Wallace v. Buttar

• Citation: 378 F.3d 182
• Decision Date: 05 August 2004
• Docket Number: Docket No. 03-7158.
• Parties: Michael E. WALLACE, David Jacaruso and Joseph Scotti, Petitioners-Appellees, v. Daljit S. BUTTAR and Paramjit Buttar, Respondents-Appellants, Robert Winston, Additional Respondent.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

378 F.3d 182

Michael E. WALLACE, David Jacaruso and Joseph Scotti, Petitioners-Appellees, v. Daljit S. BUTTAR and Paramjit Buttar, Respondents-Appellants, Robert Winston, Additional Respondent.

Docket No. 03-7158.

United States Court of Appeals, Second Circuit.

Argued: October 14, 2003.

Decided: August 5, 2004.

Appeal from the United States District Court for the Southern District of New York, Robert W. Sweet, J Robert S. Wolf, Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP, New York, NY, for Petitioners-Appellees David Jacaruso and Joseph Scotti.

Stuart A. Jackson, Re, Parser & Partners, New York, NY, for Petitioner-Appellee Michael E. Wallace.

David B. Chenkin, Zeichner Ellman & Krause LLP, New York, NY, Stanley T. Padgett, Morgan, Padgett & Associates, P.A., Tampa, FL, for Respondents-Appellants Daljit S. Buttar and Paramjit Buttar.

Before: JACOBS, POOLER, and WESLEY, Circuit Judges.

POOLER, Circuit Judge.

This case raises questions regarding the scope of federal court review of a decision issued by an arbitral panel. We resolve the case through the application of the familiar principle that the scope of such review is highly constrained. This is especially true with regard to an arbitral panel's assessment of whether the documentary and testimonial evidence presented to it is sufficient to satisfy a particular legal claim. Federal district judges are, of course, highly skilled in matters of weighing evidence. As illustrated by the result we reach here, however, district judges must put these skills aside when faced with the question of whether a decision issued by an arbitral panel should be confirmed.

FACTS

A. The Buttars' Claim.

Daljit and Paramjit Buttar, who are husband and wife, are residents of Raleigh, North Carolina. Daljit Buttar (hereafter "Dr. Buttar") is a physician specializing in neurology, and is currently in solo practice.

Dr. Buttar has assumed sole responsibility for managing his family's finances. In 1999, he happened to meet Vivek Verma, a stockbroker based in New York City, at a social event in North Carolina. At this event, and in a series of subsequent telephone calls, Dr. Buttar and Verma discussed the Buttar family's current investments and future investment goals. In July 1999, Verma persuaded Dr. Buttar to open the first of a series of investment accounts at the firm for which he worked, Montrose Capital Management ("Montrose"). The application signed by Dr. Buttar when he opened this account contains the following provision:

All controversies which may arise between us concerning any transaction, or the construction, performance or breach of this or any other agreement between us, whether entered into prior, on, or subsequent to the date hereof, shall be determined by arbitration in accordance with the Federal Arbitration Act to the fullest extent permitted by law. The arbitration shall be determined only before and in accordance with the rules then in effect of either the New York Stock Exchange, Inc., or the National Association of Securities Dealers, Inc. or any other exchange or self-regulatory organization of which [Montrose is] a member as I may elect. The award of the arbitrators, or of the majority of them, shall be final....

We note that, immediately preceding the arbitration clause, the application sets forth the following "understanding" in bold lettering: "The arbitrator's award is not required to include factual findings or legal reasoning and any party's right to appeal or to seek modification of rulings by arbitrators is strictly limited."

Soon after opening this initial account, Dr. Buttar also began to discuss his investments with Robert Winston. Winston's actual responsibilities at Montrose are not entirely clear from the record, but Dr. Buttar testified that Winston "talked to me like he was the owner" of the firm. Verma himself testified that while he worked at Montrose he was under the impression that Winston ran the firm.

Verma and Winston successfully urged Dr. Buttar to make substantial investments in the securities of two firms: (1) Skynet Holdings, Inc. ("Skynet") and (2) CNF Technologies ("CNF"). Dr. Buttar was also persuaded to provide a "bridge loan" to CNF in the amount of $150,000.00. Eventually, Dr. Buttar alleges, Montrose "had invested virtually all of [his] liquid assets in CNF and Skynet." It is undisputed that Dr. Buttar suffered substantial losses as a result.

B. The Arbitration Proceeding.

On September 11, 2000, the Buttars instituted an arbitration proceeding by filing a statement of claim with the National Association of Securities Dealers, Inc. ("NASD"), which names Montrose and Winston as respondents. The statement of claim alleges that Winston and Verma made numerous false statements to Dr. Buttar regarding the wisdom of investing in Skynet and CNF. These included characterizing Skynet as "a long-term safe investment" when it was in fact "a thinly traded bulletin board stock," falsely representing that Skynet's immediate prospects were particularly favorable because it "was in the process of a buyout by Federal Express," and assuring Dr. Buttar that the principal amount of his loan to CNF would be returned to him "plus ten percent within two months, `guaranteed.'" The Buttars sought compensatory damages in the amount of $1,375,000.00 and an unspecified amount of punitive damages.

The Buttars filed an amended statement of claim with the NASD on March 9, 2001 which repeats the factual allegations of their original pleading, but which names Michael E. Wallace, David Jacaruso and Joseph Scotti as respondents in addition to Montrose and Winston. Liability as to Wallace, Jacaruso, and Scotti is set forth in the following allegation:

Respondents Wallace, Jacaruso and Scotti are liable as control persons of Respondents Montrose, Winston and Verma. See 15 U.S.C. § 78t(a); 15 U.S.C. § [77o¹]; [North Carolina General Statute] § 78A-56(a)(2)(c) ....

* * * * * *

Respondents possessed the power to control and supervise the operations of Montrose, Winston and Verma and knew or should have known that Montrose, Winston and Verma were handling Claimants' accounts in an unsuitable manner, making unauthorized trades [and] were making misrepresentations to Claimants. Respondents, as control persons, failed to properly superivse the activities of Montrose, Winston and Verma, but benefitted from the improper and illegal activities conducted by Montrose, Winston and Verma.

* * * * * *

.... Respondents Montrose, Wallace, Jacaruso and Scotti are responsible for the wrongdoing of its registered representatives due to the doctrine of respondeat superior, for failing in all respects to supervise the account activity. Respondents Wallace, Jacaruso and Scotti are liable as control persons. The conduct of respondents violated the federal securities laws, state statutory and common law, and the rules and regulations of the National Association of Securities Dealers, Inc. and the securities industry.

The Buttars' claim was assigned to a three-person arbitration panel ("the Panel"). None of the Panel's members is an attorney, but they are all seasoned business executives with substantial experience as arbitrators. On May 29, 2001 the Panel granted Winston's motion, which was joined by Wallace, Jacaruso, and Scotti, to assert a third-party claim against Verma.

The Panel conducted a three-day hearing on the Buttars' claim in November 2001. Although they were all represented by counsel at the hearing, Winston, Jacaruso, and Scotti chose not to appear in person and did not give any testimony. Wallace was also represented by counsel and testified very briefly by telephone.

A central issue on this appeal is whether the Panel could conclude that Wallace, Jacaruso, and Scotti are liable to the Buttars as control persons of Montrose. During his opening statement to the Panel, counsel for Wallace, Jacaruso, and Scotti denied that the three men could be found liable as control persons and alerted the Panel to his intention to move for dismissal on this ground at the close of evidence. This motion was in fact made, but the Panel declined to rule on it "until all of the various written pleadings and memoranda have been reviewed." The Buttars submitted a post-hearing memorandum to the Panel which sets forth the basic principles of control person liability under North Carolina and federal law. Counsel for Wallace, Jacaruso, and Scotti, however, submitted a post-hearing memorandum which is notable for its use of invective, but which is almost completely devoid of legal discussion of any type. It devotes slightly more than one-half of a page to the law of control person liability, and does not discuss North Carolina law at all. The Buttars and Wallace, Jacaruso, and Scotti also submitted reply memoranda to the Panel regarding the common law issues of laches and respondeat superior.

The evidence before the Panel regarding the status of Wallace, Jacaruso, and Scotti as control persons was neither non-existent nor overwhelming. In the first place, documents filed by Montrose with the Securities and Exchange Commission tend to support a finding of control person status. On a "Form BD" — a Uniform Application for Broker-Dealer Registration — filed by Montrose in May 1999, Wallace is identified as the firm's president. On the same form, Jacaruso and Scotti are identified as directors who each owned a 50% share of Montrose, but only Wallace is actually identified as a "control person." On an amended Form BD, however, dated November 11, 1999, Jacaruso and Scotti are listed as each owning a 25% to 50% interest in Montrose and each, along with Wallace, is listed as a "control person." Two subsequent Form BD amendments, dated December 17, 1999 and December 21, 2000, repeat this listing.

The Panel also heard the testimony of Michael Kavanagh, a stockbroker who came to work at Montrose upon a promise that he would be given a 5% ownership interest in the firm....