Opposition Brief — Sargent v. PaineWebber Inc.

IN THE

No. 89-1144 rep 22

Supreme Court of the United States

October Term, 1989

ERNEST E. SARGENT and CYNTHIA SARGENT,

Petitioners,

v.

PAINEWEBBER INCORPORATED and KEVIN GREENAN,

Respondents.

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

DISTRICT OF COLUMBIA CIRCUIT

BRIEF OF RESPONDENTS PAINEWEBBER

INCORPORATED AND KEVIN GREENAN IN

OPPOSITION TO PETITION FOR A WRIT OF

CERTIORARI TO THE UNITED STATES COURT

OF APPEALS FOR THE DISTRICT OF

COLUMBIA CIRCUIT

Harvey A. Levin

Counsel for Respondents

Umana & Levin

1025 Thomas Jefferson St.,

Of Counsel: N.W.

Robert L. Salzberg Sate 303 West

Associate General Counsel Washington, D.C. 20007

PaineWebber Incorporated (202) 898-2600

1285 Avenue of the Americas

New York, New York 10019

DATED: February 22, 1990

CASILLAS PRESS INC. - 1717 K STREET SW WASHINGTON IC 20036 — 225-1220

ak

tae 6

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ty

(1)

QUESTIONS PRESENTED

1. Should this Court grant the petition for a writ of cer-

tiorari to review an arbitration award (A) when petitioners have

alleged at most a procedural, not substantive, error by the

New York Stock Exchange panel with respect to a New York

Stock Exchange procedural rule; (B) where the New York

Stock Exchange arbitration rules provide that the arbitrators

are empowered to interpret and determine the applicability

of the rules; (C) where petitioners failed to bring to the at-

tention of the arbitrators at any time petitioners’ complaint

regarding the application of the rule; (D) where petitioners

fail to show that the rule was not applied correctly; and (E)

where petitioners fail to demonstrate any prejudice.

Z. Should this Court grant the petition for a wnt of cer-

tiorani to review, vacate and remand to the arbitrators a clear,

unconditional, lump-sum arbitration award when petitioners

have demonstrated no grounds for vacation or reversal under

the Federal Arbitration Act, 9 U.S.C. § 10.

3. Should this Court grant the petition for a writ of cer-

tiorarl to review an arbitration award (A) where there is no

conflict between or among the Circuit Courts of Appeals; and

(B) when to do so would upset the long-standing federal policy

favoring arbitration and the principles of speed and thnift sought

to be obtained by that federal policy.

(ii)

LISTING OF PARENTS, SUBSIDIARIES AND

AFFILIATES

Respondent PaineWebber Incorporated is a wholly owned

subsidiary of Paine Webber Group Inc., a publicly held cor-

poration the stock of which is listed on the New York Stock

Exchange. Paine Webber Group Inc., through PaineWebber

Incorporated and other wholly owned subsidiaries, owns 100%

of the outstanding voting stock of over 200 entities that carry

on business on behalf of Paine Webber Group Inc.

(ini)

TABLE OF CONTENTS

Page

CL sc i

LISTING OF PARENTS, SUBSIDIARIES AND

ci in va etcvscescccses: verre? ii

ST MOE, ccc cc ecccccccsces Vv

ee ds. a oc cvssvecoccecsccceces 1

Te i. ce wtecsccvcuesccecwas 2

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et 3

FACTS AND PROCEEDINGS........................... 3

THIS COURT SHOULD DENY THE PETITION

FOR A WRIT OF CERTIORARI...................... 10

1. The Petition Should Be Denied Because (A)

Petitioners Have Alleged At Most A Procedural,

Not Substantive, Error By The NYSE Arbitration

Panel With Respect To An NYSE Rule; (B) The

NYSE Rules Provide That The Arbitrators Are

To Interpret And Apply The Rules; (C)

Petitioners Did Not Raise Their Procedural

Objection And Claim Of Rule Violation With The

Arbitrators; (D) Petitioners Have Failed To Show

That The Rule Was Not Applied Correctly; and

(E) Petitioners Have Failed To Show Any Harm. ...... 10

A. Petitioners Complain Of A Procedural

Violation Only Under NYSE Rules................ 10

B. The NYSE Rules, By Which Petitioners

Agreed To Be Bound, Lodged Sole Authority

For The Interpretation And Application Of

NYSE Rules In The Arbitrators.................. 14

2.

CONCLUSION

(iv)

C. Petitioners Did Not Raise Their Procedural

Objection and Claim Of Rule Violation With

pe Been sae are ere

D. Petitioners Fail To Show That NYSE Rule

607 Was Not Applied Correctly..............

E. Petitioners Fail To Show Any Harm Resulting

From Any Alleged Incorrect Interpretation Or

Apulbcation OF Tille G07... 2c ccc cece ene es

The Petition Should Be Denied Because The

Lump-Sum Award Was Clear, Unconditional And

Unambiguous And Was Based On Grounds

lnferrdee Prom The BecOrd...........2csc0e0e.

A. The Award Was Clear And Unambiguous.... ..

B. A Basis For The Award Is Inferrable From

ES a A EDEL: he

The Petition Should Be Denied Because (A)

There Is No Conflict Between Or Among The

Circuit Courts of Appeals; And (B) Certiorari

Would Upset Long-Standing Federal Policy

Favoring Arbitration And Contravene The

Principles Of Speed And Thrift Underlying That

EE hk es ed eecea kee honeys 0

A. There Is No Conflict Between Or Among

The Circuit Courts Of Appeals...............

B. Certiorari Would Upset The Long-Standing

Federal Policy Favoring Arbitration And

Contravene The Principles Of Speed And

Thrift Underlying That Policy................

“ei Ss oe w foe ee ee oe a ee ee ie ee ee ee ew ome ee ee a

Page

ree

(v)

TABLE OF AUTHORITIES

Cases Page

Atlanta-Tomberlin, Inc. v. Eastern Board of

Cherokee Indians, 672 F. Supp. 887

Cer SE as ee intone te eG hee eee 19, 21

Ballantine Books, Inc. v. Capital Distributing Co.,

ae Se OT Ge A ss oe oe eee ieee 19

Comprehensive Accounting Corp. v. Rudell,

760 F.2d 138 (7th Cir. 1985), aff'd, 802 F.2d

926, cert. dented, 480 U.S. 907 (1987).................. 15

Fatrchild & Co. v. Richmond, Fredencksburg and

Potomac R. Co., 516 F. Supp. 1305

Rt RED i ias enero ree eae re 17, 18, 19, 21

Ficek v. Southern Pacific Co.,

338 F.2d 655 (9th Cir. 1964), cert. denied,

Boe Wie ee Re ho mdasukics eel ee re cee 13, 15

Florasynth, Inc. v. Pickholz,

oP eee is Ae ener re er 16

French v. Mernll Lynch, Pierce, Fenner & Smith, Inc.,

Gee ££ ee Oe ere yr 16, 17, 20

Galt v. Libbey-Owens-Ford Glass Co.,

397 F.2d 439 (7th Cir.), cert. denied,

SD Cae TO Ts wo 6 soos 5 eae ee 25, 26

Hale v. Fnedman,

mon Foe Ge ti. Gr. WO cc cgi cdivieece eae 24

John Wiley & Sons, Inc. v. Livingston,

BP Ui ady eed MME s bs oh cwee ence oss cee 11, 12

(vi)

Page

Kahal v. ].W. Wilson & Assoc., Inc.,

me ie Ole CC. CW. TED ccc cc ncee ee tasiens 16

Koch Oil, S.A. v. Transocean Gulf Oil Co.,

7a. F.28 $51 Ga Cw. 1965)...... 22... 20508: 8, 19, 21, 24

Kurt Orban Co. v. Angeles Metal Systems,

LR &s Be fe er errr rr ree 19, 20

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc.,

ee OR EPDIID. coc esas ss vesneassedectuendes 17, 26

Moseley, Hallgarten, Estabrook & Weeden, Inc. v. Ellis,

Be’ e By, Bo ae Ree rrr eee re 15

Moses H. Cone Memonal Hospital v. Mercury

Construction Corp., 460 U.S. 1 (1983).........-.. 9, 16, 24

Olympia & York Florida Equity Corp. v. Gould,

y ER Poe, Be a.) ee ee 25

Peters Fabncs, Inc. v. Jantzen, Inc.,

582 F. Supp. 1287 (S.D.N.Y. 1984).........--------05- 15

Refino v. Feuer Transportation, Inc.,

480 F. Supp. 562 (S.D.N.Y. 1979), aff,

ig § Fos a er re 20

Rodriguez de Quijas v. Shearson/Amencan

Express, Inc., 109 S. Ct. 1917 (1989).........--+------ 18

Sargent v. Paine Webber, Jackson & Curtis, Inc.,

oe ES. Fit kee aa rors: passim

Sargent v. Paine Webber, Jackson & Curtis, Inc.,

687 F. Supp. 7 (D.D.C. 1988)..............+.58-- ee

(vii)

Page

Sargent v. Paine Webber, Jackson & Curtis, Inc.,

674 F. Supp. 920 (D.D.C. 1987).................. 1, 8,

Shearson/American Express, Inc. v. McMahon,

482 U.S. 220, 107 S. Ct. 2332 (1987)..... 11-13, 17, 18,

Shearson Loeb Rhoades, Inc. v. Much,

C.A. No. 81-4225 (N.D. Ill, Jan. 3, 1983)

(unreported), appeal dismissed,

Coe ae Be ee ee ne

Siegel v. Titan Indus. Corp.,

179 F 26 Bi (2d Cir. 1985)............: 16, 17, 19, 20,

Sobel v. Hertz, Warner & Co.,

469 F.2d 1211 (2d Cir. 1972)......... 8, 19, 21, 24, 27,

Svoboda v. Negev Assoc., Inc.,

Goo ©. Supp. 1300 G.D..Y. W067)... oo os ce cw en ece

Tinaway v. Merrill Lynch & Co.,

692 F. Supp. 220 (S.D.N.Y. 1988).............. 19, 21,

United Steelworkers v. American Mfg. Co., .

RR er er eer ane

United Steelworkers v. Enterprise Wheel and Car Corp.,

Ae a ee So ku Ck ee es a 12-14, 16,

Wilko v. Swan,

wee es Gt Cl AS 6, 8, 11-13, 17,

Other

14A C. Wnght, A. Miller & E. Cooper,

Federal Practice and Procedure: Jurisdiction 2d

TF ieee Oy ery Peron wire hey Lene Res 12,

25

26

24

28

19

22

12

21

24

13

IN THE

Supreme Court of the United States

October Term, 1989

No. 89-1144

ERNEST E. SARGENT and CYNTHIA SARGENT,

Petitioners,

V.

PAINEWEBBER INCORPORATED and KEVIN GREENAN,

Respondents.

BRIEF OF RESPONDENTS PAINEWEBBER

INCORPORATED AND KEVIN GREENAN IN

OPPOSITION TO PETITION FOR A WRIT OF

CERTIORARI TO THE UNITED STATES COURT OF

APPEALS FOR THE DISTRICT OF COLUMBIA

CIRCUIT

OPINIONS BELOW

The opinion of the United States Court of Appeals for the

District of Columbia Circuit in Sargent v. Paine Webber, Jackson

& Curtis, Inc. is reported at 882 F.2d 529 (D.C. Cir. 1989)

and is reprinted at pp. la-20a of the Appendix to the Petition

for a Writ of Certiorari. The two opinions of the United Staies

Distnet Court for the Distnet of Columbia, granting petitioners’

motion to vacate the arbitration award and denying

respondents’ motion for reconsideration, are, respectively,

reported at 674 F. Supp. 920 (D.D.C. 1987) and 687 F. Supp.

2

7 (D.D.C. 1988) and reprinted at pp. 40a-52a and pp. 21a-39a

of the Appendix.

JURISDICTION

Petitioners invoked the jurisdiction of this Court pursuant

to 28 U.S.C. § 1254(1).

STATUTE INVOLVED

This case involves subsection (d) of section 10 of the Federal

Arbitration Act, 9 U.S.C. § 10. Section 10 in full is as follows:

In either of the following cases the United States court in

and for the district wherein the award was made may mahe

an order vacating the award upon the application of any party

to the arbitration —

(a) Where the award was procured by corruption, fraud

or undue means.

(b) Where there was evident partiality or corruption in the

arbitrators, or either of them.

(c) Where the arbitrators were guilty of misconduct in

refusing to postpone the hearing, upon sufficient cause shown,

or in refusing to hear evidence pertinent and material to the

controversy; or of any other misbehavior by which the rights

of any party have been prejudiced.

(d) Where the arbitrators exceeded their powers, or so

imperfectly executed them that a mutual, final, and definite

award upon the subject matter submitted was not made.

(e) Where an award is vacated and the time within which

the agreement required the award to be made has not expired

the court may, in its discretion, direct a rehearing by the

arbitrators.

3

STATEMENT OF THE CASE

The Petition for a Writ of Certiorari is the latest, and prop-

erly the final, stage of petitioners’ five-plus-year effort to

litigate with respondents over the alleged negligent mis-

management of petitioners’ brokerage account by Paine Web-

ber, Jackson & Curtis, Inc., now doing business as PaineWeb-

ber Incorporated, and certain of its personnel.

Petitioners obtained a $46,000 award in arbitration on August

19, 1986. By certiorari, petitioners would have this Court fur-

ther extend their long-running effort by vacating the award,

remanding it to the arbitrators and ordering the panel of ar-

bitrators, appointed by the New York Stock Exchange

(‘‘NYSE"’) pursuant to the agreement between petitioners

and respondents to arbitrate their disputes, to file with the

District Court a memorandum providing ‘‘a full explanation

of the manner in which damages were computed,’’ in the

absence of any facts suggesting that the arbitrators indulged

in any disregard of the law, in the absence of any grounds mak-

ing it appear probable that the arbitrators committed error and

in the absence of any reason to believe that petitioners were

denied a full opportunity to present their claim, were denied

full and bona fide consideration by the arbitrators or other-

wise were, in any way, harmed by the arbitration process.

Nothing in the law of arbitration, and nothing in the record,

justifies this action.

FACTS AND PROCEEDINGS

On September 18, 1984, petitioners Ernest E. Sargent and

Cynthia L. Sargent (together, ‘‘Sargent’’ or ‘‘petitioners’’)

filed in the District Court a ‘‘Complaint for Negligent Manage-

ment of Investment Account and Breach of Fiduciary Duty’’

against Paine Webber, Jackson & Curtis, Inc. and certain of

its employees (together, ‘‘PaineWebber”’ or ‘‘respondents’’).

4

PaineWebber moved to stay proceedings on the complaint

in the District Court pending arbitration pursuant to the ar-

bitration clause of the customer agreement between Paine-

Webber and Sargent. In response, Sargent elected to proceed

to arbitration and did not oppose PaineWebber’s motion.

Sargent then filed a virtually identical complaint (the *‘Com-

plaint,’’ appended to this brief at pp. 1a-8a) before the NYSE.

According to the Complaint, Sargent transferred existing

brokerage accounts to PaineWebber in August 1983. Prior to

switching his accounts to PaineWebber, Sargent had maintain-

ed, and had purchased securities in, accounts at two brokerage

firms, Merrill Lynch and Anderson & Strudwick. The transfer-

red accounts included common stock and also riskier put

and call options of Coleco Industries. Complaint { 13.

As testimony in the arbitration proceeding also made clear,

Coleco securities were a particularly risky investment, a fact

which was known to Sargent. The market value of the securi-

ties in Sargent’s accounts had decreased during the period

that Sargent had been trading through the two antecedent

brokerage firms and continued to decrease after the transfer

to PaineWebber. Jd.

To avoid further financial loss, Ernest Sargent, an account-

ant, ‘‘decided on a cost averaging plan’’ based on his own

knowledge of the market, involving hedging his existing port-

folio of Coleco securities through additional purchases of

Coleco stock in a ceclining market. /d. Sargent informed

PaineWebber of the manner in which he intended to trade his

securities and thereafter ‘‘instructed’’ and ‘‘directed’’ various

PaineWebber personnel to make purchases in the market in

furtherance of his cost averaging plan. Jd. 44 15-17, 20, 23.

Sargent’s cost averaging plan, entailing continuous, additional,

speculative purchases of Coleco securities over a five-month

period, failed.

5

In the Complaint, Sargent did not complain that PaineWeb-

ber had been responsible for counseling or directing Sargent’s

transactions in Coleco securities pursuant to his risky, self-

devised and self-directed ‘‘cost averaging plan.’’ Rather,

Sargent’s claim was based on PaineWebber’s alleged failure

to effect certain buys and sells in furtherance of the plan, as

conceived and directed by Sargent. Jd. 44 17, 20 and 23.

Sargent sought compensatory damages of $256,000, punitive

damages of $500,000 and other, incidental relief.

PaineWebber answered, denying Sargent’s allegations of

wrongdoing and raising eight affirmative defenses. Particularly,

PaineWebber alleged that Sargent was an experienced and

sophisticated investor; that Sargent’s own conduct had caus-

ed or contributed to the claimed losses; that Sargent had full

knowledge of the transactions and with that knowledge had

allowed matters to proceed; that Sargent had authorized and/or

ratified the transactions in his account; that the demand for

punitive damages was improper as a matter of law: and that

the Complaint failed to state a claim on which punitive damages

could be awarded.

With the assistance of counsel, Sargent aggressively and

fully prosecuted his claim in arbitration. The hearing cov-

ered three days. Sargent was given the opportunity to pre-

sent his case fully through both documentary and testi-

monial evidence, including expert testimony. At the time,

Sargent made no claim of unfairness, impropriety or error in

the conductof the arbitration hearings. Particularly, Sargent

never objected to being heard before three (versus five) ar-

bitrators and otherwise never made either the arbitrators or

PaineWebber aware of any discontent with the number or com-

position of the panel. Such is implicitly conceded in the Peti-

tion, at 16-17.

Although (1) Sargent had brought to PaineWebber existing

6

accounts of securities, including risky put and call options in

speculative securities; (2) Sargent had ‘‘directed’’ his own cost

averaging plan with respect to his account, including direc-

tion of the purchases of thousands of dollars of Coleco securi-

ties in an uncertain and declining market; (3) Sargent did not

complain initially of any PaineWebber culpability in making

these purchases; and (4) over the five-month period in ques-

tion, Sargent had received full and timely notice of the trans-

actions, yet continued his cost averaging program without

surcease, on August 19, 1986 the arbitrators awarded Sargent

a total lump sum of $46,000, $43,000 against the firm Paine-

Webber and $3,000 against broker Kevin Greenan individ-

ually.

Pursuant to the NYSE rules and long-standing, accepted ar-

bitration practice, the arbitrators were under no obligation to

explain the basis for the determination that Sargent was en-

titled to an award of $46,000.! Nor did any party request of

the arbitrators that they provide an explanation of their deci-

sion. Furthermore, because neither Sargent nor PaineWeb-

ber had requested that a verbatim record be kept, none was.

Consequently, the August 19, 1986 majority arbitration

decision’ stated as follows:

(I]n full and final settlement of the above-referenced

matter, respondent Painewebber shall pay to the

claimants the sum of $43,000.00 and respondent

Kevin Greenan shall pay claimants the sum of

$3,000.00, and further, upon claimants request and

with the consent of respondents the claims of the

See Wilko v. Swan, 346 U.S. 427, 436 (1953), and its progeny, including

the instant case

2T wo arbitrators signed the award. The third arbitrator dissented, favor-

ing no award at all.

7

claimants against respondents Bruce Edgington, C.

Jordan Ball and Joan Doyle are in all respects dis-

missed.

Sargent was dissatisfied with this award. He moved to vacate

in the District Court in a document entitled ‘‘Motion to Vacate

Arbitration Award and for Reconsideration of Damages and

Complaint for Punitive Damages.’’ Sargent’s Motion indicated

quite clearly that the primary basis was his perception that

the one white member of the three-person arbitration panel

(who had dissented from the award) was so biased against

Sargent, a black, that the white arbitrator successfully had in-

fluenced the two black members of the arbitration panel to

award Sargent far less than the amount to which he was en-

titled: ‘‘[The white panel member] apparently intimidated the

two black non-member [1.e., not associated with the securities

industry] arbitrators and adversely affected the outcome of

the decision.’’ According to Sargent, he had the right to de-

mand of the New York Stock Exchange a panel of arbitrators

consisting of a black, a Jew and a female (Sargent’s ideal panel

comprised three, not five, arbitrators), and because he did

not receive a panel of precisely that composition, the panel

he did receive was biased against hiin. Paine Webber opposed

Sargent’s motion and cross-moved for confirmation of the

award.

On December 8, 1987, ina Memorandum Order, the District

Court vacated the arbitration award, despite finding that the

panel was not biased against Sargent. The basis of the District

Court decision was the failure of the NYSE panel to set forth

an explanation for its $46,000 award. Despite the rule, recog-

nized by the District Court, that the NYSE arbitration panel

was under no obligation to explain its decision, the District

Court concluded that the award was ‘‘ambiguous”’ and “‘il-

lusory’’ without an explanation of how the arbitrators had ar-

rived at $46,000 and that it was impossible to determine

8

whether the Court should enforce the award without an ex-

planation of how it had been reached. Therefore, the Court

vacated the award, remanded the dispute back to the ar-

bitrators and ordered the arbitrators to file a memorandum

with the Court providing a ‘‘full explanation of the manner in

which damages were computed .. . ."’ The Court gave the

arbitration panel forty-five days in which to complete this task.

Sargent v. Paine Webber, Jackson & Curtis, Inc., 674 F. Supp.

920, 923 (D.D.C. 1987).

PaineWebber moved for reconsideration of the District

Court's decision. Meanwhile, the forty-five day period pass-

ed without appearance or responsive action by the NYSE or

the arbitrators. On May 10, 1988, in a second Memorandum

Order, the District Court denied PaineWebber’s motion for

reconsideration and reiterated its order of vacatur and remand

and that the NYSE arbitration panel file with the Distnct Court,

this time by July 1, 1988, a full explanation of the manner in

which damages were computed. Sargent v. Paine Webber,

Jackson & Curtis, Inc., 687 F. Supp. 7, 11 (D.D.C. 1988).

Once again, neither the NYSE nor the arbitrators took respon-

sive action.

PaineWebber appealed. The Court of Appeals unanimously

reversed, ordering that the District Court grant PaineWeb-

ber’s motion to confirm the award. Sargent v. PaineWebber,

Jackson & Curtis, Inc., 882 F.2d 529, 533 (D.C. Cir. 1989).

On the principal points, the Court of Appeals held:

1. A lump-sum arbitration award cannot be rejected for want

of an explanation or remanded for an explanation in the absence

of facts making it appear probable that the arbitrators com-

mitted an error justifying vacation of the award, citing Wilko

v. Swan, 346 U.S. 427, 436 (1953), Sobel v. Hertz, Warner

& Co., 469 F.2d 1211, 1215 (2d Cir. 1972), Koch Oil, S.A.

v. Transocean Gulf Oil Co., 751 F.2d 551, 554 (2d Cir. 1985),

9

and Moses H. Cone Memonal Hospital v. Mercury Construc-

tion Corp., 460 U.S. 1, 24 (1983). 882 F.2d at 532.

2. There was nothing to suggest that the arbitrators had

indulged in any disregard of the law. Jd.

3. The record provided a basis for the arbitrators’ award.

from which “‘it seem[ed] likely that . . . the arbitrators ap-

portioned blame to both sides and calculated the award ac-

cordingly.”’ Jd.

4. Sargent’s suggestion that the arbitrators had not prop-

erly resolved the punitive damages issue was “utterly fan-

ciful.’’ Jd. at 533.

Sargent’s petition for reconsideration and rehearing en banc

was denied, and the instant petition for a writ of certiorari

followed.

10

THIS COURT SHOULD DENY THE PETITION FOR

A WRIT OF CERTIORARI

1. The Petition Should Be Denied Because (A)

Petitioners Have Alleged At Most A Pro-

cedural, Not Substantive, Error By The

NYSE Arbitration Panel With Respect To

An NYSE Rule; (B) The NYSE Rules Pro-

vide That The Arbitrators Are To Interpret

And Apply The Rules; (C) Petitioners Did

Not Raise Their Procedural Objection And

Claim Of Rule Violation With The Arbitra-

tors; (D) Petitioners Have Failed To Show

That The Rule Was Not Applied Correctly;

and (E) Petitioners Have Failed To Show

Any Harm.

A. Petitioners Complain Of A Procedur-

al Violation Only Under NYSE Rules.

Petitioners’ main complaint is that under NYSE Rule 607

(the cited NYSE rules are appended to this brief at pp. 9a-10a),

they were entitled to a panel of five arbitrators, not the three

to whom petitioners presented their case. See Petition at 1,

Question 1, 16-17, 39-41. The argument is that Rule 607 pro-

vides for five arbitrators in controversies of $500,000 or more

unless the parties agree otherwise, and that while petition-

ers’ total losses and compensatory damages claim were under

$300,000, their $500,000 punitive damages claim made this

an $800,000 controversy and thus caused the five-arbitrator

provision to be invoked.

Even were petitioners correct, and they are not, they have

not stated grounds for this Court to grant the requested peti-

tion. Petitioners do not claim that there was any substantive

error or misapplication of law. They do not argue that the ar-

bitrators misperceived or misapplied the law of negligence,

11

breach of fiduciary duty or breach of contract, or even of the

Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq.,

which was not an express basis for the Complaint. Rather,

petitioners argue only that there was procedural error, that

under NYSE Rule 607 the case should have been heard by

two more persons. It is, however, axiomatic that this Court,

and indeed the lower federal courts as well, will not sit in judg-

ment over these procedural issues. See John Wiley & Sons,

Inc. v. Livingston, 376 U.S. 543, 557 (1964):

Once it is determined . . . that the parties are

obligated to submit the subject matter of a dispute

to arbitration, ‘‘procedural’’ questions which grow

out of the dispute and bear on its final disposition

should be left to the arbitrator.

See also Wilko v. Swan, supra at 436 (footnote omitted):

As their award may be made without explanation of

their reasons and without a complete record of their

proceedings, the arbitrators’ conception of the legal

meaning of such statutory requirements as ‘‘burden

of proof,’’ ‘‘reasonable care’’ or ‘‘material fact’’

. . cannot be examined.

Effectively, petitioners would have this Court vastly expand

the federal courts’ limited power to vacate arbitration awards.

See Shearson/Amencan Express, Inc. v. McMahon, 482 U.S.

220, ___, 107 S. Ct. 2332, 2340 (1987). Petitioners want

the Court of Appeals’ decision reversed, and the District

Court's vacatur and remand reinstated, on the basis of an alleg-

ed deviation from NYSE Rule 607. In other words, petitioners

seek adoption of the principie that federal courts must examine

arbitrators’ and arbitral forums’ procedural determinations and

must vacate awards, and remand for explanation, whenever

federal courts are uncertain about the interpretation and ap-

plication of the forum's procedural rules.

12

This is directly contrary to the well established limitations

on federal court review powers set down by statute in the

Federal Arbitration Act and by case law in such cases as Wilko

and McMahon. There is no warrant in this case to grant cer-

tiorari to overthrow these established limitations.

Even were this Court to open its doors to review of such

procedural uncertainties, thereby converting those doors to

floodgates, this Court should not do so where, as here, review

necessarily involves consideration of the merits. Federal courts

simply should not, and will not, delve into the merits of an

arbitration. John Wiley & Sons, Inc. v. Livingston, supra at

557. See United Steelworkers v. American Mfg. Co., 363 U.S.

564, 568 (1960): ‘‘The Courts . . . have no business weighing

the merits... .’’; United Steelworkers v. Enterprise Wheel

and Car Corp., 363 U.S. 593, 599 (1960): ‘‘It is the ar-

bitrator’s construction which was bargained for . . . the courts

have no business overruling him because their interpretation

._ is different from his.”’

In order to determine whether or not the procedure em-

ployed in petitioners’ arbitration conformed to NYSE Rule 607,

the reviewing court will have to explore and assay the delibera-

tions and conclusions of the NYSE arbitration department and

arbitrators regarding whether petitioners met the ‘‘matter in

controversy” or ‘‘amount in controversy’’ tests of Rule 607.

This review will require judicial consideration of both the merits

of petitioners’ compensatory and punitive damages claims and

the application of the NYSE’s standards regarding the value

of the matter in controversy to those claims, in order to deter-

mine the correctness of the NYSE’s decision on the number

of arbitrators. Cf. 14A C. Wright, A. Miller & E.Cooper,

Federal Practice and Procedure: Junsdiction 2d \ 3702 at

23-25.

The NYSE must be accorded wide discretion in deter-

13

mining whether petitioners’ punitive damages claim was to

be included in the matter in controversy and whether the

claim, if it were to be included, was sufficient to meet the

five-arbitrator threshhold. Such discretion includes the right

to exclude punitive damages altogether from the value of the

matter in controversy. See id. at nn. 21 and 63.

Certiorari is particularly inadvisable in this case simply to

inquire into NYSE procedural standards and discretionary

determinations regarding their applicability. See Shearson/

Aniencan Express, Inc. v. McMahon, supra at ___, 107 S.

Ct. at 2340, citing Wilko v. Swan, supra at 436-37:

Finally, Wilko noted that the ‘‘[p]ower to vacate an

award is limited,’’ and that ‘‘interpretations of the

law by the arbitrators in contrast to manifest disre-

gard are not subject, in the federal courts, to judicial

review for error in interpretation.”’

Finally, and most fundamentally, this Court should not open

up Judicial review of the NYSE’s decision on the number of

arbitrators because that decision has nothing to do with ar-

bitrability of this matter or the NYSE’s power to arbitrate this

matter. These issues were determined previously by peti-

tioners and respondents in their written agreement to arbitrate

all disputes, subject to petitioners’ choice of forum (petitioners

chose the NYSE). That is, the source — the sole source —

of the arbitrators’ jurisdiction or power is the parties’ agree-

ment to arbitrate and their presentation to the arbitrators. See,

e.g., United Steelworkers v. Enterprise Wheel and Car Corp.,

supra at 598; Ficek v. Southern Pacific Co., 338 F.2d 655,

657 (9th Cir. 1964), cert. denied, 380 U.S. 988 (1965).

So much is evident from Rule 607. The Rule itself is titled

‘Designation of Number of Arbitrators’’ and clearly sets out

only the number of arbitrators, not the basic question of power

to arbitrate. Moreover, the Rule expressly contemplates

14

agreements by the parties to limit the number of arbitrators,

indicating that the parties’ agreement, not the Rule, is the

genesis of the forum’s jurisdiction. See United Steelworkers

v. Enterprise Wheel and Car Corp., supra at 599.

B. The NYSE Rules, By Which Peti-

tioners Agreed To Be Bound, Lodged

Sole Authority For the Interpretation

And Application Of NYSE Rules In

The Arbitrators.

Petitioners agreed to proceed under the NYSE Rules and

to be bound by the arbitrators’ decisions on and under the

Rules. See United Steelworkers v. Enterprise Wheel and Car

Corp., supra at 599. NYSE Arbitration Rule 622 expressly

provides:

The arbitrators shall be empowered to interpret and

determine the applicability of all provisions under this

Code which interpretation shall be final and binding

upon the parties.

Petitioners in effect now want this Court to abrogate their

agreement or, alternatively, to vitiate this Rule so as not to

be bound by it. Neither this subject matter nor the relief sought

is appropriate for certiorari.

C. Petitioners Did Not Raise Their Pro-

cedural Objection And Claim Of Rule

Violation With The Arbitrators.

Even were petitioners persuasive that as a matter of prin-

ciple, the restrictions on judicial review of arbitration awards

should be forsaken to allow vacatur and remand because of

an alleged error in the number of arbitrators, petitioners can-

not succeed because they never brought their objection to the

15

attention of the arbitrators (or of PaineWebber). By proceeding

before the three arbitrators, and submitting their claim for deci-

sion to the three arbitrators, without objecting to or other-

wise informing the panel of the objection to its composition,

petitioners waived their right to challenge the number of ar-

bitrators in court. On this, the federal courts are uniform. See,

e.g., Moseley, Hallgarten, Estabrook & Weeden, Inc. v. Ellis,

849 F.2d 264, 267-69 (7th Cir. 1988); Comprehensive Account-

ing Corp. v. Rudell, 760 F.2d 138, 140-41 (7th Cir. 1985),

aff'd, 802 F.2d 926, cert. denied, 480 U.S. 907 (1987); Ficek

v. Southern Pacific Co., supra at 657. For a case on point on

closely analogous facts, see Peters Fabrics, Inc. v. Jantzen,

Inc., 582 F. Supp. 1287, 1291-92 (S.D.N.Y. 1984). Accor-

dingly, there is no reason for this Court to grant certiorari.

D. Petitioners Fail To Show That NYSE

Rule 607 Was Not Applied Correctly.

Petitioners simply assume that because (1) their Complaint

sought a total of $756,000 in compensatory and punitive

damages and (2) NYSE Rule 607 provides for three arbitra-

tors where the ‘‘matter in controversy”’ is less than $500,000

but for five arbitrators where the ‘‘amount in controversy”’

is $500,000 or greater, petitioners were absolutely entitled

to five arbitrators under Rule 607. That is not necessarily the

case. NYSE Arbitration Rules do not state that punitive dam-

ages Claims (or claims for treble damages, interest, attorneys

fees, costs or other similar relief) are, or must be, included

in valuing the ‘‘matter in controversy”’ or ‘‘amount in contro-

versy’’ for purposes of Rule 607.3 NYSE arbitration officials

‘The use first, in Rule 607(a), of ‘‘matter in controversy,’’ rather than

‘‘amount in controversy,’’ as the operative criterion indicates that peti-

tioners’ simple equation that total damages sought equals the determinative

figure under Rule 607 is incorrect. Rather, consistent with the underlying

notion of arbitration, the arbitrators are to bring and apply their ex-

16

and/or the arbitrators readily could have found that the value

of the matter in controversy was the compensatory damages

claim, without the punitive damages amount included. Indeed,

that determination would have been facially correct, as the

Complaint was for negligence, breach of fiduciary duty and

breach of contract, theories of relief which in and of themselves

do not permit recovery of punitive damages. Mere invocation

of the magic words for punitive damages is not a token guar-

anteeing that amount in controversy requirements have been

met, even under the liberal pleading standards of the Federal

Rules of Civil Procedure. See Kahal v. ].W. Wilson & Assoc.,

Inc., 673 F.2d 547 (D.C. Cir. 1982).

Because it is possible, even likely, that NYSE arbitration

personnel and/or the arbitrators applied Rule 607 correctly,

federal courts cannot second guess or disturb the arbitration.

See, e.g., French v. Mernill Lynch, Puerce, Fenner & Smith,

Inc., 784 F.2d 902, 908 (9th Cir. 1986), citing, inter alia, Moses

H. Cone Memonal Hospital v. Mercury Construction Corp.,

supra at 24-25; Siegel v. Titan Indus. Corp., 779 F.2d 891,

893, 894 (2d Cir. 1985). This refusal to intervene is especially

appropriate where petitioners have shown nothing harmful,

or even untoward, in the application of the Rule or in the ar-

bitrators’ actions.

Even were such a plausible, and likely correct, application

of Rule 607 not discernible from the record, and even were

the misinterpretation of Rule 607 evident from the record, that

would not permit a federal court to disturb the award. Errors

in the interpretation or application of law by arbitrators, ‘‘in

contrast to manifest disregard’’ of the law, ‘‘are not subject,

perience, expertise and judgment, when asked, to the issue of the value

of the matter in controversy. See generally United Steelworkers v. Enter-

prise Wheel and Car Corp., supra at 597; Florasynth, Inc. v. Pickholz,

750 F.2d 171, 173-74 (2d Cir. 1984).

17

in the federal courts, to judicial review... ."’ Wilko v. Swan,

supra at 436-37. See French v. Mernll Lynch, Pierce, Fenner

& Smith, Inc., supra at 906 (citations omitted):

‘*The rule is, though the ‘arbitrators’ view of the

law might be open to serious question, . . . [an

award] which is within the terms of the submission,

will not be set aside by a court for error either in

law or fact’... .’’

‘*Manifest disregard’’ of the law exists only where the ar-

bitrators plainly understand and correctly state the law, but

proceed to ignore it nonetheless. Stegel v. Titan Indus. Corp.,

supra at 893; Fairchild & Co. v. Richmond, Fredericksburg

and Potomac R. Co., 516 F. Supp. 1305, 1315 (D.D.C. 1981).

Petitioners do not make any showing whatsoever that the ar-

bitrators were consciously aware of a principle of law but

disregarded it nevertheless. As is evident from the two District

Court opinions below, and as the Court of Appeals expressly

found, petitioners have never made a showing of manifest

disregard of the law, 1.e., have never presented the key to

unlock the door of substantive federal court review, let alone

to invite the extreme remedy of vacatur and remand. Sargent

v. Paine Webber, Jackson & Curtis, Inc., supra, 882 F.2d at

532.

Moreover, this Court has made it clear that the attention

of the federal courts in this respect is to be focused on

‘substantive nghts."’ Shearson/Amencan Express, Inc. v.

McMahon, supra at ____, 107 S. Ct. at 2340, citing Mitsubishi

Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614,

628, 633-34 (1985). Petitioners point to no trenching of any

substantive nght, whether or not the result of ‘‘manifest

disregard’’ of the law. Nor is there any to be found in this case.

18

E. Petitioners Fail To Show Any Harm

Resulting From Any Alleged Incorrect

Interpretation Or Application Of Rule

607.

Petitioners do not show any harm, prejudice or unfairness

which resulted from the alleged erroneous interpretation or

application of NYSE Rule 607. Before the judicial interven-

tion into the arbitration process sought by the Petition is

justified, petitioners must show harm or unfairness. See, ¢.g.,

Fairchild & Co. v. Richmond, Fredericksburg and Potomac

R. Co., supra at 1314 (citations omitted):

The error which would constitute misconduct so as

to justify vacating an award must not simply be an

error of law, but one which so affects the rights of

a party that it may be said to deprive him of a fair

hearing.

The logic of requiring that palpable, substantial harm or un-

fairness result before a court will vacate an arbitration award

has been a constant theme of this Court from at least Wilko

v. Swan in 1953 through Rodriguez de Quijas v. Shearson/

Amencan Express, Inc., 109 S. Ct. 1917 (1989). See Shearson/

Amencan Express, Inc. v. McMahon, supra at ___, 107 S.

Ct. at 2340.

Arbitration is intended to relax the procedures, limitations

and expenses of court actions. Arbitrators are intended to have

wide discretion in conducting hearings, and the resulting

awards are immune from judicial review even if the product

of erroneous interpretations of law or erroneous determina-

tions of fact. Thus, error alone will not cause an award to be

disturbed and should not give rise to certiorari. Here error

alone is all, at most, that petitioners argue. The Court of Ap-

peals below was wholly correct and in line with the decisions

of this Court, and of every other court, when it ruled:

19

We reject the idea that a lump-sum award can be

rejected . . . in the absence of facts making it ap-

pear probable that the arbitrators committed an

error justifying vacation of the award.

Sargent v. Paine Webber, Jackson & Curtis, Inc., supra, 882

F.2d at 532.

2. The Petition Should Be Denied Because The

Lump-Sum Award Was Clear, Uncondi-

tional And Unambiguous And Was Based On

Grounds Inferrable From The Record.

A. The Award Was Clear And Unambigu-

ous.

Never in the reported history of federal court review of ar-

bitration awards has a lump-sum award, such as the one in

this case, ultimately been vacated and remanded for an ex-

planation. See, e.g., Siegel v. Titan Indus. Corp., supra at

893-95; Koch Oil, S.A. v. Transocean Gulf Oil Co., supra at

554; Kurt Orban Co. v. Angeles Metal Systems, 573 F.2d 739,

740-41 (2d Cir. 1978); Sobel v. Hertz, Warner & Co., 469 F.2d

1211, 1216 (2d Cir. 1972); Ballantine Books, Inc. v. Capital

Distributing Co., 302 F.2d 17, 22 (2d Cir. 1962); Tinaway

v. Mernll Lynch & Co., 692 F. Supp. 220, 226 (S.D.N.Y.

1988); Atlanta-Tomberlin, Inc. v. Eastern Board of Cherokee

Indians, 672 F. Supp. 887, 889 (W.D.N.C. 1987): Svoboda

v. Negey Assoc., Inc., 655 F. Supp. 1329, 1333 (S.D.N.Y.

1987): Fairchild & Co. v. Richmond, Fredencksburg and

Potomac R. Co., supra at 1312-16. Despite the unanimity of

the courts refusing to second-guess arbitrators’ lump-sum

awards, and despite the explicit, definite and unambiguous

award of $46,000 ‘‘in full and final settlement’’ of all claims,

petitioners attempt to gain certiorari by questioning whether

the arbitrators decided petitioners’ punitive damages claim.

20

There is no cause to break from this history in this case.

Petitioners were awarded $46,000, $43,000 against Paine

Webber, Jackson & Curtis, Inc. and $3,000 against Kevin

Greenan, ‘‘in full and final settlement’ of petitioners’ claims.

Petitioners submitted their punitive damages claim to the ar-

bitrators voluntarily, openly and without reservation, see Com-

plaint € 22 and ad damnum clause 4 2, and tried the claim to

the arbitrators. Also, the punitive damages claim was clearly

within the terms of the submission, under both the arbitra-

tion agreement between Sargent and PaineWebber and the

Complaint. See French v. Mermill Lynch, Pierce, Fenner &

Smith, Inc., supra at 906; Kurt Orban Co. v. Angeles Metal

Systems, supra at 740-41; Point 1.A. above. Thus, there can

be no ambiguity as to whether the punitive damages claim was

considered and decided. It was.4

The $46,000 award itself is not ambiguous. It is a fixed,

definite sum. There is no condition or contingency to the

award, nor any unexplained or unanticipated condition or con-

tingency arising after or out of the award. There is no uncer-

tainty as to who gets what or as to what the District Court

was asked to confirm.

A mere failure to state the means by which the arbitrators

arrived at this clear and definite award, or to specify precise-

ly which of various theories or claims were successful and to

what extent, is not an ambiguity which requires explanation

or permits vacatur and remand. See Siegel v. Titan Indus.

Corp., supra at 893-94; Refino v. Feuer Transportation, Inc.,

‘Additionally, the award assessed the costs equally against the parties,

indicating the arbitrators’ view that both sides bore fault for the claimed

loss and that excessive damages were not justified. Also, this even split

of costs corroborates the Court of Appeals’ view that “‘it seems likely

that . . . the arbitrators apportioned blame to both sides... .”’ Sargent

v. Paine Webber, Jackson & Curtis, Inc., supra, 882 F.2d at 532.

21

480 F. Supp. 562, 565-66 n.3 (S.D.N.Y. 1979), aff'd, 633 F.2d

205 (2d Cir. 1980) (citing United Steelworkers v. Enterpnse

Wheel and Car Corp., supra at 598). Uniformly, it is well es-

tablished, following Wilko v. Swan, that arbitrators may render

lump-sum awards without any explanation at all, and the

absence of an explanation does not give cause for suspicion

or judicial inquiry. See, e.g., Koch Oil, S.A. v. Transocean Gulf

Oil Co., supra at 554; Atlanta-Tomberlin, Inc. v. Eastern

Board of Cherokee Indians, supra at 889; Fairchild & Co. v.

Richmond, Fredericksburg and Potomac R. Co., supra at

1315-16.

B. A Basis For The Award Is Inferrable

From The Record.

Petitioners repeatedly and emphatically argue that this Court

should grant certiorari to consider whether to vacate’and re-

mand the award because there was ‘‘no arbitration record

whatsoever”’ or ‘‘no arbitration record of any sort.’’ E.g.,

Petition at 29, 36. But petitioners are wrong on this point.

There is a record. The ‘‘record”’ is not limited to, and does

not require, the verbatim reproduction of the testimony and

other evidence at the hearing. The ‘‘record,’’ as Sobel v. Hertz,

Warner & Co., supra at 1215, and Tinaway v. Mermll Lynch

& Co., supra at 225-26, indicate, can be the written submis-

sions of the parties, including the complaint (or, as it is known

in arbitration, the statement of the claim). That record exists

in this case, and it is from that record that the Court of Ap-

peals found a ready, plausible basis for the award. Sargent v.

Paine Webber, Jackson & Curtis, Inc., supra, 882 F.2d at 553.

In fact, one need look no further than Sargent’s own Com-

plaint to the NYSE to find ample grounds for the award.

Sargent maintained that he decided on the ‘‘cost averaging

plan’’ to recoup already existing losses, that he informed

22

Paine Webber of the plan and that he instructed PaineWebber

on particular executions within that cost averaging plan. Com-

plaint 44 12-13. His particular complaint was that on five

discrete occasions (mid-September, October 20, November

25 and December 14, 1983 and January 1984), over a five-

month period, PaineWebber negligently failed to comply with

Sargent’s directions. Jd. 44 14-18, 20. During these five

months, Sargent rode the market, all the while receiving notice

of PaineWebber’s alleged failures. It is entirely possible, and

indeed likely, as the Court of Appeals found, that the ar-

bitrators found shared responsibility and apportioned blame.

Furthermore, it is also quite possible, on the basis of Sargent’s

own pleading, that the arbitrators placed limitations on claim-

ed losses due to ratification or acceptance by Sargent and his

continuation of his cost averaging plan.

The record of the case also contains PaineWebber’s answer

and defenses. It is clear from this pleading that PaineWebber

presented defenses of the fault and contributory fault of

Sargent and of Sargent’s awareness, authorization and ratifica-

tion of the actions complained of.

From this record the arbitrators may have concluded, per-

missibly, properly and in accordance with law, that PaineWeb-

ber was not entirely responsible for Sargent’s claimed losses,

that Sargent bore substantial responsibility for the losses or

that Sargent’s actual losses, régardless of responsibility, were

substantially less than the amount claimed. See Tinaway v.

Mermnll Lynch & Co., supra at 225-26.

What petitioners really decry is not the general lack of a

record from which a basis for the award may be gleaned, but

the absence of a verbatim transcript. That absence, however,

is petitioners’ fault, as well as a consequence of the speed

and thrift of the arbitration process. NYSE Arbitration Rule

624, captioned ‘‘Record of Proceedings,’’ provides:

23

Unless requested by the arbitrators or a party or

parties to a dispute, no record of an arbitration shall

be kept. If a record is kept, it shall be a verbatim

record. If a party or parties to a dispute elect to have

the record transcribed, the cost of such transcrip-

tion shall be borne by the party or parties making

the request.

No formal verbatim record was kept because Sargent did not

request one. Having bypassed the nght to a verbatim record

(and later transcription if desired), it is not now Sargent’s

prerogative to rely on the absence of a formal, verbatim record

as grounds to vacate and remand the award. See Point 1.C.

above.

3. The Petition Should Be Denied Because (A)

There Is No Conflict Between Or Among The

Circuit Courts Of Appeals; And (B) Certiorari

Would Upset Long-Standing Federal Policy

Favoring Arbitration And Contravene The

Principles Of Speed And Thrift Underlying

That Federal Policy.

A. There Is No Conflict Between or

Among The Circuit Courts of Appeals.

Petitioners paint the decision below as conflicting with other

federal court decisions:

The Columbia Circuit is alone, and is in conflict with

five other circuits, in holding that a lump-sum award

is immune from all judicial remand for explanation

of how damages were computed where there is no

arbitration record of any sort from which support for

or understanding of the award may be gleaned, ab-

sent probability of manifest disregard of the law ap-

pearing from the (non-existent) record or failure of

facts to support It.

24

Petition at 36. This portrayal of the Court of Appeals’ deci-

sion is imprecise and inaccurate and in truth, there is no

conflict.

The Court of Appeals expressly followed precedent from

this Court and from the Court of Appeals for the Second Cir-

cuit in reaching its decision. Following Wilko v. Swan, the

Court of Appeals acknowledged that arbitral awards may be

made without explanation. 882 F.2d at 532. Following Moses

H. Cone Memonal Hospital v. Mercury Construction Corp.,

the Court of Appeals found that the requirement of an explana-

tion for arbitration awards would unjustifiably undermine the

speed and thrift manifested by the federal policy favoring ar-

bitration. Jd. Following Sobel v. Hertz, Warner & Co., Koch

Oil, S.A. v. Transocean Gulf Oil Co. and Stegel v. Titan In-

dus. Corp., the Court of Appeals held that lump-sum awards

could not be rejected for want of an explanation in the absence

of an indication of probable error justifying vacation of the

award. Jd. at 532, 533. Following Sobel and Koch Oil, S.A.,

the Court of Appeals found that a lump-sum award could not

be vacated if grounds for it could be gieaned from the record

and that the necessary gleaning was normally possible as long

as the record disclosed a permissible route to the stated con-

clusion. Jd. at 532.

Thusly stating the applicable standards, the Court of Ap-

peals was wholly in line with every other decision on the sub-

ject cited by petitioners and of which respondents are aware.°®

The Court of Appeals then examined the record, particularly

Sargent’s Complaint before the NYSE, and found a plausible,

permussible ‘‘route to the stated conclusion,’’ namely that the

*Though unstated in the decision, the Court of Appeals also was in com-

plete harmony with a pnor decision of its own, Hale v. Fnedman, 281

F.2d 635 (D.C. Cir. 1960).

a

25

facts indicated the likelihood of shared fault and the award

reflected this likelihood. The Court of Appeals also found that

there was no ambiguity as to the meaning of the award, with

petitioners’ suggestion that the panel may not have decided

the punitive damages claim ‘‘utterly fanciful’’ in the face of

petitioners’ own facts as alleged in the Complaint and the plain

words of the ‘‘full and final’ award. Jd. at 532-33.

In all but three cases cited by petitioners, remand was

denied, consistent with the Court of Appeals’ decision below.

In the remaining three cases, an award was remanded but not

for ‘‘a full explanation of the manner in which damages were

computed,’’ as the District Court here ordered. Sargent v.

Paine Webber, Jackson & Curtis, Inc., supra, 687 F. Supp.

at 11 and 674 F. Supp. at 923. Rather, remands were neces-

sary to clarify or complete the award, so that the District Court

could determine what to enforce and how to enforce it.

In Olympia & York Florida Equity Corp. v. Gould, 776 F.2d

42 (2d Cir. 1985), the award failed to deal completely with

a material contingency to the award, created by the arbitrators.

When the contingency failed, the reviewing court could only

speculate on what to enforce and how to enforce, and so it

sought the arbitrators’ assistance on a remand as to what they

had intended upon the failure of the material contingency. As

the Second Circuit stated, the remand ‘‘simply provides an

expeditious means for dealing with . . . a casus omissus in the

Award.”’ Id. at 45.

In Galt v. Libbey-Owens-Ford Glass Co., 397 F.2d 439 (7th

Cir.), cert. denied, 393 U.S. 925 (1968), the Distnct Court

was unable to discern from the award or the record if the ar-

bitrators had considered whether a maternal payment clause

had been subject to arbitration under the arbitration agree-

ment. The District Court asked this question of the arbitrators,

who responded that the payment clause had not been within

a

26

the purview of the arbitration agreement. With this response,

the District Court confirmed the award, leaving the nonar-

bitrable issue for judicial resolution. This decision was affirm-

ed by the Court of Appeals. 397 F.2d at 441-42, 443.

In Shearson Loeb Rhoades, Inc. v. Much, C.A. No. 81-4225

(N.D. Ill. Jan. 3, 1983) (unreported), appeal dismissed, 754

F.2d 773 (7th Cir. 1985), the District Court enforced the ar-

bitrator’s finding of liability but remanded for a recalculation

of damages because the original award was not based on

anything in the record but rather on ‘‘ ‘sheer speculation.’ ’’

754 F.2d at 775. The Court of Appeals did not reach the merits

of the appeal. However, in Galt the Seventh Circuit had set

out as a general standard for judicial review that questions of

arbitrability ‘‘will not be disturbed if there is any basis

therefor,’’ 397 F.2d at 442 (citations omitted). The District

Court’s inability in Much to find any basis in the record for

the damages is consistent with this standard, substantially

similar to the standard articulated and applied by the Court

of Appeals below.

B. Certiorari Would Upset The Long-

Standing Federal Policy Favoring Ar-

bitration And Contravene The Prin-

ciples Of Speed And Thrift Underiying

That Policy.

Federal policy favoring arbitration, and particularly favor-

ing the ‘‘simplicity, informality, and expedition of arbitration’ ’

over ‘‘the procedures and opportunity for review of the court-

room,’’ is thoroughly embedded in this Court’s decisions on

arbitration. Mitsubishi Motors Corp. v. Soler Chrysler-

Plymouth, Inc., supra at 628. See Shearson/American Express,

Inc. v. McMahon, supra at___, 107 S. Ct. at 2340, and cases

cited therein. Courts of Appeals have expressly recognized

27

and deferred to that policy in their chary approach to judicial

invasion of the arbitrators’ domain. See, e.g., Sobel v. Hertz,

Warner & Co., supra at 1215:

But there is also a public interest manifested in the

United States Arbitration Act, 9 U.S.C. § let seq.,

in the proper functioning of the arbitral process. It

would be destructive of that process if we approv-

ed the district judge’s requirement here that the ar-

bitrators give reasons for their decision.

The Court of Appeals below, following this Court and the

Second Circuit, effected that policy in its decision:

But the absence of a duty to explain is presumably

one of the reasons why arbitration should be faster

and cheaper than an ordinary lawsuit. We thus agree

with the Second Circuit that an explanation require-

ment would unjustifiably undermine the speed and

thrift sought to be obtained by the ‘‘federal policy

favoring arbitration,’’ Moses H. Cone Memonal Hos-

pital v. Mercury Construction Corp., 460 U.S. 1, 24,

103 S. Ct. 927, 941, 74 L. Ed.2d 765 (1983).

Sargent v. Paine Webber, Jackson & Curtis, Inc., supra, 882

F.2d at 532.

Granting certiorari to review the arbitration in this case

would offend this federal policy. This case presents a com-

monplace, lump-sum award, based on faultless proceedings

and issued in customary form. On its face and mm its making,

it does not admit of, or even suggest, any error by the ar-

bitrators or disobedience to their duties of full and fair con-

sideration. Petitioners themselves show no error of substance,

no error impeaching the fairness of the process, no entrench-

ment on their rights to present their case or seek recompense.

To hold that this award must be reviewed, vacated, remand-

OO ————

28

ed and then reviewed again simply because the arbitrators did

not explain their reasoning would free no arbitration from this

multi-level review, save those awards accompanied by explana-

tions satisfactory to all. Either way, whether explanation is

necessitated initially or on remand, and whether new substan-

tive review by the federal courts follows the award directly

or indirectly, the purposes of arbitration will be defeated. There

will be no more speed, and no more thrift. This would grave-

ly disturb — if not_end — the arbitration process. See Sobel

v. Hertz, Warner & Co., supra at 1215 n.7.

CONCLUSION _

For the foregoing reasons, respondents PaineWebber In-

corporated and Kevin Greenan respectfully urge this Court

to deny the petition for a wnt of certiorari to the United States

Court of Appeals for the District of Columbia Circuit.

Respectfully submitted,

Harvey A. Levin

Counsel for Respondents

Umana & Levin P

1025 Thomas Jefferson St., N.W.

Suite 303 West

Washington, D.C. 20007

(202) 898-2600

Of Counsel:

Robert L. Salzberg

Associate General Counsel

PaineWebber Incorporated

1285 Avenue of the Americas

New York, New York 10019

DATED: February 22, 1990

EE

la

BEFORE THE ARBITRATION COMMITTEE

OF THE

NEW YORK STOCK EXCHANGE CORPORATION

ERNEST E. SARGENT

4711 Sargent Road N.E.

Washington, D.C. 20017 .

and

CYNTHIA L. SARGENT

140 35th Street N.E.

Washington. D.C. 20019

Claimants

v.

PAINE WEBBER JACKSON & CURTIS INC.

1120 20th Street N.W.

Washington. D.C.

and

KEVIN GREENAN

c/o PAINE WEBBER

1120 20th Street N.W.

Washington. D.C.

and *

BRUCE EDGINGTON

c/o Johnston Lemon & Co.. Inc. .

Atnum Building .

Alexandna, Virginia .

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and *

C. JORDAN BALL .

c/o PAINE WEBBER :

1120 20th Street N.W. .

Washington, D.C. .

and .

JOAN DOYLE .

c/o PAINE WEBBER .

1120 20th Street N.W. .

Washington, D.C. - .

Respondents .

CLAIM FOR NEGLIGENT MANAGEMENT OF

INVESTMENT ACCOUNT, BREACH OF

FIDUCIARY DUTY AND BREACH OF CONTRACT

Il. Nature of Claim

1. This claim is based on the respondents’ negligent

mismanagement of the claimants’ investment account and their

failure to execute orders to sell and purchase stock as directed

by claimants.

ll. Arbitration

2. The parties to this claim agreed to Arbitration

before the New York Stock Exchange pursuant to wnitten

agreements signed by the parties.

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Ill. Parties

3. Claimants, Ernest E. Sargent and Cynthia L.

Sargent, are residents of the District of Columbia and were

owners of certain securities managed by the respondents in

their capacity as stockbroker for claimants.

4. The respondent, Paine Webber Jackson & Curtis

Inc., a corporation, (hereinafter ‘‘Paine Webber’’) is a licensed

secunties broker with offices in New York, and in many states

of the United States, as well as in the District of Columbia.

Claimants are advised and believe that said respondent is

licensed by the District of Columbia to carry on its business

therein. At all times pertinent to this action, Paine Webber

was so engaged in the business of acting as broker for its

customers in the District of Columbia.

5. Respondent, Kevin Greenan, was. at all times per-

tinent to this action, employed by respondent Paine Webber

as an account executive, and acted as agent for respondent

Paine Webber at its place of business in the District of Col-

umbia. Defendant Kevin Greenan may hereinafter be refer-

red to as ‘‘Greenan.”’

6. Respondent, Bruce Edgington, was, at all times

pertinent to this action, employed by respondent Paine Web-

ber as an account executive. and acted as agent for respon-

dent Paine Webber at its place of business in the District of

Columbia. Defendant Bruce Edgington may hereinafter be

referred to as ‘‘Edgington.”’

7. Respondent, Jordan Ball, was, at all times perti-

nent to this action, employed by respondent Paine Webber

and acted as agent for respondent Paine Webber at its place

of business in the District of Columbia. Defendant Jordan Ball

may hereinafter be referred to as **Ball.’’

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8. Respondent, Joan Doyle, was, at all times perti-

nent to this action, employed by Paine Webber as an account

executive, and acted as agent for Paine Webber at its place

of business in the District of Columbia. Respondent Joan Doyle

may hereinafter be referred to as ‘‘Doyle.”’

IV. Statement of the Claim.

9. The allegations in paragraphs numbered 1-8 are

incorporated herein as if they were literally set forth again.

10. In approximately July of 1983, the claimant Ermest

E. Sargent (hereinafter ‘‘Sargent’’) transferred his investment

accounts to Paine Webber from two other brokerage houses,

after Greenan approached him and solicited his business.

Sargent’s daughter, Cynthia L. Sargent, was also named on

the Paine Webber account as joint tenant with nght of sur-

vivorship. The Sargents’ portfolio at this time included approx-

imately 400 shares of stock and approximately eight put and

call options thereon in Coleco Industries (hereinafter ‘‘Col-

-co"') as well as assorted other investments.

| 11. At all times pertinent to this claim, the

respondents were acting as the claimants’ duly appointed agent

for the purpose of conducting sales and purchases of corporate

stotks and put and call options thereon on behalf of claimants.

The respondents owed the claimants the duty to exercise

reasonable care, diligence and judgment on the claimants’

behalf.

12. The market value of the Coleco securities had

decreased since Sargent purchased them. To avoid any finan-

cial loss, Sargent decided on a ‘‘cost averaging plan’’ by which

he would purchase additional shares of Coleco stock at the

decreased market price to reduce his average cost basis in

all of his Coleco stock. When the average cost basis of the

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Coleco stock was equal or close to the market value, Sargent

planned to sell all of that stock thereby eliminating or reduc-

ing any financial loss.

13. In approximately September of 1983, Sargent in-

formed Greenan of his cost averaging plan. Sargent informed

Greenan that he was inexperienced in the options market and

would rely on Greenan’s expertise for options dealings.

Greenan responded that he understood Sargent’s cost averag-

ing plan, would manage the Coleco options accordingly, and

would trade the stock as directed by Sargent.

14. By mid-September 1983, Sargent had reduced

the average cost of his Coleco stock to approximately the then

prevailing market value. Sargent instructed Greenan to sell

all his Coleco stock if the market price dropped as much as

one-half point. Greenan said he understood, would watch the

daily market and sell if there was any drop. In violation of his

duty to claimants, Greenan failed to exercise due care or

diligence in monitoring Sargent’s account and failed to sell the

Coleco stock as directed by Sargent even though the Coleco

stock dropped about five points during the following week.

15. On October 18, 1983, in furtherance of his cost

averaging plan (which had to be put into action again because

of Greenan’s failure to sell the claimants’ stock and thus

eliminate any loss to claimants as alleged in paragraph 17

above [sic]), Sargent, through Greenan, purchased 1,000

shares of Coleco stock for $28,184.71, including commission.

16. In October of 1983, in violation of his duty to

claimants, Greenan negligently failed to advise Sargent that

certain option contracts for Coleco stock would be exercised

against Sargent on or about October 20, 1984. As a result,

Sargent was unable to anticipate and avoid this contingency

and was forced to purchase 400 shares of Coleco stock at ap-

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proximately $16.00 a share above the prevailing market price,

for a total of $18,296.50 including commission.

17. On November 25, 1983, in continued furtherance

of his cost averaging plan (which had been put into action again

because of Greenan’s failure to sell the claimants’ stock and

thus eliminate any loss to the claimants as alleged in paragraphs

17 and above [sic]), Sargent directed Edgington to purchase

3,000 shares of Coleco stock at the current market price of

$18.75 a share for a total of $56,250, excluding commission.

Edgington, who was acting for the vacationing Greenan, refus-

ed without just cause or reason in violation of the respondents’

duty as claimants’ agent to execute the purchase order on

Sargent’s behalf although Sargent had the money in his ac-

count for the transaction. As a direct result of Edgington’s

refusal to act, Sargent’s cost averaging plan was thwarted

because he was unable to reduce his average cost basis when

the market price of Coleco stock was low. He was then unable

to take advantage of the subsequent rise in the price of Col-

eco stock before Christmas 1983 to sell his Coleco stock with

little or no loss, because he had not been allowed to adequately

reduce his average cost basis.

18. On November 28, 1983, Jordan Ball assigned

Doyle to replace Greenan as Sargent’s individual account ex-

ecutive. On December 14, 1983, Doyle failed to exercise her

duty of reasonable care and judgment and (contrary to

Sargent’s investment objectives because the market price had

risen) purchased an additional 2,500 shares of Coleco at $25.00

a share for a total of $62,990.26 including commission.

19. In violation of its duty to claimants, Paine Web-

ber acting through Ball, failed and neglected to exercise pro-

per supervision and control over subordinate account ex-

ecutives by allowing them to neglect their duties to claimants.

20. In January of 1984, Sargent instructed Doyle to

sell the Coleco options as soon as possible. Doyle negligently

failed to sell those options in a prompt and efficient manner,

despite the fact that the market price continued to drop.

21. Asa direct result of the aforesaid actions, the

claimants lost at least $300,000, in Coleco stocks and put and

call options thereon, calculated as the difference between the

sum advanced by claimants for the purchase of said securities

and the sum received by them upon the final sale of said

securities, including brokerage commissions, plus interest. The

exact amount of claimants loss has not as yet been definitely

ascertained.

22. The negligence of respondents was gross and

wanton and claimants should recover therefore punitive

damages in the sum of $500,000 in addition to their compen-

satory damages in this action.

WHEREFORE, the premises considered, claimants

demand:

1. That an award be rendered in favor of claimants against

all respondents, jointly and severally, in the amount of Three

Hundred Thousand Dollars ($300,000) as compensatory

damages or such larger amount as shall be proved:

2. That an award be rendered in favor of claimants against

all respondents, jointly and severally, for the sum of Five Hun-

dred Thousand Dollars ($500,000) as punitive damages:

3. That claimants be awarded their arbitration costs, ex-

penses and attorneys fees; and

4. That the costs of the arbitration be borne by

respondents, jointly and severally.

a,

*

5. For such other and further relief as this arbitration com-

mittee deems just and proper.

~ Respectfully submitted,

REUSS HERNDON McCONVILLE & KING

By:

Mary L. Wilson

729 15th Street N.W. #800

Washington, D.C. 20005

202/393--8100

Attorney for Claimants

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NEW YORK STOCK EXCHANGE RULES

Rule 607. Designation of Number of Arbitrators

(a)(1) Except as otherwise provided in this Code in all ar-

bitration matters involving public customers and other non-

members where the matter in controversy does not exceed

the amount of $500,000, or where the matter in controversy

does not involve or disclose a money claim, the Arbitration

Director shall appoint an arbitration panel which shall consist

of no less than three (3) nor more than five (5) arbitrators,

at least a majority of whom shall not be from the securities

industry, unless the public customer or non-member requests

a panel consisting of at least a majority from the securities

industry.

(2) In all arbitration matters involving public customers and

other non-members where the amount in controversy is

$500,000 or more, the Director of Arbitration shall appoint

an arbitration panel which shall consist of five (5) arbitrators

unless the parties agree in writing to a panel of three (3) ar-

bitrators, at least a majority of whom shall not be from the

securities industry, unless the public customer or non-member

requests a panel consisting of at least a majority from the

securities industry.

Rule 622. Interpretation of Code

The arbitrators shall be empowered to interpret and deter-

mine the applicability of all provisions under this Code which

interpretation shall be final and binding upon the parties.

Rule 624. Record of Proceedings

Unless requested by the arbitrators or a party or parties

to a dispute, no record of an arbitration shall be kept. If a

a

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record is kept, it shall be a verbatim record. Ifa party or par-

ties to a dispute elect to have the record transcribed, the cost

of such transcription shall be borne by the party or parties

making the request.