Matter of Walker v Connelly

[*1] Matter of Walker v Connelly 2008 NY Slip Op 52161(U) [21 Misc 3d 1123(A)] Decided on October 16, 2008 Supreme Court, New York County Madden, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on October 16, 2008
Supreme Court, New York County

In the Matter of Arbitration between Wayde C. Walker and NATHANIEL R. CLAY, Petitioners,

against

Peter W. Connelly and FINRA DISPUTE RESOLUTION, Respondents.



100681/08

Joan A. Madden, J.

In this Article 75 proceeding, petitioners seek to confirm a stipulated arbitration award ("stipulated award" or "award") of the Financial Industry Regulation Authority, Inc. ("FINRA"),[FN1] dated August 7, 2007 (Motion Sequence No. 001). The stipulated award states that the "parties have entered into a confidential settlement agreement" and that "[a]ny and all claims against Respondents, Casimir Capital, L.P., Wayde C. Walker, and Nathaniel R. Clay, are denied and dismissed with prejudice." The award also states that the arbitration panel "recommends the expungement of all references to the above captioned arbitration from Respondents, Wayde C. Walker's and Nathaniel R. Clay's registration records maintained by the FINRA Central Registration Depository ( CRD')" and that pursuant to FINRA Rule 2130, the panel has made an "affirmative finding of fact [that] [t]he claim, allegation, or information is factually impossible or clearly erroneous."[FN2]

The Attorney General of the State of New York moves for an order pursuant to CPLR 1012(a)(2) and CPLR 1013, granting leave to intervene in this proceeding, "on the ground that the movant's interest may not be adequately represented by the present parties and the movant is [*2]or may be bound by the judgment to be rendered herein" (Motion Sequence No. 002).[FN3] The Attorney General seeks intervention "for the purpose of protecting from expungement certain official records" of the Department of Law of the State of New York, that are kept electronically in the CRD, maintained by the FINRA.

As explained by the Attorney General, the records maintained in the CRD are not solely the property of the FINRA, but pursuant to the "CRD Agreement" between FINRA and the North American Securities Administrators Association ("NASAA"), the records are the joint property of the FINRA and the state members of the NASAA (i.e. New York), and state securities regulators, such as the New York State Attorney General, rely on the CRD, rather than maintaining their own record system.[FN4] Specifically, the Attorney General explains that pursuant to General Business Law §§359-e(3)(b), 359-e (13)(a) and (b), securities brokers, dealers and salespersons in New York are required to file a registration statement with the Attorney General, and the CRD system is the method by which the Attorney General maintains such registration information.[FN5]Upon intervention, the Attorney General seeks an order and judgment pursuant to CPLR 7511(b)(2), dismissing the petition and vacating the underlying arbitration award.

The Attorney General's motion for leave to intervene is granted. Since New York State has a strong interest in maintaining the accuracy and integrity of the CRD records for the protection of New York's investing public, intervention in this proceeding is appropriate. See BNY Investment Center Inc. v. Bacchus, Index No. 109678/07 (Sup Ct, NY Co., June 13, 2008); In re UBS Financial Services, Inc., 13 Misc 3d 1131(A) (Sup Ct, NY Co. 2007); Zaferiou v. Holgado, Index No. 102996/07 (Sup. Ct, NY Co., October 22, 2007); Sage, Rutty & Co., Inc. v. Salzberg Index No. 2007-01942 (Sup. Ct, Erie Co., May 30, 2007); but see, Kay v. Abrams, 19 Misc 3d 371 (Sup Ct, NY Co, 2008).

Turning to the merits of this proceeding, at the outset the court notes that respondent Connelly has not responded to the petition, and respondent FINRA submits a Response to the Petition stating that it "does not oppose confirmation or the expungement ordered therein."

The Attorney General opposes confirmation of the stipulated award pursuant to CPLR 7511(b) on the grounds that the panel "exceeded its authority" by failing to provide a factual basis for its recommendation of expungement and its finding that the claim was "factually impossible or clearly erroneous," and absent facts of an evidentiary nature in the award, the court [*3]is unable to determine what facts, if any, the panel actually considered. The Attorney General objects that the panel did not hold a hearing, that the award contains no "affirmative findings," and that the "verbatim quote" of one of the three standards set forth in Rule 2130, is an insufficient basis for ordering expungement. The Attorney General also argues that a stipulated award providing for expungement without explanation, is against public policy, and that the panel's recommendation of expungement is not an "award" subject to confirmation under CPLR Article 75.

Generally, the court's review of an arbitration award, whether under the Federal Arbitration Act or CPLR Article 75, is limited to determining whether the award was procured by fraud or misconduct, whether the arbitrator exhibited partiality, whether the arbitrator exceeded his or her power, or whether the arbitrator failed to follow the statutory procedures.[FN6] CPLR 7511(b); 9 USC §10. Where as here the ground asserted is that the arbitration panel "exceeded its power," an excess of power will be found "only where the arbitrator's award violates a strong public policy, is irrational or clearly exceeds a specifically enumerated limitation on the arbitrator's power." Matter of New York City Transit Authority v. Transport Workers' Union of America, Local 100, AFL-CIO, 6 NY3d 332, 336 (2005).

The law is well settled, that under federal and New York statutes, arbitrators are not required to give reasons or explain the basis for an award. See Solow Building Co. LLC v. Morgan Guaranty Trust Co., 6 AD3d 356, 367 (1st Dept), lv app den 3 NY3d 605 (2004), cert den 543 US 1148 (2005); Marfrak Realty Corp. v. Samfred Realty Corp., 140 AD2d 524 (2nd Dept 1988), app den 74 NY2d 614 (1989); D.H. Blair & Co., Inc. v. Gottdiener, 462 F3d 95 (2nd Cir 2006); Sobel v. Hertz, Warner & Co., 469 F2d 1211, 1214-1215 (2nd Cir 1972). An award subject to review under the Federal Arbitration Act will be upheld as long as the grounds for the award "can be gleaned from the record." Id at 1215; accord D.H. Blair & Co., Inc. v. Gottdiener, supra at 110. Likewise, an award subject to review under CPLR 7511, will not be vacated as irrational "unless there is no proof whatever to justify the award." Matter of Peckerman v. D & D Assocs, 165 AD2d 289, 296 (1st Dept 1991); accord Matter of Matra Building Corp. v. Kucker, 2 AD3d 732 (2nd Dept 2003), lv app den, 2 NY3d 708 (2004).

Here, the stipulated award recommended expungement on the authority of FINRA Rule 2130, which in pertinent part provides as follows:

(a) Members or associated persons seeking to expunge information from the CRD system arising from disputes with customers must obtain an order from a court of competent jurisdiction directing such expungement or confirming an arbitration award containing expungement relief.

(b) Members of associated persons petitioning a court for expungement relief or seeking judicial confirmation of an arbitration award containing expungement relief must name NASD as an additional party and serve NASD with all appropriate documents unless this requirement is waived pursuant to subparagraph (1) or (2) below.

(1) Upon request, NASD may waive the obligation to name NASD as a party if NASD determines that the expungement relief is based on affirmative judicial or arbitral findings that:

(A) the claim, allegation or information is factually impossible or clearly erroneous; [*4]

(B) the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds; or

(C) the claim, allegation, or information is false.

Based upon the foregoing rule, the arbitration panel recommended expungement, explicitly finding that "[p]ursuant to Rule 2130, the panel has made the following affirmative finding of fact: The claim, allegation, or information is factually impossible or clearly erroneous."

While the Attorney General argues, inter alia, that the arbitrators failed to comply with Rule 2130 by not providing any "affirmative findings" to support the recommendation of expungement, petitioners argue that for a court to confirm an award, the arbitrators are not required to make any of the specific factual findings listed in Rule 2130. It must be noted that the explicit language of Rule 2130(b)(1) references "affirmative findings" only as a prerequisite to NASD waiving the obligation to be named as a party to the arbitration. However, courts who have considered this issue have reached different conclusions as to whether "affirmative findings" are required before an award containing expungement relief can been confirmed. Compare In re Johnson (Summit Equities, Inc.), ___ NYS2d ___, 2008 WL 4456935 (Sup Ct, NY Co, Oct. 2, 2008) (court had "insufficient information" to conduct the review "mandated" by Rule 2130, which "requires that awards granting expungement recommendations contain affirmative findings of the specific facts on which the recommendation is based") with Kay v. Abrams, supra ("for judicial confirmation, there is no requirement for the arbitrator to make any of the specific factual findings listed in the Rule").

This court concludes that irregardless of whether the Rule 2130 requires "affirmative findings," the record before the arbitration panel, as delineated below, contains a sufficient factual basis to support both the panel's determination that "the claim, allegation or information is factually impossible or clearly erroneous," and the panel's recommendation of expungement as to the individual respondents Walker and Clay.[FN7] For these reasons, it cannot be said that the arbitration panel exceeded its power in recommending expungement.

On or about April 20, 2006, respondent Peter W. Connelly ("Connelly") filed a Statement of Claim against Casimir Capital, L.P. ("Casimir"), Wayde Walker and Nathaniel Clay, seeking damages for actual losses in excess of $100,000, punitive damages against Casimir in the sum of $100,000, and punitive damages against Walker and Clay in the sum of $25,000 each. Connelly asserted claims for breach of contract, breach of fiduciary duty, negligence, churning, excessive trading, and failure to supervise. As described in the Stipulated Award, "[t]he causes of action related to the recommendation and purchase of various securities including, Maxim Integrated Products (MXIM), Amazon (AMZN), Cisco Systems (CSCO), Synaptics (SYNA), and ATI Technologies (ATYT). Claimant asserted that Respondents put him into positions which indicated churning activity in Claimant's account, solicited transactions that were inappropriate, [*5]and were inconsistent with Claimant's investment objective of capital appreciation."

Before a hearing could be held, the parties entered into a confidential settlement agreement and requested that the arbitration panel issue a stipulated award. On April 2, 2007, the arbitrators wrote to the parties regarding the proposed stipulated award, which "present[ed] in effect a motion of the parties for entry of an award in this case, including affirmative finding by the panel recommending expungement." Explaining that the "case is governed by Rule 2130 of the NASD rules," the arbitrators stated that they had foundno evidentiary record in this case, which was settled prior to hearing, which would support at present an affirmative finding regarding expungement. Without further stipulated factual particulars and/or affidavits, or without evidentiary hearing, the Arbitrators would have no basis for endorsing or affirmatively finding in fact that "The claim, allegation, or information is factually impossible or clearly erroneous." Further, while arbitrators may certainly embody terms of a settlement in an award, they are not required to do so unless satisfied with the propriety of the terms of settlement. Having no basis in this case to divine the terms of the

settlement, let alone the propriety of the settlement, the panel is likewise not inclined to join in the Stipulation.

The parties may make such further joint submissions, seek hearing and/or pre-hearing guidance as they believe worthwhile and appropriate, but any affirmative finding sought from the panel must be supported by an evidentiary record, and the panel is not inclined to endorse the agreement on bare stipulation.

On May 22, 2007, the arbitration panel held a telephonic conference to discuss the parties' request for expungement. On June 27, 2007, the parties submitted two documents to the panel addressing the issue of expungement, so as "to create an evidentiary record in this matter, so the Panel may make a finding on whether expungement is appropriate under the circumstances." The parties submitted a combined affidavit of Walker and Clay dated June 6, 2007, and Stipulated Factual Particulars dated June 27, 2007, signed by counsel for claimant Connelly and counsel for respondents Casimir, Walker and Clay. On August 7, 2007, the arbitration panel issued the stipulated award, which inter alia recommended "expungement of all reference to the above captioned arbitration" from Walker's and Clay's CRD registration records, based upon a finding, pursuant to Rule 2130, that "[t]he claim, allegation, or information is factually impossible or clearly erroneous."

The affidavit from Walker and Clay, and the parties' stipulated facts provide a sufficient factual basis for the panel's conclusion that the allegations were "factually impossible or clearly erroneous." In their affidavit, Walker and Clay state that Connelly told them that the money he would be investing "was not going to be used for his retirement or his daily needs," and that "he wanted to aggressively trade the account to maximize his potential for return." They also state that Connelly indicated "his aggressive' risk tolerance on his opening account application."

Walker and Clay explain that Connelly indicated in his Statement of Claim that his signature was obtained on a blank form that was filled out without his consent, but in "Respondents Answer and Counterclaims, we proved that those allegations were blatantly untrue and that Mr. Connelly had in fact signed his name after the form had been filled out," and that in Connelly's

answer to the counterclaims, he "stated that he apologizes' if the allegations in the Statement of [*6]Claim were misremembered' by him." For those reasons, Walker and Clay state that Connelly's allegations of "wrongdoing . . . were both factually impossible and clearly erroneous."

As to the allegations in the Statement of Claim concerning "approximately $45,000 in trading losses," Walker and Clay note that the Statement of Claim "specifically shows that Mr. Connelly lost $45,571.07 in two days in February 2005 by selling 5,000 shares of Synaptics Inc." According to Walker and Clay, "[t]hat company was performing well up until the end of February 2005 — when it lost a vital contract with Apple" and "[b]ecause of that situation, which was disclosed to Mr. Connelly, Mr. Connelly authorized and ratified those sells, which resulted in the unfortunate $45,571.07 loss." Walker and Clay also point out that in Connelly's response to respondents' request for information, Connelly admitted that he authorized and ratified every single one of the transactions in his account. Relying on those admissions, Walker and Clay state that "for Mr. Connelly to claim that Respondents engaged in excessive trading is both factually impossible and clearly erroneous."

Walker and Clay further state that their decision to settle the matter prior to hearing "was made from a pure business standpoint, as such hearing would have required [them] to travel from New York to Missouri, take off from work and continue to pay their own attorneys," and that

they were "able to settle this matter for less than it would have cost them to pay their attorneys to continue to represent them." Walker and Clay also note that they "specifically denied any and all admission of guilt in the Settlement Agreement," and that as a result of the "above facts, Mr. Connelly agreed that it would be appropriate for any reference to this arbitration to be expunged

from both Mr. Walker's and Mr Clay's CRD." Finally, Walker and Clay assert that "[e]ven if the Panel refuses to find that the claim is factually impossible,' a sufficient record exists particularly with Mr. Connelly's admissions that he authorized and ratified every transaction and was wrong about the opening account documents to find that the claim was clearly erroneous.'"

The Walker and Clay affidavit is consistent with the Stipulated Factual Particulars, executed by Connelly's counsel and respondents' counsel. Notably, in the stipulated facts, Connelly essentially recants the allegations in his Statement of Claim, by agreeing that the "account upon which this arbitration is based was not for [his] retirement or daily needs," and that he "authorized" and "ratified each and every securities transaction upon which this arbitration is based." Addressing the amount of Connelly's alleged losses and damages, the Stipulated Factual Particulars states as follows:The Statement of Claim alleges approximately $45,000 in trading losses. The Statement of Claim (at Exhibit 3-3, Statement Date 02/01/2005 to 2/28/2005) shows that Connelly lost $45,571.07 in two days in February 2005 by selling 5,000 shares of Synaptics Inc. ("Synaptics"). The remaining trades in the account

were profitable, before consideration of commissions, and in Respondents' view were proper and appropriate given their understanding of Connelly's investment objectives.

The Stipulated Factual Particulars concludes as follows: "Respondents specifically denied any and all admission of guilt in the Settlement Agreement," and "Connelly has agreed that the expungement language in the Stipulated Award is appropriate." [*7]

Thus, under the specific circumstances presented in this proceeding, where the respondents to the arbitration provided the panel with an affidavit, and the claimant and respondents agreed to stipulated facts, and those documents supplied an underlying factual basis explicitly addressing the grounds for expungement, the panel had a sufficient evidentiary record to support its conclusion that the claim was "factually impossible or clearly erroneous." The Attorney General's reliance on In re Sage, Rutty & Co., Inc. v. Salzberg, Index No. 2007-01942 (Sup. Ct, Erie Co.), is misplaced, as that case is distinguishable on its facts. In contrast to the instant proceeding, the parties in that case did not execute a written settlement agreement and did not submit any other documents to the panel, so the court determined that the arbitrator's decision on expungement was "irrational because it was made without evidentiary support."

As to the Attorney General's argument that the arbitration panel was required to hold a hearing on the issue of expungement, although a proposed amendment to the federal rules would require an arbitrator considering expungement to hold a hearing, nothing in language of the existing rules imposes such a requirement. See Notices, Securities and Exchange Commission, Self-Regulatory Organizations: Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to Amendments to the Codes of Arbitration Procedure to Establish New Procedures for Arbitrators to Follow When Considering Requests for Expungement Relief, 73 FR 18308 (April 3, 2008).[FN8] In any event, the procedure followed by the arbitrators, in holding a telephonic conference and permitting submissions, as noted above, on papers addressed to the issue of expungement, provided a sufficient evidentiary basis for the recommendation of expungement, and thus, satisfied the purpose of a hearing.

The Attorney General's memorandum of law suggests that the panel's recommendation of expungement is not an "award" subject to confirmation under CPLR Article 75, without citing any legal authority. While this decision was sub judice, the Attorney General sent the court a letter enclosing a recent opinion from the United States Court of Appeals for the District of Columbia Circuit in Karsner v. Lothian, 532 F3d 876 (D.C. Cir. 2008). In that opinion, the court wrote that "[a]n expungement recommendation . . . is not an award and, accordingly the district court is without section 9 authority to confirm' it." In light of the Attorney General's late submission, the implications of Karsner have not be briefed. In any event, Karsner is not binding on this court, and at least one New York Appellate Division has confirmed an arbitration award [*8]recommending expungement. See Goldstein v. Preisler, 24 AD3d 441 (2nd Dept 2005).[FN9] Furthermore, in this proceeding, the arbitration panel's decision is written so that the recommendation of expungement is part of the "Award," and as such, is properly before the court for consideration.

Finally, as to the Attorney General's public policy argument, on the record presented, the Attorney General fails to make a sufficient showing that the confirmation of the instant award recommending expungement violates public policy.

Accordingly, it is hereby

ORDERED that the motion of the Attorney General of the State of New York to intervene in this proceeding is granted (Motion Sequence No. 002); and it is further

ORDERED that the petition of Wayde C. Walker and Nathaniel R. Clay to confirm the arbitration award of the FINRA dated August 7, 2007, is granted and the award is confirmed (Motion Sequence No. 001); settle judgment on notice, with copies of this order and the arbitration award.

DATED: October 16, 2008ENTER:

s/

________________________

J.S.C. Footnotes

Footnote 1:In July 2007, the NASD was consolidated with the regulatory, enforcement and arbitration bodies of the New York Stock Exchange to form the Financial Industry Regulatory Authority ("FINRA").

Footnote 2:The CRD is an on-line registration and licensing database used by federal and state securities regulators, such as the New York State Attorney General, to license and regulate securities firms and their brokers. The "Broker-Check" feature of the CRD provides investors with information about individual brokers and registered securities firms. General information, such as a broker's current employer and 10 years of employment history, is available to the public on-line. On a specific request, the FINRA will provide "disclosure information" as to criminal and civil actions, customer complaints, and securities-related terminations for cause. See Rosenberg v. MetLife, Inc., 8 NY3d 359, 362, fn 3 (2007).

Footnote 3:Motion Sequences Nos. 001 and 002 are consolidated for determination herein.

Footnote 4:The CRD Agreement between NASD (now FINRA) and NASAA provides that "[t]he data on CRD Uniform Forms filed with the CRD shall be deemed to have been filed with each CRD State in which the applicant seeks to be licensed and with the NASD [now FINRA] and shall be the joint property of the applicant, NASD, and those CRD States." CRD Agreement, §3:10 (a), as amended in 1996.

Footnote 5:Pursuant to the express terms of the CRD Agreement, the New York Department of Law, by virtue of its membership in the NASAA and its participation in the CRD system, is a third-party beneficiary of the CRD Agreement.

Footnote 6:The Attorney General maintains that vacatur of the instant award is appropriate under the standards of both the Federal Arbitration Act and CPLR Article 75.

Footnote 7:While the petition as originally submitted, did not include the Statement of Claim, the arbitrators' April 2, 2007 letter, or the parties' additional submissions addressing the issue of expungement, those documents were provided by the Attorney General, as exhibits to the motion to intervene.

Footnote 8:In its statement of purpose of the proposed rule change, the Securities and Exchange Commission ("SEC") explains that the new "procedures are designed to: 1) make sure that arbitrators have the opportunity to consider the facts that support or weigh against a decision to grant expungement; and 2) ensure that expungement occurs only when the arbitrators find and document one of the narrow grounds specified in Rule 2130." The SEC also states that the new procedures would require arbitrators considering an expungement request to hold a recorded hearing by telephone or in person, to provide a brief written explanation of the reasons for ordering expungement, and in cases involving a settlement, to review the settlement documents to examine the amount paid to any party and any other terms and conditions of the settlement that might raise concerns about the associated person's involvement in the alleged misconduct. Federal Register, Vol. 73, No. 65 at 18308 (April 3, 2008).

Footnote 9:In Goldstein v. Preisler, supra , the Article 75 petition was unopposed, and the Supreme Court sua sponte declined to confirm the portion of a stipulated award recommending expungement. The Supreme Court's opinion is not published, and the reason for the court's determination is not discussed in the Second Department's reversal. Thus, it is unclear whether the issue was raised as to whether a recommendation of expungement is an award subject to confirmation under Article 75.