Wall Street Associates v. Becker Paribas, Inc.

• Decision Date: 28 April 1993
• Docket Number: No. 85 Civ. 4649 (LBS).,85 Civ. 4649 (LBS).
• Citation: 818 F. Supp. 679
• Parties: WALL STREET ASSOCIATES, L.P., Plaintiff, v. BECKER PARIBAS, INCORPORATED, Merrill Lynch & Company, Michael Wise, Monroe Friedman, Securities & Arbitrage Co. and Wall Street Arbitrage Co., Defendants.
• Court: U.S. District Court — Southern District of New York

818 F. Supp. 679

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

No. 85 Civ. 4649 (LBS).

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

April 28, 1993.

Reid & Priest, New York City (Robert S. Carlson, Lawrence S. Hirsh, Susan L. Bedford, of counsel), for plaintiff.

Lankler Siffert & Wohl, New York City (Frank Wohl, David C. Esseks, of counsel), for defendants Wise and Friedman.

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

OPINION

SAND, District Judge.

This case is before the Court on plaintiff's motion to confirm and defendants' motions to vacate an award entered by the American Arbitration Association ("AAA") on November 9, 1992 after a protracted arbitration. We find that defendants have not demonstrated either that the arbitration panel exceeded the scope of its authority or that it acted in manifest disregard of the law, and we therefore confirm the award.

The Parties

Plaintiff, Wall Street Associates, L.P. ("WSA") is a Delaware limited partnership which was formed in 1981 by defendants Michael Wise and Monroe Friedman, who acted as its managing general partners. The business of WSA involves trading and market making activity in options and securities. In October, 1982, WSA lost approximately $8.7 million, virtually all of the assets of the company, on the stock and stock options markets. Defendant Becker Paribas, Inc. was the clearing broker for WSA, and Merrill Lynch & Co. is Becker's corporate successor (collectively referred to as "Becker"). The other defendants, Wall Street Arbitrage Co. ("WARCO") and Securities & Arbitrage Co. ("SARCO"), are two more limited partnerships of which Wise and Friedman are the general partners.

The facts underlying this action were set out in detail in a prior opinion of this Court, familiarity with which is presumed. See, Wall Street Associates. L.P. v. Becker Paribas et al., 1986 WL 10479 (S.D.N.Y.1986).

Procedural Background

We briefly summarize the procedural background, as it is relevant to the first argument made by Wise and Friedman in support of their motion to vacate the award.

In 1985 plaintiff commenced this action, charging defendants with fraud under the Securities Exchange Act of 1934, common law fraud, conversion, breach of fiduciary duty and negligence. On August 5, 1985 plaintiff served an amended complaint which added a cause of action under RICO.

Shortly after the complaint was filed, defendant Becker moved for an order staying the action and directing the parties to arbitrate the controversy. Becker's motion named four arbitral bodies before which it alleged that WSA and Becker were obligated to arbitrate: the Philadelphia Stock Exchange, the Chicago Board Options Exchange, the National Association of Securities Dealers, Inc. and the New York Stock Exchange, Inc.

In its motion seeking arbitration, Becker also acknowledged and attached three separate contracts between WSA and Becker, including a guaranty agreement dated September 16, 1982 whereby WSA agreed to guaranty the account of WARCO at Becker. That guaranty contained an arbitration clause specifying that any controversy between WSA and Becker arising out of or relating to the contract would be settled by either the Arbitration Committee of the Chamber of Commerce of the State of New York, the American Arbitration Association, or the Board of Arbitration of the New York Stock Exchange. Wise and Friedman, appearing pro se at that time, joined in Becker's motion to compel arbitration.

At a hearing on September 19, 1985 this Court granted defendants' motion to stay the litigation and directed arbitration, without specifying which arbitral body should preside. On September 27, 1985 plaintiff commenced an arbitration proceeding before the American Arbitration Association based on the arbitration clause in the guaranty agreement noted above.

On October 17, 1985 defendants Wise, Friedman, SARCO and WARCO moved to stay the arbitration initiated by plaintiff before the AAA and asked the Court to direct that the arbitration proceed before the NASD. On November 14, 1985, after having heard oral argument, we denied the motion by endorsement. No transcript was made of the hearing on the motion.

Subsequently, the Court heard motions addressed to the arbitrability of plaintiff's RICO claim. On September 12, 1986, the Court dismissed the RICO claim, in the opinion cited supra, based in part on our finding that the plaintiff had not adequately alleged an injury to the limited partnership in connection with the purchase or sale of securities under Rule 10(b)(5). In this regard, it appeared to the Court that plaintiff was attempting to base its securities fraud claim against the general partners, at least to some degree, on material misstatements and failure to disclose material facts in the offering memoranda. We suggested in our opinion that such a claim would be improper, since the partnership would not have standing where the injury in connection with the purchase of securities was an injury to the limited partners, who were allegedly fraudulently induced to invest in WSA, and not an injury to the partnership.

By letter dated April 21, 1987, counsel for Wise and Friedman urged the Court to reconsider the decision to allow the arbitration to proceed before the AAA, on grounds substantially similar to those which will be discussed below. We denied that request. No application for appellate review of this Court's direction to proceed to arbitration before the AAA was made.

Arbitration hearings were conducted by a three member panel of the AAA over a five-year period, generating voluminous testimony and exhibits. The panel consisted of a certified public accountant, an investment banker, and a commercial lawyer. On November 9, 1992, the arbitrators issued an award, without opinion, in favor of plaintiff against defendant Becker for $1,522,500 plus Becker's share of the administrative fees and expenses of the AAA. The award also granted plaintiff damages of $6,090,000 against defendants Wise and Friedman, plus their share of the administrative fees and expenses of the AAA, jointly and severally, on a finding that they were guilty of willful misconduct. The award against Wise and Friedman was reduced by 12.5%, the share which would have gone to Gerald Blank. Blank is currently 50% owner of the general partner of WSA, and was formerly an employee of WSA who was allegedly involved in the preparation of the misleading memoranda. No findings were made against WARCO or SARCO.

After the decision was rendered, plaintiff moved to confirm the award in state court in New York. After some further motion practice, the proceeding was removed to this Court. We heard extensive oral argument on February 22, 1993, and our decision follows.

Discussion

We note at the outset the oft-stated federal policy, embodied in the Federal Arbitration Act; 9 U.S.C. § 1 et seq., favoring the enforcement of arbitration agreements and the confirmation of arbitration awards. Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 226, 107 S.Ct. 2332, 2337, 96 L.Ed.2d 185 (1987); Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). With this mandate in close focus, we first address the argument advanced only by Wise and Friedman, and then the other two arguments which are advanced on behalf of Wise, Friedman and Becker.

I.

A. Wise and Friedman's argument that they did not agree to arbitrate before the AAA:

Defendants Wise and Friedman strenuously argue that they never agreed to arbitrate with WSA before the AAA, and because they did not agree to that particular forum, we must vacate the arbitration award. Although apparently recognizing that the decision to allow the arbitration to proceed before the AAA is the law of the case, defendants argue that decisions rendered after our opinion constitute an intervening change in the law that should alter that result.

We need not determine whether Wise and Friedman did or did not in fact agree to arbitrate before the AAA, because we do not find that subsequent case law in any way alters our decision in 1985 in which we allowed the arbitration to proceed before the AAA. We look first at the basis for defendants' argument, and then at the law which governs this question.

Defendants point to the language of the guaranty, which by its terms is an agreement between the guarantor, WSA, and the clearing broker, Becker, to arbitrate disputes relating to the guaranty. Defendants argue that even if the dispute between Friedman and Wise and WSA can be viewed as related to the guaranty, the agreement does not obligate them, the general partners, to arbitrate against the limited partnership.

In response, plaintiff argues that as a matter of partnership law, because the general partners signed the guaranty on behalf of the partnership, the general partners are bound to arbitrate. Furthermore, plaintiff argues that by joining defendant Becker's motion to compel arbitration, in which Becker acknowledged its obligation to arbitrate before the AAA under the guaranty, defendants Wise and Friedman also obligated themselves to arbitrate before the AAA.

Assuming for the purposes of this motion only that defendants Wise and Friedman did not agree to arbitrate before the AAA, we nonetheless find no basis for vacating the award on that ground. The determination that the AAA had jurisdiction over Wise and Friedman to hear this controversy is the law of the case. The law of the case doctrine requires that courts adhere to their own decisions rendered at an earlier stage of the litigation unless there are cogent or compelling reasons not to, such as an intervening change of controlling law, the availability of...