Rich v. Spartis, No. 06-1723 (2d Cir. 2008)
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06-1723-cv Rich v. Spartis 1 2 UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT 3 August Term 2007 4 Docket Nos. 06-1723-cv(L); 06-1814-cv(XAP) 5 Argued: 6 __________________________________________________________ 7 ELIZABETH H. RICH and DONALD RICH, 8 9 10 Decided: February 8, 2008 Plaintiff-Appellants, v. PHILLIP L. SPARTIS and AMY JEAN ELIAS, 11 12 13 September 18, 2007 Defendants-Appellees-Cross-Appellants, SALOMON SMITH BARNEY, INC., FORMERLY KNOWN AS CITIGROUP GLOBAL MARKETS, INC., 14 Defendants-Appellees. 15 __________________________________________________________ 16 Before: 17 18 19 20 21 22 23 24 25 Appeal and cross appeal from a judgment entered in the United States District Court for the Southern District of New York (Cote, J.) vacating NASD arbitration panel award of damages for brokerage account losses against individual stock brokers and their employer and confirming the panel s dismissal of the crossclaims of the brokers for indemnification from their employer, the District Court having determined, inter alia, that the claims for losses sustained by plaintiff in their brokerage account were released by a court order approving settlement of a class action. MINER, CABRANES, and STRAUB, Circuit Judges. 26 Judgment vacated and remanded with instructions. 27 Judge Straub concurs in a separate opinion. 1 1 2 3 4 5 CULVER V. HALLIDAY (Kathryn V. Eberle, on the brief), Stoll, Keenon, & Ogden PLLC, Louisville, Kentucky, for Appellants. 6 7 8 9 10 SUSANNA BUERGEL (Eric S. Goldstein, on the brief), Paul, Weiss, Rifkind, Wharton & Garrison, New York, NY, for Appellees. 11 12 13 14 DAVID I. GREENBERGER, Liddle & Robinson, New York, New York, for Appellees-CrossAppellants. 15 2 1 MINER, Circuit Judge: 2 Plaintiffs-appellants, Elizabeth H. Rich and her husband, 3 Donald Rich (the Riches ), appeal from a judgment entered in the 4 United States District Court for the Southern District of New 5 York (Cote J.) vacating an award made in their favor by an 6 arbitration panel established under rules adopted by the National 7 Association of Securities Dealers ( NASD ). 8 Sec. Litig., No. 02-3288, 2006 WL 709101 (S.D.N.Y. Mar. 21, 9 2006). See In re WorldCom The award was made against defendant-appellee Solomon 10 Smith Barney, Inc. ( SSB ), now known as Citigroup Global 11 Markets, Inc. ( Citigroup ), and against Philip L. Spartis and 12 Amy Jean Elias, stockbroker representatives employed by SSB. 13 at *1. 14 as it confirms the arbitration panel s dismissal of their cross 15 claims for indemnity against Citigroup. 16 determined, inter alia, that the arbitration award was solely for 17 losses sustained by the Riches that were released by a court 18 order approving settlement of a class action. 19 Sec. Litig., 2006 WL 709101, at *1. 20 Court concluded that the award of damages to the Riches must be 21 vacated on the ground that the arbitrators exceeded their 22 authority when they granted damages to the Riches. . . . 23 at *4. 24 claim, the District Court concluded that Spartis and Elias failed 25 to show any basis for vacating the arbitration panel s decision. 26 Id. Id. Spartis and Elias cross appeal from the judgment insofar The District Court See In re WorldCom Accordingly, the District Id. As to the arbitration panel s dismissal of the cross- We find that the District Court could not have determined 3 1 that the arbitration award relied solely on WorldCom losses based 2 on the record before us. 3 order the arbitration panel to clarify the award. BACKGROUND 4 5 We remand to the District Court to The Riches are residents of Louisville, Kentucky. As a 6 long-term employee of WorldCom, Inc. ( WorldCom ), Mrs. Rich was 7 provided with stock options as part of her compensation. 8 Beginning in 1998, employees of WorldCom desiring to exercise 9 their stock options were required to do so through the Atlanta, 10 Georgia office of SSB. 11 1999, Mrs. Rich exercised stock options and immediately sold the 12 acquired shares. 13 Plan (the Plan ) for WorldCom employees. 14 employees would exercise their options and hold the shares for 15 later sale pending anticipated increases in share prices. 16 holding the shares long enough, the employee shareholders would 17 be able to have the increase in value taxed at capital gain 18 rates. 19 On July 2, 1998, and again on July 17, Thereafter, SSB proposed an exercise and hold Through the Plan, the By In August of 1999, the Riches subscribed to the Plan by 20 opening an account with SSB. They allege that they were advised 21 in all matters relating to their account by Mr. Spartis and Ms. 22 Elias. 23 shares of WorldCom stock at $4.60 for 6,012 shares and $17.87 for 24 4,000 shares. 25 $83.19. 26 acquisition with funds borrowed from SSB by means of a margin On August 5, 1999, Mrs. Rich exercised options for 10,012 The closing price for each share that day was The Riches held their shares after financing the 4 1 account. On October 6, 1999, Mrs. Rich exercised options for 2 6,000 shares of WorldCom stock at an acquisition cost of $8.94 3 per share. 4 The Riches again paid for the shares through the margin account 5 that they had established and again held the acquired shares as 6 they claim they were advised to do. The closing price per share on that date was $70.87. 7 On August 7, 1999, Mrs. Rich sold 10,012 shares of WorldCom 8 stock and used the proceeds to purchase 11,700 shares of Sprint, 9 Inc. ( Sprint ) on that date. Allegedly, Mrs. Rich was advised 10 that the exercise and hold strategy would be advanced by the 11 Sprint purchase, since it was anticipated that Sprint would be 12 merged into WorldCom. 13 options to purchase 11,514 shares of WorldCom at $5.82 per share. 14 The closing price per share on that day was $45.94. 15 this purchase, the Riches again used their margin account to 16 borrow the necessary funds from SSB. 17 through the SSB Plan one more time. 18 exercised options for 13,500 shares of WorldCom at $9.00 per 19 share, with the closing price on that day being $41.25 per share. 20 This transaction also was financed through the margin account. 21 On January 31, 2000, Mrs. Rich exercised To finance Mrs. Rich exercised options On April 18, 2000, she The Riches received margin calls in August and September of 22 2000 and responded with cash and securities, including 23 liquidation of securities held in their account, to meet the 24 calls. 25 then began to sell the WorldCom shares to meet the margin calls. 26 The Riches sold a total of 12,450 shares of WorldCom between They first liquidated their 11,700 shares of Sprint and 5 1 September 13 and September 25, 2000. On September 26, they 2 directed the sale, pursuant to a stop-loss order, of the 3 remaining 22,030 shares of WorldCom in their account. 4 was sold that day for $25.50 per share. 5 $25,000 in brokerage commissions and nearly $100,000 in margin 6 interest during the thirteen months they maintained their account 7 at SSB. 8 $25.50 per share during that period. 9 Sprint stock fall from $64.00 per share on the date of purchase The stock The Riches paid SSB over The Riches saw their WorldCom stock fall from $83.00 to They saw the price of their 10 to $33.75 on the date of sale, August 11, 2000. 11 their losses to the investment advice provided by SSB and its 12 registered representatives, Spartis and Elias, the Riches 13 demanded arbitration of their claims for the losses sustained by 14 filing a Statement of claims against SSB with NASD Dispute 15 Resolution, Inc. 16 SSB, Spartis, Elias, and three other employees of SSB who were 17 dismissed as respondents prior to the arbitration award. 18 Attributing Named as respondents in the arbitration were The Statement of claims was filed on June 19, 2002, and 19 included, generally, the historical facts described above. 20 claimants in the arbitration, the Riches sought compensation from 21 the respondents for failing to advise them, inter alia, as to: 22 the facts that would enable them to adequately assess the risks 23 of the SSB Option Plan ; the risks of drops in the stock prices 24 of WorldCom and Sprint presented by the Plan; the risks posed by 25 failing to diversify their stock holdings; the risks of utilizing 26 a margin account; a suitable investment strategy other than the 6 As 1 SSB Option Plan; and the conflict of interest stemming from the 2 relationship between WorldCom and SSB as underwriter, market 3 maker, and employer of Telecommunications Analyst Jack Grubman. 4 The Riches also charged SSB and the manager of the Atlanta office 5 with failing to adequately supervise Spartis and Elias. 6 bases for the Riches claims were set forth in six separate 7 Counts of the Statement of claims. 8 Suitability; (ii) Lack of Supervision; (iii) Dishonest and 9 Unethical Practice; (iv) Breach of Fiduciary Duty; (v) They included: Detailed (i) Lack of 10 Negligence; and (vi) Gross Negligence. 11 $1,312,141.08 were claimed, along with punitive damages, 12 attorneys fees and costs, and interest. 13 Compensatory damages of Substantially denying the allegations made in the Statement 14 of claims, SSB filed its Statement of Answer with Affirmative 15 Defenses on September 6, 2002. 16 to Dismiss and Cross-Claim, filed by Spartis and Elias on 17 September 6, 2002, included affirmative defenses, denials of the 18 allegations in the Statement of claims, an application for 19 dismissal of the claim, and a request for indemnification relief 20 from SSB. 21 Agreements submitting the Riches claims to arbitration in 22 accordance with the Rules of the NASD. 23 NASD convened a three-person arbitration panel in Louisville, 24 Kentucky. 25 consisted of Robert P. Ross, Esq., designated Public Arbitrator, 26 Presiding Chair, Amelia F. Adams, Esq., designated Public A Statement of Answer with Motion All parties concerned executed Uniform Submission On April 19, 2004, the The panel, constituted according to NASD Rules, 7 1 Arbitrator, and Todd Parker Lowe, designated Non-Public 2 Arbitrator. 3 at hearings that were held from April 19 to April 22, 2004 and on 4 December 13 and 14, 2004. 5 Elias; William Hobby and Michael Grace, employees of SSB; Mrs. 6 Rich; Dr. Craig J. McCann, a securities consultant; and John 7 Fazio, Senior Vice President of Citigroup. Testimony was taken and various motions were made Sworn as witnesses were Spartis; 8 On December 14, 2004, counsel for Spartis and Elias brought 9 to the panel s attention the lack of any evidence that Mrs. Rich 10 had opted out of the WorldCom Securities Class Action, a 11 necessary element to succeed in her arbitration claim. 12 WorldCom Sec. Litig., 2006 WL 709101, at *1. 13 had certified the plaintiff class in the WorldCom Securities 14 litigation on October 24, 2003. 15 Litig., 219 F.R.D. 267 (S.D.N.Y. 2003). 16 was disseminated to the plaintiff class on December 11, 2003. 17 The Citigroup defendants, including SSB, entered into a proposed 18 class settlement with the lead plaintiff on or about July 1, 19 2004, and a Notice of Proposed Settlement was distributed to the 20 class on August 2, 2004. 21 District of New York ultimately set September 1, 2004 as the firm 22 date for potential class members to seek exclusion from the 23 plaintiff class. 24 See In re The District Court See In re WorldCom, Inc. Sec. A Notice of Class Action The District Court in the Southern On November 12, 2004, approximately one month prior to the 25 final session of the arbitration panel considering the claims of 26 the Riches, the District Court issued its Judgment Approving 8 1 Settlement and Dismissing Action Against the Citigroup 2 Defendants in the securities class action case. 3 WorldCom Sec. Litig., No. 02-cv-3288 (S.D.N.Y. Nov. 12, 2004). 4 The judgment enjoined class members from instituting, commencing 5 or prosecuting, either directly or in any other capacity, any 6 claim arising out of the matters giving rise to this Action. 7 Id. at ¶ 10. 8 include: 9 10 11 12 13 14 15 16 17 18 See In re Released Claims is defined in the Judgment to [A]ll claims . . . arising out of or relating to investments (including, but not limited to, purchases, sales, exercises, and decisions to hold) in securities issued by WorldCom, and/or in options or derivative instruments based in whole or in part on the value of securities issued by WorldCom . . ., including without limitation all claims arising out of or relating to any analyst research reports or other statements made or issued by the Citigroup Defendants concerning WorldCom . . . . 19 Id. at ¶6 (a). 20 well as its Released Parties was defined to include SSB as former employees. 21 After hearing arguments on December 14, 2004 regarding the 22 effect of the foregoing judgment on the arbitration proceeding, 23 the Presiding Chair of the Arbitration Panel stated as follows: 24 25 26 27 28 29 30 31 32 33 34 35 36 37 Here s my ruling: We ll go ahead, and we will finish this arbitration and we will reach a decision. I presume that the respondents can go to the court in the class action and say, Here s the arbitrators decision; hold it void, because she s a member of the class. That being so, we will attempt to reach our decision based upon, one, it not be void; and, two, it being void. So we will have I m thinking right now, we are going to reach a decision, and I m thinking right now we will have two decisions. One as it relates to WorldCom and everything else in the account; one as it relates not to WorldCom and the class action suit, so that if they do go to void, there will be a remainder of the decision that remains valid. 9 1 The Arbitration Panel issued its Award on January 20, 2005, 2 finding SSB, Spartis, and Elias jointly and severally liable to 3 the Riches for $315,000 in compensatory damages, $63,000 in pre- 4 judgment interest, $50,000 in attorneys fees, and $20,000 in 5 costs, with post-judgment interest to be paid at the rate of 12% 6 per annum if the Award were not paid within 30 days. 7 dismissed with prejudice the cross-claims of Spartis and Elias 8 for indemnification. 9 statement of the reasoning behind its compensatory damages The Panel Although the Panel did not provide a 10 determination, it did include in its Award a Case Summary that 11 included the following language: 12 Respondents gave them unsuitable investment advice to purchase 13 WorldCom stock by means of a margin account with money borrowed 14 from Salomon Smithy [sic] Barney, Inc. 15 that Respondents never discussed the risks associated with the 16 holding of the WorldCom shares. 17 Claimants alleged that Claimants also alleged By an action filed in the Circuit Court of the Commonwealth 18 of Kentucky, Jefferson County, on January 31, 2005, the Riches 19 sought confirmation of the Award. 20 thereafter was removed to the United States District Court for 21 the Western District of Kentucky at the behest of Spartis and 22 Elias. 23 pending in federal court in Kentucky, counsel for Spartis and 24 Elias, by letter to Judge Cote of the Southern District of New 25 York, who had directed the entry of judgment approving the 26 settlement in the WorldCom Class Securities Action, advanced the On February 7, 2005 the action On February 2, 2005, while the action to confirm was 10 1 argument that the judgment barred the enforcement of the 2 Arbitration Award and requested the court to schedule a 3 conference. 4 February 9, 2004, ordered the Riches to show cause why they 5 should not be enjoined from enforcing their NASD arbitration 6 award against Mr. Spartis and Ms. Elias. 7 February 11, 2005, Citigroup sought to join in the application 8 made by Spartis and Elias. 9 In response, the District Court in New York on By letter dated At the show cause hearing held before the District Court on 10 February 25, 2005, the Riches conceded that they should be 11 enjoined from enforcing any portion of their Award that related 12 to their investments in WorldCom securities. 13 District Court, by Order dated March 3, 2005, enjoined the Riches 14 from seeking to enforce the Award with respect to all claims of 15 every nature and description, known and unknown, arising out of 16 or relating to investments (including, but not limited to, 17 purchases, sales, exercises, and decisions to hold) in securities 18 issued by WorldCom. 19 provision: IT IS HEREBY . . . ORDERED that the arbitration panel 20 that issued the award is not enjoined from clarifying whether any 21 portion of the Award relates to claims not covered by the Rich 22 Injunction. 23 Accordingly, the The injunction order included the following It appears that the NASD provided the Panel with a copy of 24 the foregoing order. Upon application of Citigroup, and after 25 receiving the submissions of the parties in connection with their 26 quest for clarification as permitted by the District Court, the 11 1 Panel on March 15, 2005 issued, without explanation, a one-line 2 decision determin[ing] that the Motion for Clarification is 3 denied. 4 Western District of Kentucky, where the action to confirm the 5 Award remained pending, transferred the action to the Southern 6 District of New York by Order dated April 12, 2005. 7 court, citing 28 U.S.C. § 1404, determined that the interest of 8 justice and the convenience of parties would be served by the 9 transfer because the New York court could decide both issues of Thereafter, the United States District Court for the The Kentucky 10 whether to confirm the award and whether confirmation violates 11 the injunction. 12 parties time to litigate these issues in two separate cases. 13 It would be inconvenient and a waste of the Spartis and Elias thereafter moved in the Southern District 14 of New York to vacate the Arbitration Award in its entirety. 15 March 21 2005, the District Court issued its Memorandum, Order 16 and Opinion vacating the Award insofar as it provided for 17 recovery of damages by the Riches and confirming the Award 18 insofar as it denied the cross-claims of Spartis and Elias. 19 District Court determined that the Award to the Riches was 20 intended to compensate them only for losses arising out of the 21 advice that Mrs. Rich exercise her options and hold the stock in 22 WorldCom. 23 According to the District Court, that advice was the focus of 24 the claim, the evidence at the hearing, and the summation 25 arguments of counsel. 26 On The See In re WorldCom Sec. Litig., 2006 WL 709101, at *4. Id. Turning to the Award itself, the District Court found that 12 1 [t]he award s own description of the claims focused exclusively 2 on WorldCom and described no other stock. 3 of the District Court, the decision of the Arbitration Panel to 4 issue just one Award, having recognized its power to issue two 5 Awards, and then to decline to clarify the Award after the 6 Arbitrators were informed that no recovery could be had for 7 WorldCom losses, provided further evidence that the entirety of 8 the award was for WorldCom trading losses. 9 Court concluded that the award of damages to the Riches must be Id. Id. In the opinion The District 10 vacated on the ground that the arbitrators exceeded their 11 authority when they granted damages to the Riches based on their 12 WorldCom trading losses. 13 the cross-claims of Spartis and Elias, the District Court 14 concluded that, [g]iven the strong presumption of regularity to 15 which an arbitration award is entitled, Spartis and Elias have 16 not shown that the Panel lacked authority to issue an award and 17 that the dismissal of their cross-claim should be vacated. 18 19 Id. In confirming the dismissal of Id. This timely appeal and cross-appeal from the judgment of the District Court followed. 20 ANALYSIS 21 On appeal, the Riches again acknowledge that they cannot 22 recover for their losses in WorldCom, but they contend that other 23 losses in their SSB account justify the Award made by the 24 arbitration panel. 25 award in their favor, the District Court recognized that as a 26 theoretical matter, the losses sustained by the Riches were large Although ultimately vacating the arbitration 13 1 enough to permit the $315,000 to be attributed to non-WorldCom 2 losses. 3 seeing the Award as encompassing losses attributable to 4 securities in the Riches account other than WorldCom. 5 thing, Dr. McCann, damages expert for the Riches, testified 6 before the panel that his report, with exhibits showing the 7 losses in the Riches account, would enable the panel to separate 8 the WorldCom losses from losses attributable to other securities. 9 For another, Citigroup s expert, John Fazio, testified before the Id. But there is more than a theoretical basis for For one 10 panel that losses in the Sprint transactions totalled $448,000. 11 This sum equals the precise total of the panel s Award $315,000 12 (compensatory damages) plus $63,000 (pre-judgment interest) plus 13 $50,000 (attorneys fees) plus $20,000 (costs). 14 The Riches are also aided by the general rule that 15 [a]rbitration awards are subject to very limited review in order 16 to avoid undermining the twin goals of arbitration, namely, 17 settling disputes efficiently and avoiding long and expensive 18 litigation. 19 Microsystems Corp., 103 F.3d 9, 12 (2d Cir. 1997). 20 that the Federal Arbitration Act ( FAA ), 9 U.S.C. §§ 1 307, 21 creates a strong presumption in favor of enforcing arbitration 22 awards and have gone so far as to say that courts have an 23 extremely limited role in reviewing arbitration awards. 24 Street Assoc., L.P. v. Becker Paribas, Inc., 27 F.3d 845, 849 (2d 25 Cir. 1994) (citations omitted). 26 an arbitration award should be enforced, despite a court s Willemijn Houdstermaatschappij, BV v. Standard We have noted Put another way, Wall 14 1 disagreement with it on the merits, if there is `a barely 2 colorable justification for the outcome reached. 3 Michaels Realty Corp. v. Local 32B-32J Serv. Employees Int l, 954 4 F.2d 794, 797 (2d Cir. 1992) (quoting Andros Compania Maritima, 5 S.A. v. Marc Rich & Co., 579 F.2d 691, 704 (2d Cir. 1978)). 6 Landy When an arbitration panel makes a lump sum award without 7 further explanation, courts generally will not look beyond the 8 lump sum award in an attempt to analyze the reasoning processes 9 of the arbitrators. Barbier v. Shearson Lehman Hutton, Inc., 10 948 F.2d 117, 121 (2d Cir. 1991) (internal quotations omitted); 11 see also, Sobel v. Hertz, Warner & Co., 469 F.2d 1211, 1214 (2d 12 Cir. 1972) (stating that there is no general requirement that 13 arbitrators explain the reasons for their award. ) 14 determination by the NASD panel in the case at bar is, 15 essentially, a lump sum award even though the sum is broken down 16 into component parts. 17 The The Riches also are entitled to the benefit of the burden of 18 proof that the FAA imposes upon SSB, Spartis, and Elias as 19 challengers of the Award. 20 848. 21 upon the application of any party to the arbitration, are 22 limited to the following grounds: See Wall Street Assoc., 27 F.3d at According to the FAA, challenges to an arbitration award 23 24 (1) where the award was procured by corruption, fraud, or undue means; 25 26 (2) where there was evident partiality or corruption in the arbitrators, or either of them; 27 28 (3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause 15 1 2 3 4 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; or 5 6 7 8 (4) 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. 9 9 U.S.C. § 10(a). 10 The District Court concluded that the arbitrators exceeded 11 their powers by granting damages to the Riches for their WorldCom 12 trading losses. 13 *4. 14 the Award encompassed only losses in WorldCom, any claim for such 15 losses having been released by the WorldCom Securities Litigation 16 Judgment. 17 Court correctly determined that the arbitration panel exceeded 18 its authority, SSB, Spartis, and Elias contend that the panel 19 acted in manifest disregard of applicable law. 20 manifest disregard is not included in § 10(a) of the FAA as a 21 ground for vacating an arbitration award, we have noted that if 22 the arbitrators simply ignore the applicable law, the literal 23 application of a `manifest disregard standard should presumably 24 compel vacation of the award. 25 In re WorldCom Sec. Litig., 2006 WL 709101, at That conclusion, of course, is grounded in the finding that In addition to arguing on appeal that the District Although Sobel, 469 F.2d at 1214. In the same vein, we have said that where a reviewing court 26 is inclined to find that arbitrators manifestly disregarded the 27 law or the evidence and that an explanation, if given, would have 28 strained credulity, the absence of an explanation may reinforce 29 the reviewing court s confidence that the arbitrators engaged in 16 1 manifest disregard. Halligan v. Piper Jaffray, Inc., 148 F.3d 2 197, 204 (2d Cir. 1998); see also NLRB v. Bristol Spring Mfg. 3 Co., 579 F.2d 691, 704 (2d Cir. 1978). 4 which we affirmed a finding that a panel award was issued 5 partially in manifest disregard of the law, we opined that an 6 arbitral award may be vacated for manifest disregard only where a 7 petitioner can demonstrate `both that (1) the arbitrators knew of 8 a governing legal principle yet refused to apply it or ignored it 9 altogether, and (2) the law ignored by the arbitrators was well- In a recent decision in 10 defined, explicit, and clearly applicable to the case. Porzig 11 v. Dresdner, Kleinwort, Benson, N. Am., LLC, 497 F.3d 133, 139 12 (2d Cir. 2007) (internal citations omitted). 13 We simply are not yet in a position to determine whether the 14 Award of the NASD arbitration panel either exceeded its powers or 15 was in manifest disregard of the law. 16 confusion occasioned by the circumstances surrounding the 17 delivery of the unexplained lump sum award in this case. 18 Although, as has been shown, an arbitration panel may render a 19 lump sum award without explaining its reasons, the unique 20 situation presented here dictates that the Award be clarified. 21 All parties agree that the Riches cannot recover for their 22 WorldCom trading losses, but it is not clear whether those losses 23 are reflected in all, part, or none of the Award. 24 missing is an assessment by the arbitration panel sufficient to 25 enable us to determine the validity of the Award in this unusual 26 case. And that is because of the What is The confusion in the Award arises from the actions of the 17 1 2 panel itself. Before the Award was made, and on the last day of the 3 arbitration panel hearing, the WorldCom Securities Litigation 4 Judgment releasing all claims against SSB and its employees was 5 brought to the attention of the panel. 6 including the Presiding Chair, apparently are lawyers. 7 Confronted with the judgment, however, the Presiding Chair failed 8 to recognize the force of the Judgment and ruled that the panel 9 would go ahead, and . . . finish this arbitration and . . . Two of the panel members, 10 reach a decision. 11 Elias] can go to the court in the class action and say that the 12 arbitrators decision is void. 13 panel would attempt to reach our decision based upon, one, it 14 not be void; and two, it being void. 15 panel, speaking through its Chair, seemed to leave to the 16 district court the decision as to whether the Award would be 17 barred by the WorldCom judgment. 18 The Chair presume[d] that [SSB, Spartis, and The Chair went on to say that the By the foregoing, the Continuing with his ruminations, the Chair then introduced 19 further confusion into his Ruling by speaking in terms of two 20 decisions by the panel as follows: 21 22 23 24 25 I m thinking right now we will have two decisions. One as it relates to WorldCom and everything else in the account; one as it relates not to WorldCom and the class action suit, so that if they do go to void, there will be a remainder of the decision that remains valid. 26 Despite the thinking of the Chair, the Award was made in terms 27 of one, unexplained lump sum. 28 District Court, that only WorldCom was mentioned in the panel While it is true, as noted by the 18 1 decision, that mention was made only in the context of the Case 2 Summary discussing the contentions of the parties. 3 Summary of the contentions of the parties clearly was not 4 complete, since the Statement of claims, as well as testimony at 5 the hearing, referred to trading losses in Sprint. 6 However, the Evidence that the parties were confused by the Award is 7 found in the application by Citigroup to the panel for 8 clarification of the Award and the submissions of the parties in 9 connection therewith. Although the District Court found that the 10 denial of the motion without explanation, combined with the two- 11 decision comments of the Presiding Chair, demonstrated that the 12 entirety of the Award represented WorldCom trading losses, see In 13 re WorldCom Sec. Litig., 2006 WL 709101, at *4, these findings 14 also support the proposition that the Award was not for WorldCom 15 losses or not for WorldCom losses alone. 16 Ample authority supports our conclusion that the District 17 Court should remand this case to the arbitration panel for 18 clarification. 19 1987), we declared that [i]ndefinite, incomplete, or ambiguous 20 awards are remanded so that the court will know exactly what it 21 is being asked to enforce. 22 Co. v. Seagull Compania Naviera, S.A., 774 F.2d 64, 67 (2d Cir. 23 1985)). 24 require the arbitrators to state their reasons, but only to 25 explain their indefinite, incomplete, and ambiguous award in a 26 way sufficient to allow effective judicial review. In Ottley v. Schwartzberg, 819 F.2d 373 (2d Cir. 819 F.2d at 376 (quoting Am. Ins. In ordering a remand for clarification here, we do not 19 See Siegel v. 1 Titan Indus. Corp., 779 F.2d 891, 894 (2d Cir. 1985). 2 emphasize that the difficulty here lies not alone in the fact 3 that a lump sum has been awarded without explanation but in the 4 unique circumstances of this case where, as recognized by the 5 parties previously, it is impossible to tell what the lump sum is 6 for. 7 We Because the lack of clarity in the arbitration panel s award 8 does not permit us at this time to determine whether the Award 9 was issued in manifest disregard of the law, see Hardy v. Walsh 10 Manning Sec., L.L.C., 341 F.3d 126, 129 30, 134 (2d. Cir. 2003), 11 or exceeded the powers of the arbitrators, see Siegal, 779 F.2d 12 at 894, we will remand this case to the District Court with 13 instructions to remand to the NASD arbitration panel for 14 clarification of the Award. 15 Omaha Indemnity Co., 943 F.2d 327, 335 (3d Cir. 1991). 16 Specifically, the panel should be ordered to specify whether the 17 WorldCom trading losses suffered by the Riches are represented in 18 all, part, or none of the lump-sum Award and, if part, the amount 19 thereof. 20 parties to seek clarification before it ruled on the motion to 21 confirm but believe the better practice would have been, as we 22 now require, to order rather than permit clarification by the 23 NASD arbitration panel. 24 the clarified award, reconsider its earlier decision in light 25 thereof, and make such further determination as it may deem 26 proper. See Colonial Penn Ins. Co. v. The We recognize that the District Court permitted the The District Court should then review The foregoing is not intended to express any opinion as 20 1 to what that determination should be or as to the merits of the 2 claims and cross-claims submitted to the arbitrators. CONCLUSION 3 4 For the reasons set forth above, the judgment of the 5 District Court is vacated, and the case is remanded to the 6 District Court for further proceedings consistent with this 7 opinion. 8 challenges made by Spartis and Elias to the District Court s 9 confirmation of the arbitration panel s denial and dismissal of In view of the foregoing, we do not rule on the 10 their cross claims for indemnification. Under the procedure set 11 forth in United States v. Jacobson, 15 F.3d 19, 21-22 (2d Cir. 12 1994), we direct that the mandate shall issue forthwith and that 13 jurisdiction shall be restored to this Court upon a letter 14 request from any party. 15 the case is to be sent to this panel. Upon such a restoration of jurisdiction, 21 1 STRAUB, Circuit Judge, concurring: 2 I agree with the majority with respect to the disposition of 3 this case. I write separately to emphasize that while our role in 4 reviewing an arbitration award is extremely limited, this case 5 presents the type of extraordinary circumstances that warrant 6 remand. 7 The majority reasons that remand is required here because 8 the lack of clarity in the arbitration panel s award does not 9 permit us at this time to determine whether the Award was issued 10 in manifest disregard of the law or exceeded the powers of the 11 arbitrators. (internal citations omitted). Our caselaw suggests 12 that such lack of clarity should result in upholding the award. 13 We have held that even if it is probable that a panel based its 14 award on legally erroneous grounds, the award should be upheld so 15 long as there is a plausible legal basis for the award. See 16 Duferco Int l. Steel. v. T. Klaveness Shipping, 333 F.3d 383, 392 17 (2d Cir. 2003) ( In construing an arbitral award we look to only 18 plausible readings of the award, and not to probable readings of 19 it. Even absent a plausible reading free of error, we would 20 confirm the award if we independently found legal grounds to do 21 so. ). We have also stated, however, that in some limited 22 circumstances, arbitration awards may be remanded so that the 23 court will know exactly what it is being asked to enforce. 24 American Ins. Co. v. Seagull Compania Naviera, S.A., 774 F.2d 64, 22 1 67 (2d Cir. 1985). I believe remand is appropriate here because 2 this case presents such limited circumstances. 3 Here, the arbitration panel heard testimony with respect to 4 securities losses sustained by the Riches. Due to an intervening 5 class action settlement, some of those losses became ineligible 6 for arbitration. The arbitration panel acknowledged this fact, 7 and even indicated an intent to award for both the eligible and 8 ineligible losses and to leave it to the District Court to void 9 the award as it pertained to ineligible losses. However, in 10 issuing the Award, the panel failed to specify the amount awarded 11 for eligible losses versus the amount awarded for ineligible 12 losses. Accordingly, the District Court was faced with an award 13 that it could not enforce without further information. See id.; 14 see also New York Bus Tours, Inc. v. Kheel, 864 F.2d 9, 12 (2d 15 Cir.1988) ( When an arbitration award provides no clear 16 instruction as to how a court asked to enforce the award should 17 proceed, the court should remand to the arbitrator for 18 guidance. ). Given the unique facts of this case, I agree with 19 the majority that remand in order to direct the arbitration panel 20 to provide a breakdown of its award is the proper course of 21 action. 22 I also emphasize that in ordering a remand here, we do not 23 require the arbitrators to state the reasons for their award, but 24 only to state the precise amount of the award attributable to 25 WorldCom losses as well as the precise amount of the award 26 attributable to non-WorldCom losses. We in no way intend to 23 1 preclude the panel from answering that the award was intended to 2 compensate solely for WorldCom losses or solely for non-WorldCom 3 losses. A remand for clarification in such circumstances would 4 not improperly require arbitrators to reveal their reasons, but 5 would instead simply require them to fulfill their obligation to 6 explain the award sufficiently to permit effective judicial 7 review. Siegel v. Titan Indus. Corp., 779 F.2d 891, 894 (2d Cir. 8 1985). Such a limited review of an arbitrator s award is 9 necessary if arbitration is to serve as a quick, inexpensive and 10 informal means of private dispute resolution. Id. (internal 11 quotation marks and citation omitted). Remand for the limited 12 purpose of asking the arbitration panel to provide a breakdown of 13 the award will ensure that the District Court will know exactly 14 what it is being asked to enforce. American Ins. Co., 774 F.2d 15 at 67. 16 Accordingly, I concur in the judgment. 17 24
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