Opinion
02 Civ. 1522 (GEL)
September 4, 2002
David E. Robbins, David W. Oppenheim, Kaufmann, Feiner, Yamin, Gildin Robbins, New York, NY, for Petitioner Warren A. Hardy.
Marvin G. Pickholz, William A. Rome, Lisa Rosenthal, Hoffman, Pollok Pickholz, New York, NY, for Respondents Walsh Manning Securities and Frank James Skelly III.
OPINION AND ORDER
Warren A. Hardy ("Hardy" or "petitioner"), an investor, brings this action to confirm an award entered by an arbitration panel of the National Association of Securities Dealers ("NASD") against Walsh Manning Securities LLC ("Walsh Manning"), a securities brokerage firm with which he had an account, and Frank James Skelly fill ("Skelly"), its former Chief Executive Officer (collectively, "respondents"). Petitioner moves for a judgment confirming the award; respondents oppose the motion and cross-move to vacate the award. For the reasons set forth below, petitioner's motion will be granted, and respondents' motion denied.
BACKGROUND
Hardy, a British national, opened an account at Walsh Manning in or about December 1997, after being solicited to do so by Barry Cassese, who headed the firm's branch office in Westbury, New York. (Pet. ¶ 8 Ex. 2.) It is common ground among the parties presently before the Court that Cassese engaged in substantial wrongful conduct involving Hardy's account. including the unauthorized purchase of $1.7 million worth of securities for the account and the use of high-pressure tactics to persuade Hardy to purchase unsuitable securities without disclosing material negative information about those securities. (Resp. Mem. at 11.)
After incurring substantial losses in the account, Hardy sought arbitration under the auspices of the NASD against Cassese, respondents, and a number of other parties. (Robbins Aff. ¶ 10.) Although respondents never executed Uniform Submission Agreements submitting to the arbitration, they answered the arbitration demand on the merits. appeared through counsel, and vigorously contested their liability through 25 days of hearings before an arbitration panel. (Pet. ¶ 9 Ex. 3.) In that proceeding, Hardy argued that respondents were liable to him on a variety of theories. Among other things, he presented evidence that Walsh Manning and Skelly failed to properly supervise Cassese, that Walsh Manning was liable for Cassese's misconduct on a theory of respondeat superior, that Skelly was liable as a control person of Walsh Manning, and that Skelly personally violated federal securities laws by manipulating the market of some of the securities sold to Hardy by Cassese. (Robbins Aff. ¶ 20-34.)
After the case was dismissed or settled as to certain other parties (including Cassese, who paid damages to Hardy and testified on his behalf in the arbitration proceeding), the arbitrators entered an award finding respondents "jointly and severally liable for . . . compensatory damages in the amount of $2,217,241.00, based upon the principles of respondeat superior." (Award at 5.) The award noted that this amount "reflects deductions for the amounts previously paid by settling respondents." The arbitrators also directed respondents to pay $548,767 in interest, as well as various fees and expenses of the action; made a small award against Hardy in favor of Walsh Manning's compliance officer, Wesley Rusch; and denied all other claims for relief
Hardy now asks this Court to confirm the arbitration award, and respondents seek to vacate it, presenting a series of objections, most of which are completely without merit.
DISCUSSION
I. Jurisdiction of the Arbitrators
Analytically the first of respondents' arguments — though understandably placed last in their brief — is the claim that the NASD lacked jurisdiction over respondents, because by the time Hardy filed his claim, Walsh Manning was no longer a member of the NASD and Skelly was no longer associated with a member, and because respondents did not execute submissions to arbitration. (Resp. Mem. at 29-36.) This claim is frivolous.
Respondents are correct that "arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." United Steelworkers of America v. Warrior Gulf Navigation Co., 363 U.S. 574, 582 (1960). At the same time, however, arbitration agreements are favored in the law and are to be broadly construed. An order to arbitrate should not be denied unless the arbitration clause is not susceptible of a reasonable interpretation covering the asserted dispute; doubts should be resolved in favor of coverage. Id. at 582-83. The relevant contract here is that between Hardy and Walsh Manning. It is undisputed that at the time Hardy opened his account at Walsh Manning, and at the time of the misconduct complained of. Walsh Manning was a member of NASD, which requires its members to arbitrate any claim arisina in connection with its business "between or among members or associated persons and public customers." NASD Code of Arbitration Procedure, Rule 10101(c). This arbitration requirement. which governed Walsh Manning's relations with its customers at the time it contracted to provide brokerage services to Hardy, becomes part of the understanding between NASD members and their customers, and thus part of Hardy's contract with Walsh Manning. Having agreed to arbitrate disputes with Hardy, respondents could not terminate that agreement by unilaterally withdrawing from NASD membership after the harm was done and after the dispute had ansen.
In the comparable case of members of the New York Stock Exchange, the courts (including this Court) have universally held that withdrawal from membership does not terminate a member firm's obligation to arbitrate any claims arising during the course of his membership. Dunay v. Weisglass, 54 N.Y.2d 25, 32-33 (1981); Muh v. Newberger. Loeb Co., 540 F.2d 970, 972-73 (9th Cir. 1976); Isaacson v. Hayden. Stone. Inc., 319 F. Supp. 929 (S.D.N.Y. 1970) (Pollack, J.). As Judge Pollack put it, the fact that the action was commenced after a respondent "ceased to be a member of the Exchange does not impair or destroy the obligation to arbitrate [its] controversies with the [petitioner] concerning their business relationship assumed by [it] while it was a member of the Exchange." 319 F. Supp. at 930. Here. Walsh Manning and Skelly assumed their business relationship with Hardy while a member or associated with a member of the NASD, and with the implicit promise to Hardy that they would abide by the NASD's rules. They cannot disavow that promise by withdrawing from membership after Hardy had been defrauded and an arbitration claim arising from conduct committed while the firm was a member already loomed.
Indeed, the New York courts have rejected the very argument made by respondents, in a case in which one of them was involved. Skelly v. Willet, 705 N.Y.S.2d 227 (1st Dep't 2000). The fact that Willet involved a dispute with an employee rather than with a customer does not affect the outcome; in either case, the dispute concerns a relationship that was entered into, and misconduct that occurred, while respondents were members of NASD and subject, by their own agreement, to the arbitration requirement.
The principal authority relied on by respondents, Waldron v. Goddess, 61 N.Y.2d 181 (1984), is not to the contrary. There, the employment contract containing the arbitration clause had expired before the dispute between the parties arose. The Court of Appeals held only that an employee's continuation in employment after the termination of a written contract containing an arbitration clause did not automatically renew the arbitration agreement. That holding has no bearing on the instant case, where the dispute arose while respondents were still parties to the arbitration agreement.
The arbitrators had jurisdiction for a second, independent reason. A party can agree to submit a dispute to arbitration by participating in the arbitration process. Put another way, failure to object in a timely manner to the arbitrability of a claim waives the objection. See, e.g., ConnTech Development Co. v. University of Connecticut Education Properties. Inc., 102 F.3d 677, 685 (2d Cir. 1996); International Longshoremen's Ass'n v. Hanjin Container Lines. Ltd., 727 F. Supp. 818, 821 (S.D.N.Y. 1989) (Leisure, J.); International Longshoremen's Ass'n v. West Gulf Maritime Ass'n, 594 F. Supp. 670, 674 (S.D.N.Y. 1984) (Sand, J.). Here, respondents demonstrated their agreement to arbitrate their dispute with Hardy in the most unambiguous way possible: by arbitrating it. See Gvozdenovic v. United Air Lines, Inc., 933 F.2d 1100, 1105 (2d Cir. 1991) (holding that a party, even absent an arbitration agreement, may be bound by an arbitrate award if its conduct in the course of the arbitration proceeding demonstrates an intent to arbitrate the dispute). Far from objecting to the arbitrators' jurisdiction, they served not only an answer to Hardy's claim, but a cross-claim against one of the other parties. They then took part in discovery and eventually participated in 25 days of hearings before the arbitration panel. Such conduct constitutes unequivocal waiver of any objection to the arbitrators' jurisdiction.
Respondents fail to dispute any part of this analysis in their reply brief (Resp. R. Br. at 8-10), despite the fact that it is set out persuasively in petitioner's motion papers (Petr. Br. at 35-37).
Accordingly, respondents' argument that the arbitrators lacked jurisdiction is rejected.
II. Respondeat Superior
Respondents' second claim is that the arbitration panel's award is in "manifest disregard of the law," First Options of Chicago, Inc. v. Kaplan, 514 U.S. 93S. 942 (1995); Merrill. Lynch. Pierce, Fenner Smith. Inc. v. Bobker, 808 F.2d 930, 935-36 (2d Cir. 1986), because it improperly relied on principles of respondeat superior. This claim is completely without merit as to Walsh Manning; as to Skelly, the question is closer.
On a confirmation motion, judicial review of an arbitrate award is "quite limited." Local 1199. Drug. Hosp. Health Care Employees Union v. Brooks Drug Co., 956 F.2d 22, 24-25 (2d Cir. 1992). An arbitrate award will be confirmed unless (1) one of the statutory exceptions listed in 9 U.S.C. § 10 applies, (2) the arbitrators acted in manifest disregard of the law, or (3) the arbitrate award is incomplete, ambiguous or contradictory. See Promotora de Navegacion. S.A. v. Sea Containers. Ltd., 131 F. Supp.2d 412, 416 (S.D.N.Y. 2000). When addressing the second of these grounds, courts must be particularly careful not to turn the very limited inquiry into whether the arbitrators completely ignored governing legal principles that were brought to their attention into a plenary review of whether the court agrees with the arbitrators' application of those principles. "The court is forbidden to substitute its own interpretation even if convinced that the arbitrator's interpretation was not only wrong, but plainly wrong." Local 1199, 956 F.2d at 25, quoting Chicago Typographical Union No. 16 v. Chicago Sun-Times. Inc., 935 F.2d 1501, 1505 (7th Cir. 1991).
Walsh Manning's argument that the arbitrators disregarded the law in finding it liable on a respondeat superior theory is easily rejected. "Manifest disregard" may be found where the applicable legal rule is "obvious and capable of being readily and instantly perceived by the average person qualified to serve as an arbitrator . . . [and] the arbitrator appreciate[d] the existence of a clearly governing legal principle but decide[d] to ignore it or pay no attention to it." DiRussa v. Dean Witter Reynolds. Inc., 121 F.3d 818, 821 (2d Cir. 1997). Walsh Manning's arguments are doomed by the very cases it cites. Under New York law, "an employer is answerable for the torts of an employee who acts within the scope of his or her employment." Rausman v. Baugh, 682 N.Y.S.2d 42, 43-44 (2d Dep't 1998). But "[t]here is no single mechanical test to determine whether at a particular moment an employee is engaged in its employer's business," Id. at 43, rather than going "outside of his employment, and . . . acting maliciously, or in order to effect some purpose of his own." Lazo v. Mak's Trading Co., 84 N.Y.2d 896, 899 (1994), quoting Mott v. Consumers' Ice Co., 73 N.Y. 543 (1878).
Walsh Manning contends that Cassese's derelictions were not committed in the scope of his employment. This argument simply asks the Court to reassess the evidence and determine for itself the highly fact-specific inquiry into the circumstances of the employee's actions. See Lowy v. Travelers Property Cas. Co., 99 Civ. 2727 (MBM), 2000 WL 526702 at *3 (S.D.N.Y. May 2, 2000) (cited in Resp. Mem. at 21) (listing multiple factors considered by New York courts in determining scope of employment). Here, the arbitrators did not set forth the basis of their reasoning — as, indeed, they are not required to. United Steelworkers of America v. Enterprise Wheel Car Corp., 363 U.S. 593, 597-98 (1960). Under these circumstances, "if there is even a barely colorable justification for the outcome reached, the court must confirm the arbitration award." Willemun Houdstermaatschappij v. Standard Micro Systems Corp., 103 F.3d 9, 13 (2d Cir. 1997) (internal quotation marks omitted).
Principles of respondent superior clearly permit a broker-dealer to be found liable for violations of the federal securities laws by an employee broker. Marbury Management. Inc. v. Kohn, 629 F.2d 705, 711-13 (2d Cir. 1980). While Walsh Manning contends that Cassese acted for reasons of his own, the arbitrators could easily have concluded on this record, at a minimum, that Cassese acted within the scope of his employment. The mere fact that Cassese violated published policies of the firm does not insulate the firm from liability.
The case as to Skelly is more difficult. As respondents point out. the doctrine of respondeat superior holds employers vicariously liable for the acts of employees, but "it does not apply to executive personnel who fall into the category of employees." Patton v. Dumpson, 498 F. Supp. 933, 943 (S.D.N.Y. 1980). Though Skelly was the CEO of Walsh Manning, he was technically only an employee, and vicarious personal liability cannot be imposed on individual supervisors based solely on the conduct of their underlings, when both are fellow employees of a common employer.
Hardy does not dispute this simple and arguably controlling principle, nor does he dispute that Skelly made the arbitrators aware of it. Rather, he argues that the arbitrators should not be construed to have awarded damages against Skelly purely on the basis of respondeat superior. (Petr. Mem. 14-15, 18-24.) Essentially, he claims that the evidence submitted to the arbitrators amply supports a finding that Skelly personally engaged in fraudulent and manipulative conduct, and that the arbitrators should not be assumed to have rejected this evidence and entered an award against Skelly solely on the basis of erroneously-applied respondeat superior principles.
As noted above, arbitrators are not required to state their reasoning, and the arbitrators here did not, simply setting forth in extremely abbreviated form the results of their deliberations. They may, however, have said just enough to create a problem. The award states that "Respondents Walsh Manning and Skelly be and hereby are jointly and severally liable for and shall pay to [Hardy] compensatory damages in the amount of $2,217,241.00, based upon the principles of respondeat superior." (Award at 5.) Skelly contends that this language straightforwardly declares that he has therefore been found liable solely on the basis of respondeat superior, presumably based on the misconduct of Cassese, and that the arbitrators, who expressly denied "[a]ll other requests for relief' (id.), therefore implicitly rejected Hardy's claims that Skelly was liable based on his own personal fraudulent behavior. Hardy, in contrast, argues that Skelly's interpretation of the award is "strained [and] self-serving" (Petr. Mem. at 18), and that "the most logical interpretation of the language of the Award . . . is that Respondent Skelly is liable for his own misconduct and that Walsh Manning, Respondent Skelly's and Cassese's employer, is jointly and severably liable on the principles of respondeat superior." (Petr. Mem. at 14-15.)
Surely, petitioner overstates the case in contending that his is the "most logical interpretation of the language of the Award." (Id. at 14.) To the contrary, the most direct reading of the award is that both the respondents were found liable "based upon the principles of respondeat superior." (Award at 5.) The Award language links both respondents as coordinate subjects of the sentence, without distinguishing between them. and it is easy to read the remainder of the sentence as finding both subjects "liable for . . . compensatory damages. based upon the principles of respondeat superior."
This is not the only possible reading of the arbitrators' award, however. It is possible to find that the phrase "based upon . . . respondeat superior" refers not to the finding of liability of each respondent, but to the conclusion that both respondents are "jointly and severally liable." This is essentially the reading adopted by petitioner, who would read the sentence as saying "[Skelly is liable in damages, based on his own conduct, and] both respondents are jointly and severally liable, based on respondeat superior." While the words chosen may not be the most direct or grammatical way of expressing this thought, it is worth noting that the sentence ("Respondents . . . be and hereby are . . . liable") isn't grammatical in the first place.
At any rate, the reading advanced by petitioner need not be the most logical reading, only a plausible one that is supported by a permissible view of the evidence. Here, Hardy put forward substantial evidence suggesting that Skelly played a significant part in the stock manipulations that victimized Hardy, and knew of at least one unauthorized trade that Cassese performed on Hardy's account. (Robbins Aff. Ex. E at 340-41.) Had the arbitrators written a judgment in which they rejected that evidence as unpersuasive, but nevertheless found Skelly liable, expressly stating that they did so because as Cassese's supervisor he was automatically vicariously liable, a court could reject that conclusion as one that manifestly disregarded a rule of law. But that is not what they did. The arbitrators nowhere made a finding that Skelly had committed no misconduct, nor did they ever state that only Cassese had engaged in wrongdoing. The panel does not state that it based liability for anyone solely on the actions of Cassese, nor does it anywhere exonerate Skelly of any misconduct. Contrary to respondents' contention (Resp. R. Mem. at 1), the arbitrators' denial of"[a]ll other requests for relief' (Award at 5) does not reject all or any of Hardy's "causes of action" or "theories of liability" or "factual contentions" regarding Skelly. Rather, immediately before setting forth the requests granted and denied, the Award specifically sets forth the "relief requested" by the various claimants (id. at 3-4) and lists of "other issues considered and decided" by the panel (id. at 4-5). Nowhere in these portions of the opinion does the panel indicate that it has rejected Hardy's arguments that Skelly should be held liable for personal misconduct or for failure to supervise. The Award granted relief in favor of Hardy against Walsh Manning and Skelly, and in favor of Rusch against Hardy, to the extent set forth in the portions of the Award discussed above, and denied (by the language relating to "other requests") the remaining claims and cross-claims against other parties. To read these statements of judgment as fact-findings adverse to Hardy's contentions regarding Skelly would be to insert findings that simply aren't there.
Hardy points out, in fact, that he never even argued that Skelly should be held vicariously liable for Cassese's act by respondeat superior. (Petr. Mem. at 14.)
In addition to the parties already named, and ignoring claims that were settled before the arbitrators' decision, Hardy also asserted claims against James Thomas Shanley; Skelly and Walsh Manning entered cross- or third-party claims against Cassese. (Pet. ¶ 9 Ex. 3.)
As courts have repeatedly held, "[w]hen arbitrators explain their conclusions ([and] they have no obligation to do so) in terms that offer even a barely colorable justification for the outcome reached, confirmation of the award cannot be prevented by litigants who merely argue, however persuasively, for a different result." Andros Compania Maritima. S.A. v. Marc Rich 579 F.2d 691, 704 (2d Cir. 1978). It is not clear that the cryptic reference to "principles of respondeat superior" in the Award in this case can be taken as an "explanation" for the arbitrators' conclusions at all, in light of the complete absence of legal or factual reasoning and the arbitrators' evident intention to issue a general award without supporting opinion, but assuming arguendo that it can, petitioner's reading of the Award is — at the very least — "colorable." Given that an "arbitration award will not be vacated . . . even if the arbitrator's [decision] is clearly erroneous," Meyers v. Parex. Inc., 689 F.2d 17, 18 (2d Cir. 1982), it would be perverse to interpret a sketchy remark about the basis for a decision as indicating that the arbitrators made their decision in deliberate disregard of governing legal principles, rather than on a good-faith application of legal standards to the evidence before them, where substantial evidence existed that would validate the arbitrators' conclusion. See Steelworkers v. Enterprise Wheel Car, 363 U.S. at 598 (holding that an ambiguous statement in an arbitration award that permitted an inference that the arbitrator had exceeded his authority was not a sufficient reason to overturn the award).
Such evidence clearly existed here. Cassese testified that it was Skelly who provided him with the false and materially misleading information Cassese passed along to Hardy, for the very purpose of persuading customers like Hardy to purchase securities (Robbins Aff. Ex. E at 43-46, 57, 71-72, 78, 82, 90, 168-70), and that Skelly was aware that Cassese engaged in unauthorized trading, but did nothing to prevent it (id. at 341). There was also evidence that Skelly manipulated the supply of the securities in question, and put pressure on Cassese to dispose of them, by placing stocks in the trading account of Cassese's branch office, thus imposing on Cassese the risk of loss from those stocks unless they were unloaded on Cassese's customers. (Robbins Aff. Ex. B-4; Ex. E at 36-4 1, 112-119.) There was a sound basis for the arbitrators to conclude that Skelly made efforts to manipulate the prices of favored Walsh Manning "house stocks." (Robbins Aff. ¶¶ 29-30 Ex. A at 33-38; Ex. B-11; Ex. B-12; Ex. E at 36-41.) There was also a solid basis for concluding that Skelly could be held liable for failure to supervise Cassese. As chief executive officer of Walsh Manning, he was responsible for instituting an appropriate supervision system, but substantial evidence supported the conclusion that Skelly made no effort to implement any such system at Cassese's branch office. (Robbins Aff. ¶¶ 34 Ex. E at 380-84, 707-08.)
On this point, the Court relies on the affidavit of Hardy's counsel, Mr. Robbins, which asserts that Walsh Manning's Head Trader, Tom Hack, testified as to Skelly's failure to supervise Cassese's branch office. (Robbins Aff. ¶ 34.) None of the parties has produced the transcript of this testimony. Since the respondents have the burden of demonstrating manifest disregard of the law, they also bear the responsibility for providing the court with the full record of the arbitration proceedings. Green v. Progressive Asset Management. Inc., 00 Civ. 2539 (DLC), 2000 WL 1229755 at *3 (S.D.N.Y. Aug. 29, 2000) (Cote, J.) (holding that failure to produce the record is in itself sufficient reason to reject a challenge to an arbitration award). Given the respondents' failure to produce the complete record or to object to Mr. Robbins's characterization of Hack's testimony, the Court views Mr. Robbins's affidavit as sufficient evidence of the substance of Hack's testimony.
The arbitrators need not have found this testimony credible, or drawn from it the conclusions that Hardy urged them to draw. But nothing in the Award supports the view that they rejected it. Certainly, in light of such evidence, the arbitrators' award of damages against Skelly was anything but "clearly erroneous," let alone incompatible with clear legal principles. To overturn the Award because a facially plausible but not inevitable reading of a conclusory statement awarding damages might suggest reliance on an erroneous legal theory would in effect require arbitrators to provide explicit and correct legal analyses of their conclusions — something that the law does not require, and that parties who submit their disputes to arbitration have elected to forego.
Accordingly, the arbitrators' finding of liability on the part of both respondents is confirmed.
III. Mitigation of Damages
Finally, respondents object to the amount of damages found by the arbitrators, arguing that this conclusion was in "manifest disregard" of the law requiring fraud victims to mitigate damages. But this argument is transparently an unavailing attempt to seek review of the arbitrators' factual conclusions. Nothing in the Award gives the slightest support to a contention that the arbitrators ignored or chose not to apply legal principles governing damages. Respondents argue that Hardy became aware of facts that should have put him on notice that Cassese was up to no good at a point in time when, had he terminated his relationship with Cassese, his damages would have been limited to $135,000 — or, if not then, at least by a later point, when his losses would still have been under $1,000,000. (Resp. Mem. at 3.)
This contention, perhaps better cast as a claim about reasonable reliance than about mitigation of damages, is an intensely fact-bound argument about what Hardy knew, when he knew it, and what he reasonably should have done with that knowledge. As such, it is uniquely well suited for resolution by an industry-knowledgeable fact finder such as an arbitration panel. It is thus precisely the sort of question that is not available for review by a district court. Even if the Court believed that the arbitrators' conclusion was "clearly erroneous" — and respondents have not provided the remotest reason for the Court to entertain such a belief— an arbitrators' award may not be vacated for that reason. Meyers, 689 F.2d at 18.
Thus, respondents' challenge to the arbitrators' calculation of damages is rejected.
CONCLUSION
Respondents' objections to the arbitrators' award are without merit. Respondents were required to arbitrate, and at any rate waived any objection to the arbitrators' jurisdiction by participating fully in the arbitration process. The arbitrators' award of damages to petitioner was a reasonable decision with ample support in the evidence submitted at the lengthy hearing, and was not reached in manifest disregard of applicable legal principles. The petition to confirm the arbitrators' award is therefore granted, and respondents' cross-motion to vacate the award is denied.
SO ORDERED.