Opinion
Civil Action No. 04-0870 (RMC).
January 19, 2005
MEMORANDUM OPINION
David S. Kurke petitions for enforcement of an arbitration award against Defendants Oscar Gruss Son, Inc., a securities trading firm, and Philip Wagenheim, one of the firm's executives. Defendants have filed cross-motions to vacate the arbitration award, which Mr. Kurke opposes. There being no reason to refuse to enforce the award, the Court will grant Mr. Kurke's petition and deny Defendants' cross-motions to vacate.
I. BACKGROUND
Oscar Gruss Son, Inc. ("Oscar Gruss") is a member of the National Association of Securities Dealers, Inc. ("NASD") and numerous exchangesthroughout the country, including the New York Stock Exchange, Inc. ("NYSE"). David S. Kurke opened a securities account with Oscar Gruss in 1997 and maintained it until he closed it on April 30, 2000. Mr. Kurke signed an option agreement with Oscar Gruss in August 1999, in which he indicated that he had 15 years of investment experience, including twelve in options trading, that he was president of his own company, and that his annual income and liquid net worth were quite significant. His option agreement indicated that Mr. Kurke wished to engage in "all types of options transactions." Oscar Gruss Memorandum of Law in Opposition to Motion to Confirm and in Support of Cross-Motion to Vacate Arbitration Award ("O.G. Mot.") at 2. Oscar Gruss asserts that Mr. Kurke is "a wealthy and sophisticated investor." Id.
Unless otherwise noted, the facts are not in dispute.
Mr. Kurke invested approximately $500,000 in his options account and appears to have enjoyed significant gains in its value during the late 1990's market. Although Oscar Gruss sidesteps this unfortunate fact, there is no dispute about the fact that Christopher Fong, a broker at Oscar Gruss, executed hundreds of unauthorized trades in Mr. Kurke's account. Mr. Fong churned the account to an extraordinary degree, with an annual turnover rate of 65, when a turnover rate of 6 should alert a brokerage house to churning. See Affidavit of Geraldine Genco ¶ 3 ("Genco Aff.") in Support of Plaintiff David Kurke's Opposition to Oscar Gruss' and Wagenheim's Motions to Vacate Arbitration Award ("Among other things, I testified with my expert opinions that agent Christopher Fong has committed unauthorized trading and churning of David Kurke's account. In that connection, I testified that certain periods had a turnover rate of more than 65, whereas only 6 is the industry standard for churning. I testified that, in all my experience with 500 cases, it was one of the highest excessive trading cases that I had ever seen for such periods."). Mr. Kurke received regular reports on his account and believed that "the registered representative in charge of the account was engaged in extensive unauthorized trading." O.G. Mot. at 3, Ex. K at 794. He could understand the "basics" of these reports, although many of Mr. Fong's transactions were "way beyond what [Mr. Kurke] could understand." Id. at 702.
A significant part of Ms. Genco's arbitration testimony was not transcribed. Mr. Kurke submitted her affidavit in order to supplement the record.
Mr. Kurke complained to Mr. Fong about unauthorized trades, id. at 795-97, and was informed that he could not rescind them. Id. at 691-92. Mr. Fong never sought or obtained an agreement from Mr. Kurke which would allow him to engage in discretionary trading. Id. at 696. Although offered by Oscar Gruss, Mr. Kurke refused to sign a letter acknowledging the authority of trades made by Mr. Fong. Id. at 646-48. Short-term trading was not an investment objective for Mr. Kurke's account. Id. at 1288-1295.
As of December 31, 1999, Mr. Kurke had a net worth in his account of approximately $1.07 million. Id. at 852. One month later, as of January 31, 2000, the account had a net value of $628,601.74, and at the end of February 2000, it had a net value of $845,025.21. See O.G. Mot. at 4, Ex. I. The account crashed in March or April 2000 and was subsequently closed by Mr. Kurke.
Mr. Kurke filed a Statement of Claim with NASD against Oscar Gruss and Philip Wagenheim on or about January 24, 2003, complaining of the conduct of Mr. Fong and alleging, inter alia, supervisory negligence and liability under the doctrine of respondeat superior and as "control persons" under Section 20(a) of the Securities Exchange Act of 1934 ("Exchange Act"). See Plaintiff David Kurke's Opposition to Oscar Gruss's Motion to Vacate Arbitration Award ("Pl.'s Opp.") at 6. The legal theories put forth in the Statement of Claim, later amended to conform to the evidence at the hearing, contended that Defendants were liable for: (1) unauthorized trading, (2) churning, (3) breach of fiduciary duty under Virginia law; (4) violations of the Exchange Act; (5) violations of NASD Conduct Rules and NYSE Rules; (6) negligence, and (7) breach of contract and breach of an implied covenant of good faith and fair dealing. Id. Mr. Kurke sought $1,600,000 in compensatory damages and $2,000,000 in punitive damages against Oscar Gruss. Oscar Gruss signed the Uniform Submission Agreement on March 31, 2003. While Mr. Wagenheim never signed this Agreement, he submitted to the Arbitration Panel and participated fully.
The hearing before a tripartite Arbitration Panel was held on April 26-30 and May 3, 2004. The NASD Arbitration Panel heard testimony from a wide array of witnesses concerning Mr. Fong's conduct in relation to Mr. Kurke's account and other Oscar Gruss customers, as well as experts. Ms. Genco testified that Mr. Fong's lack of supervision over Mr. Kurke's account was "intentional" and "reckless." See Genco Aff. ¶ 4.
At the end of the hearing, the Chairman of the Arbitration Panel asked the parties if they had a fair and full opportunity to be heard. Through counsel, Oscar Gruss responded, "More than full and fair." O.G. Mot., Ex. K at 1482-83. Mr. Wagenheim's counsel stated, "Without a doubt. Without a doubt." Id.
By an award executed on May 21, 2004, the arbitrators awarded Mr. Kurke $648,000.000 from Oscar Gruss, plus interest at five percent (5%), accrued from May 1, 2000 to the date the award is paid in full. The Panel also awarded Mr. Kurke $58,000.000 from Mr. Wagenheim on the same terms. All claims for punitive damages and attorney's fees were denied. As the winning party, Mr. Kurke was relieved of all fees associated with using the NASD dispute resolution process and those costs were proportionately divided between Oscar Gruss and Mr. Wagenheim.
Mr. Kurke filed his petition to confirm the arbitration award on May 28, 2004. Oscar Gruss and Mr. Wagenheim filed motions to vacate the arbitration award on June 21, 2004 and June 14, 2004, respectively.
II. LEGAL STANDARDS
The Federal Arbitration Act ("FAA"), 9 U.S.C. § 1, et seq., was passed by Congress to "make valid and enforceable written provisions or agreements for arbitration of disputes arising out of contracts, maritime transactions, or commerce among the States or Territories or with foreign nations." Revere Copper Brass v. Overseas Private Inv. Corp., 628 F.2d 81, 83 (D.C. Cir. 1980) (citing the FAA Preamble, Pub.L. No. 68-401). Congress'sgoal "was to establish an alternative to the complications of litigation." Id. ( citing Wilko v. Swan, 346 U.S. 427, 431 (1953)). "As a result, judicial review of an arbitration award has been narrowly limited." Id.; see also Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355, 395-96 (2002) (noting that "judicial review of an arbitration award is very limited"). "Allowing undue challenges to arbitration awards would defeat the finality and speedy dispute resolution expected of the arbitration procedure." Revere Copper, 628 F.2d at 83 n. 1.
Errors of fact or misinterpretations of law are not sufficient to cause vacatur of an arbitration award. Teamsters Local Union No. 61 v. UPS, 272 F.3d 600, 604 (D.C. Cir. 2001) ("We have repeatedly recognized that `judicial review of arbitral awards is extremely limited' and that we `do not sit to hear claims of factual or legal error by an arbitrator as [we would] in reviewing decisions of lower courts.'" (citations omitted)). However, an arbitrator's "manifest disregard of the law" that is "governing," "defined," "explicit" and "clearly applicable" can lead a court to vacate an award. LaPrade v. Kiddeer Peabody Co., 246 F.3d 702, 706 (D.C. Cir. 2001):
The Court recognizes that labor arbitration, drawing its authority from collective bargaining agreements, and commercial arbitration under the FAA are related, but distinct, legal fora. Principles may nonetheless be borrowed from one to the other. See Revere Copper, 628 F.2d at 83 n. 1.
Manifest disregard of the law "means more than error or misunderstanding with respect to the law." Consequently, to modify or vacate an award on this ground, a court must find that (1) the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether and (2) the law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case.Id. at 706 (citations omitted); see also Duferco Int'l Steel Trading v. T. Klaveness Shipping, 333 F.3d 383, 392 (2d Cir. 2003) ("Even where explanation for an award is deficient or non-existent, we will confirm it if a justifiable ground for the decision can be inferred from the facts of the case.") (citation omitted). Under New York law, an arbitration award will be vacated only if it is made in manifest disregard of the law. See In re R.C. Layne Constr. Inc. (Stratton Oakmont, Inc.) 228 A.D.2d 45, 51 (N.Y.App.Div. 1st Dept. 1996); Greenberg v. Bear, Stearns Co., 220 F.3d 22, 28 (2d Cir. 2000). Virginia follows the same rule. See Va. East Co. v. N.C. Monroe Constr. Co., 2001 WL 700368 at *2 (Va. Cir.Ct. 2001). "The law and policy underlying a motion to vacate an arbitration award are the same under both New York and federal law," developed under the Federal Arbitration Act. Lange v. Sartorius, Inc., 160 A.D.2d 527, 554 (N.Y.App.Div. 1st Dept. 1990). "[U]nder the FAA, an arbitration award may be vacated if it is in `manifest disregard' of the law." Sawtelle v. Wadell Reed, Inc., 304 A.D.2d 103, 113 (N.Y.App.Div. 1st Dept. 2003) (citations and internal quotations omitted).
III. ANALYSIS
Oscar Gruss asserts that the arbitration award should be vacated, and that Mr. Kurke should be denied any recovery, because the award is contrary to established law. Oscar Gruss argues that the arbitration award fails to recognize that Mr. Kurke did not mitigate or minimize his damages, and that the doctrines of ratification, waiver and estoppel bar his recovery. Agreeing in whole with these arguments, Mr. Wagenheim adds that he never owned or controlled Oscar Gruss and was never a supervisor or manager over Christopher Fong, thereby making the award against him contrary to the law and the facts.
A. Oscar Gruss's Defenses
The mitigation argument rests on the premise that Mr. Kurke learned of irregularities in his account in the summer and fall of 1999 but did not then liquidate his account and realize an immediate profit, instead of suffering losses later from the same misconduct. Oscar Gruss cites Siegel v. McDonnell Co., 25 A.D.2d 382 (N.Y.App.Div. 1st Dept. 1966) for the following proposition:
If it be found that the margin purchases for plaintiff's account were without the plaintiff's authority and the defenses are not sustained, then plaintiff is entitled to damages measured by the difference between the market value of the securities in plaintiff's cash account immediately prior to the margin transaction and the market value of the securities in her margin account at the time plaintiff first acquired knowledge or should have known of the margin transactions.Id. at 384. In addition, Oscar Gruss argues that Mr. Kurke never made any written objection to the trading in his account within ten days, as required by the margin agreement he signed when he opened his account. See Modern Settings, Inc. v. Prudential Bache Securities, Inc., 936 F.2d 640, 645-46 (2d Cir. 1991) ("The purpose of the ten-day written complaint clause in the customer agreement is to require the customer to memorialize his or her complaint soon after receipt of the account statement rather than waiting to see if the trade is profitable.").
This argument fails. At base, it complains of the Arbitration Panel's interpretation of the margin agreement and the rest of the evidence presented at the arbitration hearing. The Court does not sit to review an arbitrator's interpretation of the contract before it. See Brootherhood of Maintenance of Way Employees v. I.C.C., 920 F.2d 40, 45 (D.C. Cir. 1990) (noting that an arbitrator's interpretation of a contract is entitled to "extreme deference" and "so long as the arbitrator's award `draw[s] its essence' from the implementing agreement, it must be affirmed.") (citations omitted).
In addition, Oscar Gruss contends that Mr. Kurke cannot recover due to the controlling common law principles concerning estoppel, waiver and ratification. It argues that "a person is deemed to have ratified and is estopped from challenging a previously unauthorized act if he accepts the benefits of the act with complete knowledge of the relevant facts or fails to promptly disavow the act upon learning of it." Oscar Gruss Reply Memorandum of Law in Further Support of Cross-Motion to Vacate Arbitration Award ("O.G. Reply") at 13. There are two problems with this argument. First, Mr. Kurke testified that he complained of the unauthorized acts to Mr. Fong, the agent of Oscar Gruss, and therefore acted promptly to the extent that he could understand what Mr. Fong was doing. Second, Oscar Gruss has "unclean hands," a principle of equity jurisdiction which prevents it from raising equitable defenses. See United States v. Phillip Morris Inc., 300 F.Supp.2d 61, 74-75 (D.D.C. 2004).
To the extent that Oscar Gruss's "waiver and ratification defenses are based upon Kurke's failure to comply with the contract between the parties," O.G. Reply at 15-16, and not upon principles of equity, such arguments must fail because contract interpretation is left to the arbitrators to determine. See Brotherhood of Maintenance of Way Employees, 920 F.2d at 45. In the absence of an arbitrator's "manifest disregard of the law," LaPrade, 246 F.3d at 706, a court should defer to his or her reading of a private contract, even if that reading is implausible. See United Paperworkers Int'l Union v. Misco, Inc., 484 U.S. 29 (1987) ("as long as the arbitrator is even arguably construing or applying the contract and acting within the scope of his authority, that a court is convinced he committed serious error does not suffice to overturn his decision"); United Steelworkers v. Enterprise Wheel Car Corp., 363 U.S. 593, 599 (1960) ("so far as the arbitrator's decision concerns construction of the contract, the courts have no business overruling him because their interpretation of the contract is different from his.").
Accordingly, because nothing in the record reflects that the arbitrators manifestly disregarded clearly applicable law in their interpretation of the contract between the parties, this Court will not vacate the arbitration award. As noted by this circuit in Revere Copper, "[t]he strong federal policy in favor of voluntary commercial arbitration would be undermined if courts had the final say on the merits of the award." 628 F.2d at 84.
B. Philip Wagenheim's Defenses
Before the Arbitration Panel, Mr. Kurke asserted that Mr. Wagenheim was an "owner of the Oscar Gruss branch" and the "boss" and "supervisor" of Mr. Fong. Statement of Claim at ¶ 1. Mr. Wagenheim argues here that "there could be absolutely no support whatsoever for the [P]anel to have awarded Mr. Kurke any money based upon his claim that I was a supervisor of Mr. Fong," because the testimony of Oscar Gruss managers and supervisors all deny that Mr. Wagenheim was such a supervisor over Mr. Fong. Affidavit of Philip Wagenheim in Opposition to Petition to Confirm In Support of Motion to Vacate Arbitration Award ("Wagenheim Aff.") at ¶ 11. He asserts the same dearth of evidence to support any conclusion that he was an owner of the Oscar Gruss branch. Id. ¶¶ 13-15.
When Mr. Wagenheim filed his affidavit, he was proceeding pro se. When he filed his Reply to Mr. Kurke's Opposition to his motion to vacate the arbitration award, he was represented by counsel.
Mr. Kurke argues that Mr. Wagenheim cannot rely on the arguments related to waiver, mitigation, ratification and estoppel made by Oscar Gruss. The Court disagrees and accepts the arguments briefed by Oscar Gruss as if briefed individually by Mr. Wagenheim. For the reasons set forth in Section III-A, the Court comes to the same conclusion with respect to Mr. Wagenheim and does not find merit in these defenses.
Were Mr. Wagenheim's description of the transcript accurate, his argument would have more weight. However, Mr. Kurke testified about conversations that he allegedly had with Mr. Wagenheim concerning Mr. Wagenheim's role and authority at Oscar Gruss. Mr. Kurke also produced tape recordings of telephone conversations to the same effect. Mr. Kurke testified that Mr. Wagenheim told him that he [Wagenheim] owned the company, and that he and a partner had set up the branch office. See O.G. Mot., Ex. K at 771. Mr. Kurke also testified that Mr. Wagenheim told him "that he made the hiring decisions, he knew that Chris [Fong] had a blemish on his, uh, background, and he looked into it and felt it wasn't significant and chose to hire him anyway." Id. at 772. Finally, Mr. Kurke testified to Mr. Wagenheim's statement that Mr. Fong had no money and that, instead, Mr. Wagenheim was "going to end up paying for it. It's going to come out of my pocket." Id. at 774.
In one tape-recorded telephone conversation, Amy Galanti, Branch Manager of Oscar Gruss, stated that Mr. Wagenheim was one of the firm's Senior Managing Partners and that he was Mr. Fong's "boss." Id. at 265. In tape recordings that Mr. Wagenheim authenticated as his own voice, he stated, "But you know, I run the place. . . ." Id. at 269. As to Branch Managers Amy Cernitz and Vic Sarnatura, Mr. Wagenheim stated, "These are all people that I employ. These are people that I pay their paycheck — or that Oscar Gruss pays their paychecks — but through funds that we give them." Id. at 270. Mr. Wagenheim told Mr.Kurke, "[T]hink of Oscar Gruss as the parent company," id. at 271, and, "Now I just own, uh, the operating company under Oscar Gruss." Id. at 275.
In live testimony, Ms. Galanti contradicted the tape recording. Id. at 1332.
With this record, the Court cannot say that the Arbitration Panel had no basis for its conclusion that Mr. Wagenheim shared some liability to Mr. Kurke. Indeed, whether the Panel concluded that Mr. Wagenheim was responsible for supervising Mr. Fong and/or was an owner of some portion of the firm — or whether he should not now be permitted to deny his prior statements of such authority — are questions that do not need to be parsed for the award against Mr. Wagenheim to be sustained. See GMS Group v. Benderson, 326 F.3d 75, 77 (2d Cir. 2003) (even a "clear error in fact" is insufficient to warrant disturbing arbitration award).
Plaintiff has requested that this Court award attorney's fees because "Oscar Gruss has disingenuously filed a motion to vacate" and did not have a "reasonable chance of success." Pl's Opp. at 33. "[U]nder the American rule, absent an authorizing statute or contractual commitment, courts ought to only award fees where a case was in bad faith, vexatious, wanton, or undertaken for oppressive reasons justifying the imposition of attorney's fees." Washington Hospital Center v. Service Employees Int'l Union, Local 722, AFL-CIO, 746 F.2d 1503, 1509 (D.C. Cir. 1984) (citations omitted). The Court finds no such circumstance and Plaintiff's request will accordingly be denied.