Petition for Writ of Certiorari — Remmey v. PaineWebber, Inc.

Supremes Coert, U.S.

FILED

94 91 6 NOV 2 1 19%

\ 4

ee

OFFICE OF THE CLERK

NO.

In The

Supreme Court of The United States

October Term 1994

KATHRYN THOMPSON REMMEY and

ERNEST M. REMMEY, Executors of

the Estate of LOUISE REMMEY, Deceased,

Petitioners,

v.

PAINEWEBBER INCORPORATED

and ARNOLD MARKS,

Respondents.

Petition For A Writ Of Certiorari

To The United States Court of

Appeals For The Fourth Circuit

PETITION FOR WRIT OF CERTIORARI

*David M. Clark

CLARK, WHARTON & BERRY

Post Office Box 1349

Greensboro, NC 27402

*Counsel of Record

LEGAL ADVANTAGE - Advocates in Appellate Services

1108 East Main Street * Richmond, VA 23219

(804) 780-0800

EDITOR'S NOTE

THE FOLLOWING PAGES WERE POOR HARD COPY

AT THE TIME OF FILMING. IF AND WHEN A

BETTER COPY CAN BE OBTAINED, A NEW FICHE

WILL BE ISSUED.

QUESTIONS PRESENTED

¥ Whether concealment from the part:es

of an arbitrator's history of securities

ethics violaticns is grounds fer vacatur of

an arbitration decision under 9 J.S.C. §

10 (a).

IZ. Whether a party to a federal

arbitration has the burden of doing hie own

independent investigation cf the

arbitrators, and may not rely on the

accuracy and completeness of the

information on the arbitrators furnished by

the arbitrators and the self-regulatory

organization (SRO) conducting the

arbitration.

III. Whether an SRO, in appointing |

arbitrators, may ignore regulations

mandated by the Securities Exchange

Commission (SEC), set forth in the SRO's

rules. See Shearson/Am, Express. Inc. y-

McMahon, 482 U.S. 220, 232 (1987),

approving arbitration in Securities

disputes only because of the SEc regulatory

Power.

IV Whether a Party 0 a federal

arbitration who Snows thac relevant and

material informaticen about the &rSitrators

WaS NOt provided i8 entitled =O have the

arbitration vacated under 9 y.s.c. § lola).

The Fourth Circuit holding thar Petitioner

ig not go encticled ig contrary to

m 2 : 2. =

S€8..Co., 393 y.s. -45 (1968) ang decisions

from she 2d, 6th, 7th. 9th and llth

Circuits. See also Adfiliated Ure citizens

e--

$--

LIST OF PARTIES

The only parties to this proceeding

are named in the caption.

This matter commenced as an action

brought in 1990 by Mrs. Louise Remmey

through her attorney-in-fact, Mrs. Kaye

Grove, seeking recovery against an

individual stockbroker, Arnold Marks, and

his employer, PaineWebber, Incorporated.

Following Mrs. Remmey's death on March

20, 1993, the executors of her estate,

Kathryn Thompson Remmey and Ernest M.

Remmey, were substituted as plaintiffs by

Motion to the United States District Court

for the Middle District of North Carolina.

for ease of reference within this

Petixion, PaineWebber, Incorporated will be

referred to as PW and Arnold Marks will be

referred to as Marks. Petitioners will be

referred to collectively or as Remmey or

Mrs. Remmey.

iii

TABLE OF CONTENTS

QUESTIONS PRESENTED. .......-sseeeeeve: i

LIST CE PARTIES... ccc reeves receces Lic

TABLE OF AUTHORITIES.....-.0- eee eeees v

OFFICIAL AND UNOFFICIAL OPINIONS

INVOLVED IN THIS CASE......-.0esss sees 1

CURISDICTIONAL STATEMENT............-.- 2

PERTINENT STATUTES AND REGULATIONS.... z

STATEMENT OF THE CASE.....-..- +2000: 2

A. Post-Award Information

About The Industry

pO FE re a are ”

B. Lack of Required

Qualification Ascertainment

For The "Public" Arbitrators,

Revealed Post-Award......... 10

BASIS FOR FEDERAL JURISDICTION........ is

oi ieee LURE TTT Ce ee 16

A. SMEPOGUCCIOMs occ cscccrecee: 16

B. The "Industry" Arbitrator...19

C. The "Pubiic" Arbitrators... .27

CONCLUSION. *e¢€ eog@eeegceseeeeeeoee~e@seeecgcs#s#ewssest 37

TABLE OF AUTHORITIES

CASES:

- ‘one oie a! Vv.

> oo

Unated Scates,

SOE Gis BEE CABPOE icc eeccsccce

Anerican Guar Co, v. Caldwell,

72 F.2d 209 (9th Cir. 1934).....

Appergon vy. Fleet Carrier Corp

879 F.2d 1344 (6th Cir. 1389),

cert. denied 493 J.S. 309 (1989)

Carras v. Burn.

516 F.2d 281 (4th Cir. 1975)....

393 U.3. 145 (1968) ..... cease :

Cox vy. Cox,

33 N.C. App. 73, 234 S.B.2d 189,

(2977) ccccccccsveecaresesbsonesus

e-e at 24

‘ree B28

Maxc Rich § Cow, A.G. v.

Tranemarine Seaways Core

443 F.Supp. 386 (S.D.N.¥. 1973;........,

r a bao)

14 F.2d 673 (7th Car. 1983),

cerz. denied,464 U.S. 10°09 (1983)......

Maddlegex Mut. Ins. Co. v. Devs7€

S7G Ewe aa57 (3208 Cie. 1908) .......+.

Moxyelite Const. Corp, v. New Yors

7 , a ~

748 F.2d 79 (20 Cir. 1984).........0 00.

.

°°

Prerce v, Altman,

147 Ga. App. 22, 248 S.E.2d 34 (1978).

Remmev_v. PaineWwebber,

33 7.30 £68 COR Gees BOO) 60 cc wu cs eccs

165 F. Supp. 295 (2.N.J. 1958),

mot. den. 262 F.2d 180 (3d Cir. 1959),

aff'd 271 F.2d 266 (3d Cir. 1959),

cert. denied 359 U.S. $91 (1959).......

Lecal 420 v. Kinney Aix Conditioning,

736 F.2G 742 (SOR Che. LOGS) 2c cccvcccs

834 F.2d 751 (9th Cir. 1987).

cert. denied 486 U.S. 1043 (1988)......

vi

16

.27

1993 CCH Fed. Sec. L. Rep.

Transfer Birding $9 97,780.............. 32

— P

Gee Ee. SS TMEV AD 6 ki caess 96 ac0% CK ll

i

37

OTHER AUTHORITIES:

Weled Geen GORE. Voccecctncecssesess 2

15

16

ee Ge es BE ay oh 6 oS 6 oe eee 5

16

re is ay cae ea bons 27

ge ee Ee | ee ee re 2

es BNE ok s a ci nencancaadden 1.

27

28

P F.B.6. & AOR) (3B) « kn nwaws vives o'w rTet

19

27

Eo A ie! es) ee ee sine tl

27

15 U.S.C. § 78j..... PC pe eee 15

ces We OED vn occ viccckccecaesce 2

ee WAG els Te Mas he ps6 we sess kh 0k otek 16

vii

Federal Rule of Civil Procedure

DES 4 4 aan 0 hdd 1 KORE ae ee bate een ea 1

Federal Rule of Civil Frocedure 60..... i

Federal Rule of Appeliate Procedure 3...i

Federal Rule of Appeilate Procedure ¢.. 1

Supreme Court Rule 16....... 0. ce eceees 16

NASD Code of Arbitration

ey re ee ne ane rE 2

33

NASD Code of Arbitration

PUOOOGES & LOC 6. cc wc che ccm acueccecs S

NASD Code cf Arbitration

PEE PCO hdle 6s be Ke wks kee 11

14

e 33

34

35

NASD Code of Arbitration

oe Oe Et | re See 12

NASD Code of Arbitration

Procedure § 19(d)............ Creo rr et,

a1

NASD Code of Arbitration

Procedure § 21..... eee ore ee ee ae <a:

6

23

24

NASD Code of Arbitration

Procedure § 22.........- Sere ee Pe eae eo 2

5

viii

NASD Code of Arbitration

Procedure § 23...-cc cere eee eseres

NASD Code of Arkitration

Procedure § 23 /a@).... cece eeerees

NASD Rules of Fair Practice,

Article ITIL, § L.weceereceereerees

NASD Rules of Fair Practice.

Article III, § 2..... ik Orme oe er

NASD Rules of Fair Practice,

Append. F, $ 3.cceeeerreeereeries

ix

OFFICIAL AND UNOFFICIAL OPINIONS

INVOLVED IN THIS CASE

Citations herein to the appendix are

as A 50.

The arbitration decision was rendered

January 17, 1992. (A 56). Petitioners'

Motion to Vacate the arbitration decision

was deried by the U. S. District Court for

the Middle District of North Carolina on

December 14, 1992, by Memorandum Opinion

and Final Judgment. (A 3l, 42).

Petitioners' motions under Federal Rules

52(b) and 60 were denied July 15, 1993. (A

54). Pursuant to Appellate Rules 3 and 4,

notice of appeal as of right was given on

August 13, 1993.

The U. S. Court of Appeals for the

Fourth Circuit affirmed the District Court

decision on August 19, 1994. 32 F.3d 143

(4th Cir. 1994). (Ail). A Petition for

Rehearing with Suggestion for Rehearing en

banc was denied on September 13, 1994. (A

62).

JURISDICTIONAL STATEMENT

The date of entry of the judgment of

the Fourth Circuit sought to be reviewed is

August 19, 1994. This Petition for Writ of

Certiorari is based on 28 U.S.C. § 1254(1).

PERTINENT STATUTES AND REGULATIONS

The texts of pertinent law are in the

Appendix hereto: U. S. CONST., amend. V (A

64); 9 U.S.C. § 10(a) (1)-(4) (A 64); NASD

Code of Arbitration Procedure §§ 19, 21,

22, 23 (A 65-72); NASD Rules of Fair

Practice, Article III, §§ 1, 2 (A 72); and

NASD Rules of Fair Practice, Append. F, § 3

(A 73). |

STATEMENT OF THE CASE

In December 1985, Louise Remmey, then

80 and suffering from congestive heart

failure, entrusted her securities to Marks,

a broker employed by PW, pursuant to a

Resource Management Account (RMA). Mrs.

Remmey suffered a stroke in February 1986.

By September 1989, Marks had shifted Mrs.

Remmey's portfolio from suitable

investments, consisting of 91.4% bonds and

debt instruments, to investments highly

unsuitable. Marks admitted recommending

every trade in the Remmey account and under

Fourth Circuit precedent Marks is deemed in

control of the account. See, e.g., Carras

v. Burns, 516 F.2d 251, 258 (4th Cir.

1975). Pursuant to Marks' recommendations

65.4% of Mrs. Remmey's assets, or $443,000,

was shifted to real estate limited

partnerships and 18.52% was moved to

proprietary and closed end mutual funds.

All these investments carried very high

brokerage commissions upon purchase. The

partnerships were not generally marketable,

so their values at any time are not readily

ascertainable. But leaving aside other

losses arising from PW's and Marks' trading

of the Remmey account, by the time of the

arbitration hearings the ten real estate

limited partnerships sold by PW through

Marks had lost between $153,936 (PW

employee's testimony) and $366,960

(petitioners' expert testimony) from the

total purchase prices thereof. In

September 1989 Marks changed his employment

from PW to Prudential Bache, taking the

Remmey account with him. Members of Mrs.

Remmey's family then learned of the types

of investments which had been made in the

account and removed the account from Marks'

control shortly thereafter. .

Suit was filed against Marks and PW in

October 1990 on behalf of Mrs. Remmey, then

totally incompetent, by Mrs. Kaye Grove,

her attorney-in-fact, seeking damages under

the federal securities laws and pendent

state claims for fraud and breach of

fiduciary duty. PW referred to a mandatory

arbitration clause in fine print in its RMA

account document, and the matter was

referred by the parties to arbitration

under the Federal Arbitration Act, 9 U.S.C.

§§ 1-16, and the rules of the National

Association of Securities Dealers (NASD).

Sections 19(b) and (d) of the NASD

Code of Arbitration Procedure (NASD Code)

provide that in arbitration matters

involving public customers in sums

exceeding $30,000 a majority of the

arbitrators shall not be from the

securities industry and shall be deemed

"public" arbitrators. (A 65-67). Section

22 of NASD Code also provides that each

party shall have one peremptory challenge

to the arbitrators appointed by the NASD.

(A 69). NASD appointed Marshall H.

Johnson, a Greensboro stockbroker, as the

industry arbitrator, and H. Victor

Schwimmer and Stanley V. Lewis as public

arbitrators. Repeated requests by

petitioners' counsel in letters of August

7, 21, and 27, 1991 (A 76-82), for copies

of the sworn application questionnaires

(termed "Arbitrator Profiles" by NASD), by

which the persons appointed as arbitrators

sought appointments to the NASD pool of

arbitrators, elicited no response from the

NASD Director of Arbitration. Petitioners’

requests were authorized by NASD Code § 21

(A 67-69) which states that "(a] party may

make further inquiry of the Director of

Arbitration concerning an arbitrator's

background," in addition to names and

employment histories spanning ten years,

and NASD Code § 23 disclosures. (A 67-68).

Testimony before the arbitration panel

centered around PW's and Marks' violations

of NASD Rules of Fair Practice involving

unsuitable investments, churning, and lack

of broker supervision. The arbitration

panel dismissed all of Mrs. Remmey's claims

and set arbitrators' fees totaling $10,000

equally between Mrs. Remmey and PW.

Counsel for Mrs. Remmey filed a motion

to vacate the arbitration decision in the

District Court. Petitioners' counsel

issued subpoenas to NASD for the sworn

arbitrator profile questionnaires and all

other information available to NASD about

the persons appointed as arbitrators. Asa

result NASD agreed to furnish by affidavit

significant additional information about

the arbitrators. A description of some of

this information follows.

A. Post-Award Information About

The Industry Arbitrator

The NASD produced incontrovertible

evidence that arbitrator Johnson had

himself been found guilty of six violations

of the NASD Rules of Fair Practice, with

similarities to those at issue in this

case, and that he had submitted a sworn

false arbitrator profile questionnaire on

February 13, 1989, which covered up these

ethical violations.

The arbitrator profile, signed and

submitted by Johnson seeking appointments

as an NASD arbitrator, asked whether "any

self-regulatory organization" had found him

to be “involved in a violation of its

rules." Johnson answered this question

with a mark in the "no" column and offered

no explanation with, or for, this answer,

although ample space for comments was

provided. The answer was false. The NASD

District Business Conduct Committee had, on

two separate previous occasions, found

Johnson guilty of six distinct violations

of Article III, Section 1 of the NASD Rules

of Fair Practice, requiring "high standards

of commercial honor and just and equitable

principles of trade." (A 72-3). In

addition, Johnson had been found guilty of

two other rule infractions, making a total

of eight infractions which he should have

reported in answer to the above question.

Fines were assessed against Johnson and his

brokerage firm in amounts of $1,000 in June

1980 and $500 in December 1978 for some of

the violations.

Mrs. Remmey's claims against Marks and

PW were of a nature similar to those

involved in the NASD proceedings against

Johnson. For example, Johnson was found,

on a number of public issue prospectuses,

to have placed a label with the address and

phone number of his firm over the names of

managing underwriters, obviously misleading

to customers as to the identity of the

underwriters of the securities.

Misrepresentation as to suitability and

character of the investments sold to Mrs.

Remmey were issues in this case.

Similarly, Johnson was found guilty of

failing properly to supervise individual

brokers working for his firm, paralleling

an issue here as to PW's supervision of

Marks.

B. Lack of Required

Qualification Ascertainment

for The "Public" Arbitrators,

Revealed Post-Award

With regard to Schwimmer and Lewis the

subpoenaed information from NASD disclosed

that NASD did not have any sworn arbitrator

profile questionnaire for Schwimmer. There

was nothing in NASD's files at all to

qualify this panelist as a public

arbitrator. With regard to Lewis there was

on file an arbitrator profile questionnaire

dated July 31, 1989, but it in no way

qualified under NASD's own rules as a

determination whether Lewis met the

requirements of public arbitrator specified

10

by NASD Code §§ 19(c) and (d), as amended.

(A 66-67).

On March 26, 1990, the NASD Director

of Arbitration had sent a Memorandum

entitled Arbitrator Profile Update to all

persons on NASD's list of arbitrators. The

Memorandum is in the Appendix. (A 82).

The Memorandum noted the critical

importance of arbitrator classification,

referring to Shearson/Am. Express, Inc. v.

McMahon, 482 U.S. 220 (1987). The

Memorandum stated that Shearson/Am. Express

expressed the belief that an arbitration

forum provides a "fair, just and prompt

resolution of securities disputes," but

also noted skepticism regarding fairness,

from both this Court and the Securities

Exchange Commission (SEC), that

“individuals with industry ties [were

being] classified as public arbitrators."

(Emphasis supplied). (A 83). The

11

Memorandum stated, "This skepticism was

detailed by the SEC in a letter to the NASD

and other self-regulatory organizations

recommending certain categories to be

excluded from the pool of public

arbitrators." (A 83-4). The Memorandum

announced that NASD had amended its Code of

Arbitration Procedure on May 10, 1989, in

response to the SEC letter, to exclude from

serving as public arbitrators any

"professional who has devoted twenty (20)

percent or more of his or her professional

work effort to securities industry clients

within the last two years... ." (A

84-5). See NASD Code § 19(c) (5). (A 67).

The March 26, 1990 Memorandum directed

each recipient to complete an updating

"arbitrator questionnaire" for the purpose

of enabling the NASD to classify

arbitrators as "securities or public

arbitrators in accordance with the

12

provisions of the new rules," and stated

that a number of individuals who were then

serving as public arbitrators would "be

reclassified as securities arbitrators or

be removed from the national pool." (A

86). The Memorandum stated that NASD's

arbitrator data base for classification of

arbitrators required additional information

about the arbitrators. (A 86).

Among other subjects, the updating

questionnaire asked whether the arbitrator

had "been an expert for a broker/dealer in

an action or in support of a claim against

a broker/dealer over the past two years."

Neither Lewis nor Schwimmer ever

returned the March 26, 1990 questionnaire.

Lewis had sworn to an earlier profile, and

was approved as an arbitrator by NASD on

July 31, 1989, but NASD would not provide

the earlier sworn profile for petitioners

prior to the arbitration. But the subpoena

13

also brought forth, with Lewis' 1989 sworn

profile, a related document entitled

"Curriculum Vitae," and labeled "Input

8/29/91," which date was just twelve days

before the arbitration was to begin. This

document, in the Appendix at p. 87,

detailed consistent involvement by Lewis on

securities industry boards, panels, and

committees, and as an arbitrator and expert

witness in securities matters. This

information, which raised serious questions

about Lewis' qualifications as a public

arbitrator pursuant to the guidelines of

NASD Code § 19(c), was never provided

petitioners before the arbitration.

Essentially, the only information about

Lewis provided to petitioners was that

outlined in the Fourth Circuit opinion,

i.e., that Lewis had retired in 1989 as

Deputy Securities Commissioner in South

Carolina, had before that been a securities

14

examiner for the State, and had been a

stockbroker for five years prior to 1970.

(A 12).

The subpoenaed documents presented to

the District Court and to the Court of

Appeals thus demonstrated that none of the

arbitrators appointed in this case were

qualified to serve and their appointment by

NASD deprived petitioner of due process of

law under the Fifth Amendment to the

Constitution of the United States, unless

the arbitration is vacated, as it should

be, pursuant to 9 U.S.C. § 10(a) (1) because

corrupt, fraudulent, or brought about

through undue means, or partiality or

arbitrator misconduct pursuant to 9 U.S.C.

§§ 10(a) (2) and (3). (A 64-65).

BASIS FOR FEDERAL JURISDICTION

This action sought recovery under the

anti-fraud provisions of the securities

laws of the United States, 15 U.S.C. §

15

783 (b). Arbitration was pursuant to 9

U.S.C. §§ 1-16.

The United States Fourth Circuit had

appellate jurisdiction pursuant to 28

U.S.C. § 1291. The actions below deprived

petitioners of due process under the United

States Constitution, Amendment V.

ARGUMENT

A. Introduction

This petition for writ of certiorari

should be granted, pursuant to Supreme

Court Rule 10, because the Fourth Circuit

Opinion conflicts with mandates of this

Court requiring supervision "sufficient to

ensure that arbitrators comply with the

requirements of the statute." Shearson/Am.

Express, 482 U.S. at 232. The Fourth

Circuit decision allows the NASD to flaunt

SEC regulations, despite that the

availability of oversight by SEC was the

basis on which this Court approved

16

arbitration in securities cases. Id. It

is in conflict with the substantive law in

this Court's opinions of Commonwealth

Coatings Corp. v. Continental Cas. Co., 393

U.S. 145 (1968) and Affiliated Ute Citizens

v. United States, 406 U.S. 128, 154 (1972).

It further conflicts with federal

circuit and district court decisions such

as Middlesex Mut. Ins. Co. v. Levine, 675

F.2d 1197 (11th Cir. 1982); Apperson v.

Fleet Carrier Corp., 879 F.2d 1344, 1358-59

(6th Cir. 1989), cert. denied, 493 U.S. 809

(1989); and Rogers, Att'y Gen. v. Schering

Corp., 165 F. Supp. 295 (D.N.J. 1958), mot.

denied 262 F.2d 180 (3d Cir. 1959), aff'd

271 F.2d 266 (3d Cir. 1959), cert. denied

359 U.S. 991 (1959).

This petition should also be granted

for this Court to address the question

whether an arbitrator's history of ethics

violation convictions must be disclosed to

17

arbitration participants so that failure to

disclose is grounds for vacatur.

Furthermore, this Court should address

a split in circuit decisions, wherein the

Fourth Circuit appears to hold an

arbitration participant to a standard of

proof of harm from bias, as a ground for

vacatur, while other circuits have adopted

the standard that a "reasonable impression

of bias" is sufficient. The "reasonable

impression" standard is discussed in

Apperson, 879 F.2d at 1358, which notes

similarity among other circuits: the Second

(Morelite Const. Corp. v. New York City

Distri > ile : eit Fund,

748 F.2d 79 (1984)), the Seventh (Merit

ins. Co. v. Leatherby Ins. Co., 714 F.2d

673, 681-82, cert. denied, 464 U.S. 1009

(1983)), and the Ninth (Toyota of Berkeley

v. Automobile Salesmen's Union, Local 1095,

834 F.2d 751, 755-56, cert. denied 486 U.S.

18

1043 (1988) and Sheet Metal Workers Int'l

Ass'n Loca v. Ki Ltioning,

756 F.2d 742, 745-46 (1985)).

B. The "Industry" Arbitrator

The Fourth Circuit has condoned

concealment by an arbitrator and NASD of

the arbitrator's past ethical violations.

This holding threatens the underpinnings of

the arbitration system and must be

corrected. That the information about

Johnson was material as to his pre-existing

bias or partiality cannot be gainsaid. See

9 U.S.C. § 10(a) (2). (A 64-65). Any trial

lawyer would use a peremptory challenge on

a prospective juror who had been found

guilty of an offense the same or similar to

the matter before the court. A taint

sufficient to subject a juror to challenge

was a test of materiality articulated for

arbitration proceedings in Commonwealth,

19

393 U.S. at 148. Obviously the information

about Johnson's rule violations was

material. Otherwise, why did the NASD

questionnaire ask about them? The Court of

Appeals recognized the materiality of the

information. It said in dicta:

Regardless of whether NASD rules

strictly require disclosure of an

arbitrator's past NASD disciplinary

infractions, it seems apparent that

public confidence in the NASD

arbitration process would be enhanced

if such information were not only

available to the parties, but was in

fact actually conveyed to them. (A

1S, fn. 4).

The Court of Appeals sought to justify

limiting this ruling to dicta by holding

that petitioner "has not shown that these

[ethical] infractions affected Johnson's

impartiality, thereby yielding an

impermissible award." (A116). This

holding ignores the long established

precedent in this Court that if material

facts are withheld or concealed, reliance

20

thereon and causation of harm by such

concealment are presumed. "This obligation

to disclose and this withholding of

material facts established the requisite

element of causation in fact." Affiliated

Ute Citizens, 406 U.S. at 154. Compare

also this Court's holding in Commonwealth,

where the petitioner apparently even

conceded there was no actual bias. 393

U.S. at 147. Nevertheless, the award in

Commonwealth was "set aside on the basis of

‘evident partiality' or the use of ‘undue

means'" because of nondisclosure to the

petitioner of "dealings that might create

an impression of possible bias." 393 at

148-149. The circumstances regarding

Johnson also clearly meet the "reasonable

impression of partiality" standard

discussed in Apperson, 879 at 1358 (adopted

in the 2d, 6th, 7th and 9th Circuits).

21

The Fourth Circuit also holds that

petitioners should have raised the

objection relating to Johnson's ethical

violations before the arbitration (A 17),

disregarding the crux of the problem in

this case, which is the nondisclosure to

petitioner. This Fourth Circuit holding is

based upon the fact that, after the

arbitration was completed, petitioners'

counsel was alerted to Johnson's ethical

violations, not as he should have been by

the Director of Arbitration, but by inquiry

pursuant to the NASD's Public Disclosure

Program. This holding, if allowed to

stand, means that a party may not now rely

upon the integrity of information about an

arbitrator furnished by the NASD, but must

do his own time-consuming and expensive

separate background check on the

arbitrators. NASD's Public Disclosure

Program is unrelated to NASD Arbitration

22

and is for the entirely different purpose

of providing information to the general

public "which will help them in their

determination whether to conduct or

continue to conduct business with an NASD

member ... ." (A 90). That program is

not intended for, and generally is not even

known by, persons in an arbitration under

the NASD Department of Arbitration, which

has its own established procedures for

providing information regarding

arbitrators. See NASD Code §§ 21 and 23 at

A 67 and 70. And what about NASD's

obligation to provide relevant information,

even that which might be in its files in

another of its departments? "The law is

not tender toward those who fail in their

responsibility to exercise the necessary

good faith in their dealings with others."

Middlesex, 675 F.2d at 1204 (citation

omitted). Nor should the law be harsh

23

toward an innocent party harmed by the

failure of another.

The Fourth Circuit holding is totally

at odds with governing NASD Code §§ 21 and

23, which place upon both the individual

arbitrator and the NASD the burden of

disclosing "any circumstances which might

preclude such arbitrator from rendering an

objective and impartial determination."

(NASD Code § 23(a) at A 70). The burden is

not upon a party to search behind

information provided by the arbitrators and

the NASD. This Fourth Circuit ruling guts

the concept of arbitration, which is to

provide a convenient and less, expensive way

to resolve disputes. As this Court said in

Commonwealth:

We can perceive no way in which the

effectiveness of the arbitration

process will be hampered by the simple

requirement that arbitrators disclose

to the parties any dealings that might

create an impression of possible bias.

393 U.S. at 149.

24

The Fourth Circuit ruling is in

conflict with the Eleventh Circuit which

holds:

The law does not require that [a party

to arbitration] ascertain whether an

arbitrator has violated his duty of

disclosure. Such a procedure would be

prohibitively time consuming and

costly. It would also frustrate the

goal of arbitration which is to

expedite the resolution of disputes

and to decrease the cost of

litigation. Middlesex 675 F.2d at

1203.

The law in the Sixth Circuit is in

accord with Middlesex:

The successful party in the grievance

may not rely on the failure to object

for bias, however, unless "[a]1l the

facts now argued as to [the] alleged

bias were known .. . at the time the

{arbitration panel] heard their

grievances." Apperson, 879 F.2d at

1359 (citations omitted).

Remmey had a right to the information

concerning Johnson's ethical violations.

With that information she would have had

grounds to challenge Johnson for cause or

25

to use her peremptory challenge. Failure

to have that information disclosed to her

violated her rights under any concept of

due process of law. Compare Rogers, 165

F.Supp. at 300, which (under a different

type arbitration procedure) held that a

party, who may have a sensitivity to the

disclosure not realized by the appointing

authority, should not be deprived of at

least the opportunity to convince the

appointing authority of the desirability of

selecting an arbitrator replacement.

This Court has noted the "strict

morality and fairness .. . expected on the

part of the arbitrator." Commonwealth, 393

U.S. at 148. Here, not only is the fact of

the undisclosed infractions important.

Equally important as the infractions is the

fact that Johnson provided a false answer

concealing them. A false answer is much

more significant than a "simple failure to

26

respond." Pierce v. Altman, 147 Ga. App.

22, 248 S.E.2d 34, 36 (1978). The Fourth

Circuit is condoning this false answer, in

clear violation of petitioners' right to an

arbitration untainted by partiality or

fraud. See 9 U.S.C. § 10fa){1), (2), (3).

This Court has held that the

arbitration must not only "be unbiased but

must avoid even the appearance of bias."

Commonwealth, 393 U.S. at 150. The Fourth

Circuit intimates that the nondisclosure of

a financial interest here might have been

grounds for vacatur. (A16-17). In any

rational system of justice, how can a

falsification and resulting nondisclosure

of ethical violations be any less a ground

for vacatur under 9 U.S.C. § 10(a)?

Cc. The "Public" Arbitrators

The contract to arbitrate in this case

required that it be done "in accordance

with the rules, then obtaining" of the

27

ee

NASD. (A 92). Failure to conduct the

arbitration in accordance with arbitral

rules goes to the integrity of the body

designed to resolve the controversy and

fails to protect "due arbitration process."

Rogers, 165 F. Supp. at 301. See also

- at. dw » Fe VAG

209, 212 (9th Cir. 1934); Cox v. Cox, 33

N.C. App. 73, 234 S.E.2d 189, 190 (1977).

It is an arbitration result obtained by

"undue means" within the meaning of 9

U.S.C. 120 (a) (1).

Without the return of the sworn

arbitrator questionnaires, there was no

procedural basis on which NASD could

qualify either Schwimmer or Lewis as public

arbitrators, and their appointments

violated Mrs. Remmey's right to procedural

due process.

The Fourth Circuit ignored NASD's

violations, stating that petitioners’

28

counsel had conceded that no NASD rule

required return of the questionnaire.

Respectfully, counsel conceded only that

the published NASD Code of Arbitration

Procedure did not, by its terms, refer to

Or require return of the sworn, updated

questionnaires. But that has nothing to do

with the fact that when NASD appointed

Schwimmer and Lewis as public arbitrators,

without sworn substantiation of their

qualifications, that organization violated

its own internal operating policies,

mandated by the SEC, as set forth in

NASD's Memorandum of March 26, 1990.

NASD's failure to obtain from the

arbitrators the questionnaires it required

foreclosed any possibility that NASD could

classify these panelists as public

arbitrators in compliance with its Code of

Arbitration Procedure, which was central to

the contract with Mrs. Remmey.

29

The Fourth Circuit's superficial

reasoning that Mrs. Remmey must establish

that "failure to complete the questionnaire

impaired the ability of the arbitrators to

render a fair decision" sidesteps the

Significance of the failure of due process

in this case. It is of a piece with the

same erroneous reasoning as to arbitrator

Johnson, ignoring Affiliated Ute and

Commonwealth, supra.

The Court below recited the usual

deference to arbitration--that the courts

are not to determine whether the

arbitrators were right or wrong, but simply

whether they carried out an arbitration.

(See, e.g., A 8). But if the NASD does not

obtain the credentials of its arbitrators,

as mandated by the SEC, NASD's operating

procedures and any rule of sensible

conduct, prior to selecting and appointing

arbitrators, and the courts give great

30

deference in arbitration matters, who is

safeguarding the due process rights of the

securities consumer?

Certainly, this matter was arbitrated

poorly and incorrectly, and the result was

outrageous. Even if Mrs. Remmey had been a

healthy, fully competent, youthful

investor, the sale to her of limited

partnerships which used 65% of her assets

was in gross violation of provisions

relating to investment "suitability" in the

ethical rules set out in NASD's Rules of

Fair Practice. (See, e.g., Art. III, Sec.

2 and Appendix F, Sec. 3, A 73-5). Also

compare this case with, for example, SEC

v. Prudential Securities, Inc., 1993 CCH

Fed. Sec. L. Rep. Transfer Binder q 97,780,

in which Prudential consented to an

open-ended settlement of a minimum

$330,000,000 in a class action involving

31

But leaving aside the particular

result in this matter, it is surely taking

the judicial "hands off" policy too far

when arbitrators who were improperly

appointed to their positions may render any

arbitration decision. It is certainly not

established that arbitrators Schwimmer and

Lewis were qualified to conduct this

arbitration as public arbitrators. Yet

the Fourth Circuit elaborated on the

"suitable credentials" of these panelists,

stating, in part, "There can be little

question that Messrs. Schwimmer and Lewis

were qualified to address Remmey's claims

against Marks and PaineWebber." (A 12-13).

It even appeared to wax indignant on Mr.

Lewis' behalf, stating that "[w]e have no

reason to characterize as an "industry

arbitrator" someone whose professional

career was largely spent in enforcing state

securities laws." (A114, fn. 3). But that

32

is not the point. Petitioners are

concerned, at a minimum, with whether there

was a 20% industry involvement in the last

two years violative of NASD Code § 19(c).

(A 67).

The fact is that NASD files contained

no sworn or properly verified information

of any kind on Mr. Schwimmer's

qualifications to be an arbitrator. The

NASD file on Lewis contained an outdated

sworn arbitrator profile and an unsworn

document titled "Curriculum Vitae"

discussed above, but no response to the

March 26, 1990 questionnaire which had as

its purpose the determination of the

arbitrator's qualifications to be a public

arbitrator under the amended NASD Code §

19. These documents, particularly

"Curriculum Vitae," which NASD would

produce only after the arbitration,

pursuant to subpoena, contain information

33

which raises serious questions whether

Lewis could have been classified under the

amended Code § 19(c) as a public

arbitrator, given his work on boards and

panels in the securities industry. At a

minimum, this document, had it been timely

produced, would have provoked many

questions about whether Lewis had acted

frequently as an expert witness for

securities clients or spent more than 20%

of his professional time in the preceding

two years for industry clients. To justify.

an opinion which purports to answer

affirmatively that these persons could be

classified as public arbitrators, the

Fourth Circuit recited nothing but the

inadequate information provided

petitioners by NASD before the arbitration

began. But this information, repeated by

the Court, still does not speak to the

qualifications of these people as required

34

by amended NASD Code § 19(c). Information

intended to be elicited by the March +990

ques=ionnaires would have provided the

bases for determining qualifications, had

the questionnaires been returned. Aithougna

the Fourth Circuit presumed to gupply the

arbitrator qualificaticns, the NASD never

did, and it was certainly NASD's obligaticn

to classify properly chese arbi=rators in

the first instance.

The Fourth Circuit misapprehended the

significance of the amended NASD Code and

the March 1990 NASD Memorandum and profile

questionnaire, which can beset be stated by

borrowing the words of this Court.

ct isgue in this case is the question

whether elementary requirements of

impartiality taken for granted in

every judicial proceeding are

suspended when the parties agree to

resolve a dispute through arbitration.

Commonwealth, 393 U.S. at 145.

3$

Petitioners repeatedly requested the

Sworn arbitrator questionnaires and other

information on the panelists Prior to the

hearings, in accordance with NASD Code

Procedures, to no avail. Had NASD one its

Job, and been forthcoming, the issues

raised here would have been resclved prior

Co the commencement of the arbitration

hearings.

Mre. Remmey's age and condition

highlighted the Supposed feature of

expediency in arbitration. yet the only

way the relevant information could have

been obtained prior to arbitration would

have been by a time consuming and expensive

motion and subpoenas in federal court,

which would have been attacked ag

interlocutory and improper, and certainly

would have contradicted the principle that

arbitration ig Supposed to be speedy and

36

@nexpensive. Cf. Middlesex, 675 F.2d at

1203. Compare the Fourth Circuit's "second"

bite" theory and its corollary "parade of

horribles" (A 10) with practical and more

realistic authority holding that action to

confirm or vacate an arbitration award is

the place for judicial scrutiny of an

arbitrator's qualifications. See, e.g.,

Mare Rich & Co... A.G. v. Trarsmarine

Seawave Corp., 443 F.Supp. 386 (S.D.N.Y.

1978). Also see Commonweal =h and

Middesex.

CONCLUSION

In Sheargorn/Am. Express =his Court

approved arbitration resolution in

securties disputes because self-

regulatory organizations (SRO's) such

as the NASD are subject to regulation

by the SEC, with finai oversight by the

Courts. Here the Fourth Circuit decision

allows an SRO to ignore its own

37

SEC-mandated rules and condones an

arbitration in which the appointment of all

three arbitrators was tainted, in one

degree or another, by information not

disclosed or concealed. This decision by

the Fourth Circuit can be understood only

by assuming that the Fourth Circuit

believes its duty is to leave hands off

arbitration matters totally. This Court

should grant certiorari to give guidance to

the lower courts as to what their duty of

oversight is. Surely, it is greater than

that afforded by the Fourth Circuit in this

case.

Respectfully submitted,

‘

/ Par. ,

et ase a a

David M. Clark . .~

Clark Wharton & Berry

Attorney for Petitioners

125 South Elm Street, Suite 600

Post Office Box 1349

Greensboro, North Carolina 27402

(910) 275-7275