Petition for Writ of Certiorari — Peterson v. Rauscher Pierce Refsnes, Inc.
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92-182
NO.
=oureme Court, U,@
FJjJt pf D
MAY 1 7 1993
OFHCE OF THE CLERK
SUPREME COURT OF THE UNITER STATES
IN THE
October Term, 1993
M.K. PETERSON,
Petitioner,
VS.
RAUSCHER, PIERCE, REFSNES, INC. and
RICHARD F. JUBA,
Respondents.
PETITION FOR WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
PETITION FOR WRIT OF CERTIORARI
B. Keith Trent
Counsel of Record
O’NEILL, SNELL,
BANOWSKY & McCLURE
200 Crescent Court
Suite 1030
Dallas, Texas 75201
214/871-3515
Attorneys for Petitioner
QUESTIONS PRESENTED FOR REVIEW
1. Whether an arbitration panel that was appointed in
violation of the parties’ agreement and in violation of the
NYSE’s Arbitration Rules can render a valid arbitration
award?
2 Whether manifest disregard of the law is a viable ground
for vacating an arbitration award and, if so, did the
arbitrators’ statements that they were not bound by the
law and the arbitrators’ acknowledgment of, but refusal
to apply the law constitute manifest disregard of the law?
3. Does the evident partiality basis for vacating an
arbitration award set forth in 9 U.S.C. §10(a) require a
showing that an arbitrator had a financial interest in the
outcome or a special relationship to a party, and if not,
did the arbitrators’ pre-judgments on the merits, open
hostility to Petitioner, and refusal to hear pertinent
evidence constitute evident partiality?
4. Is a party to an arbitration proceeding entitled to
due process, and, if so, was Petitioner denied
due process?
LIST OF PARTIES
Petitioner - M.K. Peterson
Respondents - Rauscher, Pierce, Refsnes, Inc., Richard F. Juba
Other Defendant in the case below - New York Stock Exchange,
Inc.
TABLE OF CONTENTS
QUESTIONS PRESENTED FOR REVIEW ......
0 ee
EG be kb ce pe ee es eee ce
Te eee
STATUTES AND RULES INVOLVED IN CASE .
STATEMENT OF THE CASE. .............
A. Course of Proceedings and
Disposition Below...............+.--
B. Facteal Backeround.................
REASONS FOR GRANTING THIS WRIT. .....
A. NYSE’S VIOLATION OF ITS RULES
RENDERS THE ARBITRATION AWARD
INVALID AND THE FIFTH CIRCUIT’S
REFUSAL TO VACATE ON THESE GROUNDS
IS IN CONFLICT WITH DECISIONS OF
THIS COURT AND OTHER CIRCUIT
ei iy. le |! 6 re
B. THE FIFTH CIRCUIT’S REJECTION OF
MANIFEST DISREGARD OF THE LAW AS
A BASIS FOR VACATUR IS CONTRARY TO
PRECEDENT OF THIS COURT AND
CONFLICTS WITH OTHER CIRCUITS. . .
C. THE FIFTH CIRCUIT ERRED BY
CONCLUDING EVIDENT PARTIALITY
REQUIRES A SHOWING OF AN
ARBITRATOR’S PECUNIARY INTEREST
IN THE OUTCOME OR ACTUAL
RELATIONSHIP WITH A PARTY.......
D. THE FIFTH CIRCUIT ERRED IN REFUSING
TO VACATE THE ARBITRATION AWARD
ON DUE PROCESS GROUNDS........
SI, wn cc pe ce anaes ees
13
16
26
34
TABLE OF AUTHORITIES
Cases
A.G. Edwards & Sons, Inc. v. McCullough,
967 F.2d 1401 (9th Cir. 1992), cert. denied,
SED BG PG Seve wa eee cheese
Advest, Inc. v. McCarthy, 914 F.2d 6
SUR: I oc ee rer ee ares
Ainsworth v. Skurnick, 960 F.2d 939
(11th Cir. 1992), cert. denied,
Fae Os GUE ce eee ee ae is
Antoniu v. §.E.C., 877 F.2d 721
(8th Cir. 1989), cert. denied,
tt dk
Avis Rental Car System, Inc. v. Garage
Employees Union, 791 F.2d 22
Ge is WOMEN 6 os 8S Oe Sy ek ees
Ballantine Books, Inc. v. Capital
Distributing Co., 302 F.2d 17
og oe en a ee er er
Bell Aerospace Co. Div. of Textron,
Inc. v. Local 516, Intern. Union,
United Auto Aerospace and Agr.
Implement Workers of America,
Son Fae Bet Cae CM. TOPS). 2. we ees
Chameleon Dental Prods., Inc. v.
Jackson, 925 F.2d 223 (7th Cir. 1991).......
:
i 14
14
ie 15
a 25
8,9
17, 19, 20, 22
Commonwealth Coatings Corp. v.
Continental Casualty Co., 393 U.S. 145,
are ae ree
El Vocero de Puerto Rico v. Union de
Peridistas, 532 F.Supp. 13
Sn I oo rece tr ne oe
Emerson Electric Co. v. General Electric
Co., 846 F.2d 1324 (11th Cir. 1988).........
Feldman v. Board of Pharmacy, 160 A.2d 100
(D.C. 1960), aff'd, 279 F.2d 821
eta a ae ee eae ay eo
Folkways Music Publishers, Inc. v. Weiss,
No. 929, Docket 92-9061 (2d Cir.
March 26, 1993)(1993 WL 86935)..........
Food Handlers, Local 425 v. Pluss Poultry,
Inc., 260 F.2d 835 (8th Cir. 1958)..........
Gamble-Skogmo, Inc. v. Federal Trade Commission,
211 F.2d 106 (8th Cir. 1954).........0...
Gilmer v. Interstate/Johnson Lane Corp..,
ik es eg, | Sr
Henry A. Knott Co. v. The Chesapeake and Potomac
Telephone Co., 722 F.2d 78 (4th Cir. 1985)... .
Holodnak v. Avco Corp., 381 F.Supp. 191
(D. Conn. 1974), aff'd in part, ref'd in part
on other grounds, 514 F.2d 285 (2d Cir.),
cert. denied, 423 U.S. 892 (1985)..........
Hoteles Condado v. Union De Tronquistas,
Fae We oe eee Ge. OD, ce ce ec ee ke
15, 25
26, 27
14
10, 28
26
16, 17
11
Jenkins v. Prudential-Bache Securities, Inc..,
847 F.2d 631 (10th Cir. 1988)............
Jones v. St. Louis-San Francisco Railway Company,
Tae F.20 fer Ge CO. TRO on ee ee es
Kanuth v. Prescott, Ball & Turben, Inc..,
S6 ©.26 tira Ge. Ge. Fee 6c cee ss
Local 27, International HOD Carriers v.
Sullivan, 221 F.Supp. 696 (E.D. Ill. 1983)... .
Mathews v. Eldridge, 424 U.S. 319 (1976). .....
Mcllroy v. Paine Webber, Inc., No. 91-7126
(Sth Cir. May 3, 1993)(1993 WL 116092).....
Mitsubishi Motors Corp. v. Soler Chrysler/
Plymouth, 473 U.S. 614 (1985)... .........
Morelite Construction Corp. v. New York City
District Council Carpenters Benefit Funds,
(oor bie «| Se reer
Moseley, Hallgarten, Estabrook & Weeden, Inc. v.
Ellis, 849 F.2d 264 (7th Cir. 1988)..........
Muse v. Sullivan, 925 F.2d 785 (Sth Cir. 1991)...
R.M. Perez & Associates, Inc. v. Welch, 960 F.2d 534
De Ser a eae ey ere fee
R.M. Perez & Associates, Inc., 1992 WL 83799
oe Be Be: CP err eee
Reichman v. Creative Real Estate Consultants, Inc.,
476 F.Supp. 1276 (S.D.N.Y. 1979).........
vi
14
11
25
i
12
21, 22
24
25
14, 25
14
23
Robbins v. Day, 954 F.2d 679 (11th Cir.),
cert. denied, 113 §.Ct. 201 (1992).......... 15
Rodriguez De Quijas v. Shearson/American
Express, 490 U.S. 477, 109 S.Ct. 1917
Saxis Steamship Co. v. Multifacs
International Traders, Inc., 375 F.2d 577
SEE so ke hw en bo eke eee 16
Shearson/American Express, Inc. v. McMahon,
ee Ls ree 11, 12,.13, 14, 25, 28
Sidarma Societa di Italiana Armamento SPA,
Venice v. Holt Marine Indus., Inc.,
515 F.Supp. 1302 (S.D.N.Y.), aff'd,
681 F.2d 802 (2d Cir. 1981)............. 23
Stephenson v. Paine Webber, Jackson & Curtis, Inc.,
839 F.2d 1095 (Sth Cir. 1988), cert. denied,
og ee ee 13
Stroh Container Company v. Delphi Industries, Inc..,
783 F.2d 743 (8th Cir.), cert. denied, 476 U.S. 1141
1 See ear eee eae are ae eae 24
Szuts v. Dean Witter Reynolds, Inc. , 931 F.2d 830
Pe ES hase 4 Kad bese k ee eres 9, 10
Tamari v. Bache Halsey Stuart, Inc., 619 F.2d 1196,
(7th Cir. 1980), cert. denied, 499 U.S. 873
Ss bi eae eG ee eee ek nye es 16, 18
Tamari v. Conrad, 552 F.2d 778
oo fe Se eae ee era §
Tinaway v. Merrill Lynch & Co., Inc.,
692 F.Supp. 220 (S.D.N.Y. 1988).......... 23
vii
Totem Marine Tug & Barge, Inc. v.
North Amer. Towing, Inc., 607 F.2d 649
SE I So eT tS Son's sls a oe 6 808 24
Wilco v. Swan, 346 U.S. 427 (1953). ......... 12
Wolfson v. Swan, 246 U.S. 427 (1953)... . 13
STATUTES
SUPREME COURT RULE
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United States Code, Title 9
ON EU ee oe eee Wee Ee a, ae Se
United States Code, Title 28
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Sn I eo oc eg ea cee a ee ed 2
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NO.
IN THE
SUPREME COURT OF THE UNITED STATES
October Term, 1993
M.K. PETERSON,
Petitioner,
VS.
RAUSCHER, PIERCE, REFSNES, INC. and
RICHARD F. JUBA,
Respondents.
PETITION FOR WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF
APPEALS FOR THE FIFTH CIRCUIT
Petitioner prays that a writ of certiorari issue to review
the opinion and judgment of the Court of Appeals for the Fifth
Circuit, rendered in these proceedings on January 14, 1993.
OPINIONS BELOW
The opinion of the United States Court of Appeals for the
Fifth Circuit is unreported and is reproduced in the Appendix at
1A.
JURISDICTION
This Court has jurisdiction to review the opinion and
judgment of the Court of Appeals pursuant to 28 U.S.C. §1254.
The opinion and judgment of the United States Court of Appeals
for the Fifth Circuit were rendered on January 14, 1993.
Petitioner’s Petition for Rehearing and Suggestion for Rehearing
En Banc were denied on February 17, 1993. This Petition is
filed within ninety (90) days of that date as required by 28
U.S.C. §2101(c) and Sup.Ct.R. 13.4.
STATUTES AND RULES INVOLVED IN CASE
9 U.S.C. §10.
New York Stock Exchange Rule 609.
New York Stock Exchange Rule 611.
The above statute and rules are set forth verbatim in the
Appendix attached hereto.
STATEMENT OF THE CASE
A. COURSE OF PROCEEDINGS AND DISPOSITION
BELOW
This is a securities arbitration case. On March 26, 1991,
a five-member arbitration panel convened by the New York Stock
Exchange ("NYSE") found in favor of the brokerage firm
Rauscher, Pierce, Refsnes, Inc. ("RPR") and its employee
Richard F. Juba ("Juba"), and denied any relief whatsoever to
Plaintiff Peterson. The district court refused Peterson’s Motion
to Vacate the Award. Peterson then appealed the district court’s
judgment to the United States Court of Appeals for the Fifth
Circuit ("the Fifth Circuit"). In an opinion dated January 14,
1993, a Fifth Circuit panel affirmed the district court’s decision.
The Fifth Circuit thereafter denied Peterson’s Petition for
Rehearing and Suggestion for Rehearing En Banc.
ee
B. FACTUAL BACKGROUND
l. Basic controversy heard by the @7obiirators
Peterson commenced an arbitration proceeding against his
stockbroker Juba and Juba’s employer, RPR. The complaint was
that Juba had recommended, in April 1987, that Peterson engage
in a complex and risky transaction that was unsuitable to a 67-
year-old man whose agreed investment objectives were the most
conservative categories available. Peterson asserted that Juba had
misrepresented and failed to disclose important characteristics of
the transaction, that RPR had failed to supervise the transaction,
and that Juba had failed to properly close the transaction. The
Statement of Claim alleged negligence, breach of fiduciary duty,
breach of Respondents’ agreement to make no unsuitable
recommendations and securities fraud.
In the arbitration (21 days of hearings, generally in one
and two-day increments, completed 3-//2 years after the claim
was filed), the following points were established:'
1. Juba admitted that Peterson’s account documents at
RPR correctly reflected Peterson’s conservative investment
objectives (Juba at 1454).
2. In April 1987, Juba devised and recommended to
Peterson a complex, speculative transaction (1597-1602, 1674-77,
2157-58), which Juba admitted was inconsistent with Peterson's
objectives as reflected in the account documents (1663-64).
Juba’s plan was that Peterson sell puts on 52,000 shares of Sun
stock (i.e., 520 contracts of 100 shares each), exposing Peterson
to the risk that he would be obligated to purchase 52,000 shares
of Sun stock at a price of $3,380,000. Over 90% of Peterson’s
' All page citations are to the verbatim transcript, consisting of 21 full |
volumes of proceedings before the panel, plus a 17-page excerpt (labelled |
"EXCERPT FROM PROCEEDINGS HELD ON JULY 11, 1990") which was |
heard outside the presence of the panel.
portfolio was already invested in Sun stock. The effect of the
recommendation was to take a person who already had almost all
his net worth in a single security and approximately double his
concentration in it.
3. Juba admitted he failed to disclose that immediately
upon executing the strategy that Peterson would suffer a
$200,000 margin call (1796-98), that Peterson would account for
the entire market in the puts at the time he wrote them (1453,
1845-46), and that the strategy was the functional equivalent of
borrowing over $3 million to double his holdings in Sun stock
(1660, 1669, 1671).
4. All experts agreed that the recommended transaction
was extremely rare because of its enormous risk.”
5. Juba’s strategy used a position 26 times as large as
any position in Sun puts that Peterson had previously taken in this
account (1665) and combined it with another strategy (the
purchase of calls), which Peterson had never used in his account
at RPR, rendering the strategy even more aggressive (1641).
The strategy was intrinsically unsuitable for a retired man
who was entirely dependent for his livelihood on the income from
his portfolio. Certain risks of the transaction arose because of its
size - it was unwieldy to escape and it was the most dangerous
when Peterson’s existing Sun stock portfolio was weakest. The
strategy was so rare and complex that it was impossible for a
retail customer, even one like Peterson with some prior options
? Juba had never worked on a puts transaction even approaching the size
of this transaction (1464-1471). The assistant branch manager of Juba's office
had never seen such a large puts transaction in his 10 years of reviewing trades
at this 30-broker office of RPR (3025). The branch manager had seen such a
large transaction in puts only 2 or 3 times in his career, cach time by a
customer “substantially stronger” than Peterson (2558-2559). Respondents’
expert (Dorsey) testified that, during the time he oversaw all options trading at
a 500 broker firm, he would typically see such a large transaction in puts only
once a year, typically for a very substantial family that actually controlled the
company in which the trading was done (4596-4597).
4
TN |
experience, to fully appreciate all of the risks. Juba should
never have recommended it. The fact Peterson accepted the
transaction based upon his trust in Juba could not relieve Juba of
his undertaking in the Customer Option Agreement to “only make
recommendations that are not unsuitable," nor of his duties to
exercise reasonable care. Juba’s recommendation carried with it
the implicit representation that it was suited to Peterson’s needs
and objectives; that representation was fraudulent.
Juba and RPR also obstructed exit from the position.
Peterson immediately complained of the position and asked for
help from Juba in devising a strategy to exit it. Juba
recommended postponing exit (574 [Vol. III]). Finally, Peterson
insisted On exiting the position in late September, 1987 as he was
preparing to leave for remote parts of northern Michigan. Juba
never carried out this order (431-32 [Vol. II]). Even Juba’s own
expert Dorsey testified that Juba was flatly wrong in describing
how his exit plan would work. (4644-56 and 4694-95) Juba
incompetently assembled a strategy that was very unlikely to
accomplish exit from the position.
When Peterson returned to Dallas and learned on October
7, 1987 that the position remained open, he complained loudly
and asked to meet with Juba’s manager (434-36 [Vol. II], 1249-
52). Juba hid that information from management (1252-53),
violating RPR’s rules as well as the industry standards (1253-54).
Prior to the October 19, 1987 market crash, Peterson sent a
registered letter to Juba and RPR complaining of their
malfeasance, and holding them responsible for the position (448
[Vol. II]). RPR replied that the position was Peterson’s problem
(456 [Vol. II]). A few days later, Peterson lost approximately
$900,000 on the position in the market crash. (3943-44 and Exh.
70)
a History of the arbitration proceeding
The arbitration Statement of Claim was filed in
November, 1987. The first hearing occurred August 23, 1988.
At that hearing, the bias of the arbitrators was so flagrant that
Peterson and his counsel were forced to request that the panel
cease the proceeding because of its bias. Peterson and his
counsel asked for an opportunity for court review as to their
power to decide the case. The arbitrators refused any
postponement and proceeded with the second day of hearings.
Before the next scheduled hearing (approximately 2-1/2 months
later), Peterson obtained a temporary restraining order from state
district court, enjoining further arbitration proceedings.
Thereafter the injunction was lifted and the arbitration continued.
Throughout the 21 days of hearings, the arbitration panel
repeatedly expressed its views favoring the broker’s case,
criticized Peterson for his trust of the broker, and repeatedly
refused to accept settled principles of law. Finally on March 26,
1991, the panel rendered the award: it denied Peterson’s claims
without explanation.
a Composition of the panel
In the original brokerage account documents, the parties
had agreed that any disputes would be resolved through
arbitration before the NYSE in accordance with the NYSE’s
arbitration rules. Pursuant to Rule 607, the NYSE appointed 5
arbitrators, 3 of whom were not from the securities industry.
During the first of 21 hearings, the panel’s bias and unjudicial
hostility was flagrant. Thereafter, in 1990, two of the non-
industry panelists (Brotman and Bonime) voluntarily withdrew
after nine days of hearings. The NYSE named Eugene Zorn to
replace the withdrawn Brotman, but Zorn was excused due to
Plaintiff's exercise of a peremptory challenge. Dr. Carroll
Galbreath was then appointed to replace Brotman, without
challenge. The NYSE initially named Joe Shepherd as Bonime’s
replacement, but Shepherd was excused due to Plaintiff's exercise
of a peremptory challenge. Jeffrey Ritter was then appointed to
replace Bonime. At the next hearing, however, Ritter voluntarily
withdrew because of the apparent length of the case. The NYSE
then named to replace him the two persons whom Plaintiff had
previously peremptorily challenged (Zorn and Shepherd)
nullifying the prior peremptory challenges in violation of NYSE
Rules 609 and 611. Peterson’s counsel objected both to this
iia eanaeaaiaaanaieeeneaeiieel
circumvention of the peremptory challenge rules and also to
NYSE’s refusal to allow a de novo hearing. The two new
panelists had not heard the testimony of the first nine days of
hearings and had not adequately reviewed the prior testimony.
The proceedings, however, continued over Plaintiff's objection,
even before the two panelists had read the transcripts of
Plaintitf's case adduced during the prior 9 days. Thus,
Peterson’s case was decided by arbitrators appointed in violation
of the NYSE’s rules, who heard the case out of order through a
combination of cold transcript (as to most of Claimant’s case) and
live testimony (as to most of Respondent’s case).
REASONS FOR GRANTING THE WRIT
A. NYSE’S VIOLATION OF ITS RULES RENDERS
THE ARBITRATION AWARD INVALID AND THE
FIFTH CIRCUIT’S REFUSAL TO VACATE ON
THESE GROUNDS IS IN CONFLICT WITH
DECISIONS OF THIS COURT AND OTHER
CIRCUIT COURTS OF APPEAL.
As detailed below, other Circuit Courts of Appeals,
including the Second, Seventh, Eighth, and Eleventh Circuits,
have concluded that an award rendered by an arbitration panel
appointed in violation of the parties’ arbitration agreement is
invalid. In this case, Peterson, RPR, and Juba agreed that the
arbitration panel would be appointed in compliance with the
NYSE’s rules; those rules were not followed. Consequently, the
Fifth Circuit should have vacated the arbitration award.
Arbitration is playing an increasingly important role in resolution
of disputes; therefore, it is imperative that this Court resolve the
conflict between the Fifth Circuit and other Circuits on the
necessity of strictly complying with the parties’ agreement in
choosing an arbitration panel.
As stated above, after 9 days of hearings, two of the five
arbitrators withdrew. The NYSE initially acknowledged
Peterson’s peremptory challenge rights; however, the NYSE later
negated these rights by naming two persons, both of whom had
previously been peremptorily challenged by Peterson, as the only
choices to replace a third arbitrator who withdrew from the
panel. Forcing Peterson to choose between two panelists he had
already peremptorily challenged, clearly violated the NYSE’s
rules. Consequently, the arbitration panel, improperly
constituted, had no power to render a valid award.
Numerous Circuit Courts of Appeals have invalidated
arbitration awards rendered by improperly composed arbitration
panels. For example, in Avis Rental Car System, Inc. v. Garage
Employees Union, 791 F.2d 22 (2d Cir. 1986), the court vacated
an arbitration award rendered by an improperly appointed
arbitrator. The court held:
The arbitrator was designated by the Mediation Board as
called for by the Association Agreement; he was not
chosen under the AAA rules specified in Article XX of the
Avis agreement. The defect in the method used to select
him left him powerless to implement the Avis agreement.
An arbitrator may have the final say on certain issues
that affect the power to enter an award, but an award will
not be enforced if the arbitrator is not chosen in accord-
ance with the method agreed to by the parties. Tamari v.
Conrad, 552 F.2d 778, 781 (7th Cir. 1977).
Id. at 25.
The Second Circuit expressly held that the appellant was
not required to show it was prejudiced by proving that the AAA
rules (as agreed to by the parties), were better or otherwise
preferable to the Mediation Board rules. The Second Circuit
found that the district court’s conclusion to the contrary was
flawed as follows:
First, it fails to acknowledge that arbitration depends
on the consent of the parties to the contract. Under
Article XX of the Avis agreement, the union in Avis
agreed to binding arbitration only by a person selected
under the AAA rules. Courts generally enforce such
clauses strictly, vacating awards entered by arbitrators
whose qualifications or method of appointment failed to
conform to arbitration clauses. See Food Handlers, Local
425 v. Pluss Poultry, Inc., 260 F.2d 835 (8th Cir. 1958)
(arbitration panel composed of one agency-appointed and one
union-appointed panel of three); El Vocero de Puerto Rico v.
Union de Peridistas, 532 F.Supp. 13 (D.P.R. 1981)
(arbitrator resigned from bureau when contract contemplated
he would remain employed by it); Local 27, International
HOD Carriers v. Sullivan, 221 F.Supp. 696 (E.D. Ill. 1983)
(single agency-appointed arbitrator when contract specified
five member panel jointly selected by union and employer).
Id. at. 25.
Applying the same reasoning, the Eleventh Circuit
vacated an award rendered by an improperly constituted panel.
Szuts v. Dean Witter Reynolds, Inc., 931 F.2d 830 (11th Cir.
1991). In Szuts, the arbitration agreement provided that "[ajny
arbitration hereunder shall be before at least 3 arbitrators... ."
Id. at 830. After one of the three arbitrators was removed, the
remaining two panelists rendered an award, despite appellant’s
objection. The Eleventh Circuit vacated the award holding:
Because the arbitrators violated the provisions of the
arbitration agreement requiring arbitration before at
least three arbitrators, they exceeded their authority
under the arbitration agreement. So, we vacate the
award of the panel... .
Id. at 832.°
> The court also noted that the fact that the agreement authorized the
majority of the three-member panel to render an award did not validate the
award by the two arbitrators, even though they technically constituted a
majority of the original panel. Jd. at 831 n.3. This conclusion is consistent
with the court’s strict construction of rules relating to panel appointments.
9
The Fifth Circuit’s refusal to vacate the arbitration award
in this case is directly contrary to the precedent of Szuts and Avis.
Peterson and the Respondents executed a Submission Agreement
stating they “agree and understand that the arbitration will be
conducted in accordance with the constitution, bylaws, rules,
regulations, and/or code of arbitration procedure of the
sponsoring organization." The NYSE constituted Peterson’s
panel in violation of its rules and the parties’ agreement.‘
Accordingly, the panel lacked authority to render a valid
arbitration award. Szuts, 931 F.2d at 832; Avis, 791 F.2d at 25.
This result is supported not only by the contractual nature
of an arbitration action, but also by the fact that the selection of
the arbitration panel is one of the most critical procedures in the
arbitration process. The need for protection of the selection
process in an arbitration proceeding is even greater than in the
judicial arena because the parties to an arbitration proceeding
have a very limited ability to challenge an arbitration award, and
the arbitrators have no duty to explain their decision. The need
for strict compliance with the selection process is further
heightened when the NYSE or any other self-regulating
organization is the arbitration forum because the public justifiably
perceives an institutional bias in these forums.°*
* NYSE Rule 609 regarding peremptory challenges and Rule 611 (as
existing when the arbitration was commenced) provide that upon withdrawal of
a panelist, the NYSE shall appoint a replacement “obtaining the consent of the
parties." A copy of the relevant rules are attached at pages 6A through 8A of
the Appendix. Rule 611 was amended effective May 10, 1989. Under this new
rule, a copy of which is attached at page 8A of the Appendix, the NYSE was
not required to obtain the parties’ consent to a replacement panelist, but the new
rule preserved the parties’ right to one peremptory challenge for each
replacement. Consequently, under either version of the rules, the NYSE
improperly appointed the last replacement panelist.
* This Court has cited peremptory challenge rules as a non-industry
claimant’s guard against potential institutional bias in securities arbitration
proceedings. Gilmer v. Interstate v. Johnson Lane Corp., 111 S.Ct. 1647, 1654
(1991)(dismissing Gilmer’s challenges to the adequacy of arbitration
procedures, noting that the NYSE’s peremptory challenge rule gives a claimant
procedural protection enabling him to shape his panel); Shearson/American
10
ee
In addition to the violation of the NYSE’s peremptory
challenge rules, the midstream appointment of two panelists
effectively excluded evidence presented during the prior 9 days
of hearings. Although the NYSE rules do not specifically
address this point, those rules must be construed to require a de
novo presentation of the evidence in the event a panel member is
replaced during an arbitration proceeding. This result is
mandated by the Federal Arbitration Act (the "FAA"), which
requires vacatur for “refusing to hear evidence pertinent and
material to the controversy." 9 U.S.C. §10(c). See Hoteles
Condado v. Union De Tronquistas, 763 F.2d 34, 40 (ist Cir.
1985)(holding that even if evidence is technically admitted,
vacatur under §10(c) is required where the evidence is effectively
excluded from consideration). Evidence was effectively excluded
in Peterson’s case. Not only were the new panelists dependent
on a cold transcript of the first 9 days of hearings, their admitted
lack of preparation made it virtually impossible for them to
comprehend the evidence they actually heard.© See Jones v. St.
Louis-San Francisco Railway Company, 728 F.2d 257, 263-64
(6th Cir. 1984)(emphasis added)(holding that "Congress intended
for all the arbitrators to hear the proof and evidence...[and]
[o]nly after this procedure has been followed can a decision by
the majority of the board be deemed a valid award.").
Based upon the foregoing, a writ of certiorari should
issue to review the Fifth Circuit’s judgment rendered in these
Express, Inc. v. McMahon, 482 U.S. 220, 260 and n.19 (1987)(Blackmun, J.,
concurring in part and dissenting in part, recognizing “the investor has the
impression, frequently justified, that his claims were being judged by a forum
sympathetic to the securities industry,” but that a claimant's "right" to a
peremptory challenge serves as one of the safeguards against such industry bias,
as does the assurance that a majority of the panel must be composed of persons
from outside the industry).
© One of the replacement panelists, Galbreath, had only read two of nine
volumes of transcript, and had scanned many, but not all of the remaining
volumes, prior to his hearing evidence on the tenth day (2243). Panelist
Shepherd had an ever poorer introduction to the case. He had read the first two
volumes of transcript, but he had not even received, much less read, the
pleadings in the case. (2332)
11
proceedings. Assuring that arbitrators are properly selected and
that self-regulating organizations such as the NYSE follow their
rules are central to maintaining the integrity of the arbitral
process and to maintaining public confidence in that process.
The exceptional importance of these questions justify
consideration by this Court.
B. THE FIFTH CIRCUIT’S REJECTION OF
MANIFEST DISREGARD OF THE LAW AS A
BASIS FOR VACATUR IS CONTRARY TO
PRECEDENT OF THIS COURT AND CONFLICTS
WITH OTHER CIRCUITS.
Supreme Court precedent establishes that an arbitration
award should be vacated on a showing of "manifest disregard of
the law” by the arbitrators. This Court announced this judicially
created ground for vacating an arbitration award in Wilko v.
Swan, 346 U.S. 427, 436 (1953), overruled on other grounds,
Rodriguez De Quijas v. Shearson/American Express, Inc., 490
U.S. 477 (1989). Although portions of the Wilko opinion have
been rejected, the manifest disregard ground for vacating an
award remains viable.
In Mitsubishi Motors Corp. v. Soler Chrysler/Plymouth,
473 U.S. 614, 628 (1985), this Court assured parties to an
arbitration that "by agreeing to arbitrate a statutory claim, a party
does not forego the substantive rights afforded by the statutes; it
only submits to the resolution in an arbitral rather than a judicial
forum.” Likewise, in Shearson/American Express, Inc. v.
McMahon, 482 U.S. 220, 232 (1987) (emphasis added), this
Court stated, "finally, we have indicated that there is no reason
to assume at the outset that the arbitrators will not follow the law;
although judicial scrutiny of arbitration awards necessarily is
limited, such review is sufficient to ensure that arbitrators comply
with the requirements of the [securities] statute. "’
” Justice Blackmun wrote in McMahon that, "[jJudicial review is still
substantially limited to the four grounds listed in §10 of the [Federal]
Arbitration Act and to the concept of ‘manifest disregard’ of the law.”
12
Similarly, in Rodriguez De Quijas v. Shearson/American
Express, 490 U.S. 477, 109 §.Ct. 1917, 1920 (1989), this Court
reiterated that consent to arbitration is purely a choice of forum
and does not "weaken the protections afforded in substantive
law." Only by engaging in a review for manifest disregard of the
law can a court give effect to this Court’s assurance that
arbitrators must comply with the securities statutes and other
substantive law.
It is difficult to imagine a more blatant example of
“manifest disregard of the law" than that suffered by Peterson.
The arbitrators openly stated that they were not obligated to apply
securities laws, considering them irrelevant. Likewise, the
arbitrators made it clear they believed any level of negligence by
the customer would preclude recovery on all theories. This "the
buck stops with the customer" view is obviously contrary to
federal securities law. See Stephenson v. Paine Webber, Jackson
& Curtis, Inc., 839 F.2d 1095 (Sth Cir.), cert. denied, 488 U.S.
926 (1988)(holding that recklessness, rather than negligence must
be shown to constitute a bar to Plaintiff's recovery under
securities law). The panel further chose to ignore the broker’s
breach of his contractual duties to “make no unsuitable
recommendation" and his contractual duty to execute orders
given by Peterson.
During the arbitration proceedings, it became
increasingly clear that the arbitration panel did not intend to be
bound by the governing law. Panelist Brackbill unequivocally
stated: "We stated that we are not governed by the law. We are
an arbitration panel. I am sure you have read the NYSE rules."
(4085) Mr. Brackbill further stated: “My problem is that fraud-
we are using this word "fraud" very loosely with this panel,
because we are not bound by the law in arbitration." (4117)
When Peterson’s counsel attempted to explain that the
recommendation to purchase a security, if recklessly made, can
constitute securities fraud, Mr. Brackbill stated: “According to
McMahon, 482 U.S. at , 107 S.Ct. at 2355 (Blackmun, J., dissenting in
part, emphasis added).
13
securities law, but we are not bound by that." (4118) The
panelist thus blatantly stated that he did not have to comply with
the securities law.
The arbitration process afforded Peterson flies in the face
of this Court’s assurance that judicial review "is sufficient to
ensure that arbitrators comply with requirements of the
[securities] statute.” McMahon, 482 U.S. at 232. Based on the
arbitrators’ statements that they intended to disregard the law,
Peterson’s case presents an unusually clear example of manifest
disregard of the law.
It appears the Fifth Circuit did not conduct a manifest
disregard review in this case. This is supported by the fact that
the only published Fifth Circuit opinion on this issue at the time
the Fifth Circuit rendered its judgment had declined to recognize
manifest disregard of the law as a viable ground for vacating an
arbitration award. R.M. Perez & Associates, Inc. v. Welch, 960
F.2d 534 (Sth Cir. 1992). In R.M. Perez, the court initially
recognized and applied the manifest disregard doctrine in
reviewing an arbitration award. R.M. Perez & Associates, Inc.,
1992 W.L. 83799 (Sth Cir. May 13, 1992). The court later
withdrew its original opinion, and rejected the manifest disregard
doctrine. R.M. Perez, 960 F.2d at 539.
In conflict with the Fifth Circuit’s position, several
Circuit Courts of Appeals have recognized manifest disregard as
a ground for vacating an award. See e.g. Folkways Music
Publishers, Inc. v. Weiss, No. 929, Docket 92-9061 (2d Cir.
March 26, 1993)(1993 WL 86935); A.G. Edwards & Sons, Inc.
v. McCullough, 967 F.2d 1401 (9th Cir. 1992), cert. denied, 113
S.Ct. 970 (1993); Kanuth v. Prescott, Ball & Turben, Inc. , 949
F.2d 1175 (D.C. Cir. 1991); Chameleon Dental Prods., Inc. v.
Jackson, 925 F.2d 223 (7th Cir. 1991); Advest, Inc. v.
McCarthy, 914 F.2d 6 (1st Cir. 1990); Jenkins v. Prudential-
Bache Securities, Inc., 847 F.2d 631 (10th Cir. 1988). Other
Circuits reject the manifest disregard doctrine. See e.g. Mcllroy
v. Paine Webber, Inc., No. 91-7126 (Sth Cir. May 3, 1993)(1993
WL 116092); R.M. Perez, 960 F.2d 534 (Sth Cir. 1992);
14
Ainsworth v. Skurnick, 960 F.2d 939 (11th Cir. 1992), cert.
denied, 113 §.Ct. 1269(1993); Robbins v. Day, 954 F.2d 679
(11th Cir.), cert. denied, 113 S.Ct. 201 (1992). This split in the
Circuits, in light of this Court’s assurance that arbitrators would
comply with securities laws, substantiates the need for issuance
of a writ of certiorari in this case.
C. THE FIFTH CIRCUIT ERRED BY CONCLUDING
EVIDENT PARTIALITY REQUIRES A SHOWING
OF AN ARBITRATOR’S PECUNIARY INTEREST
IN THE OUTCOME OR ACTUAL RELATIONSHIP
WITH A PARTY.
It appears the Fifth Circuit narrowly limited the “evident
partiality” basis for vacating an award to instances in which an
arbitrator had a financial interest in the outcome or a special
relationship with one of the parties. This is contrary to precedent
from other Circuits.
Section 10 of the FAA (9 U.S.C. §10) provides in
periinent part that a court may vacate an award "where there was
evident partiality or corruption in the arbitrators, or either of
them."* The statute incorporates substantial protections on the
fairness of process. In Commonwealth Coatings Corp. v.
Continental Casualty Co., 393 U.S. 145, 89 S.Ct. 337 (1968),
Justice Black stated that the rules governing arbitrations rest on
the same premise as the canons of judicial ethics, “any tribunal
permitted by law to try cases and controversies not only must be
unbiased but also must avoid even the appearance of bias.” /d.
at 149-150, 89 S.Ct. at 339-340.
Precedent from the Second and Seventh Circuits further
supports the conclusion that vacatur for “evident partiality” under
Section 10(b) is not limited to instances where the arbitrators
have a financial interest in the outcome. Where verbatim
transcripts are available, the review of what the arbitrator did and
5A copy of the statute is attached hereto at page 5A of the Appendix
15
said in the hearing itself is the most important evidence of the
arbitrator’s partiality.
In Tamari v. Bache Halsey Stuart, Inc., 619 F.2d 1196
(7th Cir.), cert. denied, 449 U.S. 873 (1980), the same firm that
employed one of the arbitrators hired as an employee a witness
of one of the parties. The involved arbitrator withdrew and the
question was whether his earlier presence on the panel had tainted
the remainder of the committee. The Seventh Circuit carefully
reviewed the transcript for any appearance of bias, stating the
award should be vacated "where one or more arbitrators might
reasonably be thought biased against one litigant and favorable to
another." Jd. at 1198. It further stated that “even if actual bias
or corruption is not found, the appearance of bias will void the
award." Jd. at 1198, n. 3.
Similarly, the court in Bell Aerospace Co. Div. of
Textron, Inc. v. Local 516, Intern. Union, United Auto,
Aerospace and Agr. Implement Workers of America, 500 F.2d
921 (2d Cir. 1974), in studying a claim of evident partiality,
inquired whether there was evidence that “the arbitrator was
biased or prejudiced, that he was predisposed to favor either
party, or that he acted out of any improper motives." Jd. at 923.
The analysis of the Seventh Circuit, in Tamari, and the
Second Circuit, in Bell Aerospace, reveals that evident partiality
is not limited to an arbitrator’s financial interest in the outcome
or special relationship to one of the parties. Rather, evident
partiality can be found where the transcript reveals the
appearance of bias. Perhaps the clearest opinion on this issue is
Holodnak v. Avco Corp., 381 F.Supp. 191 (D. Conn. 1974),
aff'd in part, rev’d in part on other grounds, 514 F.2d 285 (2d
Cir.), cert. denied, 423 U.S. 892 (1985). In Holodnak, the court
initially found it necessary to review the transcript, stating:
[W]hen ’a claim of partiality is made, the court is under
an obligation to scan the record to see if it demonstrates
“evident partiality’ on the part of the arbitrators.’ Saxis
Steamship Co. v. Multifacs International Traders, Inc.,
16
a
375 F.2d 577, 582 (2d Cir. 1967); Ballantine Books, Inc.,
v. Capital Distributing Co., 302 F.2d 197 (2d Cir. 1962).
Id. at 198. The Court then reviewed the transcript and found
"substantial evidence of partiality on the part of the arbitrator, if
not open hostility toward the plaintiff." Jd. The arbitrator’s bias
reached a point that “at times the arbitrator openly badgered the
plaintiff." Jd. The court concluded that the arbitrator’s
comments and conduct revealed bias, requiring vacatur. Jd. at
199. As is detailed more fully below, the arbitrators’ hostility
toward Mr. Peterson and the badgering suffered by him greatly
exceeds that condemned in Holodnak.
The panel’s inexplicable personal animosity toward
Peterson was obvious just 45 pages into the testimony of
Peterson. In describing his reliance upon his prior advisor Herb
Vest, Mr. Peterson testified that Herb Vest “sort of shied away”
from the use of puts. (285) Panelist Brackbill, hurriedly flipping
through account statements, rudely interrupted, attempted to
make the witness take a more extreme position, suggested that
Peterson is a liar, and volunteered that he, the panelist who is
supposed to be impartial, “will embarrass you."® Brackbill later
9
PANELIST BRACKBILL [Page 285]:
Wait a minute. Is the answer is Mr. Vest did not recommend puts
and you did not use puts?
MR. PETERSON:
No sir. My answer is simply this. Mr. Vest rarely did recommend
puts along with the calls.
PANELIST BRACKBILL [Page 285}:
That's all I want to know. You keep saying you didn't use puts. 1
keep reading them.
MR. PETERSON: I didn’t say.
PANELIST BRACKBILL: You said rarely?
MR. PETERSON: | also said Mr. Vest didn’t like them.
MR. O’NEILL:
In defense I would like to note one thing. We have got a different
exhibit for Mr. Vest where he hand posted the transactions.
17
looked at the account statements, came to realize that he was
wrong as Peterson’s counsel had tried to suggest to him and made
a begrudging apology at the inception of the second day’s
hearing, off the record. The apology could not hide Brackbill’s
obvious rancor and partisanship.
Besides the panel’s words, there were powerful
demonstrations of panel bias impossible to capture by transcript -
facial expressions, evidences of disbelief, and other signals sent
by the panel on that first day, some of which were noted by
Plaintiff at pages 329-30. The totality of panel conduct
produced, on the morning of the second day, an extraordinary
exchange in which the chief panelist told Peterson that he did not
like Peterson’s personality."°
PANELIST BRACKBILL:
I’m just using what you handed to me. /'ll do the whole year and
embarrass you. (Ends at page 288).
10
PANELIST BRACKBILL:
That’s my personality. / don't like your personality. I'm not going
to use that to judge you.
MR. PETERSON:
All I’m asking for is an objective, honest member of this panel.
PANELIST BRACKBILL:
I want that in the record that you claim that I'm not honest.
MR. PETERSON: Sir.
PANELIST BRACKBILL: You said that I'm not honest.
MR. PETERSON:
All I want is an objective honest member of the panel. I want all
members to be honest and objective. And also
PANELIST BROTMAN:
Are you claiming any one of us are not honest or objective?
MR. O’NEILL:
No sir. He is saying that there are two requirements. None of us
have suggested you failed the honesty requirement. We have
concerns about the objectivity requirement.
(350 Vol. Il)
18
The panel attacked Peterson like a bully on the
playground trying to pick a fight, taking every statement by the
Plaintiff and his counsel, attempting to twist the statement into a
personal attack on the panel, and looking for some excuse to start
the punches flying. Brackbill’s statement that he doesn’t like the
Plaintiff is the kind of statement that no hearing officer should
ever make to a party; he made it after hearing Plaintiff's expert
plus roughly 2 hours of direct testimony of the Plaintiff. How
can a party present a case in that kind of atmosphere? The
panel’s vendetta continued throughout the arbitration."
A fitting summary of the process afforded Peterson is
illustrated when Plaintiff's counsel offers an expert study of the
first several volumes of the hearing transcript (the Robbins
Report), documenting the fact that the panelists should recuse
themselves. Panelist Bonime’s tirade is revealing:
PANELIST BONIME [Page 1711]:
You are the ones that wrote letters to magazines in Dallas
and national magazines calling us ignorant, biased,
whatever. You are rolling the dice. You may lose if you
don't replace this whole panel. You are going to lose
that crapshoot. That’s my only point.
Even before the arbitration panel displayed its hostility
toward Peterson, the panel revealed its bias through its premature
conclusions of fact stated in the first day of the 21-day hearing.
The panelists violated one of the basic tenets of judicial behavior,
reaching a conclusion based on something other than the evidence
heard in the proceeding. Ballantine Books, Inc. v. Capital
Distributing Company, 302 F.2d 17 (2d Cir. 1962) reviewed the
circumstances under which statements of opinion prior to
completion of the evidence raise questions of bias. There it
'! For example, when Plaintiff's counsel is proving that Juba has falsely
marked the order tickets on Peterson's account, bearing on Juba's credibility as
well as who has been truly managing the account, Guerin volunteered the
defense that if the broker has been falsifying the order tickets and the aes
hasn't caught it, it is the client's fault (2165-66).
| 19
SS een Sen en Te Te en ee
scrutinized an arbitration where the chief panelist, on the ninth
day of the hearing said that “on the basis of the record as it then
stood it was his tentative view that there should be an award" for
a named party. The court tolerated those expressions of opinion
only because the process was essentially already completed. Jd.
at 21. In Peterson’s case, the panel expressions were rendered
very early in the case, were contrary to the only evidence in the
record, involved issues of Peterson’s intent, and were
accompanied by rejection of all evidence contrary to its
predisposition.
This panel’s misconduct began during the testimony of
the first witness, Dr. Christopher Barry, an expert on the use of
option strategies. Barry’s function in the case was to lay a
groundwork as to the operation of stock options, explain what
Peterson’s financial condition and previous investments revealed
about Peterson’s conservative objectives and needs, and contrast
that background with the unusual strategy recommended by Juba.
The panel’s attacks and interruptions of Barry are particularly
glaring because the core of his testimony--that the strategy
recommended by Juba was unprecedented--was ultimately
supported by Respondents’ own witnesses.
During Professor Barry’s direct examination, three
members of the panel announced their conclusions regarding
contested facts, directly contrary to the Professor’s testimony,
and unsupported by any evidence in the record. The panel’s
predisposition was that Peterson’s true investment objective (i.e.
State of mind) was speculative, contrary to Barry’s testimony that
Peterson’s objectives and needs were conservative.’ There
was, however, absolutely no foundation in the record for their
premature conclusion that Peterson was a speculator.
2 The panel so thoroughly communicated their rejection of Barry's
testimony that Respondents conducted only a token cross-examination. The
only non-employee expert called by Respondents (Dorsey) testified at pages
4489-4730. The panel never argued with him and interrupted only to ask
respectful questions such as how to read an exhibit, never in an adversarial
tone.
20
The panel had a predisposition that options trading is a
fool’s game. In the 16th hearing, Brackbill and Guerin decide,
with the typical rancor shown to Plaintiff's witnesses, to
disregard once again the testimony of one of Peterson’s experts,
Jim Bell, a broker who has substantial options experience with
three different national brokerage firms. Bell attempted to show
to the panel that different option trading carried different risks.
The panelists incorrectly rejected this conclusion and effectively
told Bell he did not know what he was talking about."? Bell
later showed the panel that he was correct and they were
mistaken. But the panel did not want to hear the evidence and
did not want to hear Plaintiff's experts. It had made certain
conclusions on the first day that any portfolio that contained
options in any number or in any strategy was speculative, and it
held that belief regardless of the evidence.
The foregoing examples show partiality - a fact finder
rejecting the only probative evidence on important issues, due to
its own hostility toward Peterson and its pre-set notions about
options trading. The most cited analysis of the evident partiality
standard is made in Morelite Construction Corp. v. New York
City District Council Carpenters Benefit Funds, 748 F.2d 79 (2d
13
PANELIST GUERIN [Page 3927]:
Doesn't the preamble of this document [speaking of the options
clearing corporation risk disclosure statement described at page 3925]
describe the whole option trading program as speculative?
MR. BELL:
It points out that they have special risks attuned to option trading and
attempts to describe what each of the risk is in each - not each of the
strategies. There are some strategies that are not covered.
PANELIST GUERIN:
Don’t they think of all these as speculative strategies?
MR. BELL:
Not to my knowledge.
PANELIST BRACKBILL:
You are excused, but I suggest you go home and read that.
Bell later showed that the option clearing corporation prospectus
expressly supported his position (3928).
21
Cir. 1984). The Second Circuit defined "evident partiality" as
something more than a mere “appearance of bias", but held that
"proof of actual bias" was not necessary. Jd. at 84. It endorsed
a careful scrutiny of the arbitrators’ fairness.'* Morelite
concluded that "evident partiality within the meaning of 9 U.S.C.
§10 will be found where a reasonable person would have to
conclude that an arbitrator was partial to one party to the
arbitration." Jd. at 84.
A reasonable person reviewing the Peterson record must
conclude that several of the panelists in this case were partial.
This conclusion is compelled not only from the pre-judgments
and personal hostility cited above, but also from repeated
expressions by the panel of a personal dislike and distrust of
Plaintiff. No party can obtain a fair hearing from a fact finder
who has already decided the facts, or who has such hostility
toward the litigant or toward his factual or legal position that the
fact finder is unable or unwilling to hear the evidence.
Ballantine, supra, stated that a jurist who expresses a view
“which arises from the evidence" can avoid challenge for bias.
But when a jurist, including an arbitrator, expresses premature
conclusions on crucial fact issues, or such personal animus as to
'4 The court stated:
"On the other hand, we must not abjure our responsibility to maintain
the integrity of the federal courts’ role in affirming or vacating
awards.... [T]he statutory scheme we examine today implicates the
process of the federal courts in the enforcement of "private
remedies”. Were we to lend our imprimatur to an award grounded
in fraud or bias, the sense of fairness that society rightfully demands
of its judiciary would be sadly diminished. For this reason, we
cannot countenance the promulgation of a standard for partiality as
insurmountable as “proof of actual bias” as the literal words of
Section 10 might suggest. Bias is often difficult, and indeed often
impossible to prove.”
Id. at 84.
22
be unable to fairly consider the evidence, that jurist must be
removed for bias.'*
Review of the evident partiality issue is warranted. At
the Fifth Circuit level, Respondents argued that, as a matter of
law, an arbitration award could be vacated based on evident
partiality only if an arbitrator had a pecuniary interest in the
outcome or some other actual relationship with a party. In
support of this, Respondents cited Tinaway v. Merrill Lynch &
Co., Inc., 692 F.Supp. 220, 224 (S.D.N.Y. 1988); Sidarma
Societa di Italiani Armamento SPA, Venice v. Holt Marine
Indus., Inc., 515 F.Supp. 1302, 1306 (S.D.N.Y.), aff'd, 681
F.2d 802 (2d Cir. 1981); Reichman v. Creative Real Estate
Consultants, Inc., 476 F.Supp. 1276, 1284 (S.D.N.Y. 1979).
The Fifth Circuit opinion reveals no analysis whatsoever of the
evident partiality issue. Only by applying a bright line (financial
interest or special relationship) test, however, could the Fifth
Circuit have determined evident partiality did not exist. This
bright line approach to evident partiality is inconsistent with
Second and Seventh Circuit opinions cited above. Moreover, this
Court has not determined whether the bright line test championed
'S When Plaintiff's counsel asked Professor Barry to read aloud 3 pages
of the broker's deposition transcript and evaluate whether the broker's statement
is a correct understanding of options rules, the panel accused Plaintiff of
trickery:
PANELIST BRACKBILL [Page 199]:
If we haven't a chance to see in totality, it is unfair to hear a small
portion of this. Were we furnished with this?
MR. COLLINS: No.
MR. O’NEILL: We are trying to give you a break.
PANELIST BRACKBILL:
You are trying to give us a biased side. 1 want to know the whole
story.
Later, Respondents’ counsel asked questions of their expert based
upon his reivew of some undesignated portions of Juba’s deposition. The panel
allowed such testimony (4502-03 and 4508), with no suggestion that Respondent
or his witness was trying to give the panel "a biased side”.
23
by the Respondents and apparently followed by the Fifth Circuit
constitutes the correct evident partiality analysis. Consequently,
Peterson respectfully submits that this Court should review this
issue.
D. THE FIFTH CIRCUIT ERRED IN REFUSING TO
VACATE THE ARBITRATION AWARD ON DUE
PROCESS GROUNDS.
1. THE FIFTH CIRCUIT IMPROPERLY
CONCLUDED THAT PETERSON WAS NOT
ENTITLED TO DUE PROCESS.
The Fifth Circuit appears to have rejected Peterson’s
argument that he was entitled to due process during arbitration
proceedings. On appeal, the Respondents cited Seventh and
Eight Circuit opinions holding that a party is not entitled to due
process in an arbitration. See Moseley, Hallgarten, Estabrook &
Weeden, Inc. v. Ellis, 849 F.2d 264, 268 (7th Cir.
1988)(arbitration is a system “structured without due process");
Stroh Container Company v. Delphi Industries, Inc., 783 F.2d
743, 751 n.12 (8th Cir.)(same), cert. denied, 476 U.S. 1141
(1986). The Fifth Circuit did not specifically analyze the due
process issue. It appears, however, that the Fifth Circuit agreed
with the Respondents’ position because the Court refused to
vacate the arbitration award even after acknowledging that
several procedural irregularities occurred during the arbitration
proceeding.
In Totem Marine Tug & Barge, Inc. v. North Amer.
Towing, Inc., 607 F.2d 649 (Sth Cir. 1979), the Fifth Circuit
appeared to recognize the applicability of due process principles
in arbitration proceedings. In that case, the appellant urged that
it had been denied due process. The court, while acknowledging
that arbitration is less formal than a trial in court, vacated the
arbitration award based, in part, on the court’s determination that
the arbitrators had "dispensed their own brand of industrial
justice." Jd. at 652. In Peterson’s case, as well as other recent
24
opinions,’* the Fifth Circuit has moved away from the position
that parties in arbitration are entitled to due process.
This Court has not definitively ruled on the applicability
of due process in an arbitration proceeding. This Court’s
rulings, however, support a conclusion that parties to an
arbitration, especially a proceeding conducted before the NYSE,
are entitled to due process. Commonwealth Coatings Corp., 393
U.S. at 148, 89 S.Ct. at 339 (the “broad statutory language” of
the FAA effectively incorporates minimum constitutional
protections on the fairness of the process); Shearson v.
McMahon, 482 U.S. 220, 107 S.Ct. 2332, 2341
(1987)(premising the arbitrability of securities claims partly upon
the fact that the NYSE’s arbitration procedures are subject to the
SEC’s oversight authority). There is no clear precedent from this
Court on the due process issue. Consequently, review of this
issue by this Court is warranted.
y PETERSON WAS DENIED DUE PROCESS.
A fundamental requirement of due process is the
Opportunity to be heard “at a meaningful time and in a
meaningful manner" before a neutral and unbiased decision-
maker. Mathews v. Eldridge, 424 U.S. 319, 333 (4 976); Muse
v. Sullivan, 925 F.2d 785 (Sth Cir. 1991). This Court has stated:
"A fair trial in a fair tribunal is a basic requirement of due
process. Fairness of course requires an absence of actual bias in
the trial of cases." Antoniu v. S.E.C., 877 F.2d 721, 724 (8th
Cir. 1989), cert. denied, 494 U.S. 1004 (1990)(citing, In re
Murchison, 349 U.S. 133 (1955)(emphasis supplied). Peterson
neither had a hearing before an impartial and unbiased tribunal
nor an opportunity to be heard in a “meaningful manner." Such
conduct is not mere procedural irregularity, but rather a
fundamental denial of due process.
'© See R.M. Perez & Associates, Inc. v. Welch, 960 F.2d 534 (Sth Cir.
1992)(holding that an arbitration award can be vacated based only on statutory
grounds).
25
After Peterson had presented most of his case, cross-
examined Juba, and completed nine days of hearing testimony
(over 2,000 pages of transcript), two of the original five
arbitrators withdrew and the NYSE appointed two new panelists
who had not heard the testimony and who commenced hearing
new testimony before reading transcripts of the first nine days of
hearings. This device just as effectively deprived Peterson of a
meaningful hearing as if the panel had simply refused to allow
him to put on witnesses or had by any other device refused to
allow him to present his case in a cohesive manner.
Peterson’s counsel explained the impropriety of having
the case decided by panelists who had not heard all of the
testimony and he asked the panel to allow him to present his
entire case to the whole panel (2249). He further insisted that
live observation of the witnesses was crucial (2252-53). Plaintiff
continuously objected to the two-tier panel, out of order
testimony, the lack of live observation of the witnesses, and
related flaws (2239-2318, Vol. X).
Courts have held that if credibility is at issue, a fact
finder who is substituted midstream in a proceeding must engage
in a de novo hearing of all the evidence. See, e.g., Henry A.
Knott Co. v. The Chesapeake and Potomac Telephone Co., 772
F.2d 78, 85 (4th Cir. 1985)(substitute federal master must
conduct de novo hearing, “otherwise the parties’ right to a full
due process hearing would be severely undercut"); Gamble-
Skogmo, Inc. v. Federal Trade Commission, 211 F.2d. 106 (8th
Cir. 1954)(substitute trial examiner not entitled to determine
credibility based on cold record); Emerson Electric Co. v.
General Electric Co., 846 F.2d 1324 (11th Cir. 1988)(successor
judge could not make credibility determinations based on cold
record). Due to the rarity of verbatim transcripts in arbitrations,
no case could be found where this issue arose in the arbitration
context.
In Feldman v. Board of Pharmacy, 160 A.2d 100 (D.C.
1960), aff'd, 279 F.2d 821 (D.C. Cir. 1960), the court
determined that the pharmacist had been denied due process
26
TN
EBs, Grea eetaBean
SON ie SEN el
because four of the five board members present at the hearings
had been replaced before a decision was rendered. The court
noted that "the error is not cured by having the fact finder later
read the transcript." Jd. at 103.
As in Feldman, Peterson’s case was highly dependent on
the credibility of witnesses. The appointment of two new
panelists in Peterson’s case after nine days of hearing was more
pernicious than any of the examples cited above. In Peterson’s
case there was a combination of (i) some panelists deciding based
upon a cold transcript; (ii) a two-tiered panel where some of the
members had heard all live testimony and some were of the lower
“newly appointed" caste;'’ (iii) an insistence by the panel that
testimony immediately proceed even before the new panelists had
read the prior transcripts; and (iv) a necessary dependence upon
transcripts in which the five original panelists had so interfered
with the presentation of evidence and so clearly expressed their
own biases as to taint any panelist reading those transcripts.
Because of the panel’s refusal to allow Plaintiff to recall
each witness, Peterson, who had previously been questioned for
2 or 3 days before the panel, was limited to a 45-minute
description of his case, followed by 45 minutes for Respondent
Juba. The next witness was the broker’s manager, through
whom Plaintiff intended to show the misconduct of the broker in
breaking his own firm’s rules (2295). The two new panelists
could not understand the impeachment of Juba through his
supervisor because they had not heard Juba’s detailed testimony
at Volumes VI through IX of the transcript. Further, they could
not understand what proper supervisory procedures would have
'’ The substitution of two unprepared panelists created a two-tiered panel -
three members who had already been vigorously objected to on the second day
of the hearing based upon their partiality and two subservient members who
arrived in the middle of the case, without observing the demeanor of witnesses.
The two new panelists had virtually no alternative, but to defer to the strongly
expressed opinions of the other three panelists; not only had the first three heard
all the evidence as it was being presented, but also two of those three continuing
panelists (Baker and Guerin) were members of the securities industry,
presumably armed with special understanding of securities matters.
27
been and compare this to this supervisor’s testimony when neither
had any familiarity with the testimony of Plaintiff's only witness
as to the appropriate approval and supervisory procedures. In
addition, since the two new panelists had read very little about
the options positions Juba recommended, had not yet read Juba’s
admissions that the position was primarily his idea and was
inconsistent with Peterson’s prior positions, and had missed
testimony by Juba, Bell, and Barry as to the rarity of the
transaction, questions to the broker’s manager as to the unusual
character of the transaction had no contextual meaning.
Courts have held that federal judges, special masters, and
administrative law judges who are highly skilled and trained at
making fact findings cannot make fair determinations of
credibility based on a cold record. Certainly, lay arbitrators,
subjected to virtually no scrutiny by the NYSE, cannot perform
such a task by "scanning" transcripts and hearing new evidence
before reading prior days’ transcripts. Peterson was denied due
process.
Fairness of arbitration proceedings, especially those
conducted before self-regulating organizations, is critical to the
future viability of arbitration as an adjudicatory process. This
Court has, in the past, determined that an arbitration forum is
appropriate for determining securities disputes. McMahon, 107
S.Ct. at 2341; Gilmer, 111 S.Ct. at 1654. Those decisions were
based in part on the assurance that the customer would be
afforded a full and fair hearing. Through Peterson’s case, this
Court has the opportunity to explore and define the due process
protection that must be afforded all participants to an arbitration
proceeding. This important area of law, especially in light of the
trend favoring arbitration as opposed to judicial resolution of
disputes, should be reviewed by this Court.
28
CONCLUSION
For the foregoing reasons, Petitioner prays that the Court
issue a writ of certiorari to review the decision and judgment
below.
Respectfully submitted,
O’NEILL SNELL BANOWSKY & MCCLURE
By
B. Keith Trent
Counsel of Record
Texas Bar No. 20209300
200 Crescent Court
Suite 1030
Dallas, Texas 75201
214/871-3515
214/871-3517 - Telecopier
ATTORNEYS FOR PETITIONER
29
6) Sa ee
=f
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
NO. 92-1341
M.K. PETERSON,
Plaintiff-Appellant,
versus
RAUSCHER PIERCE REFSNES,
INC., ET AL,
Defendants,
RAUSCHER PIERCE REFSNES,
INC., and RICHARD F. JUBA,
Defendants-Appellees.
Appeal from the United States District Court for the
Northern District of Texas
(CA3-90-2339-P)
1A
Before GOLDBERG, JOLLY, and WIENER, Circuit Judges.
E. GRADY JOLLY, Circuit Judge: *
After our study of the briefs in this case and after
hearing oral arguments of counsel, we are convinced that the
award of the arbitration panel should not be vacated. The
circumstances under which an arbitration award will be set aside
are extremely narrow. Judicial review of arbitration awards is
extremely limited, and the standard of review applied by the
district court is a very deferential one. Anderman/Smith Co. v.
Tennessee Gas Pipeline Co., 918 F.2d 1215, 1218 (Sth Cir.
1990). The district court denied Peterson’s motion to vacate the
arbitration award. We review de novo the district court’s order.
Id. at 1218 n. 2.
Peterson argues that the panel’s award should be vacated
because of the evident partiality of the arbitrators, because he
was denied due process, because of the panel’s manifest
disregard for the law, and because of procedural irregularities
* Local Rule 47.5 provides: “The publication of opinions that have
no precedential value and merely decide particular cases on the basis of well-
settled principles of law imposes needless expense on the public and burdens
on the legal profession." Pursuant to that Rule, the court has determined that
this opinion should not be published.
2A
that prejudiced his rights. Peterson, however, has failed to
convince us with any of these arguments that the arbitration
panel’s award should be set aside. Although Peterson has
pointed out several procedural irregularities, we are not
convinced that the fundamental fairness of the proceeding was
undermined; in short, none are serious enough to warrant
vacating the award. In concluding, we must observe that the
basis for many of the claims raised in this appeal were provided
by Peterson and his counsel. And, finally, we would note as an
aside that we have been unimpressed with the merits of the
claims asserted in the arbitration proceeding. The judgment of
the district court is
AFFIRMED.
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
NO. 92-1341
M.K. PETERSON,
Plaintiff-Appellant,
versus
RAUSCHER PIERCE REFSNES, INC., ET AL.,
Defendants,
RAUSCHER PIERCE REFSNES, INC. and
RICHARD F. JUBA,
Defendants-Appellants.
Appeal from the United States District Court for the
Northern District of Texas
QN PETITION FOR REHEARING AND SUGGESTION FOR
REHEARING EN BANC
(Opinion 1/14/93, 5 Cir., ' F.2d _ )
(February 17, 1993)
Before GOLDBERG, JOLLY, and WIENER, Circuit Judges.
PER CURIAM
The Petition for Rehearing is DENIED and no member
of this panel nor Judge in regular active service on the Court
having requested that the Court be polled on rehearing en banc,
(Federal Rules of Appellate Procedure and Local Rule 35) the
Suggestion for Rehearing En Banc is DENIED.
ENTERED FOR THE COURT:
/S/
United States Circuit Judge
Judges KING and HIGGINBOTHAM did not participate in the
consideration of the suggestion for rehearing en banc.
4A
9 U.S.C. §10 Same; vacation; grounds; rehearing
In either of the following cases the United States
court in and for the district wherein the award was made may
make an order vacating the award upon the application of any
party to the arbitration --
(a) Where the award was procured by corruption, fraud,
or undue means.
(b) Where there was evident partiality or corruption in
the arbitrators, or either of them.
(c) Where the arbitrators were guilty of misconduct in
refusing to postpone the hearing, upon sufficient cause shown,
or in refusing to hear evidence pertinent and material to the
controversy; or of any other misbehavior by which the rights of
any party have been prejudiced.
(d) Where the arbitrators exceeded their powers, or so
imperfectly executed them that a mutual, final, and definite
award upon the subject matter submitted was not made.
(e) Where an award is vacated and the time within
which the agreement required the award to be made has not
expired the court may, in its discretion, direct a rehearing by the
arbitrators.
July 30, 1947, c.392, 61 Stat. 672.
NYSE Rule 609. Peremptory Challenge
In any arbitration proceeding, each party shall have the
right to one peremptory challenge. In arbitrators where there are
multiple claimants, respondents and/or third party respondents,
the claimants shall have one peremptory challenge and the third
party respondents shall have one peremptory challenge, unless
the Director or Arbitration determines that the interests of justice
would be best served by awarding additional peremptory
challenges. Unless extended by the Director of Arbitration, a
party wishing to exercise a peremptory challenge must do so by
notifying the Director of Arbitration in writing within five (5)
business days of notification of the identity of the person(s)
named under Rule 619(d), (e) or Rule 608 whichever comes
first. There shall be unlimited challenges for cause.
6A
tea
NYSE Rule 611. Disqualification or Other Disability of
Arbitrators (existing when Peterson’s
arbitration was commenced)
In the event that any arbitrator, after the commencement
of the first session but prior to the rendition of the award should
become disqualified, resign, die, refuse or be unable to perform
or discharge his duties, the Director of Arbitration, upon such
proof as he deems satisfactory, shall, where permitted by law,
either (a) appoint a new member to the panel to replace such
arbitrator, obtaining the consent of the parties; or (b) with the
consent or waiver of the parties, direct that the arbitration
proceed without the substitution of a new arbitrator.
7A
NYSE Rule 611. Disqualification or Other Disability of
Arbitrators (effective May 10, 1989)
In the event that any arbitrator, after the commencement of the
fist hearing session and prior to the rendition of the award,
should resign, die, withdraw, be disqualified or otherwise be
unable to perform as an arbitrator, the remaining arbitrator(s)
may continue with the hearing and determination of the
controversy, unless such continuation is objected to by any party
within five (5S) days of notification of the vacancy on the panel.
Upon objection, the Director of Arbitration shall appoint a new
member to the panel to fill any vacancy. The Director of
Arbitration shali inform the parties as soon as possible of the
name and employment history for the past ten (10) years of the
replacement arbitrator, as well as information disclosed pursuant
to Rule 610. A party may make further inquiry of the Director
of Arbitration concerning the replacement arbitrator’s
background and within the time remaining prior to the next
scheduled hearing session or the five (5) day period under Rule
609, whichever is shorter, may exercise its right to challenge the
replacement arbitrator as provided in Rule 609.
8A
AMICUS CURIAE
BRIEF
breme Court, U.S
FILED
JUN 15 1993
No. 92-1825 DELICE Of iWE CLERK
IN THE
Supreme Court of the United States
OcToBER TERM, 1992
M.K. PETERSON,
Petitioner,
VS.
RAUSCHER, PIERCE, REFSNES, INC.
and RICHARD F. JUBA,
Respondents.
PETITION FOR A WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
BRIEF AMICUS CURIAE OF NEW YORK
STOCK EXCHANGE, INC. IN OPPOSITION TO
PETITION FOR A WRIT OF CERTIORARI
RussELL E. Brooks
Counsel of Record for
New York Stock Exchange, Inc.
1 Chase Manhattan Plaza
New York, New York 10005
(212) 530-5000
Of Counsel:
MILBANK, Tweep, HADLEY & MCCLoy
HuGHES & Luce, L.L.P.
RESTATEMENT OF THE QUESTIONS PRESENTED
Whether a motion to vacate an arbitration award is properly
denied where
(a)
(b)
(c)
(d)
there is no basis for relief under the Federal
Arbitration Act;
the arbitrators did not display evident
partiality;
the arbitrators did not manifestly disregard
the law; and
there were no irregularities in the arbitration
which undermined the fundamental fairness
of the arbitration proceeding.
ii
TABLE OF CONTENTS
Page
RESTATEMENT OF THE QUESTIONS
etek heater cesecesseesesess i
Interest of the Exchange .........-------++ee03> 1
Statement of the Case .......----- eee eee eer eees 1
La hab ees k esse eeessecceress 2
REASONS FOR DENYING THE WRIT ......----- 9
I THIS CASE IS NOT APPROPRIATE
FOR A GRANT OF CERTIORARI .......-.- 9
Il THE DECISION BELOW IS CORRECT .... 12
A. The Award May Not Be Vacated
Under the Federal
en taba esos se eehees 12
B. Violation of an Arbitral
Sponsor’s Rules Is Not a Valid
Ground for Vacatur and
Cannot Be Established
Here in Any Event ..........---+--++- 13
C. "Manifest Disregard of the
Law" Is Not a Valid Ground
for Vacatur and Cannot be
Established Here in Any
eee ee sense 14
lil
D. The Court of Appeals Did Not
Err by Holding that the
Arbitrators Were Not
Disqualified by "Evident
Pace n ae ees bakes be Roe eee SS 17
E. The Court of Appeals Did Not
Err by Refusing to Vacate the
Arbitration Award on Due
a eT ee eee ee ee 19
See Rs | Pere eer ee Er eT rere Tee hr 20
iv
TABLE OF AUTHORITIES
CASES
A.G. Edwards & Sons v.
McCollough, 967 F.2d
1401 (9th Cir. 1992),
cert.denied, US.__,
eg Re | re re 15, 16
Advest, Inc. v. McCarthy,
914 F.2d 6 (1st Cir.
RES ae earn e henner Mel oe! 10, 11, 15, 16
Ainsworth v. Skurnick
960 F.2d 939 (11th Cir.
1992), cert. denied,
ae 5 Lae ee SA.
errr Tere errr eT Pee eT ee 15
Anderman/Smith Operating
Co. v. Tennessee Gas
Pipeline Co., 918 F.2d 1215
(Sth Cir. 1990), cert. denied,
We ., 111 544.
RRR Saher ear per Aenea 12
Bahr v. National Ass’n of Sec.
Dealers, Inc., 763 F. Supp. 584
re ee een a 6 che pee a we 19
Commonwealth Coatings Corp. v.
Continental Casualty Co., 393
fee fo. Ere ree ee rer ree eee 14, 18
English v. Cunningham,
LN TPT eey eer err err eter ee )
Fairchild & Co. v. Richmond,
F.&P. R.R., 516 F. Supp.
or er ere re 12, 18
First Heritage Corp. v.
National Ass'n of Sec.
Dealers, [1991-1992 Transfer
Binder] Fed. Sec. L. Rep. (CCH)
1 96,596 (E.D. Mich.
ea ee ere eee ee 19
Folkways Music Publishers
Inc. v. Weiss, 989 F.2d 108
kee oaks ie tek bk WRN CO ae hee Cae 16
Forsythe Int’l, S.A. v.
Gibbs Oil Co., 915 F.2d
EE co os i vc iiavacseuveaeueees 12
Fort Hill Builders v.
National Grange Mut. Ins. Co..,
SE COUP GME, BOD once cas nenesivesnss 18
French v. Merrill Lynch,
Pierce, Fenner & Smith, Inc.,
784 F.2d 902 (9th Cir.
a ae ee py oes a tbe Ve ee eae 15
Fudickar v. Guardian Mut.
Life Ins. Co., 62 N.Y.
Ee ches ehh 6 a hae ek a ee ee 11
vl Pages
Grovner v. Georgia-Pacific
Corp., 625 F.2d 1289 (Sth
oe rT errr ree renee rT eee ter 18
Health Servs. Management Corp.
v. Hughes, 975 F.2d 1253
(3) eee fee 17 a
Holodnak v. Avco Corp.,
381 F. Supp. 191 (D. Conn.
1974), aff'd in part and
rev'd in part, 514 F.2d 285
(2d Cir.), cert. denied
regs Fy. eer ree errs ee ee 19
Intercontinental Indus., Inc.
v. American Stock Exch.,
452 F.2d 935 (Sth Cir. 1971),
cert. denied, 409 U.S.
fi ere eee ee 13
Jenkins v. Prudential-Bache
Sec., Inc., 847 F.2d 631
(6 2 Tr rrrTeer errr er eer ere ce 15, 16
Ketchum v. Prudential-Bache
Sec., Inc., 710 F. Supp. 300
oe RT Per re ee eee ee eee TC Te ee 14
Layne & Bowler Corp. v.
Western Well Works, 261 U.S.
ne ec ce hanunsuns 9, 11
Merit Ins. Co. v.
Leatherby Ins. Co., 714 F.2d
673 (7th Cir.), cert. denied,
ks rer Seer rer rere ee 14
Vii Pages
Merrill Lynch, Pierce, Fenner
& Smith, Inc. v.. Bobker, 808
e) . - (s § OUP eTeCLEeeeec rier 15, 16
Moseley, Hallgarten, Estabrook
& Weeden, Inc. v. Ellis,
849 F.2d 264 (7th Cir.
ES ey 19
National Post Office Mailhandlers
v. United States Postal Serv.,
peo le ee 17
National Wrecking Co. v.
International Bhd. of
Teamsters Local 731, 143 L.R.R.M.
eo Be Le Se) eee 17
Prudential Real Estate
Affiliates, Inc. v.
Prudential MGM Realty, Inc.,
oe kg oe rr 18
R.M. Perez & Assocs., Inc.
v. Welch, 960 F.2d 534
i PP eE Tee TE TERETE TOE CT eS 10, 12
Rice v. Sioux City Memorial
Park Cemetery, Inc., 349
NM oo fa es sv xncacacstevcsrssavens 9
Robbins v. Day, 954 F.2d
679 (11th Cir.), cert. denied,
__US._, 113 S. Ct.
ee ee oa 12
viii Pages
Shearson/American Express
Inc. v. McMahon, 482 U.S.
py Ry. ere rer ree er ee ee ee ee 15
Siegel v. Titan Indus. Corp..,
779 F.2d 891 (2d Cir.
EE ee Tere 10, 16
Sperry Int’l Trade, Inc. v.
Government of Isr., 689 F.2d
501 (20 Cie. 19BZ) 0 ww wcrc ccc e er crccccsccves 11
Stroh Container Co. v.
Delphi Indus., Inc., 783 F.2d
743 (8th Cir.), cert. denied,
WUT SI ibs ncn e ce visenecnesccs 19
United Paperworkers Int'l
Union v. Misco, Inc., 484
ec ne eseanevesuencess es 19
United Steelworkers of Am. v.
Enterprise Wheel & Car Corp.,
OS ef PRS eP TTT Tee 15
Wilko v. Swan, 346 U.S.
ee CIN oe hes ore eae tedeceseasecententedns 14
STATUTES
Federal Arbitration Act,
pit tol 3 ee rer er eee oe 7
eI oo oa oe 4a eee ee Oe 15
pti to S| Peer rrrere rer rr rere. es 11, 12
heel
ix Pages
MISCELLANEOUS
SEC Exchange Act Release No.
26805, [1989 Transfer Binder]
Fed. Sec. L. Rep. (CCH)
7 84,414, at 80,114 n.61
fk Pre eT ET CREE TET TELE TET Eee 13
BRIEF AMICUS CURIAE OF
NEW YORK STOCK EXCHANGE, INC.
IN OPPOSITION TO PETITION FOR CERTIORARI
Interest of the Exchange
New York Stock Exchange, Inc. (the "Exchange") is,
and has been since October 1, 1934, registered with the
Securities and Exchange Commission as a national securities
exchange pursuant to Section 6 of the Securities Exchange
Act of 1934. The Exchange is the nation’s largest securities
exchange. The Exchange’s Constitution and Rules,
including its rules governing arbitration, are subject to
supervision by the Securities and Exchange Commission.
The Exchange was the sponsor of the arbitration which is
the subject of the Petition. The Exchange was a defendant
in the Texas State Court. That case was removed to the
District Court below. A treble damage claim against the
Exchange is pending there as a result of the Exchange’s role
as sponsor. The Exchange, pursuant to Rule 37.2 of the
Rules of this Court, submits this brief amicus curiae in
opposition to the petition for certiorari upon the written
consent of all parties.
Statement of the Case
Petitioner M.K. Peterson’s ("Peterson") claim upon
the discretionary jurisdiction of this Court rests largely upon
mischaracterizations of the arbitration proceedings. The
arbitration took four years to complete because of
Peterson’s flagrantly obstructive behavior and repeated
forays to court. A full statement of the case is necessary to
reveal how far astray the Petition departs from the record.
Peterson commenced the arbitration in November,
1987 against respondents Raucher Pierce Refsnes, Inc.
("RPR") and Richard Juba. An award was not rendered
until March 26, 1991. During those four years, Peterson
waged a compaign against arbitration as a method of
ee
2
alternate dispute resolution which included detours to both
the Texas state court and the United States District Court
in an attempt to enjoin and obstruct the arbitration process
and to assert damage claims against the respondents and the
Exchange. This behavior led the Court of Appeals to
observe after completing its de novo review "that the basis
for many of the claims [of procedural irregularities] asserted
in this appeal were provided by Peterson and his counsel."
Appendix 3A.
The Facts
Peterson commenced the arbitration by filing with
the Exchange a statement of claim and an executed
submission agreement in which he agreed to arbitrate his
dispute with RPR and Juba arising out of the conduct by
Juba of Peterson’s customer’s account at RPR. In January,
1988, RPR filed a reply to the statement of claim. The
parties then engaged in extensive voluntary discovery. The
arbitration hearings were set to begin on August 23 and 24,
1988 in Dallas, Texas.
The Exchange appointed a panel of five arbitrators
to hear the case. In accordance with Exchange Rule 608,
the background of each arbitrator was provided to the
parties in advance of the hearing. Peterson exercised one
peremptory challenge under Exchange Rule 609 to replace
an arbitrator and successfully challenged another for cause.
Exchange Rule 609 limited each party to one peremptory
challenge. Appendix 6A. As prescribed by Exchange Rule
607, of the five panel members finally sworn, two had some
securities industry affiliation. The other three were "public"
arbitrators, who were persons of high standing in the
community not affiliated with the securities industry. The
panel had over thirty-three years of cumulative experience
as arbitrators. The two arbitrators from the securities
industry had extensive knowledge about the securities
+ i
3
industry but no financial ties to it. The other three of the
five arbitrators were retired investors like Mr. Peterson.
The arbitration hearings began on August 23, 1988.
Both sides gave lengthy opening statements. Peterson
called as his first witness an expert on finance who had
never been employed in the securities industry. Peterson
testified next. The arbitrators asked reasonable questions of
each witness. When the second day of the hearing began
on August 24, 1988, Peterson's counsel asked the panel to
stop hearing the case because Peterson believed that the
panel was biased against him. The request was overruled.
Peterson stated on the record:
I want to say as a plaintiff that I have got an
armload of clippings that says that under
arbitration the claimant usually is working
against a stacked deck. I want to give you
my impression. When I came in here
yesterday, I had the feeling that I was up
against a stacked deck. That there was a
feeling of hostility on the part of this panel.
I won't say everybody, but the majority of
this panel . . . . I’m not going to stand for it.
(336)'
The panel assured the arbitrants that they were not
hostile but simply evaluating the evidence. Arbitrator
Bonime said:
The reason we ask questions is because we
want to know what is going on. All we were
trying to do is help bring this to light. We
are not trying to chastise anyone or crucify
anyone here. We want to know what
All page citations are to the arbitration transcript.
4
happened. Believe me, we are going to give
everyone a fair shake.
(332) Peterson refused to proceed with his case. The
panel advised Peterson that under Exchange Rule 616,
whether he proceeded or not, the respondents would be
permitted to present their case and the panel would render
an award. Peterson continued his testimony.
Robert Clemente, an arbitration counsel employed
by the Exchange, was in attendance at the first two days of
hearing to assist the arbitrators in commencing the
proceeding. He wrote a memorandum describing the first
two days of hearings which was marked as a deposition
exhibit and established to be a business record in the course
of the ensuing litigation brought by Peterson. Mr.
Clemente concluded:
A thorough review of the transcript will
reveal that, despite claimant’s unusual
approach, the panel patiently sat through in
excess of four (4) hours of expert testimony
while the claimant glared at each of them. It
appeared from the moment claimant entered
the hearing that the arbitrators and the
arbitration process was on trial, not the case
of Peterson v. Rauscher Pierce Refsnes Inc.
& Richard F. Juba.
Ex. B, Collins Aff.; Morris Ex. 16, at 8. Peterson
acknowledged during the hearings that he had hired a media
publicist and had embarked on a crusade against arbitration
(4032, 4034, 4037-38).
On October 13, 1988, Peterson filed suit in the
Texas state court naming the Exchange, RPR and Juba as
defendants. He sought to restrain the arbitration from
proceeding and sought damages against RPR and Juba for
the claims he was pursuing in the arbitration. Peterson
——E————————
5
obtained a temporary restraining order prohibiting the
arbitration from resuming on its next scheduled hearing date
of November 7, 1988.
Upon expiration of the temporary restraining order,
Peterson objected to the Exchange’s scheduling additional
hearing days until he had exhausted his efforts in state court
to enjoin the arbitration. The arbitration finally resumed in
July and August of 1989. Peterson then asked the
arbitration panel to withdraw, complaining that the
arbitration was taking too much time due to the difficulty of
scheduling hearings for five arbitrators, the parties and their
witnesses. His request was refused.
The hearings resumed on January 8, 1990. The
panel sought to expedite the hearings but received no
cooperation from Peterson. His response to a suggestion
that the arbitration hearings be videotaped so that they
could go forward if one or two arbitrators could not attend,
with the absent arbitrators viewing the videotape before the
next hearing, was met with this response from Peterson:
"Rejected out of hand. No more looney-tunes" (1717).
In May, 1990, one arbitrator withdrew from the
panel. Under Exchange Rule 611, the remaining arbitrators
were empowered to determine the controversy unless any
party insisted on a replacement. Appendix 8A. Peterson
demanded a panel of five. The Exchange appointed
Eugene Zorn as a replacement. Peterson exercised a
peremptory challenge against Zorn. Despite the fact that
Peterson had used his one allotted peremptory challenge
earlier, the Exchange replaced Zorn with Carol Galbraith, a
retired university administrator.
On June 28, 1990 Peterson again filed a motion in
the Texas state court to enjoin the arbitration from going
forward. On July 9, 1990, the state court declined to
interfere. Shortly before the arbitration was scheduled to
resume, another arbitrator withdrew. The Exchange
6
replaced that arbitrator with Joseph Shepherd. Peterson
exercised a peremptory challenge against Mr. Shepherd.
The Exchange attempted to honor Peterson’s challenge
even though he did not by right have any additional
peremptory challenge. Jeffrey Ritter was named as
replacement arbitrator. Mr. Ritter appeared at the July 10
hearing but voluntarily withdrew before testimony resumed
because he could not spare sufficient time from his law
practice to permit prompt completion of the hearing (2256,
2260-61). Unable to find another panelist who could
commit the required time, the Exchange reappointed Zorn
as replacement arbitrator. Peterson again asserted a
peremptory challenge against Zorn. The Exchange then
replaced Zorn with Shepherd but declined to recognize any
further peremptory challenges from Peterson pursuant to
Exchange Rules 611 and 609 (Appendix 8A, 6A). Peterson
could show no basis to challenge Shepherd for cause.
Shepherd remained a panel member.
During the July 10 hearing, Peterson refused to
agree that the panel be reduced to three members to
expedite the hearings even though the two securities
industry arbitrators each offered to resign (2275-76, 2278,
2285).
The hearing resumed on July 11, 1990. By
agreement, the substance of prior testimony was repeated in
narrative form together with brief additional cross-
examination to bring the two new arbitrators up to date and
to refresh the original three remaining arbitrators (2348-
2493). After the July hearing sessions, Galbraith and
Shepherd, the new panel members, were provided with full
Shepherd’s profile showed that he was a graduate of
Vanderbilt University who had been a vice president
in sales at Lone Star Steel Company in Dallas, Texas
from 1957 until 1986. Shepherd had three years
experience as an arbitrator.
ii
7
sets of transcripts and exhibits and the opportunity to
require any witness who had previously testified to be
recalled. The new panel members did not make such a
request because Peterson recalled his two expert witnesses
who had previously testified to repeat and supplement their
testimony before the new panel members (3606-3708, 3800-
3938). After the July sessions, the hearings proceeded
regularly each month.
On September 7, 1990 Peterson filed an amended
petition in the Texas state court seeking injunctive relief
against the arbitration proceedings and including damage
claims against RPR and Juba based upon the RICO statute
and treble damages against the Exchange for violation of
the Texas Deceptive Trade Practices Act. This action was
removed by defendants to the United States District Court
for the Northern District of Texas.
The arbitration continued. On November 6, 1990,
Peterson called his last witness. At the time Peterson
rested, his case in chief took up 4279 pages out of a total
transcript of 5422 pages. He had called four expert
witnesses. Twenty-one hearing days had been held.
The arbitration panel heard lengthy closing
arguments for one day. Both sides were permitted to file
closing briefs of unlimited length. Approximately thirty days
after receipt of the closing briefs, on March 26, 1991, the
arbitration panel rendered a unanimous award in favor of
respondents.
Peterson then moved in the case before the District
Court to vacate the arbitration award. RPR and Juba cross-
moved to confirm the award pursuant to the Federal
Arbitration Act, 9 U.S.C. § 1, etseg. (1988). On March 23,
1992, the District Court entered an order confirming the
award and denying Peterson’s motion to vacate. The
District Court held:
8
After reviewing the entire record of this case
the Court has failed to find any bias or
impartiality on the part of any of the
arbitrators ....
Additionally, the Court held:
The Court is also convinced after
thorough review of the record that Peterson
has failed to show that the arbitration
proceedings were fundamentally unfair.
Order at 2. Peterson then appealed to the Court of
Appeals for the Fifth Circuit. In affirming, the Court of
Appeals said:
Peterson, however, has failed to convince us
with any of [his] arguments that the
arbitration panel’s award should be set aside.
Although Peterson has pointed out several
procedural irregularities, we are not
convinced that the fundamental fairness of
the proceeding was undermined; in short,
none are serious enough to warrant vacating
the award.
The Court of Appeals added:
the basis for many of the claims raised in this
appeal were provided by Peterson and his
counsel. And, finally, we would note as an
aside that we have been unimpressed with
the merits of the claims asserted in the
arbitration proceeding.
Appendix 3A.
9
Peterson then petitioned the Court of Appeals for
rehearing and alternatively rehearing en banc. Peterson's
petition was denied. Appendix 4A.
REASONS FOR DENYING THE WRIT
I
THIS CASE IS NOT APPROPRIATE
FOR A GRANT OF CERTIORARI
Certiorari will be granted "only when there are
special and important reasons therefor." Sup. Ct. R. 10.
The concept of "importance" relates to the importance of
the issues to the general public rather than their importance
to the particular parties involved. Layne & Bowler Corp. v.
Western Well Works, 261 U.S. 387, 393 (1923); Rice v.
Sioux City Memorial Park Cemetery, Inc., 349 U.S. 70, 79
(1955). Even the existence of admittedly "serious legal
questions” may not be sufficient. English v. Cunningham,
361 U.S. 905, 907 (1959).
Peterson has neither argued nor suggested
circumstances compelling the conclusion that this case is
important to anyone other than to Peterson. The standards
governing the exercise of this Court’s discretionary power of
review are not met.
Peterson first argues that the Exchange’s alleged
violation of its rules renders the arbitration award invalid -
and that the Court of Appeals’ refusal to vacate on this
ground is in conflict with the decisions of this Court and
with other Courts of Appeals. Peterson, however, does not
cite one case with which the decision of the Court of
Appeals conflicts. There is no merit to Peterson’s claims
that alleged violation of an arbitral sponsor’s rules is a basis
for vacation of an arbitration award. Peterson is merely
attempting to evade the Federal Arbitration Act’s ("FAA")
|
10
well-settled principles that arbitration awards will only be
vacated om the extremely narrow grounds enumerated in the
FAA. R.M. Perez & Assocs., Inc. v. Welch, 960 F.2d 534
(Sth Cir. 1992).
Moreover, even if the Exchange’s appointment of
arbitrators were inconsistent with its rules (which it was
not), Peterson fails to demonstrate how he was prejudiced,
or, if so, why resolution of this matter by this Court is of
any public importance. There are no "special and
important” circumstances justifying a grant of certiorari.
Peterson next argues that the Court of Appeals’
rejection of the "manifest disregard of the law" doctrine as a
basis for vacatur conflicts with decisions of this Court and
other Courts of Appeals. This argument fails. First, there
is no merit to the argument that there was a manifest
disregard of the law. There is no evidence in the record
that arbitrators "correctly stated the law and then proceeded
to ignore it." Siegel v. Titan Indus. Corp., 779 F.2d 891, 893
(2d Cir. 1985). Second, contrary to plaintiffs assertion, this
Court has not held that "manifest disregard" is a separate
basis for vacating an arbitration award. The Court of
Appeals decision does not conflict with any decision of this
Court. Moreover, the Court of Appeals in this case
indicated after a de novo review of the record that it
considered Peterson’s arguments, including "manifest
disregard" of the law, and that "Peterson . . . has failed to
convince us with any of these arguments that the arbitration
panel’s award should be set aside." Courts of Appeal may
differ on whether they apply the "manifest disregard"
standard or some other phraseology. These differences
have been deemed insignificant, amounting to a basic
"fundamental fairness" analysis. See Advest Inc. v.
McCarthy, 914 F.2d 6 (1st Cir. 1990). The Court of
Appeals applied this standard to its analysis of Peterson’s
alleged procedural irregularities when it stated: “we are not
convinced that the fundamental fairness of the proceeding
11
was undermined.” Appendix 3A. The Court of Appeals
added that: "we would note as an aside that we have been
unimpressed with the merits of the claims asserted in the
arbitration proceeding.” Id. As there is thus no "real and
embarrassing conflict . . . between the circuit courts of
appeal,” Layne, 261 U.S. at 393, the issue does not merit
review by this Court.
Peterson also makes the argument that the Court of
Appeals erred by concluding that evident partiality requires
a showing of an arbitrator’s pecuniary interest in the
outcome or an actual relationship with a party. The Court
of Appeals -- in this case -- made no such finding. Instead,
it held that "the fundamental fairness of the proceeding was
[not] undermined" and that Peterson failed to convince the
Court that the arbitrators displayed "evident partiality."
Finally, Peterson contends that the Court of Appeals
erred in refusing to vacate the arbitration award on due
process grounds. The Court of Appeals, however, properly
recognized that with this argument, Peterson is merely
"dressing up” with constitutional clothing his other
arguments. The FAA does not permit courts to "roam
unbridled" in ther review of arbitration awards, Advest,
914 F.2d at 8, but rather limits judicial intervention to cases
where the award was tainted in some way, such as where
the award was procured by corruption or fraud, or where
the arbitrators demonstrated evident partiality, were guilty
of misconduct or had exceeded their powers. 9 U.S.C. §
10(a). Peterson attempts to argue that the statutory
Moreover, “i]t is a settled principle governing this
subject, and which ought never to be lost sight of,
that all reasonable intendments and presumptions
are indulged in support of awards.” Sperry Int’l
Trade, Inc. v. Government of Isr., 689 F.2d 301, 306
(2d Cir. 1982) (quoting Fudickar v. Guardian Mut.
Life Ins. Co., 62 N.Y. 392, 401 (1875)).
12
grounds under which an arbitration award may be vacated
include a violation of the Exchange’s rules and due process.
No court has ever held that an arbitration award may be
vacated on these grounds.
Il
THE DECISION BELOW IS CORRECT
A. The Award May Not Be Vacated Under the Federal
Arbitration Act
Judicial review of arbitration awards is extremely
limited, Anderman/Smith Operating Co. v. Tennessee Gas
Pipeline Co., 918 F.2d 1215, 1218 (5th Cir. 1990), cert.
denied, US. __, 111 S. Ct. 2799 (1991). For an
arbitration award to be vacated it must fall within the
narrow scope of the FAA. R.M. Perez & Assocs., Inc. v.
Welch, 960 F.2d 534 (Sth Cir. 1992); Robbins v. Day, 954
F.2d 679 (11th Cir.), cert.denied, US.___, 113 S. Ct.
201 (1992); Fairchild & Co. v. Richmond, F.&P. R.R., 516
F. Supp. 1305, 1312 (D.D.C. 1981). As stated by the Court
of Appeals for the Fifth Circuit in Forsythe Int’l, S.A. v.
Gibbs Oil Co., 915 F.2d 1017, 1020 (Sth Cir. 1990): "judicial
review of a commercial arbitration award is limited to. . .
Sections 10 and 11 of the Federe! Arbitration Act."
The FAA provides that a district court may vacate
an award where: (1) the award was procured by corruption,
fraud, or undue means; (2) the arbitrators demonstrated
evident partiality or corruption; (3) the arbitrators were
guilty of misconduct which prejudiced the rights of one of
the parties; or (4) the arbitrators exceeded their powers. 9
U.S.C. § 10(a). In determining whether the party seeking to
vacate the award has met its burden of establishing one of
the grounds required under the FAA, the court should
address whether the arbitration proceedings were
"fundamentally unfair." Forsythe, 915 F.2d at 1022-23.
13
Peterson has failed to satisfy the standards necessary to
vacate an arbitral award under the FAA.
B. Violation of an Arbitral Sponsor’s Rules Is Not a
Valid Ground for Vacatur and Cannot Be
Established Here in Any Event
Peterson argues that the arbitrators violated
Exchange Rule 611 because two arbitrators whom he hac
peremptorily challenged were later designated by the
Exchange to replace another panelist who resigned.
Peterson contends that, under Exchange rules, once
he struck an arbitrator peremptorily, the Exchange was
prohibited from appointing that individual to the panel at
any subsequent time in the arbitration. Peterson offers no
evidence or legal support for his interpretation of the
Exchange’s rules, and the record demonstrates that the
Exchange was properly applying its rules concerning the
resignation of arbitrators and appointment of replacement
arbitrators and, indeed, going beyond the rules to find a
panelist acceptable to Peterson.
Exchange Rule 611 was amended, effective May 10,
1989, long before the vacancies on the Peterson panel arose
or were filled. The Exchange expressly provided that the
amended Rule 611 would become effective immediately.
See SEC Exchange Act Release No. 26805, [1989 Transfer
Binder] Fed. Sec. L. Rep. (CCH) 9 84,414, at 80,114 n.61
(May 10, 1989). Under amended Rule 611, the Exchange
was not required to obtain the parties’ consent to a
replacement panelist. Peterson was entitled to one
peremptory challenge. See Appendix 6A-8A. He was
accorded four. It is axiomatic that securities exchanges
should be allowed "broad discretion” in interpreting and
applying their own rules. See, e.g., Intercontinental Indus.
Inc. v. American Stock Exch., 452 F.2d 935, 940 (Sth Cir.
1971), cert. denied, 409 U.S. 842 (1972).
14
Moreover, the alleged failure by Exchange to follow
its rules of arbitration do not provide grounds for vacating
an arbitration award. In Merit Ins. Co. v. Leatherby Ins.
Co., 714 F.2d 673 (7th Cir.), cert. denied, 464 U.S. 1009
(1983), the Court stated that the rules of Arbitration of the
American Arbitration Association ("AAA") and the
arbitrator’s code of ethics do not have the force of law, and
even an assumed violation of those rules and code would
fail to satisfy the narrow statutory prerequisites to vacate an
award under the FAA. 714 F.2d at 680-81 (Posner, J.).
See also Ketchum v. Prudential-Bache Sec., Inc., 710 F.
Supp. 300, 303 (D. Kan. 1989) (holding that an Exchange
rule violation would not warrant vacation of an arbitration
award because "the rules do not have the force of law and a
rule violation is not one of the enumerated statutory bases
for vacating an arbitration award").
The cases on which Peterson relies for the
proposition that an arbitration award may be vacated for
“improperly composed arbitration panels" are inapposite.
All involve instances in which arbitrators were appointed in
contravention of the terms of the parties’ agreement.
C. "Manifest Disregard of the Law" Is Not a Valid
Ground for Vacatur and Cannot be Established
Here in Any Event
The "manifest disregard" doctrine derives from dicta
employed by the Court in Wilko v. Swan, 346 U.S. 427, 436-
37 (1953), in which this Court found that "interpretations of
the law" by arbitrators were not subject "to judicial review
for error in interpretation." In so holding, it contrasted
misinterpretation with "manifest disregard" of the law. Id.
Subsequent Supreme Court decisions have relied on the
"manifest disregard" dicta as a basis for vacating an
arbitration award under the Federal Arbitration Act. See,
e.g., Commonwealth Coatings Corp. v. Continental Casualty
Co., 393 U.S. 145, 147 (1968). While this Court mentioned
the "manifest disregard" standard most recently in
15
Shearson/American Express Inc. v. McMahon, 482 U.S. 220,
231 (1987), it did not recognize this standard as a separate
basis for vacating an award under the FAA.
The line of review developed by some lower courts
out of the Wilko language is a judicially created one, not
found in the FAA, 9 U.S.C. § 10. Advest, Inc. v. McCarthy,
914 F.2d 9 n.5 (citing Merrill Lynch, Pierce, Fenner &
Smith, Inc. v. Bobker, 808 F.2d 930, 933 (2d Cir. 1986);
Jenkins v. Prudential-Bache Sec., Inc., 847 F.2d 631, 634
(10th Cir. 1988)). The Court of Appeals for the Fifth
Circuit has declined to adopt the "manifest disregard"
standard, preferring to limit its inquiry to the grounds
enumerated under the FAA. See 9 U.S.C. § 10. In its
opinion the Court of Appeals noted that Peterson argued
that the arbitration should be vacated "because of the
evident partiality of the arbitrators, because he was denied
due process, because of the panel’s manifest disregard for
the law, and because of procedural irregularities that
prejudiced his rights," but that "Peterson, however, has
failed to convince us with any of these arguments."
Appendix 3A The Court of Appeals thus rejected plaintiff's
“manifest disregard of the law" argument based on the facts
of this case.
Peterson correctly states that the standard of judicial
review of arbitration awards “has taken on various hues and
colorations in its formulations" in the Courts of Appeal.
Advest, 914 F.2d at 9; see also Ainsworth v. Skurnick, 960
F.2d 939, 941 (11th Cir. 1992) (arbitration award may be set
aside if “arbitrary and capricious"), cert. denied, _U.S.
__, 113 S. Ct. 1269 (1993); AG. Edwards & Sons v.
McCollough, 967 F.2d 1401, 1403 (9th Cir. 1992)
(arbitration award may be set aside if made in "manifest
disregard for law"), cert. denied, . U.S. __, 113 S. Ct.
970 (1993); French v. Merrill Lynch, Pierce, Fenner &
Smith, Inc., 784 F.2d 902, 906 (9th Cir. 1986) (arbitration
award may be set aside if “completely irrational"); United
Steelworkers of Am. v. Enterprise Wheel & Car Corp., 363
16
U.S. 593, 597 (1960) (holding arbitration award to be
impregnable "so long as it draws its essence" from the
underlying agreement).
These differences in phraseology have, however,
been deemed insignificant. See, e.g., Advest, 914 F.2d at 9.
Regardless of the terms of art employed, the arbitration
award has been subjected to a "sort of ‘abuse of discretion’
standard" to ensure that the arbitrator’s decision is based on
his interpretation of the contract rather than on his "own
beliefs of fairness and justice." Jenkins, 847 F.2d at 633-34.
As stated by the Court of Appeals for the First Circuit in
Advest, 914 F.2d at 9:
[T]he standard of review undergirding these
various formulations [is] identical, no matter
how pleochroic their shadings and what
"terms of art have been employed to ensure
that the arbitrator’s decision relies on his
interpretation of the contract as contrasted
with his own beliefs of fairness and justice."
Jenkins v. Prudential-Bache Securities, Inc.,
847 F.2d 631, 634 (10th Cir. 1988). However
nattily wrapped, the packages are fungible.
Moreover, those courts applying the "manifest
disregard” standard have held that it is more than the mere
erroneous application of the law that will mandate vacatur
of an arbitration award. See A.G. Edwards, 967 F.2d at
1403 (an arbitration award should not be set aside "even in
the face of erroneous interpretations of the law"). To
vacate an award under this standard, the panel must have
understood and correctly stated the law and then proceeded
to ignore it. Siegel v. Titan Indus. Corp., 779 F.2d 891, 893
(2d Cir. 1985). See Folkways Music Publishers, Inc. v.
Weiss, 989 F.2d 108, 112 (2d Cir. 1993) (to vacate an
arbitration award the arbitrators must have known of the
legal principle and wilfully refused to apply it); Bobker, 808
F.2d at 933 ("[E]rror must have been obvious and...
17
instantly perceived by the average person qualified to serve
as an arbitrator.") The party seeking to vacate the award
must demonstrate that the arbitrator deliberately
disregarded what he or she knew to be the law in order to
reach a particular result. National Wrecking Co. v.
International Bhd. of Teamsters Local 731, 143 L.R.R.M.
(BNA) 2046, 2049 (7th Cir. 1993) (citing Health Servs.
Management Corp. v. Hughes, 975 F.2d 1253, 1267 (7th Cir.
1992)).
Peterson has not demonstrated that the arbitrators
correctly stated the law and proceeded to ignore it. Nor has
he shown that the arbitrators deliberately disregarded what
they knew to be the law in order to reach a desired
outcome. While Peterson quotes out of context remarks
made by the arbitrators over the course of a 21-day
arbitration hearing, these statements do not reveal that the
arbitrators stated or knew the applicable law, and then
proceeded to ignore it. Rather, the arbitrators recognized
that they are not bound by the procedural rules of the
courts but by those of the Exchange (4085, 417). See, e.g.,
National Post Office Mailhandlers v. United States Postal
Serv., 751 F.2d 834, 841 (6th Cir. 1985) ("Arbitrators are
not bound by formal rules of procedure and evidence
ate
D. The Court of Appeals Did Not Err by Holding that
the Arbitrators Were Not Disqualified by "Evident
Partiality"
Peterson argues that because the Court of Appeals
did not find that the arbitrators displayed "evident
partiality,” that the court must have limited the "evident
partiality" test "to instances in which an arbitrator had a
financial interest in the outcome or a special relationship
with one of the parties." Petition 23. For Peterson to
impute reasoning to the court’s decision, not reflected in
the court’s opinion, and then to proceed to frame an
argument around this conjecture, is irresponsible. There is
18
nothing to suggest that the Court of Appeals limited its
inquiry into "evident partiality" to the pecuniary interests of
the arbitrators. To the contrary, the court stated:
"Peterson argues that the panel’s award should be vacated
because of the evident partiality of the arbitrators . . .
Peterson, however, has failed to convince us with any of
these arguments." Appendix 3A. It is thus not respondents
arguments that swayed the Court of Appeals -- as suggested
by Peterson -- but the rejection of Peterson’s arguments.
’
Peterson argues that the arbitrators must have been
biased against him because they interrupted his testimony,
stated their opinions regarding witness testimony and
questioned Peterson’s expert witness. Courts have long
recognized, however, that arbitration need not follow all the
"niceties" of the federal courts, but need only provide a
fundamentally fair hearing. Grovner v. Georgia-Pacific
Corp., 625 F.2d 1289, 1290 (Sth Cir. 1980). A losing party’s
perception of rudeness on the part of an arbitrator is not
the "evident partiality" envisioned by the FAA as a basis for
vacating an arbitration award. Fairchild, 516 F. Supp. at
1312 (award not vacated despite allegation that arbitrator
had expressed hostility to losing party’s counsel
demonstrated by rudeness and interruptions during the
arbitration proceedings); see Prudential Real Estate
Affiliates, Inc. v. Prudential MGM Realty, Inc., 959 F.2d
241 (9th Cir. 1992) ("[N]o case has ever held that an
arbitrator’s statements in the record can constitute errors
‘on the face of an award.”); Fort Hill Builders v. National
Grange Mut. Ins. Co., 866 F.2d 11, 13 (1st Cir. 1989)
(award not vacated despite arbitrators’ hostile conduct and
comments).
Mr. Justice White, concurring in Commonwealth
Coatings, 393 U.S. at 150, which is cited in the Petition (pp.
15, 25), cautioned that:
The court does not decide today that
arbitrators are held to the standards of
19
judicial decorum of Article III judges, or
indeed of any judges. It is often because
they are men of affairs, not apart from but
of the marketplace, that they are effective in
their adjudicatory function.
Further, while Peterson invokes Holodnak v. Avco
Corp., 381 F. Supp. 191 (D. Conn. 1974), aff'd in part and
rev'd in part, 514 F.2d 285 (2d Cir.), cert. denied, 423 U.S.
892 (1975), for the proposition that a court should review
an arbitration transcript for "evident partiality,” there is
nothing to suggest that the courts below did not do so. This
Court does not perform such tasks. See United
Paperworkers Int’l Union v. Misco, Inc., 484 U.S. 29, 38
(1987) ("Courts thus do not sit to hear claims of factual or
legal error by an arbitrator as an appellate court does in
reviewing decisions of lower courts").
E. The Court of Appeals Did Not Err by Refusing to
Vacate the Arbitration Award on Due Process
Grounds
Peterson seeks to have the award vacated on the
additional theory that he was denied due process of law.
Due process requirements under the United States
Constitution do not, however, attach to civil arbitration
proceedings sponsored by self-regulatory organizations such
as Exchange or the NASD. See, e.g., First Heritage Corp.
v. National Ass’n of Sec. Dealers, [1991-1992 Transfer
Binder] Fed. Sec. L. Rep. (CCH) 1 96,596 (E.D. Mich. Feb.
5, 1992); Bahr v. National Ass’n of Sec. Dealers, Inc., 763 F.
Supp. 584 (S.D. Fla. 1991). Other courts similarly recognize
that due process is not the yardstick against which to
measure arbitration proceedings. See, e.g., Moseley,
Hallgarten, Estabrook & Weeden, Inc. v. Ellis, 849 F.2d
264, 268 (7th Cir. 1988) (arbitration is a system "structured
without due process"); Stroh Containér Co. v. Delphi Indus.,
Inc., 783 F.2d 743, 751 n.12 (8th Cir.) (same), cert. denied,
476 U.S. 1141 (1986).
20
Peterson was afforded great latitude in presenting
his case. He was not denied either fairness or due process.
Peterson was permitted more peremptory challenges than
the rules accorded him. Although the arbitrators at times
questioned the relevance or usefulness of his evidence,
Peterson was allowed to present all his evidence. Peterson
was also permitted to put on not one, but two, securities
experts twice, allegedly to educate the panel about options
transactions. Peterson was permitted 18 days of hearings to
develop his case. He was given notice of all proceedings,
and was represented by counsel, who was permitted to
cross-examine the witnesses proffered by RPR. A careful
examination of the record of these lengthy proceedings
reveals that the panel bent over backward to afford
Peterson every opportunity to present his case and to judge
it fairly.
CONCLUSION
There is nothing in this case that calls out for this
Court’s attention. The petition for a writ of certiorari
should be denied.
June 14, 1993
Respectfully submitted,
RUSSELL E. BROOKS
Counsel of Record for
New York Stock Exchange, Inc.,
1 Chase Manhattan Plaza
New York, N.Y. 10005
(212) 530-5000
Of Counsel
Milbank, Tweed, Hadley & McCloy
Hughes & Luce, L.L.P.
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