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

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386014_1264%3A2

## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition Brief
- **Published:** January 1, 2001
- **Citation:** 531 U.S. 1075

## Text

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

ee

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386014_1264%3A2. Public record. Not legal advice.