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

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386012_0857%3A1

## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 1995
- **Citation:** 513 U.S. 1112

## Text

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 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

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386012_0857%3A1. Public record. Not legal advice.