Wall Street Associates, L.P. v. Becker Paribas Inc.

• Decision Date: 28 June 1994
• Docket Number: 704 and 705,Nos. 688,D,s. 688
• Citation: 27 F.3d 845
• Parties: Fed. Sec. L. Rep. P 98,251 WALL STREET ASSOCIATES, L.P., Plaintiff-Appellee, v. BECKER PARIBAS INCORPORATED, Merrill Lynch & Company, Monroe Friedman and Michael Wise, Defendants-Appellants, Securities & Arbitrage Co. and Wall Street Arbitrage Co., Defendants. ockets 93-7567, 93-7635 and 93-7667.
• Court: U.S. Court of Appeals — Second Circuit

Page 845

27 F.3d 845

Fed. Sec. L. Rep. P 98,251

WALL STREET ASSOCIATES, L.P., Plaintiff-Appellee, v. BECKER PARIBAS INCORPORATED, Merrill Lynch & Company, Monroe Friedman and Michael Wise, Defendants-Appellants Securities & Arbitrage Co. and Wall Street Arbitrage Co., Defendants.

Nos. 688, 704 and 705, Dockets 93-7567, 93-7635 and 93-7667.

United States Court of Appeals Second Circuit.

Argued Nov. 23, 1993.

Decided June 28, 1994.

Edward Brodsky, New York City (Proskauer, Rose, Goetz & Mendelsohn, Robert S. Carlson, Lawrence S. Hirsh, Susan L. Bedford, Reid & Priest, of counsel), for plaintiff-appellee.

David C. Esseks, New York City (Frank H. Wohl, Lankler, Siffert & Wohl, of counsel), for defendant-appellant Monroe Friedman.

David C. Segal, New York City (June Diamant, Sukenik, Segal & Graff, P.C., of counsel), for defendant-appellant Michael Wise.

Roger J. Hawke, New York City (Daniel A. Osborn, Brown & Wood, of counsel), for defendants-appellants Becker Paribas Inc. and Merrill Lynch & Co.

Before: MESKILL, ALTIMARI, and WALKER, Circuit Judges.

WALKER, Circuit Judge:

Defendants-appellants Becker Paribas, Inc. ("Becker Paribas" or "Becker"), Merrill Lynch & Company, Michael Wise, and Monroe Friedman (collectively, the "Defendants") appeal from a judgment of the United States District Court for the Southern District of New York (Leonard B. Sand, Judge ), confirming an arbitration award entered in favor of plaintiff-appellant Wall Street Associates, L.P. ("WSA"). On appeal, the Defendants contend that the arbitration panel exceeded its powers by rendering a decision in WSA's favor based upon a theory of liability that had been previously dismissed from the case and which was beyond the scope of the agreement defining the panel's authority. In addition, Wise and Friedman argue that they never consented to arbitrate before the American Arbitration Association ("AAA"), and therefore were not subject to that body's jurisdiction.

The district court confirmed the award as to all defendants-appellants. Wall St. Assocs., L.P. v. Becker Paribas, Inc., 818 F.Supp. 679 (S.D.N.Y.1993). We affirm.

BACKGROUND

WSA is a Delaware limited partnership formed in May 1981 to engage in trading and market-making activities in security options and the underlying securities. Defendants Wise and Friedman were WSA's founders and managing general partners. In October 1981, WSA entered into a clearing agreement with defendant Becker Paribas pursuant to which Becker Paribas served as WSA's clearing agent, and also as a lender on WSA's margin trading. Becker Paribas also acted as clearing broker and margin lender for two other partnerships founded and managed by Wise and Friedman, Securities & Arbitrage Co. ("SARCO") and Wall Street Arbitrage Co. ("WARCO"). SARCO and WARCO, formed to engage in high risk arbitrage trading, pursued considerably more aggressive investment policies than those followed by WSA.

In October 1982, WSA lost nearly all of its capital, approximately $8.7 million. In 1985, WSA sued Wise, Friedman, SARCO, WARCO, Becker Paribas, and Merrill Lynch & Co., Becker Paribas's successor in interest, claiming securities laws violations, breach of fiduciary duties, common law fraud, conversion, and negligence. The complaint alleged that Wise and Friedman, with Becker Paribas's assistance, fraudulently commingled funds belonging to WSA with funds in the accounts of SARCO and WARCO to cover margin positions. The complaint also charged the Defendants with obtaining loans for SARCO and WARCO by improperly grouping, for risk assessment purposes, WSA's relatively low risk accounts with SARCO's and WARCO's high risk arbitrage accounts. Without the inclusion of WSA's accounts in the risk calculus, the loans could not have met Becker Paribas's own internal lending criteria.

The complaint further alleged that WSA's losses resulted not from trading conducted on WSA's behalf, but rather from an improper pledge of WSA's assets in the form of "Guaranty Agreements" covering losses suffered by SARCO and WARCO. WSA maintains that Wise and Friedman had no authority to enter into the Guaranty Agreements on WSA's behalf and that doing so was an improper use of WSA's assets. Under the Guaranty Agreements, when the stock market took an unfavorable turn in October 1982 and Becker Paribas liquidated the unhedged positions of the three partnerships, Wise and Friedman were able to allocate losses to WSA that were attributable to SARCO and WARCO.

The Guaranty Agreements contained a clause permitting arbitration before the American Arbitration Association ("AAA"). The arbitration clause provided:

Any controversy between you [Becker Paribas] and the Guarantor [WSA] arising out of or relating to this contract or the breach thereof shall be settled by arbitration, in accordance with the rules, then obtaining, of either the Arbitration Committee of the Chamber of Commerce of the State of New York, or the American Arbitration Association, or the Board of Arbitration of the New York Stock Exchange, as the Guarantor may elect....

Shortly after WSA's complaint was filed, Becker Paribas moved to stay the proceedings and for an order directing the parties to arbitration. Becker Paribas attached one of the Guaranty Agreements, along with five other agreements in support of arbitration, to its motion. Wise and Friedman, then pro se, each joined in Becker's motion. In September 1985, the district court granted the motion and ordered the parties to proceed to arbitration.

WSA thereafter commenced an arbitration proceeding against the defendants before the AAA, one of the fora listed in the Guaranty Agreement appended to Becker's motion. Wise, Friedman, SARCO, and WARCO, all now represented by counsel, moved to stay the arbitration. They argued that they never consented to arbitrate before the AAA, and moved for an order directing arbitration before the National Association of Securities Dealers. The district court denied the motion without opinion.

Previous to the commencement of the arbitration proceeding, WSA had filed an amended complaint which added a claim under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. Sec. 1964(c). Before the AAA arbitration began, the district court granted a motion by the defendants to dismiss this count. Wall Street Assocs., L.P. v. Becker Paribas Inc., No. 85 CIV 4649 (LBS), 1986 WL 10479 (S.D.N.Y. Sept. 12, 1986). The court found that the fraud alleged constituted a single scheme and therefore did not satisfy RICO's requirement of a "pattern" of racketeering activity. Id. at * 4-* 5. The court also expressed doubt as to whether WSA had stated a claim for injury to the partnership, as opposed to an injury to the investing limited partners which WSA would not have standing to assert. Id.

at * 3. With the RICO claim out of the case, the arbitration before the AAA proceeded on WSA's remaining claims.

The arbitration continued intermittently for the next five years. On November 9, 1992, the panel awarded WSA more than $7.5 million in damages, with approximately $1.5 million to be borne by Becker Paribas, and with Wise and Friedman jointly and severally liable for the remainder. No separate findings were made as to the liability of SARCO or WARCO and they have not appealed. WSA moved for confirmation of the award and the Defendants cross-moved for vacatur of the award because the arbitrators allegedly exceeded their powers. The district court confirmed the award as to all defendants. This appeal followed.

DISCUSSION

I. Propriety of the Arbitrators' Award

On appeal, the Defendants contend that the award should be vacated because the arbitrators exceeded their powers under the arbitration clause contained in the Guaranty Agreements. Specifically, they contend that although the arbitrators did not provide the basis for their award, the circumstances surrounding the award show that it was grounded on the impermissible theory of fraud against WSA's limited partners. They argue that the panel exceeded its authority by entertaining this theory because the district court disapproved it when it dismissed the RICO claim, and because it went beyond the scope of arbitral claims permitted by the arbitration clause.

A. The Burden of Proof

As a threshold matter, the Defendants contend that since WSA attempted to advance the fraud on the limited partners theory before the arbitrators, the burden should, as a matter of policy, shift to WSA to show that the award was not tainted by WSA's improper arguments. Accepting for the moment that WSA pursued an improper line of argument before the panel, the Defendants' contention that WSA now must justify the award to obtain confirmation is without merit.

The question of who bears the burden of challenging an arbitration award is resolved by resort to Sec. 10(a) of the Federal Arbitration Act ("FAA"), 9 U.S.C. Sec. 10(a), and by the policy favoring confirmation of arbitration awards. In Sec. 10(a) Congress provided that:

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.... (emphasis added).

Among the grounds then specified in Sec. 10(a) for which an arbitrator's award can be vacated are corruption, fraud, or undue means in procurement of the award, evident partiality or corruption in the arbitrators, specified misconduct on the arbitrators' part, or "[w]here the arbitrators exceeded their powers." By enumerating the grounds for vacating an arbitration award, and specifying that those grounds may be shown "upon the application of any party," Congress evidenced its intent that the party making the application should also bear the burden of proving the defect. See, e.g., Andros Compania Maritima S.A. v. Marc Rich & Co., A.G., 579 F.2d 691, 700 (2d Cir.1978) (party asserting bias bears burden of proof).

Our interpretation of...