# Petition for Writ of Certiorari — Baghdady v. Sadler

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 1993
- **Citation:** 507 U.S. 1018

## Text

Bupreme Court, U.S.

“ae FILED
i 210 ; FEBS 1993

No. {

"DFFICE OF THE CLERK

Supreme Court of the United Strtes

October Term, 1992
ELIE J. BAGHDADY,
Petitioner,

VAY

LARRY D. SADLER, and MERRILL, LYNCH, PIERCE,
FENNER, AND SMITH, INC.

Respondents.

Petition for a Writ of Certiorari to the United States Court of
Appeals for the First Circuit

PETITION FOR A WRIT OF CERTIORARI

JACK C. CHILINGIRIAN
Attorney at Law
Attorney for Petitioner
42400 Grand River Avenue
Suite 109
Novi, Michigan 48375
(313) 348-7400

3216

ve late (800) 3 APPEAL « (800) 5 APPEAL * (800) BRIEF 21
ervices, inc.

ne

QUESTIONS PRESENTED

1. Whether the District Court erred in denying Petitioner's
request for a jury trial and ordering arbitration when there was 2
dispute of material fact as to whether the parties had agreed to
arbitrate the claims in issue between them.

2. Whether the “manifest disregard” standard for vacating an
arbitration award was properly applied in this case.

ii
TABLE OF CONTENTS

Page
ee Pee i
pe ee ii
pe PTET ETC iv
CPUS DOUG oinkck cen dnnwacensane neous |
FP eTTT Tree 2
Statutory Provisions Involved ..................2005. 2
SUMNER OT IG oo an 00000 605 440058eeeee 2
| PTET TTT ee 3
B. The DistrictCourtOpinions .......eccceseses 6
C. The Court OfAppeals’ Opinion ............... 8
Reasons for Granting the Writ .................0008- 9

I. The federal policy favoring arbitration should not

apply in cases where facts alleging fraud are

asserted and where a timely demand for jury trial is
requested under 9 U.S.C. $4. ......ccccccccens 9

A. The Statutory Right To A Trial Pursuant To

9 U.S.C. § 4 Should Not Be Undermined And
FUROR TORRE. 06 6ascecdeteeneaee 9

| . . )
.

By

:

dq

|

:

ili

Contents

Page
B. Standard Of Review And Applicable Law. .. 10

C. The First Circuit Decision In The Instant Case

Conflicts With The Third Circuit Opinion Of
Par -Knit Mills v. Stockbridge Fabrics ..... 16

II. The federal policy upholding arbitration should not

undermine the vitality of 9 U.S.C. § 4 and should be
modified to protect investors who claim fraud. ... 19

A. Further Erosion Of The Principles Of Prima

Paint As Reflected In The FAA Should Cease.
ah awee ck kweensschessenss occas 19

B. The Last Stand For The Investors — This
Court Should Level The Playing Field. ..... 20

III. A uniform stand for vacating arbitration awards
should be established by this Court. ........... 22

A. The Standard For Vacating Of An Arbitration
erry Teer ee ee ee 22

B. This Court Should Modify The Standard Set

Forth In Advest In Order To Deny

Confirmation To Arbitration Awards That

Lack Any Rational Basis Or Otherwise To

Prevent The Miscarriage Of Justice In Cases
Such As The Instant Case. .............-- 25
TCC Cec ck ane eeGesencanscnssencrecens 30

;
\

ee

iv

Contents

TABLE OF CITATIONS

Cases Cited:

Page

Advest, Inc., v. McCarthy, 914 F.2d 6 (1st Cir. 1990) ....8,23,25

Arnold v. Arnold Corp., 920 F.2d 1269 (6th Cir. 1990) ...

Aronson v. Dean Witter Reynolds, Inc., 675 F. Supp. 1324
Ge UG EE 40 sug S cd cdunecnesannakeueaeunxs

Begosian v. Gulf Oil Corp., 561 F.2d 434 (3rd Cir. 1977)

Bernhardt v. Polygraphic Company of America, Inc., 350
dk CURE we hhcbadsusciucninvesdaseceesd) eee er eer rrr eT eT ree re 10, 11,1219
DER D8 chs Wa 00 000s 950 ede wens eudeaerkerNaed 2

Vili

Contents
Page
PES ine eae Ge Cen ee ea hook ek Reon eae 2,22
ck | I Ra eee ee, en ene ae i eee 7
Se ee PRAM? | 6 Oka whee khakcnees ’ ceheecabas 2, 19,30
Ps BREED 6 ia wasn he ndewks Week eee ek ieeers 2
Rule Cited:
Federal Rule of Civil Procedure 56(c) ................ 12
Other Authorities Cited:
Robert R. Gregory, Arbitration: It’s Mandatory But It Ain’t
Patt, 19Sec. Res. LJ. 181 (1991) ......ccccccccscs 22
S. Kupperman & G. Freeman, Achieving Justice in
Arbitration, 65 Tulane L. Rev. 1547(1991) ......... 25
APPENDIX
Appendix A — Opinion of the United States Court of
Appeals for the First Circuit Dated September 9, 1992
LVKC6EASORIERNOD ORS OAAAE DR ESRDOGOEAD US Ow oe ee la
Appendix B — Judgment of the United States Court of
Appeais for the First Circuit Dated September 9, 1992
KOLAMAh eS DECREE AN THESE ODOR ERAK EERE ee tee 8a
Appendix C — Memorandum of the United States District
Court, District of Massachusetts, Dated January
oe he ce, MEE EET RE OCT OCTET eT ee 9a

ix

Contents
Page
Appendix D — Order Extending Time of the Supreme
Court of the United States Dated November 20, 1992 . 12a

Appendix E— Relevant Statutes ...............0-05- 13a

|
No.

In The

Supreme Court of the United States

*
October Term, 1992

ELIE J. BAGHDADY,
Petitioner,

vs.

LARRY D. SADLER, and MERRILL, LYNCH, PIERCE,

FENNER, AND SMITH, INC.,
Respondents.

Petition for a Writ of Certiorari to the United States Court of
Appeals for the First Circuit

PETITION FOR A WRIT OF CERTIORARI

Elie J. Baghdady, respectfully petitions for a writ of certiorari
to review the judgment of the United States Court of Appeals for
the First Circuit in this case.

OPINIONS BELOW

The opinion of the Court of Appeals (App., infra, 1a-7a) is
not a reported case.' The opinion of the District Court denying

1. Subsequent to the decision of the First Circuit, Respondents filed a
motion for publication of the September 9, 1992 opinion, specifically reciting as
one of the grounds the right of the District Court Judge to decide the need for a
trial, jury or nonjury, under the Federal Arbitration Act, 9 U.S.C. § 4. As of this
date, there has been no ruling on the motion.

2

Petitioner’s request for vacating, modifying, or correcting the
arbitration award and granting in part and denying in part
Respondent’s motion to confirm the arbitration award is attached.
(App., infra, 9a-11a).

STATEMENT OF JURISDICTION

The Court of Appeals entered its judgment on September 9,
1992. (App., infra, 8a). A timely appliction to extend the time for
docketing the case was granted on November 20, 1992. (App.,
infra, 12a). The jurisdiction of this court is invoked under 29
U.S.C. § 1254(1).

STATUTORY PROVISIONS INVOLVED
United States Arbitration Act:?
Section 3,9 U.S.C. §3
Section 4,9 U.S.C. § 4
Section 10,9 U.S.C. § 10
STATEMENT OF THE CASE
This case involves the enforceability of agreements to
arbitrate disputes under Section 12(2) of the Securities Act of
1933, 15 U.S.C. § 77(1)(2), and whether Petitioner’s demand for a
jury trial under 9 U.S.C. § 4 was improperly denied based upon a

dispute of material fact as to whether there was an arbitration
agreement between the parties in the first instance.

2. The text of these provisions is reproduced in full at (App., infra, 13(a) -
16(a)).

3

This case is a paradigm of the problems faced today by
customers with substantial grievances against their stockbrokers.
Petitioner Elie J. Baghdady (“Baghdady”) suffered damages in the
millions of dollars as a result of the wrongful conduct of
Respondents Merrill, Lynch, Pierce, Fenner & Smith (“Merrill
Lynch”) and Larry D. Sadler (“Sadler”) and his deceased former
broker, John Voll (“Voll”). When Baghdady brought a pro se
complaint against Respondents in the District Court, he was
compelled to submit his claim to binding arbitration, even though
he had never agreed to be bound by arbitration when the account in
dispute was initiated. When Baghdady did go to arbitration, the
arbitration panel found the Respondents liable, but then proceeded
to issue an award that reflected a manifest disregard of well-known
legal principles applicable to his case.

Then, when Baghdady sought to vacate the arbitration award
in the District Court, he was told that the award would be upheld
because the respondents had provided a “rational” explanation for
the award, even though the Respondents had all but admitted in
their District Court pleadings that the purported explanation of the
arbitration award was factually erroneous. The District Court also
ruled that it was Baghdady’s burden to show that the arbitration
award was irrational, but then refused out-of-hand to review the
undisputed facts which Baghdady presented to show the District
Court that the award was irrational.

A. Factual Background.
Petitioner will present only the salient facts leading up to his

involvement with Mermll Lynch.

In July, 1981, Baghdady opened an account with Merrill
Lynch’s office in Boston, Massachusetts transferring his securities
position from another brokerage firm. Merrill Lynch assigned the
account the number 818-73322. (C.A. App. 751).

0

4

When Baghdady opened the account with the Boston office of
Merrill Lynch, he was asked to sign a “Standard Option
Agreement”, which he did. The agreement contained a provision
for mandatory arbitration of disputes. This agreement, however,
never came into play because Baghdady’s account with the Boston
office of Merrill Lynch functioned as he expected it would. The
Boston account remained open from April to November 3, 1981
when the account was terminated by mutual agreement.’ Baghdady
never asserted any claim concerning his account at the Merrill
Lynch office in Boston. (C.A. App. 038-39).

In November, 1981, Baghdady searched for a broker who
could develop an options strategy with a new different objective
for him. At that time and in the course of that search, he met with
Respondent Sadler, who was then the manager of Merrill Lynch’s
office in Burlington, Massachusetts, and with John Voll, who was
then a broker in the Burlington office. Sadler and Voll
recommended to Baghdady a conservative strategy with respect to
his new objectives. After having these discussions with Sadler and
Voll and hearing the strategy outlined, Baghdady decided in mid-
December, 1981 to open a new account at the Burlington office.
When Baghdady decided to bring his business to the Burlington
office in December, 1981, it was his intent and express
understanding that he was opening a new account. (C.A. App. 040-
42). He was opening an account at a different branch, with different
brokers, and with a different objective based on a new liability
against his stock positions, and thus, requiring a different
investment strategy than he had in his Boston account with Merrill
Lynch. Merrill Lynch assigned his account with the Burlington
office a new number — 822-55654. The account in Boston was
closed out.

3. As a result of discussions between Respondent's representatives and
Petitioner, a letter was sent requesting that Baghdady take his account elsewhere,
effectively terminating the contractual relationship. (NASD Hearings,
November 1, 1990, Vol. 6, pp. 182-183).

5

Sadler, the manager at the Burlington office, who was
Baghdady’s only point of contact in opening the Burlington
account, also viewed the Burlington account as a new account.
(C.A. App. 055-56). The only relationship between the Boston and
Burlington accounts was that the securities position in Baghdady’s
already terminated Boston account was transferred to the
Burlington account, just as his Boston account had been started by
transferring his securities position from another brokerage firm to
his Boston account with Merrill Lynch.

Baghdady never signed an agreement to arbitrate disputes
arising in his account (no. 822-55654) at the Burlington office.
(C.A. App. 041). Nor was he told, nor did he understand or agree
that the option agreement he had signed in July, 1981 for his
account at the Boston office would be resurrected and apply to the
account he opened in December, 1981 at the Burlington office.
When he opened the Burlington account, neither Sadler nor Voll
nor anyone else told him that Merrill Lynch deemed the option
agreement from the Boston office to apply to his new account at the
Burlington office. Likewise, Baghdady did not know that Merrill
Lynch had altered the face of the option agreement he had signed,
without his consent (by crossing out the old Boston account
number 818-73322 and writing in the new Burlington account
number 822-55654). (C.A. App. 040, 047). Baghdady did not
know until after he had filed suit against Merrill Lynch in the
federal court that Merrill Lynch took the position that the option
agreement for his previously terminated Boston account applied to
his new account in Burlington. (C.A. App. 041).

Unfortunately, things did not go well in the Burlington
account. From the beginning, Sadler and Voll did not effect the
strategy in the account that they had outlined for Baghdady.
Indeed, the records of the account obtained from Merrill Lynch
revealed numerous violations of securities laws, Respondent’s
own policies, falsified reports of the condition of Petitioner’s
account, and violations of federal regulations.

6

When Baghdady closed the account at Burlington, he had lost
$1,432,248.91. (C.A. App. 418-422, 482). He had brought to
Sadler and Voll a portfolio valued at $2,420,762.50, burdened only
with a margin debt of $604,172.53 — in other words, an account
worth $1,816,589.97 and capable of unlimited appreciation within
the market. (C.A. App. 421). When he closed the account, it was
worth $384,381.06, and saddled with restrictions that foreclosed
any real chance of recovery. Specifically, when he closed the
account, his stock was shackled with in-the-money call options
with distant expiration dates, as well as a margin debt of
$1,243,840.19 that exceeded minimum margin requirements,
which in combination was shown to have doomed Petitioner’s
account to inevitable loss irrespective of whether the market value
of the securities actually went up or down or remained unchanged.

As a result, Baghdady was ultimately forced to sell a
substantial quantity of his stock, at a cost to him of $4,228,794.93.
(The basis for this figure was explained in Baghdady’s Arbitration
Memorandum and appears in the Appendix at C.A. App. 293-96.)

B. The District Court Opinions.

Baghdady filed suit in the District Court on August 2, 1985,
asserting violations of the federal securities laws, false and
deliberate misrepresentation, and negligence, and claiming
damages in the amount of $4,300,000.00. His claims arose out of
the transactions in his securities account with the Merrill Lynch
office in Burlington, Massachusetts. On November 1, 1985, the
Respondents Merrill Lynch and Sadler moved for an order
compelling arbitration of the matter. Baghdady vigorously
opposed arbitration, contending that there was no arbitration
agreement between him and Merrill Lynch concerning disputes
arising from transactions in his account with Merrill Lynch in
Burlington, Massachusetts. On April 2, 1987, after submissions of
affidavits and briefs, the District Court granted the Respondents’
motion and ordered Baghdady to arbitrate his claims. This order by

the District Court to arbitrate was done in contravention of 9
U.S.C. § 4. Baghdady noted an appeal of this order, but
subsequently withdrew the appeal as premature.‘

As ordered by the District Court, Baghdady filed a request for
arbitration with the National Association of Securities Dealers on
April 28, 1988. After a substantial delay, the case was assigned for
hearing by a panel of arbitrators in Boston on September 19, 1990.
On that day, and on six subsequent days, Baghdady and the
Respondents presented witnesses, exhibits, and arguments in
support of their respective positions. On February 26, 1991, the
panel rendered their decision holding Merrill Lynch and Sadler
liable to Baghdady, but awarding only the sum of $60,720.15.

On May 24, 1991, Baghdady filed a petition for vacation or
correction of the arbitration award, alleging that the award
reflected a manifest disregard of the law applicable to the dispute
and contained an evident miscalculation by the arbitrators.
Respondents opposed Baghdady’s petition and moved for
confirmation of the award. The parties submitted briefs, including
references to the substantial arbitration record, which was made
part of the record in the District Court. On January 14, 1992, the
District Court denied Baghdady’s petition and allowed
Respondents’ cross-motion to confirm. Baghdady then requested
that the District Court formally consolidate that ruling with the
Court’s prior ruling compelling arbitration, so that the issues might

4. Respondents attempted to argue in their brief filed in the First Circuit
that Petitioner's appeal was untimely. Both Congress and this Court clarified this
issue. Congress made it clear when it enacted 9 U.S.C. § 16(b)(2) that immediate
appeals from orders compelling arbitration were prohibited. This enactment
followed this Court’s pronouncement in Gulfstream Aerospace Corp. v.
Mayacamas Corp., 485 U.S. 271 (1988). That decision declared that an appeal
should be brought only after completion of the compelled arbitration. The First
Circuit followed Gulfstream in DeFuertes v. Drexel Burnham Lambert, Inc., 855
F.2d 10 (1st Cir., 1988).

8

be appealed together to the First Circuit Court of Appeals. On
January 27, 1992, the District Court consolidated the actions and
entered final judgment.

C. The Court Of Appeals’ Opinion.

The Court of Appeals’ opinion affirmed the District Court’s
order confirming the arbitration award. The Court of Appeals held
that the language in the agreement executed between the parties
pertaining to the Boston account also applied to the Burlington
account and was clear and was binding and that Petitioner was not
entitled to a jury trial.

The Court of Appeals rejected Petitioner’s reliance upon Par-
Knit Mills, Inc. v. Stockbridge Fabrics Co., Ltd., 637 F.2d 51 (3rd
Cir. 1980) which suggested that if there was a doubt to an express,
unequivocal arbitration agreement, the matter, upon proper and
timely demand, should be submitted to a jury. In the instant case,
Petitioner had, in fact, requested on a timely basis a jury demand,
which the District Court rejected without any determination and
fact finding.

The Court of Appeals completely refused out-of-hand to
review the facts and assertions in Baghdady’s complaint and
affidavit in opposition to the Respondents’ motion to compel
arbitration. Essentially, Petitioner’s arguments contending that
there were never any agreements binding him to Respondents to
arbitrate any of his claims was totally rejected. The Court of
Appeals also rejected the “manifest disregard” arguments
presented by Baghdady citing Advest, Inc. v. McCarthy, 914 F.2d 6
(1st Cir. 1990).

sd re

9

REASONS FOR GRANTING THE WRIT

1. The petition should be granted because the Court of
Appeals failed to follow this Court’s decision in Prima Paint
Corporation v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1961)
which held tht a federal court may consider issues relating to the
making and performance of the agreement to arbitrate if there is a
claim of fraud in the inducement of the arbitration clause in issue.

2. The writ should also be granted because the Court of
Appeals’ decision conflicts with another Court of Appeals’
decision in Par-Knit Mills, Inc. v. Stockbridge Fabrics Co., Ltd.,
636 F.2d 51 (3rd Cir. 1980), as well as numerous other federal court
decisions.

3. This Court should enunciate a manifest disregard standard.

I.

THE FEDERAL POLICY FAVORING ARBITRATION
SHOULD NOT APPLY IN CASES WHERE FACTS
ALLEGING FRAUD ARE ASSERTED AND WHERE A
TIMELY DEMAND FOR JURY TRIAL IS REQUESTED
UNDER 9 U.S.C. § 4.

A. The Statutory Right To A Trial Pursuant To 9 U.S.C. § 4
Should Not Be Undermined And Further Eroded.

There is no question that federal law generally favors
arbitration. This Court has recently stated that:

Section 2 [of the United States Arbitration Act]
is a congressional declaration of a liberal
federal policy favoring arbitration agreements,
notwithstanding any state substantive or
procedural policies to the contrary. . . .

10

Moses H. Cone Mem. Hosp. v. Mercury Construction Corp., 460
U.S. 1 at21 (1983). See also, Southland Corp. v. Keating, 465 U.S.
1 (1984).

Nevertheless, this Court has acknowledged that the
Arbitration Act of 1925 was enacted to make agreements to
arbitrate future disputes “as enforceable as other contracts, but not
more so”. Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388
U.S. 395, 404, n. 12 (1967). This Court has also recognized the
drawbacks of arbitration. Bernhardt v. Polygraphic Company of
America, Inc., 350 U.S. 198 (1955). Against the benefits of the
informality of arbitration, dispatch and finality must be weighed
the disadvantages of limited review, the possibilities of arbitrary
and capricious results at the hands of untrained and possibly biased
arbitrators, and the absence of any definite rule of law, any record,
or any requirement that the arbitrators articulate the factual and
legal conclusions tht underlie the award. Hale v. Friedman, 281
F.2d 635 (D.C. Cir. 1960).

In the context of a freely negotiated contract between parties
of equal bargaining power there may be no unfairness in enforcing
an arbitration provision despite the inherent shortcomings of
arbitration. However, to force arbitration on an individual who did
not execute an agreement and knowingly bargain away the right to
a judicial forum is patently unfair:

The right to select judicial forum, vis-a-vis
arbitration, is a “substantial right”, not lightly
to be deemed waived.’

B. Standard Of Review And Applicable Law.

The critical issue reduced to its simplest form is whether
Baghdady’s claim of fraud relates to the making of the arbitration

5. Main v. Merrill, Lynch, Pierce, Fenner & Smith, 67 Cal. App. 3rd 19,31,
136 Cal. Rptr. 378, 383 (1977).

1]

agreement. If it does, the court should adjudicate the fraud claim. If
it does not, the Federal Arbitration Act requires that the fraud claim
be decided by an arbitrator. In the present case, there was a factual
dispute whether there was an agreement to arbitrate Petitioner's
claims. The District Judge erroneously resolved the factual dispute
without holding any trial, let alone a jury trial, as required by 9
U.S.C. § 4. This is clearly exemplified in the following actual
disputes:

1. When faced with Petitioner's affidavit that
he did not intend or understand that the option
agreement he signed when he opened his
account in Boston would apply to his account
in Burlington (C.A. App. 36), as opposed to
Respondent’s representative’s affidavit who
was not even involved in the opening of the
Burlington account preventing conflicting
testimony that Merrill Lynch did intend the
agreement to apply to the Burlington account
(C.A. App. 32), the District Judge simply sided
with Respondents, rather than submitting the
issue to a jury, as 9 U.S.C. § 4 requires.

2. When faced with the Respondent’s “new
account” form (C.A. App. 9) describing the
Burlington account as both a “new account”
(Terminology that was admitted to by
Respondent Sadler himself [C.A. App. 17])
and, arguably, as a “transferred” account, the
lower court judge resolved all inferences in
support of arbitrability, rather than submitting
the issue to a jury, as 9 U.S.C. § 4 requires.

3. When faced with the fact that there was no
i signed arbitration agreement for the
i Burlington account (C.A. App. 41), the District
| Judge drew the inference that the parties

12

intended a prior agreement to apply to the
account, rather than allowing a jury to draw the
obvious contrary inference that the absence of
a signed arbitration agreement for the
Burlington account evidenced that the parties
did not agree to arbitration of the disputes in the
Burlington account.

The standard of review for a motion to compel arbitration is
the same as a motion for summary judgment under Fed. R. Civ. P.
56(c). Trott v. Paciolla, 748 F. Supp. 305, 308 (E.D. Pa. 1990); Par-
Knit Mills, Inc. v. Stockbridge Fabrics Co., 636 F.2d 51, 54, n. 6
(3rd Cir. 1980). Accordingly, “the moving party has the burden of
showing conclusively that there exists no genuine issue as to a
material fact, and the evidence, together with all inferences to be
drawn therefrom, must be read in a light most favorable to the party
opposing the motion”. Jordan v. Global Natural Resources, Inc.,
564 F. Supp. 59, 63 (S.D. Ohio, 1983) (emphasis in original).
Indeed, the court must read the allegations in plaintiff’s complaint
“liberally, giving plaintiff the benefit of all inferences which fairly
may be drawn therefrom”. Begosian v. Gulf Oil Corp., 561 F.2d
434, 444 (3rd Cir. 1977).

The party opposing arbitration bears the initial responsibility
of presenting the court the basis for its Opposition. This burden is
not unlike that of a party opposing summary judgment. Celotex
Corporation v. Catrett, 477 U.S. 317 (1986).

Pursuant to Section 2 of the Federal Arbitration Act, 9 U.S.C.
§ 2, agreements to arbitrate are valid “save upon grounds as exist at
law or in equity for the revocation of any contract”. Based on this
section, numerous courts have determined that a party may assert
general contract defenses such as fraud and/or breach of contract to
avoid enforcement of an arbitration agreement. Southland Corp. v.
Keating, 465 U.S. 1 (1984); see also, Hurlburt v. Gantshar, 674 F.

13

Supp. 385 (D.C. Mass. 1987) (party may assert general contract
defenses to avoid enforcement of arbitration agreement).

Indeed, the federal courts are required to adjudicate claims
where they are directed towards the validity or enforceability of an
arbitration clause within a contract (as opposed to the entire
contract). Leone v. Advest, Inc., 624 F. Supp. 297 (S.D.N.Y. 1985).
As this Court ruled in Prima Paint Corp. v. Flood & Conklin Mfg.
Co., 388 U.S. 395 (1967), any defense to a contract which is
applicable to an arbitration provision within the contract so as to
render that provision invalid, is sufficient to place this case before
the court, not a panel of arbitrators.

In Prima Paint, supra, the partes signed a written agreement
by which Prima purchased Flood’s paint manufacturing business
and retained Flood’s services as a consultant. The agreement
included a clause calling for arbitration of any controversy or claim
arising out of or in relation to this agreement, orthe breach thereof.
Shortly after the execution of the agreement, Flood filed for
bankruptcy. When Prima complained that Flood had fraudulently
induced Prima to enter into the purchase and consulting
agreements on the false representation that Flood was solvent,
Flood promptly demanded that the dispute be arbitrated. Prima
then filed suit in the federal district court seeking rescission of the
consulting agreemer on the basis of the alleged fraudulent
inducement and contemporaneously sought an order restraining
Flood from proceeding with the arbitration.

As this Court in Prima Paint held: “If the claim is fraud in the
inducement of the arbitration clause itself — an issue which goes
to the ‘making of the agreement to arbitrate’ — the federal court
may proceed to adjudicate it.” 388 U.S. at 403-04. This Court in
Prima Paint found its holding consistent with the decision in
Mosely v. Electronic Facilities, 374 U.S. 167 (1963), and with the
statutory purpose of the Arbitration Act — to make arbitration

14

agreements as enforceable as other contracts. 388 U.S. at 404, n.
12. In Moseley, this Court held that where a plaintiff’s pleading
attacks the contract in general, as well as the arbitration clause
contained therein, the allegation of fraud as to the arbitration
clause should be decided by the District Court. 374 U.S. at 171.

In interpreting Prima Paint, the lower court in Rhoades vv.
Powell, 644 F. Supp. 645, 653 (E.D. Cal. 1986), held:

The Prima Paint holding can be reduced to the
fairly simple proposition that a challenge based
on fraud in the inducement of the whole
contract (including the arbitration clause) is for
the arbitrator to decide, while a challenge
based on fraud in the inducement of the
arbitration clause only is for the court to
decide.

The Prima Paint doctrine is not limited,
however, to rescission based on fraudulent
inducement, but extends to all challenges to the
making of a contract: “The teaching of Prima
Paint is that a federal court must not remove
from the arbitrators consideration of a
substantive challenge to a contract unless there
has been an independent challenge to the
making of the arbitration clause itself. The
basis of the underlying challenge to the
contract does not alter the [Prima Paint]
principle.” Unionmutual Stock Life Insurance
v. Beneficial Life, 774 F.2d 524, 529 (CA 1,
1985) (frustration of purpose as ground for
rescission); Hull v. Norcom, 750 F.2d 1547,

15

1549-50 (CA 11); reh'g denied, 757 F.2d 287
(1985) (challenge based on lack of mutuality of
arbitration clause); Merrill Lynch v. Haydu,
637 F.2d 391 (CA 5, 1981) (duress and
unconscionability to be decided by arbitrator).

Here, Respondents failed to meet the standard required to
divest the District Court of jurisdiction over the case by failing to
establish the absence of material facts with respect to the validity
or enforceability of the arbitration provision in the “Standard
Option Agreement”. Moreover, the challenge was based on
asserted facts that there was no agreement to arbitrate in the first
instance.

Respondents have essentially argued that Petitioner did not
create “a substantial issue” regarding the validity of the arbitration
clause. A party opposing a motion to compel arbitration has the
“affirmative duty of coming forward by way of affidavit or
allegation of fact to show why the Court should not compel
arbitration”. Aronson v. Dean Witter Reynolds, Inc., 675 F. Supp.
1324, 1325 (S.D. Fla. 1987). Consistent with the Aronson holding
is the opinion of the recent case of Arnold v. Arnold Corp., 920 F.2d
1269 (6th Cir. 1990). In Arnold, the appellant argued that the
District Court erred when compelling him to arbitrate his claim,
arguing that he had sufficiently alleged fraud in the inducement
with respect to the arbitration provision of the contract. In rejecting
the appellant’s contentions and in affirming the lower court’s order
compelling arbitration, the Sixth Circuit noted:

Before a court may adjudicate an agreement to
arbitrate, the party seeking to avoid the
arbitration must make “a well-founded claim
that an arbitration agreement resulted from the
sort of fraud or excessive economic power”
that would provide grounds for the revocation
of acontract.

16

Arnold, 920 F.2d at 1277, quoting Shearson/
American Express, Inc. v. McMahon, 482 U.S.
220, 226, 106 S. Ct. 2332, 2337 (1987).

Petitioner claims that his submissions clearly nullified the
nght of the District Court to compel arbitration.

This Court’s holding in Prima Paint left the door open for a
person challenging arbitration to recite well-founded allegations
of fraud in connection with the “making” of an agreement to
arbitrate. This Petitioner accomplished in his affidavit in response
to Respondents’ motion to compel arbitration.°®

C. The First Circuit Decision In The Instant Case Conflicts
With The Third Circuit Opinion Of Par-Knit Mills vy.
Stockbridge Fabrics.

The Third Circuit, in Par-Knit Mills v. Stockbridge Fabrics,
636 F.2d 51 (3rd Cir. 1980), was faced with a situation similar to
the case at bar. The Third Circuit characterized the plaintiff’s
position as follows:

Par-Knit claims that there was never a
“meeting of the minds” on the terms and
conditions contained in the confirmations
which were signed by its production manager
and which contained an arbitration agreement
and that absent such agreement, there can be no
duty to arbitrate.

Id. at 53.

6. At the arbitration hearings, Petitioner argued that the agreement to
arbitrate had been “tampered” with. A contract induced by fraud is voidable.
Claims of forgery or “tampering” are distinguishable. Forgery relates to fraud in
the execution, and contracts involving forgery are void. See Dougherty v.
Mieczkowski, 661 F. Supp. 267, 274 (D. Del. 1987).

17

In reversing the District Court’s order compelling arbitration,
and ordering that the issue as to whether there was an arbitration
agreement be tried before a jury pursuant to Section 4, the Third
Circuit said:

Before a party to a lawsuit can be ordered to
arbitrate and thus be deprived of a day in court,
there should be an express, unequivocal
agreement to that effect. If there is doubt as to
whether the agreement exists, the matter, upon
a proper and timely demand, should be
submitted to ajury . . . The district court, when
considering a motion to compel arbitration
which is opposed on the ground that no
agreement to arbitrate has been made between
the parties, should give to the opposing party
the benefit of all reasonable doubts and
inferences that may arise.

Id. at 54 (emphasis added).

The Third Circuit in Par-Knit recognized that the general
policy of favoring arbitration could be undermined if it was too
easy to invoke the Section 4 right to a jury trial on the issue of
whether there is an applicable arbitration agreement. Hence, the
court ruled as follows:

A naked assertion, however, by a party to a
contract that it did not intend to be bound by the
terms thereof is insufficient to place in the issue
“the making of the arbitration agreement” for
the purposes of Section 4 of the Federal
Arbitration Act. An unequivocal denial that the
agreement had been made, accompanied by
supporting affidavits, however in most cases

18

Should be sufficient to require a jury
determination on whether there had in fact
been a “meeting of the minds”.

Interocean Shipping Co. v. National Shipping & Trading Co., 462
F.2d 673 (2nd Cir. 1972).

Id. at 55.

The Par-Knit Court said that the standard to be applied in
determining whether to hold a Section 4 jury trial is the summary
judgment standard, which requires the court to accept as true the
affidavits of the party opposing the motion. Obviously, the District
Court in the instant case did not give Petitioner the benefit of the
doubt. Not only did it not assume that Petitioner’s affidavit was
true, it ignored the affidavit.

Petitioner fully met the above quoted Par-Knit standard. The
District Court erred in not holding a trial on the fundamental
factual question of whether there was a meeting of the minds
between Petitioner and Respondents to a:vitrate disputes arising
from his account.

The premise on which a court can order arbitration is the
existence of such an agreement. If no agreement or contract exists,
there is no right to arbitration. See Dougherty v. Mieczkowski, 661
F. Supp. 267 (D. Del. 1987).

Other courts have followed the admonitions recited by this
Court in Prima Paint and Mitsubishi and advanced in Par-Knit.
See Woodyard v. Merrill, Lynch, Pierce, Fenner & Smith, 640 F.
Supp. 760 (S.D. Tex. 1986); CBS Employees Federal Credit Union
v. Donaldson, Rufkin & Jenrette Securities Corp., 912 F.2d 1563
(6th Cir. 1990).

The Court of Appeals in this case completely missed the issue

2 AAD he MY ile BE OR

19

raised by Petitioner that there was no contract between the parties.
In Dougherty v. Mieczkowski, supra, as in the instant case, the
uncontroverted affidavit of the plaintiff contending the documents
were “doctored” mandated a trial pursuant to 9 U.S.C. § 4.

Il.

THE FEDERAL POLICY UPHOLDING
ARBITRATION SHOULD NOT UNDERMINE THE
VITALITY OF 9 U.S.C. § 4 AND SHOULD BE MODIFIED
TO PROTECT INVESTORS WHO CLAIM FRAUD.

A. Further Erosion Of The Principles Of Prima Paint As
Reflected In The FAA Should Cease.

In the ensuing years after Prima Paint, this Court has rendered
decisions in a number of cases upholding a strong federal policy in
favor of arbitration. In Moses H. Cone Memorial Hosp. v. Mercury
Constr. Corp., 460 U.S. 1 (1983), this Court stated, “any doubts
concerning the scope of arbitrable issues should be resolved in
favor of arbitration, whether the problem at hand is the
construction of the contract language itself or an allegation of
waiver, delay, or a like defense to arbitrability”. Jd. at 24-25; see
also, Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213 (1985)
(Arbitration Act requires district court to compel arbitration of
pendant arbitrable claims); Mitsubishi Motors Corp., 473 U.S. 614
(1985) (anti-trust claims subject to arbitration); McMahon, 482
U.S. 220 (1987) (Securities Exchange Act of 1934 & RICO claims
subject to arbitration); Rodriquez de Ouijas v. Shearson/American
Express, Inc., 490 U.S. 477 (1989) (claim arising under Securities
Act of 1933 subject to arbitration, overruling this Court’s prior
holding in Wilko v. Swan, 346 U.S. 168 (1953)); Gilmer v.
Interstate Johnson Lane Corporation, 500 U.S. __, 114 L. Ed. 2d
26 (1991) (claim under age discrimination in Employment Act held
to be subject to compulsory arbitration.)’

7. As Justice Stevens in Gilmer pointed out, this Court “has effectively
rewritten the statute”, referring to the FAA. (S00 U.S. at ___, 114 L. Ed. 2d at p.
48).

20

B. The Last Stand For The Investors — This Court Should
Level The Playing Field.

Subsequent to this Court’s 5 to 4 decision in Rodriguez de
Quijas v. Shearson/American Express, 490 U.S. 477 (1989), the
right of the investing public to challenge the validity of arbitration
agreements was effectively wiped out. The current state of the law
requires federal security law claims to be arbitrated. Both the
McMahon and Rodriguez decisions open the door to mandatory
arbitration as a universal practice in the securities industry, which
had never been the intent of Congress.*

The only remaining door to a challenge to break through the
wall mandating arbitration that has been built by this Court is to
recall the admonitions recited in Wilko, Prima Paint, and
Mitsubishi. In all of these cases, this Court correctly noted a theme
that still remains vital today:

Accordingly, the first task of a court asked to
compel arbitration of a dispute is to determine
whether the parties agreed to arbitrate that
dispute. The court is to make this
determination by applying the “federal
substantive law of arbitrability, applicable to
any arbitration agreement within the coverage
of the act”.

Mitsubishi Motors v. Soler Chrysler-Plymouth, 473 U.S. at 626.

And, it has also been stated:

8. As Justice Stevens in Rodriguez said: “we, of course, are not subject to
the same restraint when asked to upset one of our own precedents. but when our
earlier opinion gives a statutory provision concrete meaning, which Congress
elects not to amend during the ensuing three and half decades, our duty to respect
Congress’ work product is strikingly similar to the duty of other Federal courts to
respect our work product”. (490 U.S. at 486).

21

Of course, courts should remain attuned to
well-supported claims that the agreement to
arbitrate resulted from the sort of fraud or
overwhelming economic power that would
provide grounds “for the revocation of any
contract”.

Mitsubishi Motors v. Soler Chrysler-Plymouth,473 U.S. at 627.

Lower courts have established the reasons why this Court
should be diligent in prohibiting fraud to go unchecked by judicial
scrutiny. In Woodyard v. Merrill, Lynch, Pierce, Fenner & Smith,
640 F. Supp. 760 (S.D. Tex. 1986), the court indicated that the case:

presented a classic example of an
unsophisticated investor who has sought,
received, and relied upon the superior
knowledge of a securities advisor. Upon
entering the relationship of trust, it is
understandable that the customer’s adversarial
instincts would be lulled. Thus, equitable
principles leave little space for the subsequent
operation of the doctrine of caveat emptor. At —
the very least, pre-dispute arbitration
agreements between brokers and their public
customers should remain subject to meaningful
judicial inquiry. There is a potential for
conflicts of interest when _ investors
marketplace intermediary, upon entering a
fiduciary relationship, has one unilateral,
adversarial eye cocked upon possible litigation
between the parties to a standarized brokerage
contract.

640 F. Supp. at 766.

22

It has been stated in numerous commentaries that the playing
field at the present time is not level. The brokerage houses have it
all their way. Arbitration may be mandatory, but it is not fair.’ The
reasons for this are numerous. The panelists are representatives of
the securities industry. The brokerage firms and their attorneys
know the ins and outs and exchange information not presently
available to investor litigants. The rules are set by the securities
industry. Discovery is limited. The primary problem is the lack of
an effective right to an appeal. Arbitration will never be accepted
unless the public perceives that the arbitration process is fair in fact
and appearance. This is certainly not the case where an investor,
such as the Petitioner in this case, receives less than 5 percent of his
provable claims!

The underlying philosophy of the securities arbitration
process, as is presently structured, is not equally appropriate for
both litigants. The basic problem is the standard upon which
arbitrators base their decision. The current uncertainty regarding
the standard that should guide arbitrators is another reason for this
Court to grant the writ and to set out and develop a guideline to
balance the playing field between the brokerage houses and the
investing public.

III.

A UNIFORM STANDARD FOR’ VACATING
ARBITRATION AWARDS SHOULD BE ESTABLISHED
BY THIS COURT.

A. The Standard For Vacating Of An Arbitration Award.

Section 10 of the Federal Arbitration Act, 9 U.S.C. § 10
provides in pertinent part:

9. See Robert R. Gregory, Arbitration: It’s Mandatory But It Ain't Fair, 19
Sec. Reg. L.J. 181 (1991).

23

The United States court in and for the district
wherein [an arbitration] award was made may
make an order vacating the award upon the
application of any partly to the arbitration. .. .

Where the arbitrators exceeded their powers,
or so imperfectly executed them that a mutual,
final, and definite award upon the subject
matter submitted was not made.

In addition, this Court has recognized the non-statutory
ground of “manifest disregard of the law” as an additional basis for
vacating arbitration awards. See Wilko v. Swan, 346 U.S. 427, 436-
37 (1953). This standard has been applied by numerous courts
around the country, including the First Circuit. See, e.g., Advest,
Inc., v. McCarthy, 914 F.2d 6 (1st Cir. 1990); Merrill Lynch, Pierce,
Fenner & Smith v. Bobker, 808 F.2d 930, 933 (2nd Cir. 1986).

The Bobker court explained the standard of manifest disregard
of the law as requiring “more than error or misunderstanding with
respect to the law”. 808 F.2d at 933. It requires: (1) an error that
would be “readily and instantly perceived” by a typical arbitrator;
and (2) that the arbitrator was aware of the proper legal standard
but proceeded to disregard it in fashioning the award.” /d.
Awareness of the proper legal standard need not be explicitly
stated, but may be inferred. /d. As the First Circuit explained in
Advest, “the governing law may have such widespread familiarity,
pristine clarity, and irrefutable applicability that a court could
assume the arbitrators knew the rule and, notwithstanding, swept it
under the rug”. 914 F.2d at 10. The court in Bobker acknowledged
that the bounds of the standard have never been interpreted to
require something “more than error or misunderstanding with
respect to the law”. Jd. The Second Circuit in Bobker found that
under the “manifest disregard” standard:

The arbitrator’s error must have been obvious

24

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 existence of a clearly
governing legal principle but decides to ignore
Or pay no attention to it.

808 F.2d at 933.

As so interpreted, the “manifest disregard” standard does not
require arbitrators to strictly comply with the law. This
interpretation merely requires that arbitrators not flaunt the law.
The implication of the language used by the Bobker court in
analyzing the “manifest disregard” standard would seem to be that
arbitrators can base their awards on whatever grounds they choose
as long as the result is not obviously in conflict with the outcome
that would be required by law.

The strict interpretation of the “manifest disregard” standard
was suggested by this Court in Wilko and McMahon. That standard
has not been followed in numerous federal decisions.

The Ninth Circuit in San Martine Compania De Navegacion v.
Saguenay Terminals Ltd., found that “manifest disregard of the law
must be something beyond and different from a mere error in the
law or failure on the part of the arbitrators to understand or apply
the law”. The court in San Martine decided that manifest disregard
“might be present when arbitrators understand and correctly state
the law, but proceed to disregard the same”. The requirement that
arbitrators must understand the law, correctly state it, and then
reject it before a court will find “manifest disregard” of the law was
also adopted by the Second Circuit in Siegel v. Tital Industries
Corp., 779 F.2d 891 (2nd Cir. 1985). Thus, the Ninth and Second
Circuits have applied an interpretation of the manifest disregard

25

standard that does not so much require arbitrators to comply with
applicable law as it requires arbitrators merely not to ignore the law
when it is understood. This interpretation is a curious analysis of
the “manifest disregard” standard. The interpretation suggests that
if an arbitrator does not understand the applicable law, he need not
apply it. Such an interpretation might place a premium on an
arbitrator’s ability to remain ignorant of the law. Pursuant to this
interpretation, without an understanding of the law, there cannot be
disregard of the law.

B. This Court Should Modify The Standard Set Forth In
Advest In Order To Deny Confirmation To Arbitration
Awards That Lack Any Rational Basis Or Otherwise To
Prevent The Miscarriage Of Justice In Cases Such As The
Instant Case.

As explained above, the District Court construed the manifest
disregard test set forth in Advest, Inc. v. McCarthy, 914 F.2d 6 (1st
Cir. 1990), to preclude review of factual matters. Petitioner
maintained that the manifest disregard test must include some
consideration of facts in that the court must assess how the
arbitrators in a case have applied the law to the facts and expecially
to undisputed facts. The Petitioner requested that the First Circuit,
if it concluded the District Court’s interpretation of Advest was
correct, that they modify the Advest test to include consideration of
how the law was applied to the facts or otherwise to avoid 4
miscarriage of justice in cases such as this. The First Circuit
refused to modify Advest.

There is ample precedent from other jurisdictions interpreting
the manifest disregard standard to include consideration of both
law and facts.'° Perhaps the most common interpretation requires a

10. Indeed, the First Circuit’s opinion in Advest has specifically been
criticized for its failure to incorporate a rational basis analysis. See S.
Kupperman & G. Freeman, Achieving Justice in Arbitration, 65 Tulane L. Rev.
1547 (1991).

ee

26

court to determine whether there is any “rational basis” for the
award. This test was described by the Eleventh Circuit as follows in
Robbins v. Day, 954 F.2d 679, 684 (11th Cir. 1992):

When no rationale is given for a lump sum
award, as in this case ... we must first
determine whether a rational ground for the
arbitrators’ decision can be inferred from the
facts of the case. Where a “ground for the
arbitrator’s decision can be inferred from the
facts of the case, the award should be
confirmed”. Raiford v. Merrill Lynch, Pierce,
Fenner & Smith, Inc., 903 F.2d 1410, 1413 (CA
11, 1990) (citing Siegel v. Tital Indus. Corp.,
779 F.2d 891, 894 (CA 2, 1985) (quoting Sobel
v. Hertz, Warner & Co., 469 F.2d 1211, 1216
(CA 2, 1972); Drummon Coal Co. v. United
Mine Workers of Am, 748 F.2d 1497 (CA 11,
1984) (cited by Raiford for the proposition that
an arbitration award may be vacated if
irrational); Barbier v. Shearson Lehman
Hutton, Inc., 948 F.2d 117 (CA2, 1991).

954 F.2d at 684.

- The Robbins court went on to explain that the burden of
proving a lack of rational basis falls on the party seeking vacation
of the arbitration award: “The onus is on the party requesting the
vacatur to refute. . .every rationai basis upon which the arbitrator
could have relied.” Jd.

Obviously, the burden outlined in Robbins is a very high one,
but it was met in this case. As set forth above, Petitioner carefully
refuted all possible reasons for which the arbitrators could have
determined to award him losses on only two out of twenty-five

ae

27

margin transactions. The one justification for this calculation,
offered up by Respondents, is contradicted by the arbitration
record and was all but conceded by Respondents below.

Another formuiation of the “rational basis” test that has been
adopted by several courts incorporates the “arbitrary and
capricious” standard developed in the administrative law context.
The Eleventh Circuit applied this test in United States Postal
Service v. National Association of Letter Carriers, 847 F.2d 775
(11th Cir. 1988), where it observed:

While great deference is normally accorded an
arbitration award, an award is not required to
be enforced which is arbitrary or capricious.
See, Drummon Coal Co. v. United Mine
Workers of Am, 748 F.2d 1495, 1497 (CA 11,
1984) (citing Loveless v. Eastern Air Lines, Inc,
681 F.2d 1272, 1276 (CA 11, 1982); United
Steelworkers of Am v. US Gypsum Co., 492
F.2d 713, 730 (CA5), cert denied, 418 US 998
(1974); Safeway Stores v. Am Bakery &
Confectionary Workers Int'l Union, Local 111,
390 F.2d 79, 81 (CAS, 1968).

Petitioner urges the Court to adopt the “arbitrary and
capricious” standard for which there is a well-developed
jurisprudence." Application of this test in the present case would

11. The use of this standard is warranted because it accords great
deference to those hearing a case as an initial matter. In the administrative
context, great deference is due because the initial decision-maker, the
administrative agency, has special expertise and statutorily-mandated
responsibility to make the initial decision. See EJ du Pont de Nemours & Co. v.
Collins, 432 U.S. 46, 54-55 (1977). In the arbitration context, great deference is
due because of the strong legislative preference for resolving disputes through
arbitration. See OR Securities v. Professional Planning Assoc., 857 F.2c © +2,
747-48 (11th Cir. 1988).

28

have required vacation of the arbitrators’ award. In light of the
arbitrators’ finding that Respondents were liable to Petitioner and
the undisputed evidence of damages presented by him, an
arbitration award that excluded 95 to 99 percent of his undisputed
damages is “arbitrary and capricious”, at best.

In the alternative, Petitioner submits that this Court should
interpret “manifest disregard of the law” to encompass the familiar
standard used in ruling on motions to set aside jury verdicts. Under
that standard, courts have set aside a civil jury award “when the
verdict is against the clear weight of the evidence. . . or will result
in aclear miscarriage of justice”. Torres-Troche v. Municipality of
Uaco, 873 F.2d 499 (1st Cir. 1989) [quoting Coffran v. Hitchcock
Clinic, Inc., 683 F.2d 5, 6 (1st Cir.), cert. denied, 459 U.S. 1987
(1982)].

Thus, for example, in the recent case of Phav v. Trueblood,
Inc., 915 F.2d 764 (1st Cir. 1990), the District Court for the District
of Massachusetts set aside a jury award of $5,000.00 in the face of
clear evidence that the plaintiff's damages were far more than that
amount. Upon retrial, the plaintiff was awarded $370,000.00, and
the judgment was affirmed on appeal. See also, Brown v. Richard
A. Wacholz, Inc., 467 F.2d 18 (10th Cir. 1972) (to the same effect).

As with the “arbitrary and capricious” standard, the use of this
test is appropriate because it accords great deference to the intial
trier of fact. The test is triggered only in cases where there is an
enormous discrepancy between the evidence presented and the
result ordered, or where the result would effect a “miscarriage of
justice”. Petitioner respectfully submits that the review of
arbitration awards in all Circuits should function under the same
standard to prevent grossly unjust results.

The difficulty in demonstrating bias or arbitrary and
capricious conduct undermines the rights of investors and leaves

=

them without any meaningful standard upon which to challenge
arbitration awards. However, the lack of a proper basis for an
arbital decision is not to be overlooked and should arouse a court's
suspicion when the award is less than a minimal percentage of the
undisputed losses of an investor.

In Tinaway v. Merrill Lynch & Co., 658 F. Supp. 567 (S.D.N.Y.
1987), the court held that an arbitration panel’s award of 5 percent
of an investor’s documented loss in the absence of some stated
basis could “only represent ‘evident impartiality’ on the part of the
arbitrators”. (658 F. Supp. at 579).

In this case, we have exactly that situation. A de minimus
amount was awarded which Petitioner claims shows evident
partiality requiring reversal.

Since there is limited review of arbitration proceedings, the
appeal by Justice Blackmun in McMahon must not be taken lightly.
This Court should take seriously the duty to review the results of
arbitration in which there is manifest disregard of the law.

Petitioner lost millions of dollars as a result of Respondents’
wrongful conduct. Although he did not agree to arbitrate, he went
to arbitration and proved that Respondents caused these losses. He
presented undisputed evidence of negligence, falsification of
records, violation of trust and governing rules and federal
regulations and obtained a finding of liability against Respondents.
Then, at the end of the line, he was presented with an award,
lacking any rationale, that does not even begin to compensate him
for his undisputed substantial losses. This is a miscarriage of
justice, if there ever was one, and this Court must now allow it to
stand even under the strictest level of review. This Court should
clearly enunciate a standard for manifest disregard for all
investors who will be protected in the arbitration process.

30
CONCLUSION

This Court should grant the petition for a writ of certiorari.
There is a split in the Circuits on the issue of the entitlement to a
jury trial under factual circumstances where fraud is alleged. With
respect to issues involving claims under Section 12(2) of the 1933
Securities Act where there is a previously terminated arbitration
agreement which is resurrected and tampered with and becomes
the basis of the alleged enforceability of an arbitration agreement
and there is a dispute as to the validity and actual execution of this
agreement, such issues are not for arbitration and must be decided
by the District Court.

Moreover, the First Circuit’s “manifest disregard” standard
conflicts with that enunciated by this Court and other Circuits.
Also, this Court needs to come to the aid of investors and prevent
further erosion of rights delineated under 9 U.S.C. § 4.

Based on all of the foregoing reasons, the judgment of the
United States Court of Appeals for the First Circuit should be
reversed and Petitioner’s Section 12(2) claims under the 1933
Securities Act ordered tried in the Fedezal District Court.

Respectfully submitted,

JACK C. CHILINGIRIAN
Attorney at Law

Attorney for Petitioner
42400 Grand River Avenue
Suite 109

Novi, Michigan 48375
(313) 348-7400

Dated: February 2, 1993

la

APPENDIX A — OPINION OF THE UNITED STATES
COURT OF APPEALS FOR THE FIRST CIRCUIT DATED
SEPTEMBER 39, 1992

UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT

No. 92-1214

ELIE J. BAGHDADY,
Plaintiff, Appellant,
v.
LARRY D. SADLER, ETAL.,
Defendants, Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS

(Hon. Joseph L. Tauro, U.S. District Judge]
Before

Cyr and Boudin, Circuit Judges,
and Hornby,”* District Judge.

Edward F. Haber with whom Andrew A. Rainer and Spairo,
Grace & Haber were on brief for appellant.

Bryan G. Killian with whom David A Guberman, Barbara
O'Donnell and Sherin and Lodgen were on brief for appellees.

* Of the District of Maine, sitting by designation.

2a
Appendix A
September 9, 1992

HORNBY, District Judge. This appeal challenges a decision
compelling arbitration of a dispute between a securities firm and a
customer, and the eventual confirmation of the arbitrator’s award.
The record satisfies us that there was an enforcable agreement
between the parties to arbitrate disputes. We therefore conclude
that the lower court properly compelled arbitration under the
Federal Arbitration Act, 9 U.S.C. §§ 1-16. Because the challenge to
the award reveals only frustration with the results, there is no basis
to vacate the district court’s decision to confirm the award. We
therefore affirm.

Facts

Elie J. Baghdady held a substantial number of shares in a
company called Teledyne, Inc. (“Teledyne”). Unhappy with the
handling of his securities account at another brokerage firm, in
July, 1981, Baghdady transferred his Teledyne shares to the Boston
office of merrill Lynch, Pierce, Fenner & Smith, Inc. (“Merrill
Lynch”). According to Baghdady, he opened the Merrill Lynch
account for the single purpose of containing risks he was facing on
certain call options. He expected the arrangement to last only until
he could find a broker with sufficient “expertise in options to help
him out of [his] precarious investment situation”. When he opened
the Merrill Lynch account on July 29, 1981, Baghdady signed an
agreement called a “Standard Option Agreement.” The agreement
provided that “[aJny controversy between [Baghdady and Merrill
Lynch] arising out of such option transactions or [the] agreement
shall be settled by arbitration only before the National Association
of Security Dealers. ...”

In November, 19481, Baghdady met Larry D. Sadler and John
Voll, two stockbrokers operating out of Merrill Lynch's

3a
Appendix A

Burlington, Massachusetts, office with expertise in options
trading. Believing that the Burlington office would better serve his
needs and perhaps find a way to reduce the losses that had
continued to escalate under Merrill Lynch’s watch, in December,
1981, Baghdady directed Merrill Lynch to open an account in his
name at the Burlington location. Merrill Lynch did so by
transferring the trade balances in the Boston account to a newly
assigned account at Burlington. Once at the Burlington office, a
slightly different investment strategy was pursued although it still
involved options trading against the Teledyne stock. Baghdady’s
misfortunes continued at the Burlington office and by the time he
closed that account in 1982 his losses had mounted to
$1,432,248.91.

On August 2, 1985, Baghdady brought this action against
Merrill Lynch and Sadler, seeking damages for their alleged
mishandling of his securities account. Merrill Lynch and Sadler
moved to compel arbitration under the Federal Arbitration Act, 9
U.S.C. §§ 1-16. That motion was granted over Baghdady’s
objections and the case proceeded to arbitration before the
National Association of Securities Dealers, Inc. (the “NASD”). On
February 26, 1991, following an evidentiary hearing, a three-
member NASD panel awarded Baghdady the amount of
$60,720.15. Baghdady petitioned the District Court to vacate or
correct the NASD award, but on January 14, 1992, the court
confirmed the award. Baghdady has appealed challenging both the
initial order to arbitrate and the final confirmation of the award.

The Decision to Combel Arbitration

The document that Baghdady signed on July 29, 1981,
explicitly governed “any transaction” executed by Merrill Lynch
for put and call options. It stated that “any controversy between us
arising out of such option transactions . . . shall be settled by

4a
Appendix A

arbitration. . . .” The document did not limit its terms to a particular
account. Instead, its scope extended to all accounts the customer
might have with Merrill Lynch.' The controversy here involves put
and call options exercised by Merrill Lynch on behalf of Baghdady.
It is thus clearly within the terms of the agreement to arbitrate.
Baghdady asserts that he did not read the printed text of the
document when he signed it, did not intend to enter into an
arbitration agreement and did not intend that the agreement would
apply to any other account. He likewise asserts that when he
opened the Burlington account in December, 1981, he did not
intend the July agreement to apply. Although these may be
disputed matters, they are not material. The document Baghdady
did sign was clear on its face and its scope was unrestricted.” There
is no suggestion that Baghdady was prevented from reading the
document before he signed it.

Baghdady argues that under this interpretation of the
document, a new account opened 30 years later in Melbourne,
Australia, would still be subje-t to arbitration. If the customer's
relationship with Merrill Lynch was ongoing during the 30 years
(as it was here during six months), that might well be the case.

1. Paragraph 3, forexample, provided: “Any securities and funds held by you
in any accountof mine with you shall be held by you as security for the performance by
me of my obligations to you under this Agreement.” Paragraph 8 also made clear that
Merrill Lynch contract documents applied to more than one account: “Any agreement
by me with you, whether previously or hereafter made applicable to any account of
mine with you, shall also apply to such option transactions except to the extent which
itconflicts with this agreement. In the event of aconflict, this agreement shall control,
and where there is no conflict, each provision of each agreement shall apply.”

2. Baghdady is bound by his “external expression of intention as distinguished
from [any] undisclosed intention.” Restatement (Second) of Contracts § 2 cmt. b
(1981).

Sa
Appendix A

Neither in that case nor in this case do we have a situation where the
contractual relationship has come to an end such that the parties
might reasonably expect their legal agreement to have lost any
continuing vitality. Instead, Baghdady transferred his stock
directly from the Boston account to the Burlington account.

Baghdady also points to the language in Par-Knit Mills, Inc. v.
Stockbridge Fabrics Co., Ltd., 636 F.2d 51, 54 (3rd Cir. 1980), that
“fi]f there is doubt as to whether [an express unequivocal
arbitration agreement] exists, the matter, upon a proper and timely
demand, should be submitted to a jury.” The “doubt” in Par-Knit,
however — and thus the genuine issue of material fact — was
whether a company's production manager had authority to bind the
corporation for which he spoke. There is no dispute here that
Baghdady had authority to bind himself. Since we find the
language clear in the contract he signed, there is no issue for a trial,
jury or nonjury, under the Federal Arbitration Act, 9 U.S.C. § 4.

We conclude therefore that the district court properly ordered
arbitration under the Federal Arbitration Act.

The Arbitration Award

The Federal Arbitration Act permits a district court to vacate
an arbitration award where it finds certain wrongdoing or abuses in
the arbitration process. 9 U.S.C. § 10. Baghdady has not asserted
that any such statutory abuses have occurred here. Rather, he
contends that the award should have been vacated because there
was evidence of a “manifest disregard of the law,” citing Wilko v.
Swan, 346 U.S. 427, 436-37 (1953) (creating a judicial standard for
reviewing arbitration awards outside the Federal Arbitration Act),
overruled on other grounds by Rodriquez de Quijas v. Shearson/
American Express, Inc., 490 U.S. 477 (1989).

fa
Appendix A

Cut to its essence, Baghdady’s claim is that the arbitrators
fully understood established legal principles for calculating
damages, but disregarded those principles. Baghdady insists that
such disregard of the law is proven by the amount of damages
actually awarded. He maintains that the $60,720.15 awarded was
the“sum of [his] losses on precisely two transactions in the
account.” If that was the basis for the award, he argues, then there
must have been a manifest disregard of the law because the
arbitration panel could not justifiably have distinguished those two
transactions from the losses demonstrated on “the 25 other
transactions in his account.” Baghdady’s displeasure with his
recovery, however, provides no basis for vacating the award. For us
to find a manifest disregard of the law, “there must be some
showing in the record, other than the result obtained, that the
arbitrators knew the law and expressly disregarded it.” Advest, Inc.
v. McCarthy, 914 F.2d 6, 10 (1st Cir. 1990) (emphasis supplied)
(citations omitted).? Here, Baghdady has nothing but the
arbitration result to buttress his claim of manifest disregard. That is
simply insufficient.

Advest left open one other additional possibility: “In certain
circumstances, the governing law may have such widespread
familiarity, pristine clarity, and irrefutable applicability that a
court could assume the arbitrators knew the rule and,
notwithstanding, swept it under the rug.” /d. at 10. But like Advest,
this is not such a case. As Advest recognized, “arbitrators possess
latitude in crafting remedies as wide as that which they possess in
deciding cases. . . . That leaway is at its zenith when, as here, the

3. Baghdady also seeks to have us modify Advest to include “consideration of
how the law was applied to the facts or otherwise to avoid a miscarriage of justice.”
We see no reason to do so. Such a modification would cut against decades of judicial
treatment of arbitrators’ decisions.

Ta
Appendix A

arbitration clause imposes no limitations on choice of remedies.”
Id. at 10-11 (citations omitted). Even if the award here was based
on two specific transactions as Baghdady suggests, the panel may
have found that the defendants had breached a promise to rescind
those transactions. Baghdady argues that this finding would have
been erroneous. That, however, is a matter beyond the scope of our
review. As we have said before, we “do not sit to hear claims of
factual or legal error by an arbitrator as an appellate court does in
reviewing decisions of lower courts.” Advest, 914 F.2d at 8
(quoting United Paperworkers Int'l Union v. Misco, Inc., 484 U.S.
20, 38 (1987)). “[As] long as the arbitrator is even arguably
construing or applying the contract and acting within the scope of
his authority,’ a court’s conviction that the arbitrator made a
serious mistake or committed grievous error will not furnish a
satisfactory basis for undoing the decision.” Advest, 914 F.2d at 9
(quoting Misco, 484 U.S. at 38). Whatever its reasoning, the
panel’s award here was at least within the realm of possible
remedies that could have been fashioned in this case. The district
court properly confirmed the awad.

Judgment AFFIRMED.

8a

APPENDIX B - JUDGMENT OF THE UNITED STATES
COURT OFAPPEALS FOR THE FIRST CIRCUIT DATED
SEPTEMBER 3, 1992

UNITED STATES COURT OF APPEALS
FOR THEFIRSTCIRCIT —

No. 92-1214

ELIE J. BAGHDADY,
Plaintiff, Appellant,

v.
LARRY D. SADLER, ETAL.,
Defendants, Appellees.

JUDGMENT
Entered: September 9, 1991
This cause came on to be heard on appeal from the United
States District Court for the District of Massachusetts, and was

argued by counsel.

Upon consideration whereof, it is now ordered, adjudged and
decreed as follows: The judgment of the district court is affirmed.

By the Court,

FRANCIS P. SCIGLIANO
Clerk

9a

APPENDIX C - MEMORANDUM OF THE UNITED
STATES DISTRICT COURT, DISTRICT OF
MASSACHUSETTS, DATED JANUARY 14, 1992

UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS

CA No. 85-3101-T #58
CANo. 91-11484-T#12

ELIE J. BAGHDADY,
Plaintiff,

, J»

MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., et al.,
Defendants
MEMORANDUM

January 14, 1992
TAURO, Ch.J.

Dr. Elie J. Baghdady petitions to modify or vacate an
arbitration award which the defendants, Merrill Lynch, Pierce,
Fenner & Smith, Inc., and broker Larry Sadler (collectively,
“Merrill Lynch ”) move to confirm. Baghdady lost approximtely
$1.4 million in his account with Merrill Lynch. He sued, alleging
violations of federal and state law. The dispute went to a panel of
the National Association of Securities Dealers, which, after a six-
day hearing, awarded Baghdady $60,720.15.

10a
Appendix C

A.

An arbitral award will be vacated only if the arbitrators
recognized the applicable law and ignored it; or, in other words,
that they acted irrationally or arbitrarily. Advest, Inc. v. McCarthy,
914 F.2d 6, 9 (Ist Cir. 1990). Baghdady must show something in
the record, other than the result, that indicates that the arbitrators
knew the law and expressly disregarded it. Jd. at 10 (citation
omitted).

The arbitrators do not need to explain their award, id., and they
did not do so here. As the First Circuit recognized, the absence of
an explanation makes it extremely difficult for a petitioner, like
Baghdady, to challenge an award. See id. (citation omitted).
Baghdady succeeds, however, in identifying the award as
equalling his losses “on precisely two transactions in the account.”
See Petitioner's Brief at 20. This in itself suggests that the award
was rationally based, and not arbitrary. Baghdady argues that it
was arbitrary, because the evidence did not permit the arbitrators to
distinguish two out of twenty-five transactions. Merrill Lynch,
however, points to record evidence that suggests that these two
transactions were distinguishable from all other transactions,
because Merrill Lynch had apparently agreed to rescind them. See
Defendants' Memorandum at 9.

In any event, it is not Merrill Lynch’s burden to show that the
award was rational, but Baghdady’s to point to record evidence of
the arbitrators’ manifest disregard of the law. Baghdady musters
what he calls “undisputed evidence” of his losses and of Merrill
Lynch’s violations of its authority. But such “evidence” is a factual
matter, and the court’s role is not to hear allegations of factual
error. Advest, 914 F.2d at 8 (citation omitted).

lla

Appendix C

Baghdady also asserts that he should have been awarded
prejudgment interest on the award but, again, does not show by
what legal authority he was entitled to the interest. Arbitrators are
entitled to craft remedies they deem appropriate. /d. at 10-
11.Where there is no limitation on their remedial power, and none
is apparent here, an award without prejudgment interest does not
contravene any legal authority. Although M.G.L. c. 231 S 6C
provides that prejudgment interest shall be awarded in contract
actions, and although Baghdady’s claim against the defendants
was essentially contractual, “the arbitrators may have concluded
that [his] entitlement was equitable, rather than contractual, and
that therefore interest was discretionary.” Nicoletti v. E.F. Hutton
& Co., Inc., 761 F. Supp. 312, 314-315 (S.D.N.Y. 1991) (noting
that petitioner cited no case in which an arbitration award was
vacated for failure to award prejudgment interest). See also
Oppenheimer & Co., Inc. v. Graziano, No. 90-C6236, 1991 U.S.
Dist. LEXIS 2101 at *2 (N.D. Il. Feb. 21, 1991) (absent proffer of
authority, petitioner not entitled to prejudgment interest).

B.

Mermill Lynch moves to confirm the award and to be given
attorneys’ fees, because, it says, Baghdady’s petition is
groundless. Although the award merits confirmation, Merrill
Lynch does not show that Baghdady prosecuted this action in bad
faith, so as to justify a discretionary award of fees. See Brigham &
Women's Hosp. v. Massachusetts Nurses Ass'n, 684 F. Supp. 1120,
1125 (D. Mass. 1988).

An order will issue.

s/ J.F. Tauro
United States District Judge

12a

APPENDIX D — ORDER EXTENDING TIME OF THE
SUPREME COURT OF THE UNITED STATES DATED
NOVEMBER 20, 1992

SUPREME COURT OF THE UNITED STATES
No. A-406

Elie J. Baghdady,
Petitioner
v.

Larry Sadler, et al.
ORDER

UPON CONSIDERATION of the application of counsel for
the petitioner,

ITIS ORDERED that the time for filing a petition for a writ of
certiorari in the above-entitled case, be and the same is hereby,
extended to and including February 5, 1993.

D.H. Souter
Associate Justice of the Supreme
Court of the United States

Dated this 20th day of November, 1992.

| eee

13a

APPENDIX E — RELEVANT STATUTES

9U.S.C. § 3:

If any suit or proceeding be brought in any of
the courts of the United States upon any issue
referabie to arbitration under an agreement in
writing for such arbitration, the court in which
such suit is pending, upon being satisfied that
the issue involved in such suit or proceeding is
referable to arbitration under such an
agreement, shall on application of one of the
parties stay the trial of the action until such
arbitration has been had in accordance with the
terms of the agreement, providing the
applicant for the stay is not in default in
proceeding with such arbitration.

9U.S.C. § 4:

Failure to arbitrate under agreement;
petition to United States court having
jurisdiction for order to compel
arbitration; notice and service thereof;
hearing and determination

A party aggneved by the alleged failure,
neglect, or refuval of another to arbitrate under
a written agreement for arbitration may
petition any United States district court which,
save for such agreement, would have
jurisdiction under Title 28 [28 USCS §§ 1 et
seq.], in a civil action or in admiralty of the
subject matter of a suit arising out of the
controversy between the parties, for an order

14a
Appendix E

directing that such arbitration proceed in the
manner provided for in such agreement. Five
days’ notice in writing of such application shall
be served upon the party in default. Service
thereof shall be made in the manner provided
by the Federal Rules of Civil Procedure [USCS
Rules of Civil Procedure]. The court shall hear
the parties, and upon being satisfied that the
making of the agreement for arbitration or the
failure to comply therewith is not in issue, the
court shall make an order directing the parties
to proceed to arbitration in accordance with the
terms of the agreement. The hearing and
proceedings, under such agreement, shall be
within the district in which the petition for an
order directing such arbitration is filed. If the
making of the arbitration agreement or the
failure, neglect, or refusal io perform the same
be in issue, the court shall proceed summarily
to the trial thereof. If no jury trial be demanded
by the party alleged to be in default, or if the
matter in dispute is within admiralty
jurisdiction, the court shall hear and determine
such issue. Where such an issue is raised, the
party alleged to be in default may, expect in
cases of admiralty, on or before the return day
of the notice of application, demand a jury trial
of such issue, and upon such demand the court
shall make an order referring the issue or issues
to a jury in the manner provided by the Federal
Rules of Civil Procedure [USCS Rules of Civi!
Procedure], or may specially call a jury for the
purpose. If the jury find that no agreement in

1Sa

Appendix E

writing for arbitration was made or that there is
no default in proceeding thereunder, the
proceeding shall be dismissed. If the jury find
that an agreement for arbitration was made in
writing and that there is a default in proceeding
thereunder, the court shall make an order
summarily directing the parties to proceed with
the arbitration in accordance with the terms
thereof.

9 U.S.C. § 10:
§10. Same; vacation; grounds; rehearing

(a) In any of the following cases the United
States court in and for the district wherein the
award was made may make an order vacating
the award upon the application of any party to
the arbitration—

(1) Where the award was procured by
corruption, fraud, or undue means.

(2) Where there was evident partiality
or corruption in the arbitrators, oreither
of them.

(3) Where the arbitrators were guilty of
misconduct in refusing to postpone the
hearing upon sufficient cause shown, or
in refusing to hear evidence pertinent
and material to the controversy; or of
any other misbehavior by which the

16a
Appendix E

rights of any party have been
prejudiced.

(4) Where the arbitrators exceeded
their powers, or so imperfectly executed
them that a mutual, final, and definite
award upon the subject matter
submitted was not made.

(5) Where an award is vacated and the
time within which the agreement
required the award to be made has not
expired the court may, in its discretion,
direct a rehearing by the arbitrators.

(b) The United States district court for the
district wherein an award was made that was
issued pursuant to section 590 of title 5 may
make an order vacating the award upon the
application of a person, other than a party to the
arbitration, who is adversely affected or
aggrieved by the award, if the use of arbitration
or the award is clearly inconsistent with the
factors set forth in section 582 of title 5.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386011_2069%3A1. Public record. Not legal advice.