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

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URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386004_0865%3A2

## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 2000
- **Citation:** 529 U.S. 1020

## Text

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

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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

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—— 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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386004_0865%3A2. Public record. Not legal advice.