S. Christopher Provenzano, Christopher J. Houpt, on the brief), Mayer Brown LLP, New York, NY, for Respondent–Appellant Credit Suisse Securities (USA).Barry Levenstam, Chicago, IL (Andrew Weissmann, Elizabeth Edmondson, Elisabeth Genn, Danielle Tarantolo, New York, NY, on the brief), Jenner & Block LLP, for Petitioner–Appellee STMicroelectronics, N.V.Before: SACK and LYNCH, Circuit Judges, and PRESKA, District Judge. ^*GERARD E. LYNCH, Circuit Judge:

Credit Suisse Securities (USA) LLC (“Credit Suisse”) ¹ is a member of the Financial Industry Regulatory Authority (FINRA), and Credit Suisse's form “New Account Agreement” includes a clause requiring its customers to submit all disputes to FINRA arbitration. When, however, Credit Suisse lost a major FINRA arbitration against a customer, STMicroelectronics, N.V. (“ST”), Credit Suisse attacked the arbitrators for various improprieties and asked the district court and now this Court to undo the award. We have given Credit Suisse's attacks on the arbitral award careful attention and find them without merit. We therefore uphold confirmation of the award in full.

We do agree with Credit Suisse on one point, however, relating not to validity of the arbitration award but to its implementation in the federal courts. We hold that the district court's judgment should have credited Credit Suisse for approximately $75 million that ST received in exchange for selling some of the failed auction rate securities at issue in this case, and should have reduced Credit Suisse's liability for interest accordingly. We therefore vacate the district court's judgment on that point and remand for modification in light of the partial satisfaction of the award. We reject, however, Credit Suisse's attempt to alter the award's scheme for distributing interest earned on the securities portfolio.

BACKGROUND

ST manufactures semiconductors. The cyclical nature of its business requires the company to have a large amount of cash or cash equivalents on hand to meet its needs. Until early 2006, ST invested this cash only in money market deposits and floating rate notes, investments chosen for their safety and liquidity.

In April 2006, Credit Suisse approached ST offering another type of investment, called auction rate securities (“ARS”), that Credit Suisse promised would meet these specifications while maintaining “an attractive yield advantage over other short-term vehicles.” ARS are debt instruments whose interest rates are reset by auctions at periodic intervals. Credit Suisse explicitly proposed, and ST explicitly accepted, investing only in ARS that are backed by federally guaranteed student loans.

Credit Suisse stuck to this plan for only a few days. Almost immediately, it began buying other types of ARS for the account. Those securities, while carrying a higher yield (and a higher average commission for Credit Suisse), had no government guarantee. By November 2006, the account contained no government-backed ARS, and after January 2007 none of Credit Suisse's purchases for the account involved student loans at all, guaranteed or not. Instead, Credit Suisse bought ARS backed by collateralized debt obligations (“CDOs”) and credit-linked notes (“CLNs”), which in turn were backed by a wide variety of assets, some of which turned out to be risky. To cover their tracks, the Credit Suisse brokers responsible for the account sent deliberately false email confirmations to ST in which they replaced words in the names of securities that identified them as CDOs or CLNs with more neutral terms like “funding” and often flatly inaccurate terms like “Student Loan.” ²

In July 2007, an ST employee noticed that Credit Suisse had purchased securities that deviated from its instructions, and asked Credit Suisse to “stick to the mandate to buy only Student Loan [ARS].” Although Credit Suisse did cancel one transaction, and although it reaffirmed its promise that it would invest ST's funds in “Aaa/AAA rated student loan paper,” it nevertheless continued to buy ARS based on un-guaranteed CDOs and CLNs, and continued to send ST email confirmations hiding the true nature of those investments. Credit Suisse did so in the face of ST's increasingly vehement instructions not to buy non-government-backed ARS and to sell the ARS it already owned. For these actions and others, the two Credit Suisse brokers responsible for ST's account were later convicted, one by plea and one by jury verdict, of securities fraud and related conspiracy charges.³

In August 2007, the ARS market began to fall apart. Some auctions failed to draw enough investors to bid on all the relevant securities, making them hard if not impossible to sell. A Credit Suisse executive reassured ST about its investments, but by September 2007, all of ST's ARS—worth over $400 million—had failed at auction. This significantly reduced both the value of the ARS and their utility to ST as a highly liquid cash equivalent.

In February 2008, ST filed an arbitration claim against Credit Suisse with FINRA, which operates “the largest securities dispute resolution forum in the world” and which counts Credit Suisse among its member institutions. Credit Suisse had provided for arbitration with the National Association of Securities Dealers, FINRA's predecessor, in the New Account Agreement it provided to ST. ST sought arbitration under this provision, raising federal claims of securities fraud under § 10(b)(5) of the Securities Exchange Act of 1934 and SEC Rule 10b–5, as well as state-law claims of fraud, intentional misrepresentation, fraudulent concealment, breach of contract, breach of fiduciary duty, breach of the duty of good faith and fair dealing, unjust enrichment, unsuitability, unauthorized transactions, and (after amending its complaint) failure to supervise.

FINRA rules provided that the parties would have three arbitrators to decide their case: two “public arbitrators” who must be unattached to the securities industry and one “non-public arbitrator” chosen for industry experience and knowledge. See FINRA Rules 12100(p), (u), 12401(c), 12403. FINRA provided the parties with lists of possible arbitrators in the relevant categories along with standard disclosure reports for each one, allowing the parties to strike arbitrators at their discretion and rank the remaining ones in each category according to their preferences. The parties were unable to select a full panel on the first try and requested another slate of candidates who possessed more experience dealing with the types of claims involved. On the second try, the parties successfully selected a panel and proceeded to arbitration.

Midway through the hearings, however, Credit Suisse sought to remove one of the three arbitrators, John J. Duval, Sr., alleging that he had served as an expert witness primarily for customers arbitrating against financial firms but that he had painted a more balanced picture of his experience on his disclosure report and that he had failed to disclose prior expert testimony on certain issues relevant to ST's case. Duval, with the support of the chair of the panel, refused to step down, noting that he had worked more often on the side of the financial industry than Credit Suisse had suggested he had and declaring that “there is no doubt in my mind that I can render a fair and unbiased opinion.” Credit Suisse next petitioned FINRA to remove him, but FINRA's Director of Arbitration denied this request.

Finally, in February 2009, after four days of pre-hearing conferences, fifteen days of hearings, and voluminous briefing from both sides, the arbitration panel ruled unanimously in favor of ST. The arbitrators' award effectively undid the trades: ST would return the failed securities (with a par value of $414,975,000) to Credit Suisse upon the latter's payment of $400 million in compensatory damages, plus $1.5 million in financing fees, $3 million to cover ST's attorneys and expert witnesses, and interest (offset, at least prior to December 31, 2008, by the amount of interest the securities paid to ST). These figures, though substantial, were all lower than the amounts ST had requested in each category.

ST quickly petitioned to confirm the award in the Southern District of New York. Credit Suisse opposed ST's petition and sought to vacate the award on the basis of Duval's purportedly misleading or insufficient disclosure and also because of the arbitrators' alleged “manifest disregard of the law.” See Duferco Int'l Steel Trading v. T. Klaveness Shipping A/S, 333 F.3d 383, 388–90 (2d Cir.2003) (discussing vacatur of arbitral awards for manifest disregard). In March 2010, the district court rejected Credit Suisse's arguments and confirmed the award.

Meanwhile, after the parties had completed briefing but before the district court issued its March 2010 confirmation order, Deutsche Bank offered to purchase some of the securities in the account. At Credit Suisse's urging, ST accepted the offer and sold securities with a face value of $153,500,000 for $74,582,000 in cash. When the district court's March 2010 order came out, Credit Suisse moved to amend the judgment to offset its obligation to ST (and more importantly the interest it owed on that obligation) by the roughly $75 million ST had received from the Deutsche Bank sale. Credit Suisse also sought several other modifications to the judgment, including offsetting the interest it owed on the award by the interest ST was receiving on the securities after December 31, 2008. (The award provided such an offset before but not after that date.) The district court granted Credit Suisse some of the modifications it sought but rejected both...