Opinion
No: C-1-02-571
October 9, 2002
Joseph Julnes Dehner, Frost Brown Todd LLC, 1 Cincinnati, OH., for STANLEY J. COHEN, Receiver of The Escrow Fund of Secured Equity Title Appraisal Corporation petitioner.
Thomas P. Dillon, Jeffrey Steven Creamer and C. Philip Campbell, Jr., Shumaker Loop Kendrick, for J.B. OXFORD CO., INC., respondent.
ORDER
This matter is before the Court on Petitioner's Application for Order Confirming Arbitration Award (doc. 1), Respondent J.B. Oxford Co., Inc.'s Motion to Vacate Arbitration Award (doc. 5), Respondent J.B. Oxford Co., Inc.'s Opposition to Pettitioner's Application for Order Confirming Arbitration Award (doc. 9), Petitioner's Reply in Support of Application to Confirm Arbitration Award and Opposing Respondent's Motion to Vacate (doc. 12), and Respondent's Reply in Opposition to Application for Order Confirming Arbitration Award and in Support of Motion to Vacate Arbitration Award (doc. 27). A hearing on this matter occurred before the Court on October 1, 2002.
This case arises out of a National Association of Securities Dealers (NASD) arbitration that was initiated by Petitioner Stanley J. Cohen ("Cohen") against Monroe Parker Securities, Inc. ("Monroe Parker"), Respondent JB Oxford Co., Inc. ("JBOC"), JBOC's parent corporation JB Oxford Holdings, Inc. ("Holdings"), Respondent EBC Trust Corporation ("EBC"), Respondent Felix Oeri, Respondent Bryan Jay Herman, Respondent Alan Scott Lipsky, and a number of other parties who were alleged to have been involved in securities fraud against the Claimant. Most of those other parties were dismissed from the arbitration because of bankruptcy filings, settlements, or by reason of no known current address as of December 17, 1999 (doc. 1). As a result of separate litigation, Holdings was dismissed from the arbitration (doc. 9). EBC and Cohen settled, on the basis that the arbitrators exceeded their powers as to EBC (doc. 10) and this Court vacated the arbitration award against EBC (doc. 24). Respondents Felix Oeri, Bryan Jay Herman, and Alan Scott Lipsky were served with Petitioner's Application (doc. 7) but failed to respond. At the October 1, 2002 hearing the Court orally confirmed the arbitration awards entered against Felix Oeri for $7,300,250, Bryan Jay Herman for $6,000,250, and Alan Scott Lipsky for $6,000,250. The remaining dispute is now between JBOC and Petitioner Cohen over the $3,000,250 arbitration award entered against JBOC on July 24, 2002.
Cohen argues that the standard of review of an arbitration award is very narrow (doc. 12). Cohen's position is that the Federal Arbitration Act specifies four bases for overturning an arbitration award, and that JBOC cites none of these as a basis for overturning the award ( Id. ). Instead, JBOC bases its challenge upon the standard of "manifest disregard of the law" ( Id. ).
JBOC argues that it is a clearing Broker, and as such, has no contact with clients, and therefore no fiduciary duties to the broker's customers (doc. 9). Clearing brokers, according to JBOC, owe no general duties of disclosure to clients (Id.). JBOC argues that the bad actor in the transactions was Monroe Parker, and that it is wrong to hold JBOC "guilty by association" (Id.). JBOC argues that the Claimant must demonstrate more: that JBOC had actual knowledge of the fraud, and that JBOC offered substantial assistance in perpetrating the wrongdoing (Id.).
JBOC argues that Claimants' case before the arbitration panel consisted primarily of attempting to prove that JBOC "should have" known that Monroe Parker was involved in fraudulent activities (Id.). JBOC argues that this is not enough of a basis to justify an award of compensatory damages against them, and that though these well-established principles of law were presented to the arbitrators, that law was disregarded ( Id.).
The arbitration panel also awarded punitive damages against JBOC, which JBOC argues must be vacated because the record contains no evidence of actual malice by JBOC, which it argues is a required element to any punitive damage claim (Id.). According to JBOC, the record shows that it had no knowledge of any improper conduct, and so that it does not follow that JBOC could have harbored any malice (Id.). JBOC posits that the arbitration panel likewise manifestly disregarded the malice requirement in their punitive damage award (Id.).
In contrast, Cohen argues that there is a substantial body of precedent supporting an arbitration award against a clearing broker for a fraud conducted in tandem with the introducing broker (doc. 12). Cohen recites evidence he states was presented to the arbitration panel that showed that JBOC did not function "merely as a clearing broker" (Id.). Cohen argues that during the 1990's three notorious "boiler room" operations, Stratton Oakmont, Biltmore, and Monroe Parker, were known as the "three sisters" ( Id.). The three sisters, according to Cohen, were an outgrowth of other boiler rooms that had been shut down by regulators (Id.). Cohen argues that JBOC did not innocently or naively agree to be Monroe Parker's clearing broker (Id.). Cohen argues that the three sisters were the subject of public reports, injunctions, orders and other regulatory attack by the National Association of Securities Dealers ("NASD") and the Securities and Exchange Commission ("SEC") (Id.). On the very day that JBOC signed a clearing agreement with Stratton Oakmont, the largest of the three sisters, Stratton Oakmont was enjoined by a U.S. District Court, at the SEC's request, and described as a menace to the investing public (Id.).
Cohen further argues that JBOC had close connections to Irving Kott, a Canadian stock promoter with a notorious history of stock swindling (Id.). Cohen alleges that Kott essentially controlled JBOC and arranged the deal for JBOC to take on the business of the three sisters (Id.). From the start, Cohen argues, JBOC knew about, participated in, and materially assisted the pump and dump scheme that caused the losses of hundreds of investors (Id.). Cohen alleges that JBOC knew that Monroe Parker was taking companies public at $7 per share, immediately pumping the price artificially to $15, and then dumping the price back to near nothing ( Id.). According to Cohen, the result was large, unmistakable trading profits for Monroe Parker that were tracked daily and monitored by JBOC (Id.). Even if JBOC had not participated in stock manipulation, Cohen argues that JBOC received numerous customer complaints and had notice of "reneges" that were red flags about Monroe Parker's fraudulent activities (Id.)
Cohen states that JBOC offered no evidence to rebut the above facts, and that the arbitrators compelled JBOC three times to produce additional documents (Id.). The facts, state Cohen, showed that JBOC actively participated in the fraudulent scheme ( Id.) Cohen argues that it is neither the Claimant's nor the Court's burden to revisit seven days of arbitration hearings nor to review 23 volumes of exhibits, but it is rather JBOC's burden to show that there is no evidence that could conceivably justify the award (Id.). Cohen concludes that the law and evidence support the award, and that this Court should confirm the arbitration award against JBOC in all respects (Id.).
At the hearing on October 1, 2002, the Court heard the Parties argue their respective positions and is satisfied that there is substantial evidence to support the arbitration award. Respondent JBOC has cited none of the four bases for overturning an arbitration award under the Federal Arbitration Act. 9 U.S.C. § 10 (a). JBOC relies instead upon a non-statutory ground to challenge the award, alleged "manifest disregard of the law."
The Court does not find that the arbitrators in this case manifestly disregarded the law in issuing an award against JBOC. The arbitrators relied, among other things, upon the testimony of Petitioner's expert Howard Berg, who stated that he had never seen a case where a clearing broker had as much knowledge, gave as much material assistance and participated as actively in a fraud as was true of JBOC. The Court finds that testimony credible. The facts show that Irving Kott and Felix Oeri controlled JBOC, and JBOC therefore had knowledge about the fraudulent stock transactions and was substantially involved in those transactions. Felix Oeri initially put $2 million into JBOC, along with $2 million from the three sisters, so that JBOC would have enough capital to serve as a clearing broker for the three sisters. It is questionable whether a clearing broker ever before had been capitalized by its introducing brokers.
The first security manipulated after JBOC became the three sisters' clearing firm was JB Oxford Holdings, for which Mr. Oeri was the largest shareholder. Those shares were worth ninety cents at the outset, were sold by Mr. Oeri to Monroe Parker at $1.20 a share, which pumped up the price further and sold those shares for $2.03 to the unsuspecting public. Within weeks of lending $2 million to JBOC, Oeri Finance got back $2 million through this stock manipulation, while the price of the JBOC stock fell back to $1.00 a share within days. Mr. Oeri decided to sell more JBOC shares two months later. Mr. Oeri again sold shares to Monroe Parker, who again pumped the shares up to a spiked price at which unsuspecting customers were duped and at which Oeri collected profit. The pumpers and dumpers financed JBOC and then used it as a vehicle for their transactions.
The Court finds that Felix Oeri's knowledge of the pumping and dumping, while Mr. Oeri had a controlling interest in JBOC's parent company, shows that JBOC was aware of the scheme. This finding is supported by the testimony of Michael Chiodo, the Chief Financial Officer of JBOC, who said that Mr. Oeri could fire him if he wanted, and that Oeri was in full control of JBOC. At the October 1, 2002 hearing, Cohen's counsel explained that Irving Kott, who has been convicted in Canada of criminal stock swindling and in Holland of securities manipulation, was also critically involved in the direction of JBOC. Mr. Kott, who has left the United States, had a corner office at JBOC. According to JBOC's report to the NASD, Mr. Kott and JBOC's president, Steven Rubenstein, negotiated the fundamental arrangement with the three sisters for JBOC to serve as their clearing broker. Kott's influence did not stop there. JBOC's C.F.O. Chiodo indicated that Mr. Kott told him what to do. The web of special relationships is exemplified by that of JBOC's president, Mr. Rubenstein, with Felix Oeri. According to Petitioner's Counsel Mr. Rubenstein executed a trade for Mr. Oeri when Mr. Oeri did not have a nickel in his pocket. That day trade, according to Counsel, yielded $200,000 for Felix Oeri.
As a final matter, JBOC also challenges the punitive damages award levied against it. JBOC argues that under Ohio law, to obtain an award of punitive damages on a fraud claim, Petitioner must establish the existence of malice or ill will. However, JBOC neglects to note that punitive damages can also be awarded when the wrongdoing is particularly gross or egregious. W.D.I.A. Corp. v. McGraw-Hill, Inc., 34 F. Supp.2d 612, 627-28 (S.D. Ohio, 1998). The record shows that the pump and dump scheme orchestrated by the Respondents could not have occurred without JBOC, and that a great number of investors were harmed repeatedly in the course of Respondents' conduct. The arbitrators were not acting in manifest disregard of the law by awarding punitive damages against JBOC. In closing, the court notes that there is no "ostrich defense" available to Respondent JBOC. Malice can also be established under the "conscious disregard" standard. Preston v. Murty, 512 N.E.2d 1174, 1176 (Ohio 1987).
CONCLUSION
The Court is satisfied that the arbitrators had an adequate basis for their award such that it was made in accordance with the law. Actors within JBOC had actual knowledge of the pumping and dumping scheme and offered substantial assistance in the execution thereof. As such, the Court will affirm the arbitrator's award in its entirety.
Accordingly, the Court GRANTS Petitioner's Application for Order Confirming Arbitration (doc. 1), and CONFIRMS the arbitration award of July 24, 2002 entered against J.B. Oxford Co., Inc. for $3,000,250. The Court further REITERATES its oral confirmation of the arbitration awards entered against Felix Oeri for $7,300,250, Bryan Jay Herman for $6,000,250, and Alan Scott Lipsky for $6,000,250, and DISMISSES this case.
SO ORDERED.