Opposition Brief — Greenberg v. Bear, Stearns & Co.

Pa Gupreme Court, U.S.

— FILED

No. 00-699 ~

: | __DEC 2 = 2000

IN THE |

Supreme Court of the United States

OCTOBER TERM, 2000

HOWARD GREENBERG,

Petitioner,

We

BEAR, STEARNS & CO., BEAR, STEARNS & Co., INC. AND

BEAR, STEARNS SECURITIES CORP.,

Respondents.

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE SECOND

CIRCUIT

BRIEF IN OPPOSITION TO PETITION

JACK P. LEVIN

Counsel of Record

P. BENJAMIN DUKE

COVINGTON & BURLING

1330 Avenue of the Americas

New York, NY 10019

(212) 841-1000

Attorney for Respondents Bear,

Stearns & Co., Inc. and Bear.

Stearns Securities Corp.

December 2000

QUESTIONS PRESENTED

l. Should arbitral awards deciding claims under

the federal securities laws be subject to a heightened standard

of review not applicable to awards invo!ving other statutory

claims?

es Did the Court of Appeals err in concluding

that the arbitral award in this case, which was rendered by a

three-member arbitration panel based on extensive witness

testimony and other evidence, did not constitute a “manifest

disregard of the law’?

PARTIES TO THE PROCEEDING AND

STATEMENT PURSUANT TO RULE 29.6

Respondents Bear, Stearns & Co., inc. and Bear,

Stearns Securities Corp. are wholly-owned subsidiaries of

The Bear, Stearns Companies Inc. Contrary to the captioned

listing of parties in this case, there is no separate entity

incorporated as “Bear, Stearns & Co.”

aks

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED cscs cscsscccsssssssessssessessesevssse

PARTIES TO THE PROCEEDING AND STATEMENT

PURSUANT TO RULE 29.6 -ccscsssssccsssesssssssssessssessssssese i

TABLE OF CONTENTS o.cccccscccccccascecsscccsesssssssacoecssssce ii

TABLE OF AUTHORITIES .0...cc-csccsccccsssssssssccsssssssevsnssoce iv

INTRODUCTION -secscscscsscssssesretsesseresereereesec

Sy eT 2

STATEMENT OF THE CASE ...ccccccccccscssssscscsssessesessssesvenee 2

REASONS FOR DENYING THE PETITION ..--ecccccosecccooc 5

I. The Manifest Disregard Standard Is Applied in Every

Federal Circuit and Has Been Approved by This

I]. | This Court Has Previously Rejected any Special

Standard of Review for Arbitral Decisions Under the

Pe CNN TIE on cc cccccncnenneccecececarcnscsccecacasens Y

III. The Arbitration Award Was Based on Factual

Findings to Which the Court Below Properly

de 1]

IV. Before Reaching Any of the Foregoing Issues,

This Court Would Have to Find Subject Matter

Jurisdiction Over This Case. ...............cccccccsscsesseeeseees 15

EGRESS RESON en OLE a ae 17

TABLE OF AUTHORITIES

Page(s)

Cases

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

Barnes v. Logan, 122 F.3d 820 (9th Cir. 1997), cert. denied,

SE Fie EET Aatcsctnisnetotiisitionaticintinalasdessnabunniiiceicn 6

In re Blech Sec. Litig, 928 F. Supp. 1279 (S.D.N.Y.

POPIII isscsasdcacehaeiutdisutécdetuacaduuccansnadtesaiadiaaelidtnneaiaabuaiahdadie 12

Cole v. Burns Int'l Sec. Serv., 105 F.3d 1465 (D.C. Cir.

IPI e sss nscaiescai a aéaanitabariikccdaanaiavaeiiabeddtadesa cto hncniensdaundcacsn uke: 6,7

First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938

IIE id taGanGcatdiapic tik Dalia maiinNabatceiee Le 1,6, 7,11

Franchise Tax Board v. Construction Laborers Vacation

Re ee la Oe iin actnncasiiniicenshceualin baiapuaatvede 15

Gulf Coast Funds Workers Union vy. Exxon Co., 991

Pe.) eT NOE PETAR NEP OE 7,8

Health Services Mgmt. Corp. v. Hughes, 975 F.2d 1253

EU RIUEY iia canantsscmastinadeicessiaacinederaiianinamonidaruaaianes 6

Jenkins v. Prudential-Bache Sec., Inc., 847 F.2d 631

II I Siceenctchdpcahnsceticisdchaistnaia cesteeiolieplatadtan aaa eats 6

Kasap v. Folger Nolan Fleming & Douglas, Inc., 166

Fc ee i Mas Ne Wilcnennsiccetcchasactcasioncencameindniiivase 16

Lee v. Chica, 983 F.2d 883 (8th Cir.), cert. denied, 510 U.S.

Pe ID sciesthcdiatenncicsacinsenccceniteihcgidlantianies Aeseiiel wainanedhade 6

M&C Corp. v. Erwin Behr GmbH & Co., 87 F.3d 844 (6th

Gis IIE chal icashepictreinccnsspicncnpeiadainlat daeittatiltitale eee 6

Manginelli v. Smith Barney, Inc., No. 98 Civ. 8986, 1999

WL 615096 (S.D.N.Y. Aug. 12, 1999)... eee eeeeeee 16

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc.,

473 US. G4 GHB) iiscctcinistii eee 7,11

Montes v. Shearson Lehman Bros., Inc., 128 F.3d 1456

CE BGR Clie. FOF escsitanccsasiecrakcoeleudes nannies 6, 8

Moses H. Cone Hosp. v. Mercury Construction Corp., .

S60 UB. TIGRIS sccscessiessccntsseasnatiegsnaeleeee ae 15

Press v. Chemical Inv. Servs. Corp., 166 F.3d 529 (2d

COP. TID D) sacasininishiscieniaccinnmnisiaeei adaamadi are 4

Remmey v. PaineWebber, Inc., 32 F.3d 143 (4th Cir.

1994), cert. denied, 513 U.S. 1112 (1995) wee 6

Rodriguez de Quijas v. Shearson/American Express, Inc.,

VOUS. 47 CFE) cccrvickntroouiauaaail 6, 7, 10, 11

Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,

DAO F 26 (RCS, Be ikcicccsaseeten eae 10

Ross v. Bolton, 904 F.2d 819 (2d Cir. 1990)... 12

SEC v. First Jersey Sec., Inc., 101 F.3d 1450

(Aik OIG, FWD eissininidcccstnasccueabesaenns anata eee 12

Shearson/American Express, Inc. v. McMahon,

B82 UB: ZOO CTOs) itenennnndiiaens 7, 9, 10, 11

Southland Corp. v. Keating, 465 U.S. 1 (1984) uu... eee 15

Stander v. Financial Clearing & Servs. Corp., 730 F.

Sage. L502 GEAAIN. 1. PRO sosntsscccsda 12

United Transp. Union Local 1589 v. Suburban Transit

Carp., 31 F368 576 6G Fi cccesctseecaieecs 6

Wilko v. Swan, 346 U.S. 427 (1953), overruled on other

grounds, Rodriguez de Quijas v. Shearson/American

Express, Inc., 490 U.S. 477 (1989)........cccccceseeeee 6, 7, 9, 10

Williams v. Cigna Fin. Advisors, Inc., 197 F.3d 752

CORO. CPR oicisnicstccnateckciaaumcese Coan ee 6, 8

Woods v. Bank of New York, 806 F.2d 368 (2d Cir. 1986) .. 13

Statutes

17 CIR. & ZI. FF .-.secssecsscccouisoucsennistestincssiaaaaee 14

17 CP RR. & BOG BD cercssiccnnscctscctaterseasusessacieeaeiasieen 14

DUB, 8 BG vicscoscacsssccnsstiohssnhseaneeninnaaa 6, 7,5, 35, 19

1S USAC. 8 97 scicccascnasschacssssleseniacanemaneaaanee 9,10

BS USC. © Fi wcccscscssecocscisccstictacadieiaeee 9,12

-Vil-

BRIEF IN OPPOSITION TO PETITION

INTRODUCTION

This Petition is Petitioner Howard Greenberg’s third

attempt to overturn the award (the “Award”) of a National

Association of Securities Dealers (“NASD”) arbitration panel

dismissing his claims after a full evidentiary hearing.

Petitioner's principal contention is that “there should be

applicable standards to vacate . . . an apparently irrational

arbitration decision” under the Federal Arbitration Act (the

“FAA”). Pet. at 16. In reality, such a standard already

exists, and the Second Circuit properly applied it in affirming

the district court’s denial of Greenberg’s petition to vacate

the Award. The Petition fails to identify any conflict among

the federal circuits concerning the “manifest disregard of the

law” standard applied below, nor does it suggest that any

other circuit would have reached a different result had it

reviewed this case. Though Petitioner decries the purported

unfairness of arbitrations conducted by the securities

industry's self-regulatory organizations (“SROs”), he points

to no evidence that the manifest disregard standard provides

an inadequate level of review. Moreover, the Petition simply

ignores the recent decision of this Court in First Options of

Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995), which cited

that standard with approval.

Far from raising a compelling legal question for

review, Petitioner asks this Court to revisit the factual record

and rule anew upon fact-bound issues decided by the

arbitrators. The decision below correctly concluded that the

the Award was rooted in findings of fact and witness

credibility that should not be disturbed. Petitioner’s repeated

assertions that the pertinent facts are “undisputed” and

“simple,” see Pet. at 5, 9, 13, 14, 17, and that the Award is

“jrrational” and “perverse,” see id. at 13, 15, 16, are refuted

—

by the record and were properly rejected. Indeed, the

Petition fails even to address several independent factual and

legal grounds supporting the Award. In any event, Petitioner

merely challenges the lower courts’ straightforward

application of an accepted standard of review and therefore

does not raise any issue warranting this Court’s attention.

Even if the Petition raised compelling questions for

review, the Court could reach those questions only if it first

agreed with the Second Circuit’s threshold conclusion that it

_ had subject matter jurisdiction over Greenberg’s petition to

vacate pursuant to § 10 of the FAA, 9 U.S.C. § 10. This

potentially dispositive issue might preclude this Court’s

consideration of the questions presented by Petitioner and

makes this Petition particularly inappropriate for review. For

these reasons, Respondents respectfully submit that the

Petition for Writ of Certiorari should be denied.

OPINIONS BELOW

The opinion of the Second Circuit is reported at 220

F.3d 22 (2d Cir. 2000). The opinion of the District Court

does not appear in an official reporter, but is accessible on

the Westlaw electronic database at 1999 WL 642859

(S.D.N.Y. Aug. 23, 1999).

STATEMENT OF THE CASE

The Petition’s “Statement of the Case” contains a

lengthy and grossly misleading account of the factual record

developed in the underlying arbitration. While most of the

pertinent facts are recited accurately in the Second Circuit’s

opinion, see 220 F.3d at 24-25, the Petition’s numerous

factual misstatements call for a corrective response here.

Greenberg’s claims arose from alleged investment

losses he suffered as a customer of non-party Sterling Foster

& Co., Inc. (“Sterling Foster”), an independent retail broker-

x

ee

dealer, in 1995 and 1996. During that period, respondent

Bear, Stearns Securities Corp. (“Bear Stearns”), a wholly-

owned subsidiary of co-respondent Bear, Stearns & Co., Inc.,

provided “back-office” securities clearance services to

Sterling Foster pursuant to an arms-length contract approved

by the New York Stock Exchange.

The arbitration hearing extended over seven days

between September and November 1998. The central focus

of the hearing was the events surrounding the initial public

offering (“IPO”) of ML Direct, Inc. (“ML Direct”) in

September 1996. Greenberg contended that the ML Direct

IPO was fraudulent because, inter alia, the IPO prospectus

falsely represented that the underwriter had no “present

intention” to release, for sale in the public secondary market,

2.4 million ML Direct shares held by so-called “selling

shareholders” which were subject to a 12-month “lock-up”

agreement. At the hearing, Respondents took no position

concerning whether Sterling Foster had committed fraud, but

denied any knowledge of such fraud and maintained that

Bear Stearns merely provided customary back-office services

to Sterling Foster by clearing the ML Direct transactions.

Contrary to Greenberg’s assertion, it was not

“undisputed” at the hearing that anyone reading the ML

Direct prospectus provided to Bear Stearns would have

known “beyond per adventure of doubt [sic],” Pet. at 5, about

Sterling Foster’s intention to commit fraud. As the Petition

acknowledges, see id. at 6, Bear Stearns obtained only a

preliminary prospectus prior to the ML Direct offering and

therefore did not know the contents of the final document.

(A 102, 112)' In any event, all Bear Stearns witnesses

testified that they did not read the technical language of the

' References to the Joint Appendix filed in the court below are cited as “A

preliminary prospectus concerning sale restrictions and had

no knowledge of any arrangements to release a lock-up

agreement prior to the specified period. (A 110, 112, 134-38.

373.)

The Petition also incorrectly implies that only 1.1

million ML Direct shares were “set forth in the prospectus,”

and that Bear Stearns improperly “distributed . . . three times

that number or 3.5 million shares.” Pet. at 8. In fact, the ML

Direct prospectus covered the registration of 3.5 million

shares, comprising 1.1 Tnillion IPO shares and a separate 2.4-

million share “shelf registration.” (A 66-69.) Moreover,

Bear Stearns did not “distribute” shares; as a clearing firm, it

processed transactions in ML Direct executed by Sterling

Foster in its customers’ accounts. There was no allegation

that ML Direct shares were sold without being properly

registered or that Bear Stearns itself acted as an underwriter

with respect to those shares. Bear Stearns also introduced

evidence that the ML Direct stock certificates delivered to it

for deposit to Sterling Foster’s account were freely tradable

and in proper form.

The Petition further mischaracterizes as “undisputed”

Greenberg’s contention that the sale of the selling

shareholders’ shares was a risky “short sale” and an

“underwriting of a most unusual sort.” Pet. at 5. To the

contrary, there was evidence that the ML Direct offering

merely resulted in a technical deficit, or short “position,” in

Sterling Foster’s proprietary accounts, which was then

eliminated by the delivery of additional shares. (A 130.)

Moreover, Bear Stearns typically received certificates for

public offering shares after the shares had been sold to

customers; as a result, temporary short positions in such

circumstances were not abnormal, but routine. (A 486, 104,

130.) Throughout the hearing, Bear Stearns vigorously

contested and introduced evidence contradicting Greenberg’s

version of these events.

Also misleading is the Petition’s vague assertion that

Bear Stearns “handled” payments by Sterling Foster to

“insiders” and knew that Sterling Foster reaped “a 400%

profit” on the sale of selling shareholders’ shares. Pet. at 8.

At the hearing, Greenberg contended that Bear Stearns must

have learned about such illegal profits from memoranda it

received from Sterling Foster referencing the receipt of ML

Direct shares and requesting that Bear Stearns issue checks in

specified amounts against a Sterling Foster proprietary

account. (A 276-77.) Bear Stearns denied that anyone at

Bear Stearns had attempted to compute Sterling Foster’s

purchase price for such shares, and no Bear Stearns witness

testified to the contrary. There was testimony that such a

computation would have been both irrelevant to Bear

Stearns’ clearing functions and meaningless, since Bear

Stearns could not determine whether other consideration not

mentioned in the memoranda had been paid for the shares.

(A 285.) As a clearing firm, Bear Stearns issued the checks

without inquiry, provided that Sterling Foster’s accounts

contained sufficient equity to cover the payments. (A 276-

77.)

In sum, the Petition ignores the abundant evidence

presented to the arbitrators that Bear Stearns’ actions were

consistent with the normal provision of clearance services to

introducing brokers and did not bespeak knowledge of

Sterling Foster’s alleged misconduct.

REASONS FOR DENYING THE PETITION

I. The Manifest Disregard Standard Is Applied in

Every Federal Circuit and Has Been Approved By

This Court.

The Petition vaguely challenges the Second Circuit’s

use of the “manifest disregard” standard in reviewing the

Award and implies that a conflict exists among the circuit

courts concerning the standard’s validity. See Pet. at 10.

ee

There is no such conflict, and this Court has recently

indicated its approval of review for “manifest disregard.”

Since Wilko v. Swan, 346 U.S. 427 (1953), overruled

on other grounds, Rodriguez de Quijas v. Shearson/American

Express, Inc., 490 U.S. 477 (1989), federal courts have cited

“manifest disregard of the law” as a basis for vacating an

arbitral award, in addition to the statutory grounds set forth in

FAA § 10(a). In Wilko, the Court contrasted an arbitrator’s

mere legal misinterpretation or error with “manifest

disregard” and indicated that only the latter constituted a

valid basis to overturn an award. See 346 U.S. at 435-37.

Today, “each of the ... numbered circuits and the D.C.

Circuit have recognized manifest disregard of the law as

either an implicit or nonstatutory ground for vacatur under

the FAA.” Williams v. Cigna Financial Advisors, Inc., 197

F.3d 752, 759 (5th Cir. 1999).

While this Court has not directly considered the

manifest disregard standard since first enunciating it in

Wilko, the Court’s unanimous decision in First Options of

Chicago, Inc. v. Kaplan, supra, reiterates and implicitly

approves that standard. First Options concerned, inter alia,

the standard of review to be applied to arbitrators’ decisions

on whether the parties had submitted a particular matter to

arbitration. In analyzing the practical significance of this

? See, e. g., Montes v. Shearson Lehman Bros., Inc., 128 F.3d 1456 (11th

Cir. 1997); Barnes v. Logan, 122 F.3d 820 (9th Cir. 1997), cert. denied,

523 U.S. 1059 (1998); Cole v. Burns Int'l Sec. Servs., 105 F.3d 1465

(D.C. Cir. 1997); M&C Corp. V. Erwin Behr GmbH & Co., 87 F.3d 844

(6th Cir. 1996); United Transp. Union Local 1589 v. Suburban Transit

Corp. ,51 F.3d 376 (3d Cir. 1995); Remmey v. PaineWebber, Inc., 32 F.3d

143 (4th Cir. 1994), cert. denied, 513 U.S. 1112 (1995); Lee v. Chica,

983 F.2d 883 (8th Cir.), cert. denied, 510 U.S. 906 (1993); Health Servs.

Mgmt. Corp. v. Hughes, 975 F.2d 1253 (7th Cir. 1992); Advest, Inc. v.

McCarthy, 914 F.2d 6 (Ist Cir. 1990); Jenkins v. Prudential-Bache Sec.,

Inc., 847 F.2d 631 (10th Cir. 1988).

=

+. -_——,

issue, the Court summarized the standards of review applied

by federal courts reviewing arbitral decisions on the merits:

[A] party [that has been required to arbitrate]

still can ask a court to review the arbitrator’s

decision, but the court will set that decision

aside only in very unusual circumstances,

See, e.g., 9 U.S.C. § 10 (award procured by

corruption, fraud, or undue means; arbitrator

exceeded his powers); Wilko v. Swan, 346

U.S. 427, 436-37, 74 S.Ct. 182, 187-188, 98

L.Ed. 168 (1953) (parties bound by

arbitrator’s decision not in “manifest

disregard” of the law), overruled on other

grounds, Rodriguez de Quijas v. Shearson/

American Express, Inc., 490 U.S. 477, 109

S.Ct. 1917, 104 L.Ed.2d 526 (1989).

Id. at 942 (emphasis added). Thus, the Court plainly

recognized “manifest disregard” as a valid basis for vacatur

of arbitral decisions under federal law and indicated that

Wilko, insofar as it established that standard, remains good

law.

Greenberg’s assertion that the Fifth Circuit “does not

even recognize the vague concept of manifest disregard,” Pet.

at 10, is wrong. The case on which Greenberg relies, Gulf

Coast Funds Workers Union v. Exxon Co., 991 F.2d 244 (Sth

Cir. 1993), was expressly rejected in a later Fifth Circuit

decision, which concluded that the above-quated language in

> See also Shearson/American Express v. McMahon, 482 U.S. 220 (1987)

(Blackmun, J., concurring in part and dissenting in part) (judicial review

of arbitral awards “substantially limited” to explicit grounds listed in

FAA § 10 “and to the concept of ‘manifest disregard’ of the law”);

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614,

656-57 (1985) (Stevens, J., dissenting) (“Arbitration awards are only

reviewable for manifest disregard of the law[.}”).

PP

First Options compelled the lower courts to review

arbitration awards for “manifest disregard of the law.” See

Williams, supra, 197 F.3¢ at 757-59. In Williams, the Fifth

Circuit stated:

In our opinion, clear approval of the “manifest

disregard” of the law standard in the review of

arbitration awards under the FAA was

signaled by the Supreme Court’s _ state-

ment in First Options that “parties [are] bound

by [an] arbitrator’s decision not in

‘manifest disregard’ of the law.”

Id. at 759 (quoting 514 U.S. at 942). At least two other

circuits have construed First Options in the same manner.

See Montes v. Shearson Lehman Bros., Inc., 128 F.3d 1456,

1460 (11th Cir. 1997); Cole v. Burns Int'l Sec. Servs., 105

F.3d 1465, 1486 (D.C. Cir. 1997).

Moreover, although circuits have adopted varying

formulations of the review mandated by the manifest

disregard doctrine, see Cole, 105 F.3d at 1486-87 & n.20

(giving examples), Greenberg makes no claim that the

outcome of this case would have been different under the

standard as applied in any circuit. Nor does he contend that

any circuit applying the standard accords less deference to

arbitral decisions than that given by the Second Circuit in the

decision below. Indeed, the Fifth Circuit’s refusal to apply

manifest disregard in Gulf Coast Funds, supra, on which

Greenberg relies, would have resulted in even narrower

- review of the Award than both lower courts conducted here.

Thus, even if some disagreement about the manifest

disregard standard existed among the circuits, this case

would not be a proper vehicle for resolving such a conflict.

Il. This Court Has Previously Rejected Any Special

Standard of Review for Arbitral Decisions Under

the Federal Securities Laws.

Greenberg also contends that, even if “manifest

disregard” is nominally the proper standard, arbitral decisions

concerning “the nghts of investors under the Federal

Securities Act” should be subject to “effective,” ie.,

heightened, judicial review. Pet. at 13. In support of that

contention, the Petition advances a generalized attack on the

fairness of the securities industry arbitration system in

disputes brought by individual investors. See Pet. at 10-13.

These arguments, however, fly in the face of this Court’s

prior decisions affirming the legitimacy of securities

arbitration. Greenberg fails to demonstrate any basis for the

Court to revisit these issues again here.

In Shearson/American Express v. McMahon, 482

U.S. 220 (1987), this Court held that pre-dispute arbitration

agreements are enforceable with respect to claims under

§ 10(b) of the Securities Exchange Act of 1934 (the

“Exchange Act”), 15 U.S.C. § 78}. McMahon rejected the

“general-suspicion of the desirability of arbitration and the

competence of arbitral tribunals” that had informed the

Court’s prior holding in Wilko v. Swan, supra, which held

claims under § 12(2) of the Securities Act of 1933, 15 U.S.C.

§ 771(2), to be non-arbitrable. See McMahon, 482 U.S. at

233. The McMahon Court expressly noted the “intervening

changes” in securities industry arbitration procedures that

had occurred since Wilko, including the 1975 Exchange Act

amendments giving the Securities Exchange Commission

“expansive power” to approve, “abrogate, add to, and delete

from’ any SRO rule” to accord with the requirements of the

Exchange Act. Jd. (quoting 15 U.S.C. § 78s(c)). Thus, the

Court concluded:

In short, the Commission has broad authority

~ to oversee and to regulate the rules adopted by

es

ee ee

the SROs relating to customer disputes,

including the power to mandate the adoption

of any rules it deems necessary to ensure that

arbitration procedures adequately protect

statutory rights.

Id. at 233-34. This reasoning was reaffirmed by the Court

two years later in Rodriguez de Quizas v. Shearson/American

Express, Inc., supra, which explicitly overruled the holding

of Wilko on non-arbitrability of § 12(2) claims. See 490 U.S.

at 477.

In light of the Court’s pronouncements in McMahon

and Rodriguez de Quizas, Greenberg’s general allegations of

bias in the securities arbitration system at most raise policy

matters that should be addressed to the SEC and the SROs,

not this Court. The Petition cites no evidence that these

regulatory authorities have not performed their duty to

oversee this system in the public interest, consistent with the

purpose of the federal securities laws. Indeed, the First

Circuit recently rejected allegations of “structural bias” in the

New York Stock Exchange (“NYSE”) arbitration procedures,

concluding that there was no evidence of bias in, inter alia,

the organizational structure of the NYSE, the pool of

potential NYSE arbitrators, or the procedures for selecting

arbitration panels. See Rosenberg v. Merrill Lynch, Pierce,

Fenner & Smith, Inc., 170 F.3d 1, 14-15 (1st Cir. 1999). In

this case, the NASD procedures that governed the underlying

arbitration proceedings were substantially the same as those

specifically considered in McMahon. Greenberg fails to

muster any credible basis for reconsidering the Court’s

previous approval of SRO-sponsored securities arbitration.

It bears mention that the Petition nowhere suggests

the arbitrators in Greenberg’s case were actually biased,

failed to comply with the relevant NASD procedures, or

acted improperly in any way during the arbitration. The

panel that issued the Award was indisputably subject to the

-10-

ee

system of oversight endorsed in McMahon. Had Greenberg

believed he had suffered such prejudice, he could have

sought to vacate the Award under FAA § 10(a)(2), which

expressly provides for vacatur of an award where the

arbitrators are guilty of “evident partiality or corruption” or

prejudicial “misconduct” in conducting the arbitration

proceedings. 9 U.S.C. § 10(a)(2). Greenberg never raised

such a claim either in his initial petition to the district court

or on further appeal to the Second Circuit. Nor does he

attempt to do so here.

Finally, the Petition’s appeal for a heightened

standard of review in arbitrations involving federa! securities

claims is in direct conflict with “the prevailing uniform

construction of other federal statutes governing arbitration

agreements in the setting of business transactions,”

Rodriguez de Quijas, 490 U.S. at 484. This Court’s

consideration of a special standard in securities arbitrations

would invite similar challenges in other statutory fields

where the Court previously has upheld the broad federal

policy favoring arbitration. See, e.g., Mitsubishi Motors

Corp., supra, 473 U.S. at 628-40 (antitrust laws); McMahon,

482 U.S. at 240-42 (RICO statutes). As the Court stated in

First Options: “[I}t is undesirable to make the law more

complicated by proliferating review standards without good

reasons.” 514 U.S. at 948. The Petition offers no good

reasons to do so here.

Ill. The Arbitration Award Was Based on Factual

Findings to Which the Court Below Properly

Deferred.

At bottom, Greenberg simply asks this Court to find —

contrary to the judgment of both courts below — that the

arbitrators’ decision was “irrational.” See Pet. at 16. This

ordinary exercise of reviewing the Award for manifest

disregard of the law does not warrant this Court’s attention.

ott.

In any event, none of Greenberg’s substantive challenges to

the Award has any merit.

While the Petition contends that the arbitrators were

“irrational” to conclude Bear Stearns had no knowledge of

Sterling Foster's fraud, it flatly ignores other sufficient

grounds for the rejection of Greenberg’s claim under § 10(b)

of the Exchange Act. As a clearing firm, Bear Stearns had no

duty to disclose even material information to customers of

Sterling Foster, including Greenberg. See, e.g., Jn re Blech

Securities Litigation, 928 F. Supp. 1279, 1295-96 (S.D.N.Y.

1996) (“Even if Bear Stearns knew but failed to disclose a

material fact, no plaintiff can claim to have been defrauded

by that omission, because, as a matter of law, a clearing

broker owed no duty of disclosure to the clients of an

introducing broker.”); Ross v. Bolton, 904 F.2d 819, 826 (2d

Cir. 1990) (same). Moreover, Greenberg failed to

demonstrate that Bear Stearns made any affirmative

misrepresentation or engaged in any “manipulative or

deceptive practice,” as required to prove a claim under

§ 10(b), see, e.g., SEC v. First Jersey Sec., Inc., 101 F.3d

1450, 1467 (2d Cir. 1996). Regardless of scienter, the

arbitrators could have rejected Greenberg’s § 10(b) claim on

this wholly independent ground.

The Second Circuit’s decision acknowledges this

possible basis for the arbitrators’ decision. The court

concluded that the arbitrators had “ample basis” to find Bear

Stearns’ conduct insufficient to prove the “substantial

assistance” element of a common-law aiding-and-abetting

claim, much less the affirmative deception required by

§ 10(b). See 220 F.3d at 29. The Petition does not quarrel

with the principle, cited by the Second Circuit, that “’the

simple providing of normal clearing services to a primary

broker who is acting in violation of the law does not make

out a case of aiding and abetting Against the clearing

broker.”” Jd. (quoting Stander v. Financial Clearing &

Servs. Corp., 730 F. Supp. 1282, 1286 (S.D.N.Y. 1990)).

i

Although Greenberg contended at the hearing that Bear

Stearns had gone beyond “ordinary clearing” for Sterling

Foster, this was a disputed factual issue that the arbitrators

could have resolved in favor of Bear Stearns. The Petition

does not contend otherwise.

Greenberg’s insistence that the hearing testimony of

certain Bear Stearns witnesses was not credible presented a

pure question of fact for the arbitrators, and the decision

below properly recognized it as such. See 220 F.3d at 28; see

also 1999 WL 642859, at *1 (S.D.N.Y. Aug.23, 1999) (“The

arbitrators credited the testimony of [Bear Stearns]

employees and rejected Greenberg’s contention .... The

Court will not second-guess the credibility findings of the

arbitral panel and will not disturb the panel’s findings that ~

Bear Stearns lacked knowledge of Sterling Foster’s fraud

scheme.”). The Petition’s mere assertion that certain

testimony “would be laughed out of court if this case had

been before a federal court,” Pet. at 14, certainly does not

make it so.

Greenberg’s attempt to turn this fact-bound credibility

dispute into a legal question of “imputed” knowledge also

has no merit and was properly rejected. The Petition

complains that the Second Circuit did not cite authorities for

its conclusion that “’it is by no means clear that the doctrine

of imputed knowledge applies in this context.’” Pet. at 5

(quoting 220 F.3d at 28). But the Petition simply ignores

explicit case law (which Bear Stearns cited in its appellate

brief) holding that knowledge of documents’ contents should

not be imputed to a financial entity performing high-volume

processing functions like those performed by clearing firms.

See Woods v. Bank of New York, 806 F.2d 368, 369 (2d Cir.

1986). Moreover, as the district court expressly found, the

authorities on which Greenberg relies are plainly

distinguishable from the circumstances presented in this case.

See 1999 WL 642859 at *1. The arbitrators did not

manifestly disregard the securities laws by refusing to impute

ots

knowledge to Bear Stearns. They simply credited the

testimony of Bear Stearns witnesses.

Greenberg’s argument concerning allegedly “false

confirmations” is equally infirm. The decision below

correctly held that the arbitrators could have found the

disputed language in the confirmations to be literally true.

See 220 F.3d at 28. It was undisputed that Sterling Foster

was an NASD market-maker in ML Direct securities; the

statement in Greenberg’s confirmations that Sterling Foster

“makes a market in this security” therefore complied with the

regulatory requirement that confirmations disclose “whether

{the principal] is a market maker in the security.” 17 C.F.R.

§ 240.10b-10(a)(2). In any event, the Petition here fails to

address the other sufficient grounds for the arbitrators’

rejection of this claim —- including the absence of any

evidence that Greenberg relied on the allegedly misleading

confirmations, thereby causing his losses. See Press v.

Chemical Inv. Servs. Corp., 166 F.3d 529, 539 (2d Cir. 1999)

(proof of “transaction” causation is an “essential” element of

a securities fraud claim).

Finally, there is no foundation for Greenberg’s

assertion that the decision below failed to enforce 17 C.F.R.

§ 230.174 (“Rule 174”), which requires a “dealer” or

“underwriter” of certain public offerings to deliver a

prospectus in connection with sales of a newly issued

security. The plain language of the regulation does not

impose any duty upon clearing firms, and it was undisputed

that Bear Stearns was not an issuer, underwriter or seller of

ML Direct or any other relevant securities. Greenberg’s

alternative contention that Sterling Foster somehow

delegated its duties under Rule 174 to Bear Stearns at most

raised a factual issue concerning the terms of the relationship

between Sterling Foster and Bear Stearns, and that issue was

properly resolved by the arbitrators under ordinary principles

of New York contract law. In short, none of the arguments in

ote

the Petition remotely suggests a compelling legal question

worthy of this Court’s review.

IV. Before Reaching Any of the Foregoing Issues, This

Court Would Have to Find Subject Matter

Jurisdiction Over This Case.

Even if the Petition raised compelling issues for

review, this Court ¢ould reach them only after determining

whether the Second Circuit properly found subject matter

jurisdiction over this case. The decision below focuses

principally on this question, which concerns the scope of

federal jurisdiction, absent diversity of citizenship, over

petitions to vacate arbitration awards under FAA § 10. See

220 F.3d at 25-28. While none of the parties seeks this

Court’s review of the jurisdictional issue, it cannot be

waived. Since the holding is disputable, it is possible that

~~——~this Court might never reach the questions presented by the

Petition.

The decision below did not disturb the well-settled

principle that “the FAA does not confer subject matter

jurisdiction on the federal courts even though it creates

federal substantive law.” Jd. at 25 (citing Southland Corp. v.

Keating, 465 U.S. 1, 16 n.9 (1984); Moses H. Cone Hosp. v.

Mercury Constr. Corp., 460 U.S. 1, 25 n.32 (1983)). Rather,

applying the jurisdictional analysis set forth in Franchise Tax

Board v. Construction Laborers Vacation Trust, 463 U.S. 1,

27-28 (1983), the court below concluded that a petition to

vacate under FAA § 10 raises a “substantial federal question”

sufficient to confer jurisdiction “where, as here, the petitioner

complains principally and in good faith that the award was

rendered in manifest disregard of federal law.” 220 F.3d at

27 (emphasis added). In the court’s view, the “process” of

determining whether the arbitrators manifestly disregarded

federal law “so immerses the federal court in questions of

federal law and their proper application that federal question

subject matter jurisdiction is present.” /d. |

ths

However, the Second Circuit frankly acknowledged

that dicta in other cases suggest the potential for

disagreement among federal courts concerning this holding.

See id. at 27-28 (citing Kasap v. Folger Nolan Fleming &

Douglas, Inc., 166 F.3d 1243, 1247 (D.C. Cir. 1999)

(suggesting that review for fraud under FAA § 10 implicates

federal law but is insufficient to support federal jurisdiction);

Manginelli v. Smith Barney, Inc., No. 98 Civ. 8986, 1999

WL 615096, at *2 (S.D.N.Y. Aug. 12, 1999)). The

jurisdictional decision below is not squarely in conflict with

the law of any other circuit or this Court, and it therefore

does not independently merit writ consideration. But given

the potential obstacle it raises to review of the main questions

presented here, this threshold issue constitutes another

corapelling reason to deny review of the Petition.

a eS

CONCLUSION

Petitioner’s real quarrel with the decision below does

not concern the standard of review applied, but rather the

amply supported conclusion of both lower courts that the

Award was not “irrational” or in manifest disregard of the

law. There is no reason for this Court to undertake for a third

time the conventional task of applying a well-established

legal standard to the factual record of this case. Respondents

respectfully submit that the Petition should be denied.

Respectfully submitted,

JACK P. LEVIN

COVINGTON & BURLING

1330 Avenue of the Americas

New York, New York 10019

(212) 841-1000

Attorney for Respondents

Bear, Stearns & Co., Inc. and

Bear, Stearns Securities Corp.

Of Counsel:

P. BENJAMIN DUKE

December 4, 2000

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