Appendix — Zinsmeyer Trusts Partnership v. Paine Webber Group, Inc.

APPENDIXA

UNITED STATES COURT OF APPEA LS

FOR THE EIGHTHCIRCUIT

No.98-1649

No.98-174]

Paine Webber Group, Inc.; Paine Webber, Inc.:

Mitchell Hutchins Asset Management, Inc.:

William J. Reik, Jr.; William D. Witter, Inc.,

Plaintiffs - Appellants,

V.

Zinsmeyer Trusts Partnershi p,

Defendant - Appellee.

Appeals from the United States District Court

for the Eastern District of Missouri.

Submitted: January 14, 1999

Filed: August 16, 1999

Before LOKEN, HANSEN, and MORRIS SHEPPARDARNOLD.

Circuit Judges.

LOKEN, Circuit Judge.

Zinsmeyer Trusts Partnership ( “Zinsmeyer”) submitted claims of

securities fraud and market manipulation to anarbitration panel ofthe

National Association of Securities Dealers (“NASD”). After a

lengthy hearing, the arbitrators dismissedall of Zinsmeyer’s claims.

The appellants in this court — PaineWebber Group, Inc.;

Paine Webber, Inc.; Mitchell Hutchins Asset Management, Inc.:

William D. Witter, Inc.; and William J. Reik, Jr.—commenced this

action by filing motions to confirm the arbitration award. Zinsmeyer

responded by moving to vacate the award. The district court vacated

the award in favor of appellants on the ground that iit was procured by

undue means within the meaning of the Federal Arbitration Act, 9

pg ep

U.S.C. § 10(a)(1), because Paine Webber withheld four allegedly

privileged documents from discovery during the arbitration. Appel-

lants challenge that ruling on appeal. We reverse.

Zinsmeyer isa family partnership that invests the assets of various

trusts. In 1986, Zinsmeyer entered into an investment advisory

agreement with Mitchell Hutchins Asset Management, Inc. (“Mitchell

Hutchins”), giving William J. Reik, Jr.,a Mitchell Hutchins managing

director, discretion to invest a portion of Zinsmeyer ’s total assets.

Mitchell Hutchins isa subsidiary of Paine Webber, Inc., whichintum

isa subsidiary of PaineWebber Group, Inc. Wewill refer tothe three

companies collectively as “PaineWebber.” In February 1991, after

Reik resigned from Mitchell Hutchinsand took a position with William

D. Witter, Inc. (“Witter”), Zinsmeyer retained Witter as investment

advisor for the assets previously managed by Mitchell Hutchins.

Dissatisfied with his performance, Zinsmeyer fired Reik in August

1993.

In February 1994, Zinsmeyer filed an arbitration claim with the

NASD against PaineWebber, Witter, Reik, and others, alleging

federal securities law violations, common law fraud, breach of

fiduciary duty, breach of contract, and negligence. A panel of three

arbitrators held thirty-eight sessions between Marchand November

1995, hearing evidence regarding Zinsmeyer’s claims that Reik

engaged in illegal market manipulation and other wron gdoing that

caused large losses in Zinsmeyer’s accounts controlled by Reik. The

panel entered a final order dismissing all of Zinsmeyer’s claims on

November 30, 1995.

The arbitration proceedings included a major document discovery

dispute over PaineWebber’s claims of attorney/client and work

productprivilege. In 1990,a senior Paine Webber compliance officer

had conducted an internal investigation of Reik’ strading activities at

the direction of in-house Paine Webber attorneys. In response to

Zinsmeyer’s document production requests in the arbitration,

a a

Paine Webber produced thousands of documents but objected that

documents generated during its internal investi gation of Reik were

privileged. Paine Webber provided Zinsmeyera log describing each

allegedly privileged documentand identifying its unique “Bates stamp

number.” The 347-page privilege log contained nearly 2000 entries.

In December 1994, Zinsmeyer filed a motion chal lenging

Paine Webber’ s assertions of privilege withrespecttoeach document

listed in the privilege log. The arbitrators initial] y ordered production

of all the documents for in camera review, but when Zinsmeyer

identified seventy that it wanted reviewed, the panel ordered those

seventy produced, and they were reviewed in camera. After the

arbitrators ruled that all but a few were privileged, Paine Webber

produced those ruled not to be privileged.

In March 1995, PaineWebber produced an additional file created

by the compliance officer during his internal investigation of Reik’s

trading activities. Paine Webber removed documents considered

pnivilegedandreplacedeach witha blue sheetcontaining thedocument’s

Bates stamp number. In May 1995, Zinsmeyer filed a motion to

compel Paine Webber to produce all documents in this file that had

been withheld as privileged, about seventy of which were not

previously listed onthe privilege log. Zinsmeyer later limited this

request to twelve documents. The panel ordered those twelve

produced for in camera review.

After the arbitration, Zinsmeyer’s attorneys obtained many ofthe

documents withheld as privileged when the district court rejected

Paine Webber’s claims of privilege in unrelated investor liti gation.

Zinsmeyer then argued that the arbitrators’ award should be vacated

because Paine Webber hid relevant documents through its claims of

privilege. Thedistrict court agreed. Withoutaddressing the under! ying

issues of privilege, the court concluded that the arbitration award was

“procured by .. . undue means” within the meaning of 9 U.S.C. §

10(a)(1) because Paine Webber hid four documents from discovery

bynot fully oraccurately describing them initsprivilege log. Thecourt

further concluded that the documents were relevant to

a re

Zinsmeyer’s claims and “their absence could certainly have im-

pacted the decision making process of the arbitrators.” Finally, the

court vacated the award as to Witter, as well as PaineWebber and

Reik, because “the integrity of the judicial process will not permit

Witter to benefit from these actions of PaineWebber.” These

appeals followed.

Judicial review of arbitration decisions 1s limited. For the most

part, courts may vacate an arbitration award only for the reasons set

forth in the Arbitration Act. See First Options of Chicago, Inc. v.

Kaplan, 514 U.S. 938, 942 (1995). The statute provides that a

reviewing court may vacate an award that was “procured by

corruption, fraud, or undue means.” 9 U.S.C. § 10(a)(1). There was

no corruption or fraud in this case. The issue is whether Paine Webber

procured the favorable arbitration award by “undue means” given

the manner in which it claimed that certain documents were

privileged from discovery in the arbitration proceedings.

A. The term “undue means” must be read in conjunction with the

words “fraud” and “corruption” that precede it in the statute. See

Draver v. Krasner, 572 F.2d 348, 352 (2d Cir.), cert. denied, 436

U.S. 948 (1978). Consistent with the plain meaning of fraud and

cormuption, and with the limited scope of judicial review of arbitra-

tion awards, other circuits have uniformly construed the term undue

means as requiring proof of intentional misconduct. See American

Postal Workers Union, AFL-CIO v. United States Postal Serv., 52

F.3d 359, 362 (D.C. Cir. 1995) (undue means limited to conduct

“equivalent in gravity to corruption or fraud, such as a physical

threat to an arbitrator”); 4.G. Edwards & Sons, Inc. v. McCollough,

967 F.2d 1401, 1403 (9th Cir. 1992) (undue means “connotes

behavior that is immoral ifnot illegal”), cert. denied, 506 U.S. 1050

(1993); Shearson Hayden Stone, Inc. v. Liang,493 F. Supp. 104, 108

(N.D. Ill. 1980) (“*undue means’ requires some type of bad faith in

the procurement of the award”), aff'd, 653 F.2d 310(7th Cir. 1981).

Undue means does not include “sloppy or overzealous lawyering.”

re SS

Edwards, 967 F.2d at 1403. In an unreported case, the Sixth

Circuit applied this strict standard in rejecting aclaim that a party

used undue means to prevail in a discovery dispute before the

arbitrators. See Pontiac Trail Medical Clinic, P.C. y.

Paine Webber. Inc., 1 F.3d 1241, 1993 WL 288301 at *5 (6th Cir.

July 29, 1993). We agree with those decisions.

B. To put the issue of undue means in this case in proper

perspective, we must consider the nature ofa discovery dispute over

allegedly privileged documents. The attorney/client privilege is based

upon the principle “that sound legal advice or advocac y...depends

upon the lawyer’s being fully informed by the client.” Upjohn Co. v.

United States, 449 U.S. 383, 389 (1981). Upjohn involved a

corporate counsel's internal investigation of; possible illegal payments

to foreign government officials. The Supreme Court confirmed that

the privilege applies broadI y tocommunications made by corporate

employees to counsel to secure legal advice from counsel. /d. at 394.

Wehave likewise applied the privilege tocommunicationstoand from

corporate attorneys investigating theirclient’s possible violations of

federal securities law. See Di versified Indus., Inc. v. Meredith, 572

F.2d 596, 600-01 (8th Cir. | 977), followed in In re Bieter Co.. 16

F.3d 929, 935-36 (8th Cir. 1994). These cases confirm that

Paine Webber hada reasonable basis for asserting that the attorney/

client privilege, and perhaps the work product doctrine, protected

from discovery in the arbitration at least some internal communica-

tions to and from the Paine Webber attorneys who conducted the

investigation of Reik’s trading activities.

Theattorney/clientpri vilege is waived by the voluntary disclosure

of privileged communications, and courts typically apply sucha

waivertoall communications on the same subject matter. See United

States v. Workman, 138 F.3d 126] , 1263 (8th Cir. 1998). Thus, a

party wishing to invoke the privilege in responding to document

discovery mustassert it as to all documents to which it may apply.

Whether a documents in fact privileged can bea difficult question,

and if the parties engaging in discovery cannot resolve the issue

aay ee

informally, it must be decided by the tribunal conducting the

proceeding in which the privilege has been asserted. The party

seeking discovery cannot sce the allegedly privileged documents —

that might waive the privilege — so the dispute is usually resolved

by submitting them to the tribunal in camera. This is an awkward,

time-consuming process. To make the process work, and to encour-

age parties to minimize the number of documents that must be

reviewed in camera, most tribunals require the party asserting the

privilege to provide the party seeking discovery witha list or log that

describes the document without disclosing the allegedly privileged

communications it contains. This practice is now codified in the

Federal Rules of Civil Procedure, see Rule 26(b)(5) (1993), and it

was used by the panel of arbitrators in this case.

Certain inherent aspects of this privileged document process are

relevant to the “undue means” issue before us. When a party claims

that certain documents are privileged and provides a list or log of

those documents, the other party, the one seeking discovery, must

take the initiative, for if the party seeking discovery does not press

for in camera review ofa particular document, the process ends with

the claim of privilege de facto upheld. Because privilege disputes

can only be resolved by in camera review of a document, formal

resolution of such disputes is tedious and difficult. When many

documents are at issue, the tribunal will of course want the party

seeking discovery to limit the number it challenges. The tribunal

ultimately decides what information must be disclosed on a privi-

leged document log. Because that log is the basis upon which the

party seeking discovery decides whether to request in camera

review of a particular document, when the disclosure is inadequate

— for example, PaineWebber’s use of blue sheets to replace

allegedly privileged documents in the compliance officer's file —

the party seeking discovery must either demand in camera review

of all documents, or ask the tribunal to require greater disclosure on

the log. While this awkward process may seem to present the

opportunity for a party to “hide” damaging documents by providing

a deceptive or inaccurate privileged document log, inadequacies in

near x. ele

the log will become apparent to the tribunal if the party seeking

discovery demands in camera review of some documents, and

stiff sanctions may be imposed on a party whose log is found to

be inaccurate or dishonest.

C. Given the importance of the attorney/client privilege and

the work product doctrine, and the realities ofa discovery dispute

over allegedly privileged documents, we disagree with the

district court’s decision to vacate the arbitration award for three

distinct reasons.

First, we conclude that Paine Webber did not employ “undue

means” in asserting that some of its documents were privileged. In

response to Zinsmeyer’s discovery requests, Paine Webber individu-

ally identified each allegedly privileged document. listing the vast

majority of them in its 347-page log, and showing witha blue sheet

where others appeared in the compliance officer’s file. This gave

Zinsmeyera basis for determining whether to request that some orall

ofthese documents be submitted for in camera review of the asserted

privilege.

The district court nonetheless concluded that PaineWebber’s

handling of fourdocuments constituted undue means:

* The first document was amemorandum to Mitchell Hutchins’s

general counsel froma staff. attorney recommending that restrictions

be imposed on Reik’s management ofa closed-end mutual fund (not

the Zinsmeyer account). Both this final documentand an earlier draft

were listed on PaineWebber’s privilege log, described as documents

regarding “Reik Compliance Issues.” The draft was submitted for in

camera review, and the arbitrators upheld Paine Webber’s claim of

privilege. Zinsmeyer did not request in camera review of the final

memorandum. The district court concluded that PaineWebber’s

failure to disclose the relationship between the two documents

constituted undue means.

* The second document contained handwritten notes ofa meeting

between the compliance officer and three Mitchell Hutchins

aS oe

attorneys. Paine Webber listed this document on the log, attrib-

uting the notes to the attorneys, whose names appeared on the

document. In fact, the notes were taken by the compliance

officer, whose name did not appear on the document. Zinsmeyer

did not request in camera review of this document. The court

concluded this inaccuracy constituted undue means.

* The third document wasa file memorandum by Paine Webber,

Inc.’s general counsel describing atelephone conversation in which

he told a Witter executive there was “reason to believe Reik was

primarily responsible” for“ millions of dollars of potential losses” to

Paine Webber customers. This document was in the compliance

officer’s file. It was not listed on the privilege log, buta second file

memorandum prepared by the same attorney on the same day

regarding a conversation with the same person was listed on the log.

The courtconcluded thatnotlisting the document inthe log was undue

means.

* The fourth document wasa memorandum from Paine Webber’s

director of compliance and Mitchell Hutchins’s general counsel to

PaineWebber, Inc.’s general counsel. The document was listed and

correctly described on the privilege log; Zinsmeyer didnotrequestin

camera review. Two earlier drafts of the memorandum were pro-

duced by Paine Webber. During the arbitration hearing, while ques-

tioning the author of the drafts, counsel for Zinsmeyer asked opposing

counsel whether a complete version of the draft existed.

PaineWebber’ s counsel responded, “[t}hat is the only document that

existsinthe files... youhave everything that exists in ourclient’s file.”

The district court concluded this response was undue means.

Ontheir face, these mistakes do notreflectthe intentional miscon-

duct that constitutes “undue means” under9 U.S.C. § 10(a)(1). They

are the kinds of errors and oversights that are apt to attend the process

of claiming privilege for a large group of corporate documents.

Paine Webber has offered innocent explanations for its handling of

each document. It is improper to infer nefarious intent or bad faith

ae ae

from what appear to be ordinary discovery errors. The district

court held no evidentiary hearing, and thus there is no proof that

Paine Webber’s attorneys intentionally abused the process for

asserting claims of privilege. Zinsmeyer was not particularly

diligent or aggressive in challenging PaineWebber’s claims of

privilege to the arbitrators. In these circumstances, the court’s

undue means conclusions cannot be upheld.

Second, an arbitration award may be vacated if it was “pro-

cured by” undue means. In other words, there must be some

causal relation between the undue means and the arbitration

award. See Edwards, 967 F.2d at 1403 (“the statute requires a

showing that the undue means caused the award to be given’);

Forsythe Int'l, S.A. v. Gibbs Oil Co. of Texas, 915 F.2d 1017,1022

(Sth Cir. 1990) (there must be a “nexus” between the misconduct

and the arbitrator’s decision); Bonar v. Dean Witter Reynolds,

Inc., 835 F.2d 1378, 1383 (11th Cir. 1988) (fraud must “materi-

ally relate[] to an issue in the arbitration”); see also BLACK’S

LAW DICTIONARY 1208 (6th ed. 1990) (to “procure” means “to

cause a thing to be done”). Zinsmeyer argues that requiring the

showing of a causal connection would impose an impossible

burden because the arbitratior. panel did not state the reasons for

its decision in this case. We disagree. Arbitration panels are not

required io explain their decisions. See Wilko v. Swan, 346 U.S.

427, 436 (1953), overruled on other grounds, Rodriguez De

Quijas v. Shearson/American Express, Inc.,490 U.S. 477(1989).

Thus, eliminating the need to prove a causal connection when-

ever an award is unexplained would effectively read the “pro-

cured by” requirement out of the Statute, and would be inconsis-

' Three of the documents were listed on Paine Webber’s privilege log, and

the fourth was replaced in the compliance officer’s file witha blue sheet bearing

its Bates stamp number. If Zinsmeyer believed that the descriptions on the

privilege log were inadequate, or that documents replaced with a blue sheet

should be described, it could have asked the panel to order Paine Webber to

supplement its log and pressed for a ruling on that request. Compare Gingiss

Int'l, Inc. v. Bormet,58 F .3d328, 333 (7th Cir. 1995).

— A-10 —

tent with the limited nature of judicial review of arbitration

awards. See Edwards, 967 F.2d at 1403.

Zinsmeyer further argues that there is proof of the requisite

causal connection because Paine Webber hid relevant evidence

by undue means, namely, the manner in which PaineWebber

disclosed the existence of four allegedly privileged documents.

Assuming for the sake of argument that PaineWebber’s errors

constituted undue means, we will further assume that, absent

those errors, Zinsmeyer would have included the four docu-

ments in the group submitted to the arbitration panel for in

camera review. But the documents would not have been pro-

duced, and therefore would not have been available as evidence,

unless the arbitrators overruled PaineWebber’s claims of privi-

lege. Thus, a fatal flaw in Zinsmeyer’s argument, and the district

court’s decision, is the complete failure to address the merits of

the privilege issues. The arbitrators upheld PaineWebber’s claims

of privilege on most documents submitted for in camera review,

and Zinsmeyer has not challenged those rulings. On this record,

to give the arbitration award the deference it is due, we must

assume that claims of privilege not submitted to the panel for in

camera review would also have been upheld. Therefore,

Zinsmeyer has failed to prove that PaineWebber’s errors in the

privileged document process, even if intentional and therefore a

form of undue means, “procured” the arbitration award.

Third, a related but distinct flaw in Zinsmeyer’sargumentis its failure to

explain how Paine Webber’s alleged undue means affected the arbitration

hearing record. Assuming now that the arbitrators would have overruled

Paine Webber ’s claims of privi e had the four documents been submitted

for in camera review, that does notmean thatnew material evidence would

during the thirty-cight-day hearing regarding Reik’s trading activities and

Paine Webber ’s investigation of those activities.

— A-11 —

For example, one of the four documents consisted of notes by

a Paine Webber attorney of his phone conversation with a Witter

executive. Zinsmeyer argues that it would have called the Witter

executive as an adverse witness if the document had been p:oduced.

But the phone conversation, which involved emplcyees of two

independentinvestment firms, wasnotprivileged (though theattomey’s

filenotes might have been properly listed as privileged if they included

work product). Paine Webber disclosed the fact of the conversation

on its privilege log. Thus, it was not Paine Webber’ s alleged undue

means that kept the substance of the conversation out of evidence, it

was Zinsmeyer’s lack of interest in obtaining and presenting that

evidence.

Zinsmeyer’s brief effectively demonstrates that its attorneys in

the arbitration would have found the four documents very interest-

ing. But Zinsmeyer fails to show how production of those four

documents would have resulted in additional facts being presented

to the arbitration panel. For this reason, too, Zinsmeyer failed to

prove that the alleged undue means procured the arbitrators’ award.

For each of the foregoing reasons, the district court erred in

vacating the arbitration award in favor of the Paine Webber compa-

nies, Witter, and Reik onthe ground that the award was procured by

undue means.

ITI.

Zinsmeyer argues that even if the arbitration award was not

procured by undue means, it must be vacated because of the

arbitrators’ “bias and misconduct.” Zinsmeyer points to comments by

the arbitrators that the hearing was taking too long, that it was

interfering with their practices, and that they were relatively underpaid

for this work. Zinsmeyer argues that this attitude caused the

arbitrators to deny Zinsmeyer’s motions for continuances to pursue

discovery issues, thereby playing into PaineWebber’s Strategy to

stonewall discovery andtorush the proceedings to judgment before

its bad documents came to light. Zinsmeyer does not challenge

—A-12 —

the merits of the arbitrators’ procedural rulings. Rather, itargues

the award should be vacated because of “evident partiality or

corruption in the arbitrators.” 9 U.S.C. § 10(a)(2). Zinsmeyer

waived this contention by failing to raise it to the arbitrators. See

Kiernan v. Piper Jaffray Companies, Inc., 137 F.3d 588, 593 (8th

Cir. 1998); Fort Hill Builders, Inc. v. Nat'l Grange Mut. Ins. CA,

866 F.2d 11, 13 (ist Cir. 1989).

In addition, when viewed in the light of our limited power to

review arbitration awards, the argument borders on the frivo-

lous. Challenges to arbitration awards based on partiality gener-

ally involve claims that the arbitrators failed to disclose relation-

ships that “create an impression of possible bias.” Olson v.

Merrill Lynch, Pierce, Fenner & Smith, Inc., 51 F.3d 157, 159

(Sth Cir. 1995), citing C ommonwealth Coatings Corp. v. Conti-

nental Cas. Co., 393 U.S. 145, 149 (1968). Here, no such

relationship is alleged, and there is no evidence the arbitrators

had any financial or personal interest in the outcome of the

arbitration. Moreover, nothing in the arbitrators’ comments

evidences partiality to one side or the other. Read in context, the

comments reflect an understandable desire to move the arbitra-

tionalong, which, far from demonstrating bias, is consistent with

the general policies underlying arbitration. See Ballantine Books,

Inc. v. Capital Distrib. Co., 302 F.2d 17, 21 (2d Cir. 1962) (an

arbitrator should . . . expedite the proceedings . . - since among

the virtues of arbitration . . . are speed and informality”).

The judgment of the district court is reversed and the case is

remanded with directions to grant appellants’ motions ‘o confirm the

award.

A true copy.

Attest:

CLERK, U.S. COURT OF APPEALS,

EIGHTHCIRCUIT.

— A-13 —

APPENDIXB

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF MISSOURI

EASTERN DIVISION

No. 4: 95CV02528 ERW

ZINSMEYER TRUSTS PARTNERSHIP. a Missouri General

Partnership, by Andrew Roberts Zinsmeyer Trust dated July 27,

1964, Jeffrey Woods Zinsmeyer Trust dated J uly Trust B dated

November 29, 1971, Andrew R. Zinsmeyer Revocable Trust date

August 27, 1982, Mary Jane Zinsmeyer Trust dated August 27,

1964, Andrea Zinsmeyer Trust B dated April 15, 1983, Daniel M.

Zinsmeyer Trust B dated F ebruary 5, 1985, AmyS. Zinsmeyer

Trust dated January 19, 1987, Jonathan Roberts Zinsmeyer Trust

B dated February 10, 1989, Daris Zinsmeyer Education Trust

dated December 22, 1982,

and Jada Partnership, General Partners.

Plaintiff/counter-claim defendant.

V.

MORGAN STANLEY & CO.. INCORPORATED:

KIDDER PEABODY & CO.. INCORPORATED.

Defendants/counter-claimants.

Consolidated with: No. 4:95MC00318 ERW

PAINEWEBBERGROUPINC.: PAINEWEBBER, INC.:

MITCHELL HUTCHINS ASSET MANAGEMENT INC.;

WILLIAM J. REIK, JR.; WILLIAM D. WITTER, INC.;

Plaintiffs, )

v. |

ZINSMEYER TRUSTS PARTNERSHIP,

Defendant.

[Filed April 15, 1997]

— Als —

MEMORANDUM AND ORDER

This matter is before the Court on the application of plaintiff

Zinsmeyer Trusts to vacate an arbitration award [document #1 in

Case No. 4:95CV02528 ERW], onthe counterclaim of defendant

Morgan Stanley foran order and judgment confirmingan arbitration

award [document #10 in Case No. 4:95CV02528 ERW], on the

counterclaim of defendant Kidder Peabody & Co. for an order and

judgment confirming an arbitration award [document #12 in Case

No. 4:95CV02528 ERW], onthe motion of plaintiffs Paine Webber

Group Inc., Paine Webber Incorporated, Mitchell Hutchins Asset

Management Inc., William Reik, Jr. and William D. Witter, Inc.

(hereinafter referred to collectively as “PaineWebber ' or “the

Paine Webberrespondents’”’) forjudgment confirming andarbitration

award [document #1 in Case No. 4:95MC00318 ERW], on the

cross-motion of defendant Zinsmeyer Trust Partnership to vacate an

arbitration award [document #4 in Case No. 4:95MC00318 ERW],

on the motion of PaineWebber for leave to file a response to

Zinsmeyer’s supplemental memorandum in support ofits motion to

vacate [document #53 in Case No. 4:95CV02528 ERW], and on the

motion of Zinsmeyer Trust Partnership fora hearing on the motions

to vacate an the arbitration award [document #63].

1. Background

Zinsmeyer is a family partnership of various individual trusts

established to preserve capital and generate income forthe beneficia-

ries. Inearly 1986, Andrew Zinsmeyer, whocontrolled the partner-

ship assets, retained Bill Reik and signed a discretionary investment

advisory agreement, giving sole discretion to Mitchell Hutchins to

manage the investments. Reik was then a managing director at

Mitchell Hutchins, an investment advisory firm that isasubsidiary of

PaineWebber. PaineWebber Group is a holding company that

oversees both Paine Webber and Mitchell Hutchins.

Zinsmeyer began to experience trouble with Reik’s advisory

investing in late 1989 and 1990, when Reik requested $600,000 in

— AS —

additional capital to “weather” a downturn in the market, when

Zinsmeyer loaned certain Novellus stock to Reik to attempt torecoup

Zinsmeyer’s investment, and when Zinsmeyer received several mar-

gin calls on its account with Mitchell Hutchins. On February 8, 1991,

Reik was apparently involuntarily terminated from Mitchell H utchins

and PaineWebber. Andrew Zinsmeyer testified at the arbitration that

he was never informed of the circumstances surrounding Reik’s

departure from Mitchell Hutchins and PaineWebber.

Reik immediately joined the investment firm of William

Witter. In connection with this move, Zinsmeyer entered into a

discretionary investment advisory agreement with William

Witter, giving William Witter sole discretion to manage its

investments. At this same time, Reik directed Zinsmeyer to open

a margin account at Morgan Stanley, a brokerage house, and

custody of the Zinsmeyer assets managed by Reik at Paine Webber

was transferred to Morgan Stanley. Andrew Zinsmeyer testified

that Reik had initially indicated to him that his account was

appreciating in value, but that Reik later informed him of

“margin problems” with the Morgan Stanley account. Zinsmeyer

testified that he never received notice of any margin calls from

Morgan Stanley, although he later learned that there had been

numerous such margin calls.

Around June 1991, Reik transferred the Zinsmeyer account to

Kidder Peabody brokerage house. Zinsmeyerreceiveda margincall

while his account was at Kidder Peabody. Zinsmeyer continued to

have problems with Reik and Reik’s management of the account.

Ultimately, Zinsmeyer terminated its business with Reik in August,

1993.

An arbitration claim was initiated in February, 1994 by

Zinsmeyer Trust Partnership (hereinafter Zinsmeyer) with the

National Association of Securities Dealers (NASD) against

Paine Webber Group Inc., Paine Webber Inc.. Mitchell Hutchins

Asset Management Inc., Morgan Stanley, Kidder Peabody,

William D. Witter, Inc., William J. Reik. Jr. (Bill Reik), and Trey

— A-16—

Reik. The claim arose out of Zinsmeyer’s investment relationship

with these respondents. In a lengthy statement of claim, Zinsmeyer

set forth the alleged events and actions of Bill Reik, and his son, Trey

Reik. In Count I, Zinsmeyer claimed that Bill Reik, Mitchell

Hutchins, Paine Webber and William Witter engaged in a complex

scheme to manipulate the stock prices for and market in Neutrogena,

Tejon Ranch, and Frisch’s Restaurants; that Reik and these respon-

dents omitted or failed to state numerous material facts to Zinsmeyer

regarding Reik’s investment activities and his alleged scheme to

manipulate prices; and that such omissions and activities of respon-

dents operated as a fraud upon Zinsmeyer in violation of Section

10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78), and

Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. In

Count II, Zinsmeyer alleged that Reik, Mitchell Hutchins,

PaineWebber and William Witter engaged in unlawful manipula-

tion of the security prices for Tejon Ranch and Frisch’s Restaurants

in violation of Section 9(a)(2) of the Securities Exchange Act of

1934, 15 U.S.C. § 78i(a)(2). In Count III, Zinsmeyer alleged that

Reik, Mitchell Hutchins, and William Witter engaged in a scheme

to manipulate the prices for and markets inthe stocks of Neutrogena,

Tejon Ranch, and Frisch’s Restaurants and omitted to state material

facts in furtherance of the scheme, with the intent of deceiving

Zinsmeyer or with reckless disregard for the welfare of Zinsmeyer,

and that such conduct operated as a fraud upon Zinsmeyer in

violation of Section 206 of the investment Advisors Act of 1940, 15

U.S.C. § 80b-6. Count IV alleged common law fraud against the

PaineWebber respondents; Count V alleged breach of fiduciary

duty by the Paine Webber respondents; Count VI alleged breach of

contract claim against the PaineWebber respondents, Morgan

Stanley, and Kidder Peabody; and Count VII alleged a negligence

claim against the Paine Webber respondents, Morgan Stanley, Kid-

der Peabody and Trey Reik.

The arbitration consisted of a total of 38 hearing sessions between

the dates of March 27, 1995, and November 2, 1995. Each session

lasted approximately four hours. On September 11, 1995, the

arbitrators dismissed Zinsmeyer’s claims against Kidder Peabody

— A-17 —

and Morgan Stanley. On November?2, 1995, the remaining respon-

dents moved for dismissal of Zinsmeyer’s claims. On or about

November 13, 1995, after hearing oral arguments and requesting

briefing on the motions, the arbitrators determined that the

motion to dismiss should be granted. On or about November 30,

1995, the NASD issued its final order in the arbitration.

Zinsmeyer then brought an action to vacate the arbitration

award as to Morgan Stanley and Kidder Peabody; Morgan

Stanley and Kidder Peabody counterclaimed, seeking confirma-

tion of the arbitration award. See Case No. 4:95CV02528 ERW.

Paine Webber Group Inc., Paine Webber Incorporated, Mitchell

Hutchins, Bill Reik and William Witter commenced a different

action to have the arbitration award confirmed; Zinsmeyer

counterclaimed to have the arbitration award vacated. See Case

No. 4:95MC00318 ERW.

On March 1 1, 1996, the Court consolidated these actions. The

Court determined that the motions to vacate were timel y brought

within three months of the arbitration award. See 9 U.S.C. § 12.

The Court, after reviewing the initial motions of all parties, then

set a briefing schedule under which the parties could submit

memorandum in support of their motions. Subsequent to this

briefing, the Court also granted Zinsmeyer leave to file several

supplemental memoranda in Support of its motion to vacate,

requesting briefing on issues raised in these supplemental memo-

randa as well. The issues have now been fully briefed and the

Court will now consider all issues raised in the motions.'

II. Zinsmeyer’s Motion to Vacate

Zinsmeyer seeks to vacate the arbitration award. All parties

agree that the Federal Arbitration Act (FAA),9 U.S.C. § 1 ef Seq.,

' Zinsmeyer has moved fora hearing onthe motions to vacate the arbitration

decision. The Court has permitted considerable opportunity for briefing all

issues in the motions and the Court, in its discretion, will deny Zinsmeyer’s

request for oral argument on the motions. See Eastern District of Missouri Local

Rule4.02(A).

— A-18 —

governs these proceedings. Under the FAA, a federal court may

reverse an arbitration award only under limited circumstances.

Section 10) (a) of the FAA permits a federal court to vacate an

arbitration award (1) where the award was procured by corruption,

fraud, or undue means, (2) where there exists evident partiality or

corruption in any of the arbitrators, (3) where the arbitrators engaged

in misconduct in refusing to postpone the arbitration hearing or in

refusing to consider relevant ev idence, or engaged in any other

prejudicial misbehavior, or (4) where the arbitrators exceeded their

powers by making an award not within their powers. 9 U.S.C. §

10(a); DVC-JPW Investors Vv. Gershman, 5 F.3d 1172, 1174 (8th

Cir. 1993). The burden of proof rests squarely on Zinsmeyer, as it

is the party attempting to vacate the arbitration award. M & A

Electric Power Coop. v. Local Union No. 702 Internat’! Bhd. Of

Elec. Workers, AFL-CIO, 773 F.Supp. 1259, 1262(E.D. Mo. 1991).

As grounds for its motion, Zinsmeyer asserted that the arbitrators

(1) improperly denied Zinsmeyer’s request for postponement of the

arbitration hearing, (2) were biased and partial, and engaged in

misconduct, (3) refused to allow evidence which was pertinent and

material to the controversy, and (4) made a decision in manifest

disregard of the law. Zinsmeyer subsequently asserted an additional

ground — that PaineWebber obtained the arbitration award by

undue means by improperly withholding material and important

documents and denying Zinsmeyer discovery of such documents,

and thus, precluding their review and consideration by the arbitra-

tors.

Relevant to Zinsmeyer’s arguments that the arbitration order

should be vacated due to the arbitrators’ refusal to postpone the

hearing, the arbitrators’ refusal to hear material evidence, and the

arbitrators’ bias, partiality and misconduct, which all fall under the

sections 10(a)(2) and (3) of the FAA, the relevant record, as

presented by the parties, reveals the following. Zinsmeyer first filed

its statement of claim in February, 1994. On May 23, 1994,

Zinsmeyer’s counsel, Thomas E. Douglass, sent a letter to the

NASD Arbitration Department, stating that it was Zinsmeyer’s

— A-19 —

judgment that the matter would not be ready for arbitration until

the first quarter of 1995. The letter also indicated concern over

whether Kidder Peabody would submit to arbitration, in light of

Kidder Peabody’s challenge in federal court as to whether it was

required to submit to arbitration.

On September 15, 1994, NASD sent Zinsmeyer a letter and an

“advance sheet” for the arbitration hearing, which included the identity

of the three arbitrators selected for the hearing. The letter provided

information forthe upcoming arbitration, including instructionsas to

postponement of the hearings. The letter indicated that any questions

concerning subpoenas or orders of: production shouldbe directed to

Mark Nowicki immediately; that postponement requests would

decided by the arbitrators; and that any party seeking to disqualify one

of the three selected arbitrators shouldcontact Nowicki immediately.

Inan October 7, 1994 letterthe NASD notified Zinsmeyer, in light of

Zinsmeyer’s objections totwo ofthe initially selected arbitrators, of

the identity of thetwonew replacementarbitrators, one of whom was

Sherrie L. Catlett. On October 28, Zinsmeyer wrote to the NASD,

pursuantto Section 21 ofthe NASD Arbitration Code of Procedure,

requesting further information regarding Catlett’s background. NASD

apparently informed Catlett of Zinsmeyer’s inquiry and Catlett pro-

vided a detailed response to this inquiry in early November, 1994, in

her effort to clarify “any concerns the claimant may have about [her]

background.”

Zinsmeyer served upon Paine Webberits first request for produc-

tion of documents on August 12, 1994, requesting, among other

items, all documents regarding Bill Reik’s trading activity in Frisch’s

Restaurants, Tejon Ranch, and Neutrogena. PaineWebber had

initially refused to produce any documents unless they were subject

toaconfidentiality agreement similar toa protective orderinarelated

action, Bond v. PaineWebber Group, Inc., et al., Case No.

2:93CV00071. Around December 1 5, 1994, Paine Webber appar-

ently changed its position and produced “all responsive documents

relating to[Zinsmeyer’s] accountthat were not previously produced

to plaintiff's counsel pursuant to the Bond case.” Paine Webber,

— A-20 —

however, continued its objections to the discovery of documents

relating to Bill Reikandcustomer accounts controlled by Reik, unless

a confidentiality agreement could be reached. On December 23,

Zinsmeyer fileda motion to compel discovery from the Paine Webber

respondents. In late December, Zinsmeyer also moved toadjourn the

January 23, 1995 hearing date, citing discovery disputes, including

the disagreement over a confidentiality agreement, and Kidder

Peabody’ srefusal to submitto the arbitration.

On January 6, 1995, after losing its challenge in federal court

regarding its submission to the arbitration, Kidder Peabody filedan

answer to Zinsmeyer s arbitration claim. On January 18, 1995, the

arbitrators issued several orders: they granted Zinsmeyer 's motion to

adjourn - in thatthey grantedatwoday continuance of the arbitration

hearing; they entered an interim order of confidentiality regarding the

PaineWebber discovery; they ordered, as to all documents for which

a privilege was asserted, in camera production and a copy of the

privilege log forall such documents; they ordered all discovery to be

completed by January 20; and they advised that they wouldrule on

the discovery of the documents for whichaprivilege was asserted on

January 25, the first day ofhearings.

On January 20, Zinsmeyer moved forreconsideration of the two-

day continuance of the hearings, citing its difficulty in obtaining

discovery from respondents, the complexity of the alleged trading

scheme of Reik and the respondents, the need for more time for

Zinsmeyer to review recently obtained discovery, and the late entry

of Kidder Peabody into the arbitration. Ina letter dated January 20,

Zinsmeyer was advised that the arbitration panel had granted the

motion forreconsideration. The letter also advised that all discovery

was to be completed by February 27 and that the hearings would

beginon March 27 through March 31, withadditional hearing dates,

ifnecessary, to be set at that time. On January 24, Zinsmeyer moved

to shorten the time for Kidder Peabody, who only submitted to

arbitration in January, 1995, to respond to Zinsmeyer’s recently

propounded discovery requests, citing the need to complete such

— A-21 —

discovery before the March 27 deadline and for time to prepare

its case. This motion was denied.

On March 6, PaineWebber indicated that it objected to requiring

William Cavell, a compliance officer at Mitchell Hutchins and a

supervisor of Bill Reik, to testify at the arbitration; PaineWebber

also objected to Paul Guenther, one ofthe presidents at Paine Webber,

being required to appear, asserting that he hada tremendously busy

schedule. Ina letter dated March 16, | 995, Zinsmeyer requested that

the arbitration panel reconsider “its denial of Zinsmeyer’s motion

for postponement.” As grounds for reconsideration, Zinsmeyer

asserted that its counsel would be busy with discovery, pre-trial and

trial in the federal case of Houston Municipal Employees Pension

System v. PaineWebber Group Inc. etal., acase that was also based

upon Bill Reik’s trading practices and activities, and thus would not

be available for additional hearings during the months of April

through July, causing disruptions in the presentation of the case; that

Paine Webber had objections pending to the appearances of Cavell

and Guenther, two witnesses that Zinsmeyer planned to call at the

March 27-31 hearings; that Zinsmeyer was expecting to soon

receive approximately 11,000 documents from respondents and

needed additional time to review them; and that Zinsmeyer was

having difficulty obtaining evidence through several third-party

subpoenas. Zinsmeyer also requested reconsideration of the arbitra-

tors’ “ruling relating to the hearing testimony of Wiiliam Cavell.”

As grounds for this motion, Zinsmeyer asserted that Cavell was a

crucial witness, as Cavell was directly responsible for supervising

Reik; and that Zinsmeyer needed to question Cavell regarding

hundreds of documents, and would be prejudiced in its ability to

effectively question Cavell if limited to one day of testimony from

Cavell, as was previously granted by the arbitrators. On March 20,

the arbitrators held a pre-hearing conference. A fter oral arguments

at the conference, during which Zinsmeyer told the arbitrators that

Zinsmeyer had only just received | 1,000 documents from

PaineWebber which Zinsmeyer needed additional time to review

and to show its experts, the arbitrators denied Zinsmeyer’s efforts to

— A-22 —

e the hearing, ordered the hearing to commence on March 27,

ordered Cavell to appear for two days, March 28 and 29, and ordered

Paul Guenther to appear ata hearing session ata later determined date.

The hearings began on March 27, 1995. At one instance on

March 29, Cavell, under examination, could not identify a docu-

ment presented to him by Zinsmeyer, even though that document

was produced by PaineWebber. On that same day, Kidder Peabody

complained that they should be dismissed, as no evidence regard-

ing them had yet been presented at the hearing. On March 28, at

the close ofa hearing session and while the parties were discussing

scheduling matters, Arbitrator Thomas Cipolla, chairperson of the

arbitration panel, indicated to Zinsmeyer that, if its next witness,

Richard Engelhardt failed to appear, the panel would be prepared

and expect to hear testimony of another witness. In this context,

Cipolla stated, “fwe can take these out of order. . . we're

somewhat, maybe naively, a little bit more sophisticated than a

normal jury in St. Louis.” Cipolla also, in discussing with the

parties his concern for keeping the arbitration moving, stated,

I think that what you all have got to realize is that we, we all

work ... 1 know this is your job and maybe your career, but

— and it may be our career as arbitrators.

Inresponse to Cipolla’s comment, arbitrator Charles Seigel quipped,

“I’1] be out of business ina few days” and Catlett added, “Me, too.”

On March 29, the arbitrators further discussed scheduling and

witness matters, as the parties were in apparent continued dis-

agreement as to when and how long certain PaineWebber and

Mitchell Hutchins supervisors were to appear. Cipollaencouraged

the parties to work out the differences among themselves, stating,

“i]t should not be incumbent upon the Panel and the NASD to be

ordering the witnesses, putting the witnesses in the order that you

want and all the other stuff.” Cipolla then added that if the parties

could not agree, he would be prepared to make certain orders as

required. Cipolla also stated,

— A-23 —

I don’t mind saying that I don’t get paid very much for being

here. I was originally told this case was going to take a week.

I now see that this case is probably going to take several

months, and I’m in a small law firm, two lawyers with us.

Every day I’m out of that office . . . I don’t mind saying, this

is going a lot slower and it’s going to bea lot longer than it was

represented to us originally . . . and it’s a tlemendous burden

for what they pay us here, which is virtually nothing, for me to

leave my practice, and so I’m asking everyone to take that in

consideration, and we’re all — we all have jobs, so please try

to work this thing out so that everything goes more smoothly,

when we come back, we can get to the substantive evidence

that needs to be presented and move on .. . I ask that as a

professional courtesy to all you.

The hearing was adjourned and the arbitration was to be reconvened

on April 10, with Richard Engelhardt, a compliance officer for

PaineWebber who investigated Reik’s activities, required to be in

attendance. The arbitrators also ordered interim forum fees to be

assessed against Zinsmeyer for the days of March 30 and 31, for

failing to have more witnesses ready to testify at that time.

The hearings reconvened on April 10. At one point in the hearing

session on April 10, arbitrator Seigel interrupted a discussion to raise

a point. After stating his opinion, Seigel added, “and I hope I’m not

speaking out of turn Mr. Chairman.” In response, Cipolla stated, with

apparent reference to the extra rate at which the panel chairperson was

compensated, “I’1] split the fifty bucks extra, | guess, for being Chair

with you.” Seigel then added, in apparent reference to the low

compensation of the arbitrators, “Given the fact that that’s about two-

thirds of what I getall day anyway.” The transcript indicates that these

responses evoked laughter among some of those present.

Also on April 10, counsel for Zinsmeyer and counsel for Morgan

Stanley entered intoa written stipulation that Zinsmeyer wouldadvise

Morgan Stanley five days of any hearing as to whether any evidence

tobepresented would relate to Morgan Stanley. Because Zinsmeyer’s

— A-24—

evidence often related solely to other respondents, the stipula-

tion also provided that Morgan Stanley’s presence was not

required at some hearings.

On April 11, Cavell, under examination, stated that he could

not identify another document, which apparently was a copy of

a February 24, 1988 facsimile to PaineWebber from Stifel

Nicolaus regarding a letter from Andrew Zinsmeyer to Robert

Wood at Stifel Nicolaus. The arbitrators refused to consider the

document as Cavell could not recognize it.

The hearings reconvened on April 10. On April 11, the

arbitrators gave Zinsmeyer the option of either producing

Guenther as alive witness for one day, or for providing Guenther’s

video deposition. The arbitrators stated that should Zinsmeyer

not have any witness ready to testify on April 12, they would be

willing to consider sanctions against Zinsmeyer, including dis-

missal. Zinsmeyer apparently chose to use Guenther’s deposi-

tion testimony instead of live testimony.

On May 15 and 16, the arbitrators shifted the arbitration to New

York. to obtain the testimony of Richard Engelhardt, a former

compliance officer at PaineWebber who investigated Reik and

allegedly found numerous transgressions by Reik. Engelhardt

apparently refused to travel to St. Louis. Engelhardt left

PaineWebber in 1993, due to his wife’s poor health. During direct

examination of Engelhardt by Zinsmeyer’s counsel on May 15,

Engelhardt expressed objection to the behavior of two attorneys

for the Paine Webber respondents. Upon objection, the following

occurred:

ARBITRATOR CIPOLLA: Okay, Mr. Engelhardt, | am

going to instruct you, we do not need to have your comments

directed at the lawyers.

ENGELHARDT: You have got to see the facial expressions

going on here. The interplay between these two people.

ARBITRATOR CIPOLLA: Don’t worry about it.

— 2S —

ARBITRATOR SEIGEL: You just testify. They can do

whatever they want. Your testimony shouldn’t change one

way or the other depending on their facial expressions.

ENGELHARDT: Why don’t you instruct them to —

ARBITRATOR SEIGEL: If we feel there is any inappro-

priate behavicr the chairperson will take care of it. Let the

chairperson handle that. You testify to facts that you know,

period.

ENGELHARDT: It’s being made more difficult by these

frequent exchanges and facial expressions.

MR. DOUGLASS (Zinsmeyer’s counsel): All night, let’sdon’t

get into that.

At the hearing session on May 15, the arbitrators also ruled that

Zinsmeyer could not present several witnesses who were alsoclients

of Bill Reik. Zinsmeyer wanted to present these witnesses, asserting

that they would testify that Reik refused to follow their trading

instructions, justas Andrew Zinsmeyer had testified that Reik had

failed or refused to follow Zinsmeyer’s instructions. Zinsmeyer’s

counsel asserted that such testimony was important to proving intent

and a pattern of fraud through non-disclosure on the part of Reik.

Arbitrator Cipolla, explained that he understood Zinsmeyer’s argu-

ment, however, he was not going toallow the evidenceas he believed

it was irrelevant to the critical issues in the action, including the

relationship of Reik with Andrew Zinsmeyer. Cipolla stated that it was

his feeling that he did not see the “necessity” of bringing several

witnesses to testify as to the underlying transactions which Zinsmeyer

alleged were part of the pattern and practice of Reik, and that he did

not want to get into collateral issues regarding the veracity of these

witnesses testimony regarding Reik’s alleged refusal to follow client

instructions, but that he would “allow [Zinsmeyer] to use documents

that show trading in other accounts and from that [Zinsmeyer could]

argue [its] case accordingly.”

— A-26 —

On the next day, May 16, during cross-examination of

Engelhardt by the PaineWebber respondents’ counsel,

Engelhardt, after testifying that Reik was placing orders to

manipulate the stock of Neutrogena, insisted that he be allowed

to address the panel of arbitrators. The transcript reveals that the

following took place:

ENGELHARDT: Please, the Panel it’s interesting to me that

PaineWebber —

ARBITRATOR CIPOLLA: There is nota question for you.

MR. HIGGINS (counsel for respondents): There is not a

question for you.

ENGELHARDT: Thank you very much.

MR. DOUGLASS (counsel for Zinsmeyer): Just answer the

question.

Q.: Letme direct your attention to Bates stamp page 304205.

ENGELHARDT: Excuse me a second.

MR. HIGGINS: There is no pending question.

ARBITRATOR SEIGEL: I know, but, Mr. Douglass, you

are not his counsel.

MR. HIGGINS: I know.

ARBITRATOR SEIGEL: Ifyou talk right now, I have to tell

you something, lam going to ask you exactly what happened.

MR. HIGGINS: Okay.

ENGELHARDT: I would like to address the panel.

MR. HIGGINS: Why don’t you just answer the questions.

ENGELHARDT: I would like to address the panel for two

minutes.

ys poe

ARBITRATOR CIPOLLA: Youcanat the end of the dav.

ENGELHARDT: The end of the day is five o’clock, as you

said yesterday.

ARBITRATOR CIPOLLA: It may well be longer than that

if we don’t move this along.

ENGELHARDT: No, it won’t.

ARBITRATOR CIPOLLA: Yes. it will, Mr. Engelhardt. |

can guarantee you that.

ENGELHARDT: You can guarantee me?

ARBITRATORCIPOLLA: I guarantee it. You will be here

tomorrow, too, sir.

ENGELHARDT: Sowill you.

ARBITRATORCIPOLLA: Youaredamn right! will be.

ARBITRATOR SEIGEL: We havetobe here anyway.

ARBITRATORCIPOLLA: Mr. Engelhardt, lam probably the

most patient man that’s sitting in thisroomand youhave gotme

upset. Now, if you justanswerthe questions. Youare yourown

worst enemy by notanswering the questions. If youanswerthe

questions you will be out ofhere by five o’clock.

ENGELHARDT: Whycan’t you listen to me fortwo minutes?

MR. HIGGINS: Answer the question.

ARBITRATOR CIPOLLA: Answer the questions, Mr.

Engelhardt.

ENGELHARDT: Thank you for your lack of cooperation.

ARBITRATOR CIPOLLA: Thank you for your lack of

cooperation.

— A-28 —

ENGELHARDT: And thank you very much for coming

here. I appreciate your concer, if I didn’t tell you that

before.

ARBITRATOR CIPOLLA: That’s it. We are taking a five-

minute break. My fatheris in the hospital, I could giveadamn.

| was sympathetic to your position.

ENGELHARDT: Youwere? Why did you make itsodifficult?

(Recess taken.)

ARBITRATORCIPOLLA: First thing, I just wantto get this

over with, I need to apologize to everybody here. I have

conducted about 150 arbitrations. I have had lawyers blow up,

[have had witnesses blow up, I have had everything. I guessit

was time for the arbitrator to biow up. It’s unprofessional

behavior, I apologize for it. I apologize to everybody here and

Mr. Engelhardt and what we are going to dois forthe remainder

of this witness’ testimony, Mr. Seigel is going to handle the

chair’srole. I will give him his extra $25 for this session.

ARBITRATOR SEIGEL: And for the record, I am going to

take it. Inlightofthe factthat doubles the amount] get fora per

diem amount.

ARBITRATOR CIPOLLA: That puts you up to 250. Other

than that, lam sincerely sorry forthe outburst and presumably

it has only happened one out of | 50 times so we are several

years away from another one. Anyway, where do we stand in

terms of —

MR. DOUGLASS: Thank you, Mr. Chairman, lapologize if

there has been anything from thisend. People are undera lot of

stress, both Mr. Engelhardt and I understand you and we

appreciate that.

Examination of Engelhardt was completed shortly thereafter and the

session was adjourned for the day.

— A-29 —

Ina June 26, 1995 letter to Paine Webber’s counsel, Zinsmeyer

informed Paine Webber that Zinsmeyer had not received certain

documents which were requested in Zinsmeyer’s August 12, 1994

discovery request. Zinsmeyer stated that these documents included

“Paine Webber Trading Activity Reports” and “Blue Sheet Reports”

for Frisch’s Restaurants, Neutrogena, Tejon Ranch, andthe C ypress

Fund for the period of January, 1989, through December, 1990. On

September 25, PaineWebber apparently provided the missin g

“Paine Webber Trading Acti vity Reports,” tocounsel for Z insmeyer,

as Paine Webber produced these documents inregard tothe City of

Houston Municipal Employees Pension System v. Paine Webber

Group Inc., etal., litigation. Paine Webber had apparently provided

only trading activity reports for the period of 1986 to 1988 in late-

February, 1995.

On June 30, 1995, C ipolla, corrected the parties’ incorrect

assumption that no depositions could be taken of anybody at Kidder

Peabody or Morgan Stanley. While Cipolla stated that “{w]eare not

going to meet as a Panel to help in the discovery of [the] case for

[Zinsmeyer], Cipolla expressly permitted Zinsmeyerto take deposi-

tions of witnesses at Kidder Peabody and Morgan Stanley overthe

following twoto three weeks. Ci polla stated that he wanted to see the

deposition testimony, and would determine iflive testimony regarding

Kidder Peabody and Morgan Stanley was necessary afterreviewing

the depositions. Cipolla added that they wouldentertain any motions

regarding those two respondents after that time.

On July 13, Zinsmeyer deposed Bernard Stern, the principal

account representative in charge of Zinsmeyer’s account at

Morgan Stanley. On July 14, Zinsmeyer apparently took the

deposition of Matthew Gorman. the Kidder Peabody broker who

handled Zinsmeyer’s account. On August 10, Morgan Stanley

filed another motion to dismiss. On August 21, Kidder Peabody

filed a renewed motion to dismiss, based in part on Gorman’s

deposition, asserting that Kidder Peabody was merely the ex-

ecuting broker for Reik and Zinsmeyer and that Kidder Peabody

had no reason to know that Reik was not following Zinsmeyer’s

— A-30 —

investment instructions. On September 11, after briefing by the

parties, the arbitrators dismissed the claims against Kidder

Peabody and Morgan Stanley, thus, granting their motions to

dismiss.

At the November | hearing session, Zinsmeyer sought to

introduce the expert opinions of Raymond Kalinowski, a former

Chief Operation Officer of A.G. Edwards. The arbitrators ruled

that Kalinowski could not testify or give his opinions as to

statements, representations, or omissions made by Reik to cus-

tomers other than Zinsmeyer. In limiting Kalinowski’s testi-

mony, the arbitrators stated that they wanted to stay focused on

any misrepresentations made by Reik to Zinsmeyer, that they

thought that Kalinowski was going to give expert testimony

regarding damages. The arbitrators suggested that they already

accepted the fact that Reik’s trading program was one that could

lend itself to manipulative activities. The arbitrators did elicit

from Kalinowski his opinion that Andrew Zinsmeyer fell within

the definition of a sophisticated investor. At the end of the day,

Cipolla, stressing the arbitrators’ desire to hear evidence on

damages and causation, limited Kalinowski to two more hours of

testimony on the next day.

A. Refusal to Postpone the Arbitration Hearing

Zinsmeyer argues that the arbitrators unreasonably forced the

arbitration hearing tocommence before discovery was complete and

before Zinsmeyer couldreview voluminous discovery received on the

eve of the first hearing session. A refusal to postpone arbitration

hearings, when there is sufficient cause shown to do so, isatype of

misconduct provided for under 9U.S.C. § 10(a)(3). Lee v. Chica,

983 F.2d 883, 888 n.8 (8th Cir.), cert. denied, 5 10 U.S. 906

(1993). Arbitrators have discretion as to whether to grant a motion

to postpone an arbitration hearing. With respect to vacating

arbitration orders due to failure to postpone hearings, the Eighth

Circuit has stated that “[i]f any reasonable basis exists for the

arbitrators’ decision not to postpone a hearing, [the court] will

— A-31 —

not intervene.” DVC-JPW Investors, 5 F.3d at 1174: see also

ARW Exploration Corp. v. Aguirre, 45 F.3d 1455, 1463-64 (10th

Cir. 1995). Even ifno reasonable basis exists for such decision, the

party seeking to vacate must also show that the error on the part of

the arbitrators so affected the rights of the party that it may be said

that the party was deprived a fair hearing. Grahams Serv. Inc. y.

Teamsters Local 975, 700 F.2d 420, 422-23 (8th Cir. 1982).

Had the arbitrators refused to grant Zinsmeyer the continuance of

the hearings from January to March 27, the Court would have little

difficulty deciding that the arbitration award should be vacated.

However, the arbitrators granted a two month continuance, which

was necessary in light of the late entry of Kidder Peabody into the

arbitration, and the need to complete considerable discovery and

resolve outstanding discovery disputes, which arose, in part, be-

cause of PaineWebber’s zealous opposition to the discovery of

many documents, and in part because of Zinsmeyer’s delay until

August, 1994, to serve discovery requests upon PaineWebber.

The arbitrators’ decision to stand firm with its refusal to grant yet

another continuance is questionable in light of the fact that

Paine Webber only produced considerable documentary evidence

approximately ten days before the March 27 hearings, even though

the arbitrators earlier ruled that discovery should be completed at an

earlier time. Zinsmeyer’s argument that it was unable to properly

digest the discovery and prepare its case prior to the March 27

hearing raises concern to the Court that the Zinsmeyer’s presenta-

tion and examination of key witnesses at the March and April

hearings could have been negatively impacted.

However, the Court cannot conclude that no reasonable basis

existed for the arbitrators tonot grantanothercontinuance. Zinsmeyer

initially indicated to NASD that the matter would be ready for

arbitration hearings in the first part of 1994, and the arbitrators had

already granted a two-month continuance. The arbitrators did not

need to grant Zinsmeyer yet another continuance, based upon these

circumstances, and were justified in proceeding with the hear-

ay, . eee

ings. Even if Zinsmeyer was placed in a difficult position with

the late receipt of discovery from respondents, only a few

hearings occurred in March, and Zinsmeyer still had consider-

able time throughout the rest of 1995 to prepare its case between

the numerous and staggered hearing sessions. Thus, the Court

declines to vacate the arbitration award based upon the arbitra-

tors’ failure to grant another continuance to Zinsmeyer.

B. Bias, Partiality and Misconduct of Arbitrators

Zinsmeyer asserts that it is evident from the record that the

arbitrators were partial and biased against Zinsmeyer. Section 1 0(a)(2)

allows a court to vacate an arbitration award “[w]here there was

evident partiality or corruption in the arbitrators, or either of them.” 9

U.S.C. § 10(a)(2).

Zinsmeyer cites to Commonwealth Coatings Corp. v. Conti-

nental Cas. Co., 393 U.S. 145 (1968), a “leading case on evident

partiality.” See Olson v. Merrill Lynch, Pierce, Fenner & Smith,

Inc., 51 F.3d 157, 159 (1995). Commonwealth held that an

arbitrator’ s failure to disclose a business relationship that the arbitra-

tor had witha party to the arbitration amounted to evident partiality

warranting vacating an arbitration award. Commonwealth, 393

U.S. at 147-50. The Supreme Court held that arbitrators must

“disclose to the parties any dealings that mightcreate an impression

of possible bias.” /d. at 159. Zinsmeyer does not assert that any

arbitrator failed to disclose any relationship with the parties. Thus,

analogy to Commonwealth is of limited use in this action.

Zinsmeyer asserts that arbitrator Catlett was predisposed against

Zinsmeyer because Catlett was made aware that Zinsmeyer had

made an inquiry about Catlett’s qualifications. The record shows that

NASD revealed to Catlett which party sought more information

regarding her qualifications. Zinsmeyer asserts that revealing to the

arbitrator which party questioned her qualifications was contrary to

NASD normal procedures. The record also shows that Zinsmeyer

was aware these facts at the time the inquiry was made, as Catlett

— A-33 —

submitted a her response in her effort to Satisfy “any concerns

claimant may have.” Nothing suggests that Zinsmeyer objected

to, or was precluded from objecting to, Catlett’s remaining on the

arbitration panel, either prior to or at any time during the

arbitration proceedings, despite Zinsmeyer’s awareness of this

breach of NASD “normal procedures,” and this Court declines

to now consider such an objection, raised for the first time, ina

motion to vacate.

Zinsmeyer points to certain events during the hearings as

evidence of bias, partiality, and corruption on the part of the

arbitrators. As the party seeking to vacate, Zinsmeyer

has the burden of proving that a reasonable person would have

to conclude that an arbitrator was partial to the other party to the

arbitration. This reasonable person standard requires a showing of

something more than the appearance ofbias, but not the insurmount-

able standard of proofofactual bias... the alleged partiality be direct,

definite, and capable of demonstration rather than remote, uncertain

or speculative. Furthermore, the party asserting evident partiality

mustestablish specific facts that indicate improper motives on the part

of the arbitrator.

Consolidated Coal Co. v. Local 1 643, United Mine Workers of

Am., 48 F.3d 125, 129 (4th Cir. 1995) (citations and quotations

omitted); see also Kaplan v. First Options of Chicago, Inc., 19

F.3d 1503, 1523 n.30 (3rd Cir. 1994) (evident partiality requires

proofof circumstances powerfully suggestive of bias).

Zinsmeyer points to the arbitrators’ comments about how long

the proceedings were taking, the limited amount of compensa-

tion the arbitrators did receive, the time away from their busi-

nesses that the arbitration proceedings were causing, and the

need for Zinsmeyer to more quickly present its case. Zinsmeyer

also points to the arbitrators’ handling of witness Richard

Engelhardt during the May 15 and 16 hearing sessions. Based

upon this conduct, along with certain exclusion of evidence and

a,

a disregard of the law, Zinsmeyer asserts that it is reasonable to

conclude that improper motives directed the arbitrators’ decisions.

First, the Court has carefully reviewed the incidents involv-

ing the testimony of Engelhardt, for which the arbitration

hearings were relocated to New York to accommodate wit-

nesses, including Engelhardt. Zinsmeyer characterizes

Engelhardt as a neutral third-party witness. It seem apparent

that Engelhardt, by his former position at Paine Webber, was.an

important witness for providing information as to Reik’s trad-

ing transgressions, and PaineWebber’s and Mitchell Hutchins’s

lack of supervision of Reik. The transcript clearly shows that

arbitrator Cipolla “blew up” at Engelhardt, which was precipi-

tated largely by Engelhardt’s insistence that he be allowed to

address the panel on Engelhardt’s own terms instead of through

answering questions. While Cipolla’s conduct was unprofes-

sional, he did take a recess and later apologize to all parties, and

Engelhardt for his conduct. Thus, viewed in context, the events

of May 15 and 16 are not sufficient in themselves to demon-

strate partiality or bias on the part of Cipolla.

Of more concern to the Court are the comments of the

arbitrators regarding the length of time the proceedings were

taking, the arbitrators’ concern for the time away from their

businesses or professions, and the limited amount of compen-

sation they were to receive. Itis clear from the comments by the

arbitrators on March 28 and 29, and other comments made

throughout the proceedings, that the arbitrators were con-

cerned about the time that the proceedings were taking, as they

were initially under the belief that the proceedings would take

only one week. In Cipolla’s comments on March 29, he

indicates that he was concerned about how slowly the proceed-

ings were progressing, in part, because of the objections and

disagreements by the PaineWebber attorneys regarding the

appearance of certain witnesses. Cipolla encouraged the attor-

neys to try to work out their disagreements so that the hearings

would progress more smoothly. Cipolla also indicated at that

— A-35 —

time, and at other times throughout the proceedings, that the panel was

interested in getting to the substantive evidence of the case, and were

not as concemed about a full formal presentation or any cumulative

evidence. Even during the pre-hearing sessions, Cipolla expressed his

opinion that, as an arbitration, the proceedings should be handled as

expeditiously as possible. Cipolla’s view that the proceedings should

be handled in this manner is also reinforced in his limiting the amount

of time for witness testimony, and his decision notto permit testimony

of other clients of Bill Reik, possibly out of concern that this could

consume considerable time with collateral matters.

The implication from the arbitrators’ comments that Zinsmeyer

hopes to draw is that the arbitrators’s decisions regarding witnesses,

testimony, and issues regarding the merits of Zinsmeyer’s claim were

infected and influenced by the arbitrators’ desire to end the proceed-

ings and to return to their more gainful personal businesses and

professions. Zinsmeyer’s raising this implication is not without merit.

However, the Court must consider this in li ght ofthe recordasa whole.

Throughout the arbitration, the arbitrators tried to accommodate

the parties and witnesses, while faced with constant objections from

the attorneys. This accommodation included moving the hearings to

New York for several sessions. The arbitrators held a total of 38

hearing sessions, each approximately four hours long. While the

arbitrators did preclude Zinsmeyer from presenting several witnesses

who were customers of Reik and allegedly had similar problems with

Reik’s trading actions, the arbitrators indicated that Zinsmeyer could

present such evidence regarding these other customers by presenting

documentary evidence through Reik’s trading activities and their

relation to stock manipulation. Some of the arbitrators comments

could be construed as hints toward Zinsmeyer as to their concerns

about what evidence and elements of Zinsmeyer’s case that they

thought were lacking, and indicated that they wanted to hear evidence

on those issues. Nonetheless, the record Clearly shows that the

arbitrators were concemed from the beginning about completing the

arbitration as quickly as possible.

— A-36 —

The arbitrators’ extraneous comments regarding their com-

pensation may be inappropriate, and could be expected to

undermine a claimant’s confidence in the fairness of an arbitra-

tion proceeding. The comments could be expected to affect the

presentation ofa claimant’s case, as counsel would be concerned

about testing the patience of the arbitrators. The Court does not

find conclusive evidence that the arbitrator’s decisions were

infected by their bias towards ending the proceedings as quickly

as possible so that they could return to their private businesses

and professions. The comments do raise an inference that the

arbitrators’ comments reflected their attitude in unduly limiting

Zinsmeyer’s proof. However, because the Court concludes that

other grounds exist for vacating the arbitration award, the Court

need not rest its decision on these grounds.

C. Refusal to Consider Relevant Evidence

Zinsmeyer complains that the arbitrators refused to allow

Zinsmeyer to call as witnesses other clients of Reik who simi-

larly claimed that Reik had ignored or refused to follow their

instructions or had acted contrary to their instructions. Zinsmeyer

asserts that such evidence went to support its claim that Reik was

involved ina fraudulent scheme. Zinsmeyer similarly complains

that the arbitrators refused to allow its expert witness, Kalinowski,

to give any opinion related to Reik’s activities with regard to

other clients of Reik. Zinsmeyer finally complains that the

arbitrators refused to permit Zinsmeyer to present any live

witnesses from Kidder Peabody and Morgan Stanley.

In Grahams Serv. Inc., 700 F.2d at 422-23, the Fighth Circuitheld

that under the FAA, a party seeking to vacate on the grounds of the

arbitrators’ refusal to consider evidence is required to show not only

an error of law by the arbitrators in excluding the evidence, but also

that the error is one “which so affects the n ghts ofa party that it may

be said that he was deprived of a fair hearing.”” /d. at 422 (quoting

Newark Stereotypers’ Union No. 18 v. Newark Morning Ledger

Co..397 F.2d 594, 599 (3rd Cir.), cert. denied, 393 U.S.954(1968)).

— A-37 —

As to Zinsmeyer’s arguments concerning Kidder Peabody

and Morgan Stanley, Zinsmeyer presents no basis suggesting it

was deprived of a fair hearing. In lieu of live testimony, the

arbitrators clearly permitted the parties to take lengthy deposi-

tions of whom Zinsmeyer considered key witnesses at both

brokerage houses. The depositions were taken and the arbitrators

had the transcripts before them when considering the motions to

dismiss of Kidder Peabody and Morgan Stanley. Although

Zinsmeyer complains that they were precluded from using live

witnesses, Zinsmeyer points to no facts which might support its

claims against these two respondents. As to the excluded testi-

mony of Zinsmeyer’s expert, Kalinowski, Zinsmeyer has failed

to show how this evidentiary decision denied Zinsmeyer a fair

hearing, as the Court cannot fairly assess what Kalinowski’s

testimony would have been.

Zinsmeyer goes to great lengths to assert that the testimony of

other clients of Bill Reik’s should have been admitted under Rule

404(b) of the Federal Rules of Evidence. Even if such testimony

should have been admitted under Rule 404(b), the Court cannot

conclude that the arbitrators’ refusal to consider this evidence, in

itself, deprived Zinsmeyer ofa fair hearing. While such evidence

would have been relevant for showing intent on the part of Bill

Reik, the arbitrators’ in refusing the evidence, clearly stated that

they would consider documentary evidence of the trading activ-

ity and practices of Reik in other clients’ accounts. Thus,

Zinsmeyer has not shown that it entitled to relief on this ground.

D. Manifest Disregard of the Law

Zinsmeyer argues that the arbitrators acted in manifest disregard

forthe law. The Eighth Circuit has never adopted manifest disregard

for the law as a basis for vacating an arbitrator’s award, although it

has discussed the basis in dicta. See Marshall v. Green Giant Co.,

942 F.2d 539, 550 (8th Cir. 1991 ); Card v. Stratton Oakmont, Inc.,

933 F. Supp. 806, 810-11 (D. Minn. 1996). Assuming that manifest

disregard for the law is a valid basis for vacating an arbitration

— A-38 —

award, the Eighth Circuit has articulated a very high and difficult

standard which the party seeking to vacate the award must show:

Manifest disregard of the law exists when the arbitrator

commits an error that was obvious and capable of being

readily and instantly perceived by the average person

qualified to serve as an arbitrator. Moreover, the term

disregard implies that the arbitrator appreciates the exist-

ence of a clearly governing legal principle but decides to

ignore or pay no attention to it. There must be some

showing in the record, other than the result obtained, that

the arbitrators knew the law and expressly disregarded it .

__ even if we agree . . . that the arbitrator made an error of

law, we still cannot say that the arbitrator disregarded the

law.

Marshall, 942 F.2d at 550; see also AR W Exploration Corp., 45

F.3d at 1463. This standard does not permit the district court to

review the correctness of the law applied by the arbitrators. Rather,

the party seeking to vacate must point to some evidence inthe record

that the arbitrators knew the law and intentionally disregarded it.

Zinsmeyer complains about the arbitrators’ “determination that

Zinsmeyer could not demonstrate that its damages were caused by

the injuries demonstrated.” Zinsmeyer states that the issue of causa-

tion —the damages sustained by Zinsmeyer asa resultofthe alleged

market manipulation — was the central concern for the arbitrators.

The record shows that after Zinsmeyer’s expert testified as to issue

of causation, the arbitrators still had concerns as to causation and

proximate cause and asked for written briefs on the legal aspects of

causation. Zinsmeyerand respondents each filed legal memoranda on

the issue of causation, with each party citing case law and other

authority.

In moving to vacate the arbitration, Zinsmeyer expends consider-

able effort explaining how the arbitrators incorrectly applied the

relevant law to the facts of Zinsmeyer’s claim, arguing that the

arbitrators incorrectly placed the upon Zinsmeyer the burden of

— A-39 —

proving “loss causation,” see Arthur Young & Co. v. Reves, 937

F.2d 1310, 1327-31 (8th Cir. 1991) (discussing transaction

Causation and loss causation in 10b-5 context), and thereby,

demonstrated a manifest disregard of the law by the arbitrators.

In response, the Paine Webber respondents assert that the arbitra-

tors’ decision does not articulate the basis of their decision, nor

the law applied, in granting PaineWebber’s motion to Cismiss,

and thus, in cannot be concluded that the arbitrators’ decision

rested on the issue of causation or that the arbitrators deliberately

ignored the correct law regarding causation in a failure to

disclose action.

Zinsmeyer’s argument proposes the exact inquiry into the

merits and results of the arbitrators’ decision that Marshall

instructs against. Other than pointing to the case law and decision

of the arbitrators and asserting that they must have applied the

law incorrectly, Zinsmeyer has not provided evidence in the

record suggesting that the arbitrators knew the law and expressly

disregarded it. Thus, Zinsmeyer’s motion to vacate on the

grounds of manifest disregard of the law will be denied.

E. Procurement of Award by PaineWebber through

“Undue Means”

Section 10(a)(1)ofthe FAA permits vacating arbitration awards

where an award “was procured by corruption, fraud, or undue

means.” 9 U.S.C. § 10(a)(1). The terms corruption, fraud, or undue

means are not precisely defined terms. Case law, however, provides

some guidance. In American Postal Workers Union, AFL-CIO,

v. United States Postal Serv., 52 F.3d 359, 362 (D.C. Cir. 1995),

the District of Columbia Court of Appeals explained that “undue

means must be limited to an action by a party that is equivalent

in gravity to corruption or fraud, such as a physical threat to an

arbitrator or other improper influence.” The Court held that

merely presenting objectionable or inappropriate evidence did

not constitute “undue means.” /d. In A.G. Edwards & Sons, Inc.

v. McCollough, 967 F.2d 1401, 1403 (9th Cir. 1 992), cert. denied,

— Ati —

506 U.S. 1050 (1993), the Ninth Circuit explained that “sloppy or

overzealous lawyering” did not constitute “undue means.” Rather, the

Court construed “undue means” as behavior that is “not proper,”

‘Gmmoral ifnot illegal,” or “improper or wrongful.” /d. at 1403-04; see

also Shearson Hayden Stone, Inc. v. Liang, 493 F. Supp. 104, 108(N.D.

Ill. 1980) (“undue means” includes bad faith conduct), aff'd, 653 F.2d

310 (7th Cir. 1981). The Ninth Circuit also added that a party seeking

to vacate on the grounds of “undue means” must also show that the

conduct constituting the fraud or undue means was not discoverable at

the time of the arbitration hearing and that there must be some causal

relation between the conduct and that party’s obtaining the arbitration

award. A.G. Edwards & Sons, Inc., 967 F.2d at 1403-04.

Insupplemental briefing permitted by this Court, Zinsmeyer added

its“‘unduemeans” ground upon which to vacate the award. Zinsmeyer

asserts that the PaineWebber respondents hid certain documents

material to the issues of Reik’s transgressions and PaineWebber’s,

Mitchell Hutchins’s, and William Witter’s knowledge of and failure

to correct Reik’s questionable practices. As indicated above,

Zinsmeyer’s counsel has been involved in litigation in federal court

related to claims of other persons who were allegedly injured by the

trading activities of Reik. Zinsmeyer asserts, in its supplemental

briefing, that it learned, through these related actions, after the

arbitration was completed, of the existence of additional documentary

evidence material to Zinsmeyer’s claims, which was not produced by

the PaineWebber respondents, even though such documents were

sought in Zinsmeyer’s discovery requests. Zinsmeyer has attached to

its supplemental briefs copies of documents not made available to it

in the Zinsmeyer arbitration. These documents relate to the investiga-

tionsofRichard Engelhardt and other supervisorsat Mitchell Hutchins

and PaineWebber into specific questionable activities of BillandTrey

Reik, to legal implications of some of Bill Reik’s activities, and to

discussions relating to corrective actions that PaineWebber appar-

ently considered taking. One document also relates to a dispute

between Paine Webber and William Witter and involved a discussion

of problems surrounding Reik.

— hilt

The PaineWebber respondents admit that many of these docu-

ments were not provided to Zinsmeyer. The Paine Webber respon-

dents argue that Zinsmeyer cannot show “undue means.” They

assert that they asserted that these documents were privileged; that

they properly asserted a privilege regarding these documents; and

that Zinsmeyer never sought to compel production of these docu-

ments after Paine Webber asserted their privileged status. Regarding

the PaineWebber respondents’ assertions, the record reveals the

following.

Ata hearing via telephone before Cipolla on January 17, 1995, at

which Cipolla heard arguments on discovery motions, including a

motion by Zinsmeyer to compel discovery, Cipolla, after first

stating that the he wanted the arbitration to proceed “as expedi-

tiously as possible,” stated,

As to those documents which — in which a privilege has

been asserted, either attorney-client or work product, I am

inclined at this particular point to have, in this case, I guess, the

Respondents, identify those documents . . . 1 would like to see

what the log, for lack of a better term, indicates, and if

necessary, I have an in camera inspection of those documents.

Asaresult, I think that it’s going to be my determination and

the panel’s determination, if those privileges are challenged,

we are going to have to listen to it. So that’s basically what it

is.

As to those privileged items, I would like to seea log of those and

then later go through an in camera inspection and we will just

have to go through the documents and make rulings as we go.

After stating this, Zinsmeyer’s counsel then volunteered that he knew

the documents upon which PaineWebber asserted privileges; that he

would, in an effort to expedite matters, send a letter identifying those

—A42—

documents; and that PaineWebber should then produce such

documents for in camera inspection. Zinsmeyer’s counsel and

PaineWebber’s counsel then reached an apparent agreement that

there were 26 such documents. This number was based upon

Zinsmeyer’s counsel’s knowledge of 26 documents that a fed-

eral court ordered produced in the Bond litigation.

On January 18, the panel memorialized in writing its decision

at the January 17 hearing. The panel ordered, as to all documents

for which a privilege was asserted, in camera production and a

copy of the privilege log for all such documents. Thereafter, in

4 motion to compel, Zinsmeyer sought production for in camera

review of “all documents for which [PaineWebber] claim[ed] a

privilege,” and not just the 26 (later determined to be 24)

documents discussed by counsel on January 17. Zinsmeyer

identified 46 other documents on the privilege log that it wanted

produced in camera and further requested that “[i]f the

Paine Webber respondents are claiming privilege as to any of the

other documents listed on the privilege log .- - that those

documents be produced immediately for in camera review.”

Zinsmeyer requested that all other documents be produced, ifno

privilege was being asserted in the log. In a letter dated January

26, PaineWebber’s counsel responded to this motion, asserting

that it was agreed at the January 17 agreement that only 26

documents needed to be submitted to the panel for in camera

review. PaineWebber’s counsel objected to producing any other

documents for such review.

Ina letter dated February 27, NASD informed the parties that

Cipolla had apparently granted a motion for reconsideration by

PaineWebber. The letter indicated that Cipolla ordered

PaineWebber to produce “the forty or so documents and the

privilege log relating to the Bond v. Paine Webberwhichitclaims

to be privileged for in camera inspection,” and that the parties

could submit briefs on the issue of whether the documents were

privileged. PaineWebber then submitted 46 documents and the

pane! ruled on whether the documents were privileged. The

=:

panel found 20 of the group of 24 documents privileged and

apparently found most or all of the 46 documents to be privileged.

The record suggests that the panel never required Paine Webber

to produce for in camera inspection all documents to which

Paine Webber asserted a privilege. Zinsmeyer asserts, however, that

with respect to some of the documents identified in its supplemental

briefs which were not produced by Paine Webber, that Paine Webber

“hid” these documents in its 347-page privilege log containing

nearly 2,000 documents by providing vague or misleading descrip-

tions of the documents. Specifically, Zinsmeyer points to a July 10,

1990 Memorandum from Mary Joan Hoene, general counsel at

Mitchell Hutchins, to Don Spencer, anattorney at Mitchell Hutchins,

regarding “Reik Compliance Issues.” Paine Webber produced in

camera a draft version of this memorandum, while Zinsmeyer later

discovered in the Bond litigation that a longer, final version of this

memorandum, which contained more information, existed.

Paine Webber’s privilege log, makes no distinction or indication that

two versions of this memorandum existed.

As to this document, Paine Webber responds that it did not need

to produce the final version; that, in any event, the arbitrators would

have found the final version privileged because they found the draft

version privileged; and that any additional information in the final

version would not have changed the outcome of the litigation

because the panel heard other evidence and testimony on these

issues.

Zinsmeyer next points to some handwritten notes of Engelhardt,

written during a meeting with Hoene, Spencer and Cavell. The notes

are identified by PaineWebber with the stamp number 303394.

Paine Webber’ s privilege log indicates that documentnumber 303394

isadocument authored by Hoene and Cavell, both attomeys, and not

Engelhardt. Zinsmeyer asserts that this inaccuracy prevented it from

seeking in camera production of the document. Paine Webber makes

no response in its brief with regard to this inaccuracy.

—

Zinsmeyer next points to a note written by Robert Berson,

PaineWebber’s general counsel, regarding a February 13, 1991

telephone conversation he had with William Witter. The conversation

concemed Reik, his trading activities, legal problems surrounding

Reik, and Reik’s departure from PaineWebber and move to William

Witter. Zinsmeyer states that this document was neverpresented to the

panel and Berson nevertestified at the arbitration, although Zinsmeyer

asserts that if it had known of this document, it would have pursued

testimony from Berson and William Witter. Neither party (and

notably Paine Webber) asserts that this document was identified on the

Paine Webber privilege log. PaineWebber’s only response is that this

memorandum had nothing to do with Zinsmeyer, that it would have

presented no additional evidence not already known to Zinsmeyer or

not presented to the panel at arbitration.

Zinsmeyer also points circumstances regarding a nearly illegible

handwritten document of notes of William Cavell and a document

apparently referenced in that handwritten document. The handwritten

document was produced by PaineWebber. At the March 28 arbitra-

tion hearing session, Zinsmeyer’s counsel asked Cavell numerous

questions regarding this document, trying to determine what Cavell’s

notes meant. Cavell’s notes included Roman numerals I through IV

with specific notes after each numeral. Zinsmeyer’s counsel then

cross-referenced these notes with another document produced by

PaineWebber, the latter being typewritten. The typewritten document

contained headings with Roman numerals | and II, but did not contain

alll orIV. Noting that the subject matter of the Roman numerals I and

II on each documents matched, Zinsmeyer’s counsel specifically

asked Cavell and PaineWebber’s counsel if a complete typewritten

document with Roman numerals III and IV existed. In response,

PaineWebber’s attorneys stated:

| will just say for the record what we’ ve said many, many times

in the course of discovery: That is the only document that exists

in the files. You have asked many times for that document.

We’ ve verified for you many times that that is all that we have

in the files.

— ie

For the record, I will repeat what we’ve said many, many

times in the past; you have everything that exists in our

client’s file.

Zinsmeyer has now produced a lengthy typewritten document

that includes Roman numerals [ through VII, which clearly

appears to be a complete version of the type-written document

containing only Roman numeral | and II. The ful! document is a

lengthy interoffice memorandum which details information com-

piled by Cavell, Engelhardt, and Don Spencer in their investiga-

tion of Reik’s trading of Neutrogena securities. In their response

to Zinsmeyer’s supplemental memorandum, Paine Webber does

not contest that this document was not produced by them; it

asserts only that the matters discussed in this document were not

central or relevant to Zinsmeyer’s case and would not have made

a difference in the outcome of the arbitration.

The Court concludes that the PaineWebber respondents’

conduct regarding these undisclosed documents constitute “un-

due means,” warranting vacating the arbitration award. The

record before the Court, including the PaineWebber respon-

dents’ responses to Zinsmeyer’s supplemental memoranda and

the unequivocal statements of counsel during the arbitration

hearing, clearly shows that certain documents were hidden by

PaineWebber and kept from Zinsmeyer’s discovery during the

arbitration. It is clear also that these documents surfaced, or

became known to Zinsmeyer, only after the arbitration hearing

was completed, and especially after certain key witnesses were

questioned by Zinsmeyer at the arbitration. While the

PaineWebber respondents’ counsel were within their proper

bounds by zealously representing their clients and contesting

issues of privilege regarding many of the documents involved in

the arbitration, the record provides ample basis upon which the

Court can find that PaineWebber and its counsel overstepped

those bounds and improperly withheld documents from discov-

ery. The record evinces bad faith and misconduct in withholding

such discovery. Indeed, PaineWebber does not even attempt to

— A-46 —

explain why some of these documents were not available to

Zinsmeyer’s counsel prior to or during the arbitration.”

The PaineWebber respondents suggest that even if such

documents were not produced, the arbitration award should still

be confirmed. The PaineWebber respondents make the assertion

that the arbitrators would have found such documents privileged

in any event. The Court declines to speculate as to what the

arbitrators might have decided had Paine Webber been forthright

in producing a document to the arbitrators in the first instance.

PaineWebber also asserts that the withheld documents would

not have changed the outcome of the arbitration. Paine Webber

suggests in its response to Zinsmeyer’s second supplemental

memorandum, that the arbitrators would have reached the same

decision, and at one point, in reference to certain information

within a withheld document, states that “[t]he panel agreed with

PaineWebber that this activity did not constitute proof of ma-

nipulation.” The Court finds such arguments without merit.

PaineWebber’s assertion that the same outcome would have

occurred is contrary to its earlier position, asserted in response to

Zinsmeyer’s argument that the arbitrator’s decision was in

manifest disregard of the evidence, that the arbitrators did not

articulate the basis of their decision and that it could not be

determined from the record as to why the arbitrators reached

their decision. The Court is not required to reweigh the evidence

in light of the withheld documents and evidence.

Rather, the Court need only conclude that there be some causal

relation between the conduct and that party’s obtaining the arbitration

award. A.G. Edwards & Sons, Inc., 967 F.2dat 1403-04. Clearly,

the withheld documents were material and relevant to Zinsmeyer’s

2 As to some documents presented in Zinsmeyet’s supplemental briefs,

PaineWebber pointed out that some were in fact produced to Zinsmeyer,

produced in camera, or were not required to be produced in camera by the

arbitrators. Others, however, as discussed above, do not fall into any of these

categories.

a iT an

claims of transgressions by Bill Reik and the PaineWebber

respondents, and were a source of important information as to

Reik’s activities. As such, their absence undoubtedly impacted

upon Zinsmeyer’s ability to pursue its case and examine key

witnesses; their absence could certainly have impacted the

decision making process of the arbitrators. In light of this

withheld evidence, the Court cannot grant the PaineWebber

respondents’ motion to confirm the arbitration award.

III. Motions to Confirm Arbitration

While the Court will grant Zinsmeyer’s motion to vacate the

arbitration award with respect to PaineWebber Group Inc.,

Paine Webber Incorporated, Mitchell Hutchins Asset Management

Inc., William Reik, Jr., and William D. Witter, Inc., Zinsmeyer has

presented no basis upon which to vacate the award as to Morgan

Stanley and Kidder Peabody. The claims brought against Morgan

Stanley and Kidder Peabody were distinct from the claims against the

Paine Webber respondents, and Morgan Stanley and Kidder Peabody

were not involved with, or referenced in any of the withheld docu-

ments.

Ifaparty fails to meet its burden of proofby establishing a statutory

ground for vacating an arbitrator’s awardexi sts, confirmation ofthe

award by the court is mandatory. Domino Group, Inc. v. Charlie

Parker Memorial Foundation, 985 F.2d 41 7, 419-20 (8th Cir.

1993). Thus, the Court will confirm the arbitration award as to

Kidder Peabody and Morgan Stanley.

Accordingly,

IT IS HEREBY ORDERED that the application of plaintiff

Zinsmeyer Trusts to vacate an arbitration award relati ng to Morgan

Stanley & Co., and Kidder Peabody & Co., Inc. [document #1 in

Case No. 4:95CV02528 ERW] is DENIED.

IT IS FURTHER ORDERED that the counterclaim ofdefen-

dant Morgan Stanley for an order and judgment confirming an

'

j

is

—A48—

arbitration award [document #10 in Case No. 4:95CV02528

ERW] is GRANTED.

IT IS FURTHER ORDERED that the counterclaim of

defendant Kidder Peabody & Co. for an order and judgment

confirming an arbitration award [document #12 in Case No.

4:95CV02528 ERW] is GRANTED.

IT IS FURTHER ORDERED that the motion of plaintiffs

Paine Webber Group Inc., Paine Webber Incorporated, Mitchell

Hutchins Asset Management Inc., William Reik, Jr.and William D.

Witter, Inc., forjudgment confirming and arbitration award [docu-

ment #1 in Case No. 4:95MC00318 ERW] is DENIED.

ITIS FURTHER ORDERED that the cross-motion of defen-

dant Zinsmeyer Trust Partnership to vacate the arbitration awardas

to Paine Webber Group Inc., Paine Webber Incorporated, Mitchell

Hutchins Asset Management Inc., William Reik, Jr. and William D.

Witter, Inc. [document #4 in Case No. 4:95MC00318 ERW] is

GRANTED. IT IS FURTHER ORDERED that the motion of

Paine Webber for leave to filearesponse to Zinsmeyer’s supplemen-

tal memorandum in support of its motion to vacate [document #53 in

Case No. 4:95CV02528 ERW] is GRANTED.

IT IS FURTHER ORDERED that the motion of Zinsmeyer

Trust Partnership for a hearing on the motions to vacate an the

arbitration award [document #63] is DENIED.

A separate judgmentand order shall accompany this memoran-

dum and order.

Dated this 1 5th Day of April, 1997.

/s/ E. Richard Webber

UNITEDSTATES

DISTRICT JUDGE

~— A —

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF MISSOURI

EASTERN DIVISION

No. 4: 95CV02528 ERW

ZINSMEYER TRUSTS PARTNERSHIP, a Missouri General

Partnership, by Andrew Roberts Zinsmeyer Trust dated July

27, 1964, Jeffrey Woods Zinsmeyer Trust dated July Trust B

dated November 29, 1971, Andrew R. Zinsmeyer Revocable

Trust date August 27, 1982, Mary Jane Zinsmeyer Trust dated

August 27, 1964, Andrea Zinsmeyer Trust B dated April 15,

1983, Daniel M. Zinsmeyer Trust B dated February 5, 1985,

Amy S. Zinsmeyer Trust dated January 19, 1987, Jonathan

Roberts Zinsmeyer Trust B dated February 10, 1989, Daris

Zinsmeyer Education Trust dated December 22, 1982,

and Jada Partnership, General Partners,

Plaintiff/counter-claim defendant,

v.

MORGAN STANLEY & CO.. INCORPORATED;

KIDDER PEABODY & CO.., INCORPORATED,

Defendants/counter-claimants.

Consolidated with:

No. 4: 95MC00318 ERW

PAINEWEBBER GROUP INC:: PAINEWEBBER, INC.;

MITCHELL HUTCHINS ASSET MANAGEMENT INC.;

WILLIAM J. REIK, JR.; WILLIAM D. WITTER, INC-.;

Plaintiffs,

V.

ZINSMEYER TRUSTS PARTNERSHIP,

Defendant.

[Filed April 15, 1997]

— A-50 —

JUDGMENT AND ORDER

IT ISHEREBY ORDERED, ADJUDGED and DECREED

that the arbitration award reflected in the November 30, 1995 Final

Order of ‘he National Association of Securities Dealers, Inc., regard-

ing the claims ofZinsmeyer Trusts Partnership against Paine Webber,

Inc., Paine Webber Group, Inc., Mitchell Hutchins Asset Manage-

ment Inc., William J. Reik, Jr., William D. Witter, Inc., Morgan

Stanley & Co., Inc., and Kidder Peabody & Co., Inc., is CON-

FIRMED as tothe NASD award in favor of Morgan Stanley & Co..

Inc.,andKidder Peabody & Co., Inc., andagainst Zinsmeyer Trusts

Partnership.

IT ISFURTHER ORDERED that the arbitration award re-

flected in the November 30, 1995 Final Order of the National

Association of Securities Dealers, Inc., regarding the claims of

Zinsmever Trusts Partnership against PaineWebber, Inc.,

Paine Webber Group, Inc., Mitchell Hutchins Asset Management

Inc., Wiliam J. Reik, Jr., William D. Witter, Inc., Morgan Stanley &

Co., Inc. and Kidder Peabody & Co., Inc., is VACATED as to the

NASD award in favor of Paine Webber, Inc., Paine Webber Group,

Inc., Mitchell Hutchins Asset Management Inc., William J. Reik, Jr.,

and William D. Witter, Inc.andagainst Zinsmeyer Trusts Partnership.

Datedthis 1 Sth Day of April, 1997.

/s/ E. Richard Webber

UNITEDSTATES

DISTRICT JUDGE

— A-51 —

APPENDIX C

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF MISSOURI

EASTERN DIVISION

Case No. 4:95CV02528 ERW

ZINSMEYER TRUSTS PARTNERSHIP,

Plaintiff,

V.

MORGAN STANLEY & CO. INC. and, (sic)

Defendants.

MEMORANDUM AND ORDER

[Filed: Jan. 29, 1998]

This matter is before the Court on plaintiff William D. Witter,

Inc.’s (“Witter”) motion to alter or amend judgment vacating

arbitration award and to enter judgment confirming arbitration

award [document #69], and defendants PaineWebber Group

Inc., Paine Webber Incorporated, Mitchell Hutchins Asset Man-

agement Inc., and William J. Reik’s motion to alter or amend

judgment [document #70].

On April 15, 1997, the Court entered a Memorandum and

Order denying the motion of plaintiffs Paine Webber Group Inc.,

Paine Webber Incorporated, Mitchell H utchins Asset Management

Inc., William Reik, Jr. and William D. Witter, Inc., for judgment

confirming an arbitration award, and granting the cross-motion of

defendant Zinsmeyer Trust Partnership to vacate the arbitration

award as to Paine Webber Group Inc., PaineWebber Incorporated,

Mitchell Hutchins Asset Management Inc., William Reik, Jr. and

William D. Witter, Inc. Plaintiffs Witter, the Paine Webber defendants

(“PaineWebber’”), and Reik now move to alter or amend this

judgment.

ne

Motions for reconsideration, under Rule 59fe), are intended to

correct manifest errors of law or fact or to present newly discovered

evidence. Hagerman v. Yukon Energy Corp.,839 F.2d407,414 (8th

Cir.), cert. denied, 488 U.S. 820 (1988). Rule 59(e) motions should

not be used to “rehash arguments previously considered and re-

jected by the court.” Schweitzer-Reschke v. Avnet, Inc.,881 F. Supp.

530, 532 (D. Kan. 1995); see also Lewis v. United States, 555 F.2d

1360, 1362 (8th Cir. 1977).

Witter asserts that granting the motion is necessary to correct

manifest errors of law and fact, and to prevent manifest injustice.

Witter relies on the fact that it is a separate party from Paine Webber,

and is independently represented. Furthermore, Witter contends

that neither Zinsmeyer nor the Court has identified any conduct by

Witter which would support a finding that Witter procured the

arbitration award through undue means, and that there is no basis to

charge Witter with the alleged conduct of PaineWebber.

Zinsmeyer responds that Witter cannot demonstrate a basis for

altering or amending the judgment because fundamental fairness

dictates that it cannot benefit from PaineWebber’s undue means,

and also because an additional basis other than undue means existed

under the Court’s Memorandum and Order to deny Wiuer’s motion.

Paine Webber and Reik submit that the evidence before the Court

does not support a finding of intentional misconduct. They contend

that there were only two isolated errors in a privilege log that

contains some two thousand entries. Furthermore, they assert that

the record reflects that the privilege log and related materials were

sufficient to enable Zinsmeyer’ s counsel tochallenge Paine Webber’s

privilege assertions. Paine Webber and Reik contend that the panel’s

failure to review the four documents had nothing to do with any

alleged misconduct by PaineWebber’s counsel, and that there is no

evidence that the errors were intentional.

Zinsmeyer responds that PaineWebber and Reik have not dem-

onstrated any of the recognized bases under which they are entitled

— A-53 —

to have the judgment altered or amended. However, in the

alternative, Zinsmeyer argues that they could not have discov-

ered PaineWebber’s undue means because those means did not

become discoverable until after arbitration. F urthermore,

Zinsmeyer notes that the documents that were withheld con-

tained evidence that would have been critical in the arbitration.

PaineWebber’s mischaracterization of its behavior, which

requires reversal of the arbitration award, by describing its

conduct that invalidated hundreds of hours of hearings, as

unintentional and incidental is in direct conflict with the record

and the Courts’ conclusions. The arbitration award which the

Court must reverse was procured through undue means perpe-

trated by PaineWebber. Witter, like all participants in the arbi-

tration process, will suffer from PaineWebber’s conduct. At the

same time the integrity of the judicial process will not permit

Witter to benefit from these actions of PaineWebber. Thus, the

Court finds that there are no manifest errors of law and fact, and

that granting Witter’s motion is not necessary to prevent mani-

fest injustice. Therefore, Witter’s motion to alter or amend will

be denied.

The Court agrees with Zinsmeyer that Paine Webber and Reik

have not demonstrated any grounds under which they are entitled to

have the judgment altered or amended. Specifically, the Court

finds that their arguments are simply an attempt to “rehash

arguments previously considered and rejected by the court,” and

misrepresent the nature of their conduct which requires the

Court’s action in reversing the arbitration award. See Schweitzer-

Reschke, 881 F. Supp. at 532. Therefore, PaineWebber and

Reik’s motion to alter or amend will be denied.

Accordingly,

IT ISHEREBY ORDERED that plaintiff William D. Witter,

Inc.’s (“Witter”) motion toalteroramend judgment vacating arbitra-

tion award and to enter judgment confirming arbitration award

[document #69] is DENIED.

a» fp

IT 1S FURTHER ORDERED that defendants Paine Webber

Group Inc., PaineWebber Incorporated, Mitchell Hutchins As-

set Management Inc., and William J. Reik’s motion to alter or

amend judgment [document #70] is DENIED.

Dated this 29th day of January, 1998.

/s/ E. Richard Webber

E. RICHARD WEBBER

UNITEDSTATES

DISTRICT JUDGE

— A-55 —

APPENDIX D

UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

No. 98-1649/1741EMSL

PaineWebber Group, Inc.; PaineWebber, Inc.;

Mitchell Hutchins Asset Management, Inc.;

William J. Reik, Jr.; William D. Witter, Inc.,

Appellants,

vs.

Zinsmeyer Trusts Partnership,

Appellee.

Order Denying Petition for Rehearing

and for Rehearing En Banc

The petition for rehearing en banc is denied. Judge McMillian

would grant the petition.

The petition for rehearing by the panel is also denied. (5128-

010199)

October 19, 1999

Order Entered at the Direction of the Court:

/s/ Michael E. Gans

Clerk, U.S. Court of Appeals, Eighth Circuit

oa Corcenrg iA ULL

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— A-56 —

Nena Caron Tad

— A-57 —

APPENDIX F

EXHIBIT 6

PLAINTIFF’S EXHIBIT 179

I. Reik Investment Style

Bill Reik has been with Mitchell Hutchins since 1974. His

primary investment style is to research, follow and invest in

companies meeting fourinvestmentcriteria:

a) astrongmarketniche or franchise;

b) asignificant family, director or officer ownership;

c) littleornolong term debt;

d) _ littleornoinstitutional ownership or research following.

Reik clients are primarily invested in 12 companies meeting the above

criteria. Attached is a summary page reflecting these companies.

Positions in four ofthe twelve exceed 5% and Mitchell Hutchins files

Schedule Gs for such positions. The investment strategy is long term

holding of these positions.

Bill Reik has developed relationships with most of companies’

managements through the long term and large holdings in these

companies. He also has working relationships with the market-

makers or select broker-dealers through which he handles client

orders. Reik’s trading technique for exchange listed issues is for

trades to go through the Mitchell Hutchins trading desk. Trades in

over-the-counter issues are handled directly by Trey Reik (son) with

market-makers and then processed through the trading desk.

His client base includes the following types of clients:

a) discretionary accounts handled ona fee basis pursuant to

an advisory agreement;

~= M58

b) non-discretionary accounts handled on a fee basis

pursuant to an advisory agreement;

c) Cypress Fund - PaineWebber’s closed-end fund based

on the Reik investment style with about $65 million in

assets;

d) brokerage accounts based on commissions only.

The advisory clients include individuals, trusts, pension plans, and

institutions including foundations and municipalities with $400.5

million in assets under management.

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— A-60 —

HOLDINGS BY PORTFOLIO MANAGER—

MUTUAL FUNDS

(In thousands of shares)

April 1990

Reik § Cypress

Clients Fund Other Managers

Firsch’s Rest. 1,480 803 Not Meaningful

Tejon Ranch 1,920 79 a=

Neutrogena 3,815 699 —-

Medicine Shoppe, Intl. 628 169 —

Williams Sonoma 203 118 —

Church & Dwight 830 —

Smucker 277 51 —

American Precision 54 165 —

Star Banc 482 165 —

Tootsie Roll 66 51 —

McCormick & Co. 146 152 —

Tiffany & Co. 1] 75 —

0120L/8

Pret rai ea ame ah, Nag UU A

II.

— A-61 —

Neutrogena Corp. Background

Neutrogena Corporation (NGNA) is a Los Angeles, CA

based company that offers a line of premium quality spe-

cialty skin and hair care products. It is traded on NASDAQ

and has 26.8 million shares outstanding.

Bill Reik has been accumulating NGNA shares for his

advisory clients for about 10 years and in Cypress Fund

since 1986. A breakdown of current Reik clients holdings

is as follows:

Outstanding shares 26.8 million 100%

Family Ownership 13.7 million 51%

NGNA Float 13.1 million 49%

MHAM Accounts _Shares % Outstanding % Float

Total Reik

clientholdings 4.7million 17.6% 36%

Reik Discretionary 2.1million 7.8% 16%

including Cypress

(733,800)

Reik

non-discretionary 2.4million 8.9% 18%

Reik Brokerage

accounts including 2 million .7T% 1.5%

W. Reik personal

holding of 33,218 shares

Account 300P -6million 2% 4%

The average client cost basis is about $1 0, although the Fund’s

average cost (low $20’s) is higher than the client cost. Mitchell

Hutchins has filed Schedule Gs for NGNA and at 12/31/89,

a i en

our reported holding (discretionary) was 7.69% (2,005,459

shares).

NGNA has came under price pressure in the last several

months with a rising short interest (currently about |

million shares) due to several factors. The company histori-

cally has had very strong earnings growth which has now

slowed due to increased competition from major consumer

products companies, market saturation, a need for interna-

tional expansion and research capital, research analysts’

negative opinions, company resignations, and reduced com-

pany expectations.

The NGNA price history has ranged from approximately $2

in 1982 to $35 in 1989 with six stock splits/stock dividends

since 1984. It is currently trading at $2!+ having dipped

recently to the $18 - $19 range. Average daily volume in

1989 was about 56,000 shares. There are twenty market-

makers listed for NGNA,

— A-63 —

APPENDIX G

EXHIBIT 3

—CONFIDENTIAL—

ATTORNEY-CLIENT PRIVILEGED

Interoffice PaineWebber

TO: ROBERT M. BERSON, ESQ.

FROM: MARK COMMANDER

MARY JOAN HOENE, ESQ.

DATE: JUNE 11, 1990

SUBJECT: WILLIAM J. REIK. JR.

Pursuant to your request, following is a review of the activity in

the securities of Neutrogena Corp. Much of the information

contained herein has been compiled by Bill Cavell, Rick

Engelhardt and Don Spencer.

1. REIK INVESTMENT STYLE

Bill Reik has been with Mitchell Hutchins (“MH”) since

1974. His primary investment Style is to research, follow

and invest in companies meeting four investment criteria:

1.) astrong market niche or franchise;

2.) a significant family, director or officer Ownership;

3.) little or no long term debt:

4.) little or no institutional ownership or research follow-

ing.

Reik clients are primarily invested in 12 companies meet-

ing the above criteria. Attached is a summary page reflect-

ing these holdings (see Exhibit A). Positions in four of the

twelve exceed 5% of the outstanding shares and MH files

ee = ae

Schedule 13Gs for such positions. The investment strategy

is long term holding of these positions.

Bill Reik has developed relationships with most of compa-

nies’ managements through the long term and large hold-

ings in these companies. He also has working relationships

with the market-makers or select broker-dealers through

which he handles client orders. Reik’s trading technique for

exchange listed issues is for trades to go through the MH

trading desk. Trades in over-the-counter issues are usually

handied directly by Trey Reik (Bill’s son) with market-

makers and then processed through the trading desk. This

manner of effecting and recording OTC transactions is

directly related to the concerns which arise in connection

with the trades of April 18 and 19, 1990.

Reik has the following types of clients:

a.) discretionary accounts handled on a fee basis pursuant

to an advisory agreement;

b.) non-discretionary accounts handled on a fee basis

pursuant to an advisory agreement;

c.) Cypress Fund - PaineWebber’s closed-end fund based

on the Reik investment style with about $65 million in

assets; and

d.) brokerage accounts based on commissions only.

The advisory clients (a, b, and c above) consist of individu-

als, trusts, pension plans, and institutions including founda-

tions and municipalities, with a total of $400.5 million in

assets under management.

NEUTROGENA CORP. BACKGROUND

Neutrogena Corporation (NGNA) is a Los Angeles, CA

based company that offers a line of premium quality spe-

Ee

— Mi —

cialty skin and hair care products. It is traded on NASDAQ

and has 26.8 million shares outstanding.

Bill Reik has been accumulating NGNA shares for his clients

for about 10 years and in Cypress Fund since 1986. There are

26.8 million shares outstanding of NGNA. Family owner-

ship represents 13.7 million shares (51%) witha public float

of 13.1 million shares (49%). Reik accounts, including

Cypress Fund, account for a significant portion of the public

shares.

A breakdown of current Reik clients’ holdings is as follows:

MHAM % %

Accounts —— Shares Outstanding Float

Reik Discretionary 2.1 million 7.8% 16%

including Cypress

(733,800)

Reik non-discretionary 2.4 million 8.9% 18%

Reik Brokerage accounts .2 million .T% 1.5%

including W. Reik personal

holding of 33,218 shares

Account 300P million 2% 4%

Total Reik client holdings4.7 million 17.6% 36%

The average client cost basis is about $10, although the

Fund’s average cost (low $20’s) is higher than the client cost.

MH has filed Schedule 13Gs for NGNA andat 12/31/89, our

reported holding (discretionary) was 7.69% (2,005,459

shares).

NGNA has came under price pressure in the last several

months with a rising short interest (currently about | million

shares) due to several factors. The company historically has

had very strong earnings growth which has now slowed due

III.

— A-66 —

to increased competition from major consumer products

companies, market saturation, a need for international

expansion and research capital, research analysts’ negative

opinions, company resignations, and reduced company

expectations.

The NGNA price history has ranged from approximately $2

in 1982 to $35 in 1989 with six stock splits/stock dividends

since 1984. It is currently trading at $20 having dipped

recently to the $18 - $19 range. Average daily volume in

1989 was about 56,000 shares. There are approximately

twenty market-makers listed for NGNA. Reik executes

most of his transactions with Jesup and Lamont, one of

these twenty dealers; the reasons he offers for doing do are

discussed in Exhibit B. He also uses Kidder and Shearson

on occasion.

ACTIVITY OF APRIL 18 AND 19, 1990

Reik accounts purchased a total of 124,000 shares of

Neutrogena on the two days in question. Order tickets

relating to each of these trades were not processed until the

day before settlement. As noted earlier, Reik does not

transact OTC business through the MH trading desk but

rather places orders directly with market makers. Aside

from the Reiks (or their assistants), no one else at MH is

aware of the existence of a pending or consummated

transaction handled in this manner until an order ticket is

furnished to the MH trading desk. Inasmuch as Reik does

not possess a time stamp, his order memoranda bear no

record of time of entry or execution. In short, it is not

possible to ascertain when OTC orders placed by Reik

directly with a market maker are entered or executed. The

time stamp subsequently placed on such order tickets by the

MH trading desk has no regulatory relevance.

Significant questions arise from business conducted in this

manner. In addition to concerns relating to the applicable

eee eee eee eee ee a ee ee See ee eee ee ee See ee ee) ae

CC

—— ee ee

IV.

any: pee

regulations governing the creation and maintenance of

books and records, the methodology described above af-

fords the opportunity of “warehousing” positions. The

ability to absorb selling pressure is also enhanced when

additional time to locate purchasers is thus made available.

Questions as to motive must be raised when the allocation

of a large block purchase is delayed, particularly when the

purchaser already owns a substantial position and the

security has been subject to recent selling pressure.

THE “300P” ACCOUNT

Bill Cavell and Don Spencer met with Bill Reik, Trey Reik

and Breda Beckerle on June 5, 1990 to discuss the

Neutrogena purchases by the 300P account. Reik first gave

historical background on the business and results of

Neutrogena and the rationale for his large investment on

behalf of his clients and the Fund. He described several

recent developments and trends which could adversely

impact Neutrogena for the short term, and expressed con-

cern over the high level of short activity in Neutrogena’s

stock.

Reik explained that, strategically speaking, Neutrogena has

long been a prime candidate for a merger with a large

consumer products company but that the founding family,

who together own 51% of Neutrogena, have always been

reluctant to sell. He said he had approached Lloyd Cotsen,

Neutrogena’s chairman, and suggested that it would benefit

Neutrogena ifa number of large consumer products compa-

nies took substantial positions in Neutrogena, since those

companies would understand Neutrogena’s business from

the long-term point of view and would not over-react to

short-term developments. Cotsen did not object to this idea.

Reik then, through Rho Management (which has an advi-

sory relationship with Colgate Palmolive), received an

order from Colgate for up to $5 million worth of Neutrogena,

—~ As —

and this order was later increased as it was filled to just under

$15 million worth (the Hart-Scott threshold). (The account

was opened in the name “300P” to protect the identity of the

purchaser.) Reik states that he learned from either Rho Man-

agement or Colgate that Martin Lipton is advising Colgate in

some capacity and that Lipton expressed concern that Colgate

establish a record to show that it is not acting in concert with

Reik or any Reik affiliate. Reik’s contact at Rho Management

is Jack Hyland, a former PaineWebber investment banker. It

is not know whether Rho approached Reik or Reik approached

Rho.

Reik said that he would like to get other consumer products

companies to make substantial investments in Neutrogena. He

indicated that he is seeking to contact a number of companies,

including Procter and Gamble, Johnson & Johnson, L’Oreal

and a Japanese company. He further advised that he was

working with Here Segalas to help get at least some of these

companies involved, and had contacted other investment

bankers and other intermediaries who might help him with

other companies. As discussed earlier, the Schedule 13Gs

which have been filed include only Reik’s discretionary

accounts’ holdings. No intent other than investment (in the

ordinary course of business) has been reflected on these filings.

Reik was cautioned about the need to limit direct contact with

these potential investors to avoid the possibility that he might

be deemed to have received inside information, be deemed to

be acting in concert with some other investor or expose himself

and the firm to burdensome litigation and regulatory scrutiny.

The possibility was also raised that these activities could result

in his being restricted from trading his clients’ or the Fund's

Neutrogena stock. It was suggested that, if other companies

decide to take a Neutrogena position, the brokerage business

should be declined. Reik told us that turning away the broker-

age business was problematic for the following reasons:

— Aho —

(1) The commissions could be substantial.

(2) He has the best knowledge and experience in the

market for Neutrogena, and the prospective investors

might not want to deal with someone else. !

(3) Ifanother broker attempted to zaake large Neutrogena

purchases, it might cause speculation anda price run-up.

The market is accustomed to seeing Reik make large

Neutrogena purchases.

Reik’s selection of Jesup & Lamontas dealer for the bulk of the

Neutrogena orders, and the execution of some trades ata $1 /

16 interval, was also discussed. As mentioned earlier, these

matters are addressed in Exhibit B.

V. REGULATORY SCRUTINY OF REIK ACTIVITIES

On at least three occasions one of the SRO’s has made

inquiry in relation to Reik activities. Each inquiry con-

cerned one of the “concentrated” positions shown in Ex-

hibit A.

The American Stock Exchange is currently reviewing cer-

tain activity in the common stock of Frisch’s Restaurants.

The review was instigated by the simultaneous movement

(in late 1987) of Frisch’s shares from margin to cash

accounts by a number of Reik’s customers, resulting in

PaineWebber’s need to call in outstanding stock loans

during January 1988. (A significant short position in Frisch’s

existed at the time.) PaineWebber later received a report

prepared by the law firm of Rosenman & Colin, apparently

at the behest of a client (Gilder Gagnon) maintaining a

substantial short position in Frisch’s. This report, dated July

22, 1988 and entitled “Report on Trading Activity in the

‘Given that Colgate is willing to use Reik as agent rather than deal directly

with a market-maker, presumably Colgate sees important advantages to

dealing with Reik.

— eo

Stock of Frisch’s Restaurants, Inc.”, alleges among other

things that Reik was “marking the close”, splitting orders to

create the appearance of multiple executions and otherwise

executing orders in a fashion designed to manipulate the

price of the stock. (Notwithstanding such allegations, it

appears that certain similar activities may existin Neutrogena

transactions.) The AMEX investigation is currently being

handled for PaineWebber by Roberta Carmel of Kelly Drye

& Warren.

REDACTED

The AMEX is also conducting a review of transactions in

Cypress Fund. The review is apparently focussing on

certain specific transactions executed at or near the close of

trading on several days. (It should be noted that in accor-

dance with usual MH practice for exchange-listed securi-

ties, Reik phoned these orders to the MH trading desk

without providing any account designations.) It appears

that a number of transactions for accounts handled by Reik,

as well as certain transactions for an account serviced by

our Encino, CA office — Sandra Kiratsoulis and Richard

Kiratsoulis, JTW ROS — were executed at or near the close.

The Encino account also owns substantial positions in a

number of other “Reik” stocks. The nature of any relation-

ship between Reik and the Kiratsoulis’ is unclear at this

time.

In November 1989, counsel to NAV Partners sent a letter to

the SEC alleging that Reik or his affiliated accounts had

entered transactions in Cypress shares intended to mark the

close, citing specific trades on several trading days. Mitchell

Hutchins Legal and Kirkpatrick & Lockhart reviewed all

Mitchell Hutchins trading tickets for the days in question,

and found that, with one exception, the trades cited were not

those of Reik or his client’s. Kirkpatrick & Lockhart accord-

ingly told the SEC that the allegations were unfounded.

V1.

VIL.

a a

Finally, the NASD has just commenced a review of trading

activity in the common stock of Neutrogena for the period

March | through April 17, 1990. Standard trading informa-

tion has been requested.

INVESTMENT BANKING ACTIVITIES

Hercules Segales of the IBD has discussed the potential

acquisition of Neutrogena with a number of possible suit-

ors. Segales indicates that at least preliminary general

conversations have deen held recently with both L’Oreal

and Johnson & Johnson, although it appears that L’Oreal

may be uninterested at this time. Reik seems to have had a

number of conversations with Segalas on this topic and has

Suggested several potential suitors for Segalas’ consider-

ation. A copy of a letter dated May 14, 1990, from Segalas

to a director of L’Oreal, is attached as Exhibit C. Among

other things, a potential investment banking fee is dis-

cussed therein.

CONCLUSION

Based upon the foregoing, and in consideration of the

potential for market domination, it appears appropriate to

effect the following steps:

1. Create a Chinese Wall between Reik and a) the rest of

MH, b) PaineWebber’s IB Division and c)

PaineWebber’s Equity Division.

'

Add Neutrogena to the Firm’s Watch List.

‘a

Prohibit, pending a full review of the situation, any

additional purchase transactions in Neutrogena by

Cypress Fund, a// other accounts handled by Reik and

the accounts of Reik and related persons. Sales trans-

actions would not be restricted — though subject to

approval by MH Legal — unless such sales are inci-

Ca

a= ha

dent to the accumulation of a substantial position or

other activity of a banking nature.

Prohibit Reik from soliciting transactions in

Neutrogena of a brokerage or banking nature, directly

or indirectly (except as set forth in 3, above}, within

Paine Webber, Mitchell Hutchins or otherwise.

Commence a review of the overall nature and atten-

dant risks of Reik’s investment style, especially as

related to the trading practices employed in the secu-

rities of issuers where a substantial position is owned.

Require that Reik place and execute all orders through

the MH trading desk, as is the usual practice for other

MH portfolio managers.

Implement all recommendations which arise from the

previously requested and scheduled review by Manage-

ment Audit of the existing system of supervision and

control over MH and Reik in particular.

ieee

ay eo

APPENDIX H

Hearing Transcript 3/28/95, Vol. II

* * *

[238]

Re: Zinsmeyer Trusts Partnership, etc.

VS.

Paine Webber Group, Inc., etc.

March, 28, 1995

ARBITRATION HEARING, VOLUME II

* * *

[423]

MR. DOUGLASS: Ken, this is the form document for 179 that

was produced to us; all right? If you have a complete copy of the

memo and it exists, we would appreciate it being produced.

MR. LYONS: I will just say forthe record what we’ ve said many,

many times in the course of discovery: Thatis the only document that

exists in the files. You have asked many times for that document.

We've verified for you many times that that is all that we have in the

files.

MR. DOUGLASS: Allright, butin lightofMr. Cavell’s testimony,

and in light of this memo, I’masking if there is a Il and IV; okay?

MR. HIGGINS: Mr. Cavell didn’ ttell you [424] there wasa III

and IV.

MR. DOUGLASS: I understand that. Ifthere is one, I’dlike tosee

it.

MR. LYONS: Forthe record, I will repeat that we’ ve said many,

many times in the past; you have everything that exists in ourclient’s

file.

* * *

a | pa

APPENDIX I

EXHIBIT 2

Interoffice PaineWebber

MEMORANDUM

TO: File

FROM: Robert M. Berson, Esq.

Re: Bill Reik

DATE: February 13, 1991

At about 4:00 p.m., I returned a telephone call from Bill Witter

who telephoned me earlier in the afternoon. Mr. Witter said he

was calling on behalf of Bill Reik who was now working at his

company. He said that it was not professional or appropriate for

PaineWebber to hold Reik’s personal account hostage. I told

Witter that he was treading on thin ice; that he is a Director of the

Cypress Fund; that Reik has exposed the Directors personally to

potential problems; that he does not have all the facts; that the

customer situations involved millions of dollars of potential

losses and that there is reason to believe Reik was primarily

responsible for same and that I had told Reik on February 8th to

obtain counsel for the purpose of representing him in negotiating

with us an amicable resolution of the customer problems, his

participation therein and outstanding compensation issues.

Witter reiterated that although he was not a lawyer he felt that

Paine Webber was nottreating a Managing Director fairly. He said

that Reik made PaineWebber much money and this was no way to

show it. I told Witter that it was indeed awkward for him to be

advocating relief for Reik under any circumstances; that I knew him

indirectly through Haig Casparian; that perhaps he ought to chat with

Haig before he involved himselfany further on Reik’s behalf; and that

he was placing himself, inmy view, ina potential conflict situation ifhe

pursued this further on Reik’s behalf.

Se Te er Te te ne Tm |

— A-75 —

Witter went on to ‘Ithat he would like to work this out in a

professional manner. I said that is was in everyone’s interest that

this matter be resolved privatel y between Reik and Paine Webber

because it would not be in anyone’s interest to air these matters

publicly. I urged him to have Reik obtain a lawyer. I said that

Reik has shown a disdain for spending one dime on anything,

including a financial participation in the Beattie Motors case and

that he would not spend his money to retain counsel.

I told Witter that Reik has access to his personal account. He can

enter orders but cannot withdraw funds until we had the opportunity

to study the account. Witter requested that he be given a copy of

Reik’s margin account because Reik wanted to remove cash. | said

I woulddiscuss this with Reik personally and that I would not discuss

this with him, only with Reik orhis lawyer. I toldhim I would prefer

a lawyer. He said he hoped we could work this out.

RMB:SP

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