Matter of McLaughlin Piven Vogel Sec. Inc. v Ferrucci
Annotate this CaseDecided on June 20, 2008
Supreme Court, New York County
In the Matter of the Application of McLaughlin, Piven, Vogel Securities, Inc. and Lawrence T. Tulenko, Petitioners,
against
Robert Ferrucci, Respondent.
600616/08
McLaughlin, Piven, Vogel Securities, Inc. and Lawrence T. Tulenko were represented by:
Law Office of Joseph D'Elia
by Mark G. Vaughan
464 New York Avenue, suite 200
Huntington, NY 11743
Robert Ferrucci was represented by:
Malecki Law Office
by Jenice L. Malecki
11 Broadway
New York, NY 10004
Eileen A. Rakower, J.
Petitioner McLaughlin, Piven, Vogel Securities, Inc. is a securities broker-dealer corporation and Lawrence T. Tulenko is one of its brokers (together, MVP). Respondent Robert Ferrucci and his mother opened a joint account with MVP in 1987 and he opened an individual account in 1992. In 1994, Tulenko took over the handling of Ferrucci's accounts, which were eventually depleted and closed in April, 2005. In September, 2006, Ferrucci filed a statement of claim with the Financial Industry Regulatory Authority, (FINRA) charging petitioners with, among other things, breach of contract, margin violations, fraud and misrepresentation. In accordance with the National Association of Securities Dealers, Inc. (NASD) Code [*2]of Arbitration Procedure, the parties were given the names of arbitrators and were required to rank their choices so that FINRA could review the parties' lists and appoint three arbitrators. FINRA appointed two arbitrators from the parties' lists and one who was not on their list. This third arbitrator was replaced by another who, after timely objection from respondent, eventually recused himself. Ultimately, the third arbitrator appointed was Kenneth Leder, someone who was not one on the list of possible choices. Pursuant to FINRA's "Hearing Procedure Script," the panel must obtain oral confirmation from the parties of their acceptance of the panel's composition prior to the beginning of the hearing.
The arbitration hearing began on August 7, 2007, and some time in October, 2007, one of MVP's witnesses realized, and informed counsel, that Leder was a former wholesaler for Franklin Tempelton. MVP began an investigation into the extent of its possible former relationship with Leder. MVP states that it discovered a business card that belonged to Leder and hand written notes by one of its brokers from a presentation it believed Leder gave to MVP employees in June, 1996. MVP contacted Franklin Tempelton to ascertain whether Leder was MVP's wholesaler but, without a subpoena, it would not divulge any information beyond that Leder was a former employee.
By letter dated November 29, 2007, MVP wrote to the arbitration tribunal to inform it of the above regarding Leder and that respondent had purchased some Franklin Tempelton mutual funds, through MVP, in January 1998. MVP accused Leder of failing to disclose this information, and stated that it "might raise issues concerning the existence of a possible conflict" for Leder. MVP requested that the issue be addressed before their next hearing date, December 14, 2007.
FINRA permitted respondent to submit an answer to the letter and, on December 12, 2007, an Order with respect to MVP's concerns was issued by arbitrator Leder. The Order stated, "I will not recuse myself" and "K. Leder will not recuse himself, full disclosure was made, and no relationship exists nor existed between Mr. Leder and either MVP nor any witness. In fact, Mr. Leder was not calling on Regional Firms as of Jan. 1997, when he was assigned exclusively to the Financial Planner Division of Franklin Tempelton."
By letter dated December 13, 2007, petitioner wrote again to the FINRA to express "grave concern" over the integrity of the arbitration. This letter complained [*3]about Leder's "rigorous cross-examination" of its witness and FINRA's handling of the November 29 letter. It further stated, "I must now recognize the possibility of an agenda on Mr. Leder's part. I am not sure of what it is, but I know one thing, impartiality will suffer as a consequence." (Emphasis in the original.) MVP's letter concludes stating that "disclosures were not made" and "[t]he Rules virtually mandate he be remove for this reason alone. More importantly, his refusal to recuse himself demonstrates an agenda to enforce his will against fairness, an appearance of impropriety and his impartiality itself." Petitioner answered this letter, again opposing recusal of Leder.
When the hearing continued on December 14th, counsel for MVP made a record noting again that his letter asked for "guidance and disclosure," that respondent's letter opposed Leder's recusal but MVP had not asked for recusal. Counsel stated
So now I've been placed into the unenviable situation of asking the Director of Arbitration to ask you to remove yourself or remove you because you maintain that you were not at Franklin & Tempelton and you McLaughlin, Piven and Vogel was not a client of yours. I didn't want that, I don't want that, but I am compelled by law to do that because I represent a corporation and I represent an individual and both of them are entitled . . . to have me represent them to the fullest if information comes to my attention.
After counsel made his record, the hearing continued without further comment from the arbitrators. The hearing concluded with summations, respondent reserving his entire closing for rebuttal. After Ferrucci's rebuttal/summation, MVP objected to, among other things, his use of the hearing's transcript because MVP did not have a copy of it. The panel requested submissions from the parties and, by letter dated December 21, 2007, requested details regarding attorneys' fees from both sides. On January 29, 2008, FINRA issued the panel's decision in favor of Ferrucci, awarding him damages and attorney's fees.
Petitioners now file this Article 75 proceeding seeking an order vacating the award to Ferrucci on the grounds of arbitrator partiality, that the panel exceeded its authority and that the award is completely irrational and shows a manifest disregard for the law.(CPLR § 7511(b)(1)). Specifically, MVP alleges that arbitrator Leder was biased, that he failed to disclose his prior relationship with MVP and he acted [*4]improperly toward MVP's witness during the arbitration hearing. Petitioners state that Leder's actions rendered the award completely irrational and that the panel improperly awarded attorney fees in the absence of a statute, agreement or request of the parties.
Petitioners argue that "[t]he hearing was marred by numerous improper and prejudicial incidents . . .." They challenge the panel's findings claiming that there was overwhelming evidence which was ignored by Leder. Petitioners reiterate their claim that Leder , had "an agenda" for remaining on the panel despite his "obvious conflict." As support for this contention, MVP submits the supplemental affirmation of counsel with a twelve page excerpt from the hearing transcript to demonstrate what it states was inappropriate questioning, accusations and bias by Leder.
Petitioners continue to state their dissatisfaction regarding FINRA's handling of their November 29, 2007 letter which they maintain was inappropriately treated as request for the recusal of Leder. Petitioners, however, neither suggest an option other than recusal nor acknowledge that their attorney did ask for Leder's removal from the panel in the above quoted portion of the record. They state that FINRA had the power to confirm the details of Leder's former employment and could have removed him, but FINRA refused to do so.
In light of the panel's hearing decision and FINRA's refusal to investigate the details of Leder's employment with Franklin Tempelton, MVP files a second motion, sequence 002, which asks the court to sign 1) a subpoena for information and documents from Franklin Tempelton to determine, inter alia, what, if any, relationship Lerder had with MVP in his former employment and 2) an order directing Ferrucci to produce his copy of the arbitration transcript.
Respondent opposes petitioners' motion to vacate and their discovery demands. Respondent argues that the unanimous decision in his favor, by three experienced arbitrators, belies petitioner's claim of bias by one arbitrator. He states that petitioners have failed to provide exhibits and evidence to support their allegations. Respondent argues that the process used to replace arbitrators was in accordance with the rules of the forum, as was the questioning by arbitrator Leder. Respondent argues that the panel did not exceed its authority nor was there "manifest disregard" for the law that would require the court to vacate the award. Respondent states that arbitrator Leder openly disclosed his prior employment at the time he replaced another arbitrator on [*5]the panel. He argues that the alleged business relationship between MVP and Leder is unsubstantiated and "bald speculation." Respondent points out that the broker's notes provided as support for the proposition that Leder had a prior relationship with MVP, in fact, refer to a Ken "Leiter" not Leder and the business card provided has the name Ken Leder crossed out and another name and phone number written on it. Respondent further argues that petitioners' subjective characterization of Leder's questions is insufficient to overturn the unanimous decision of the panel.
Courts favor permitting consenting parties to submit their disputes to arbitration and "the law has adopted a policy of noninterference, with few exceptions, in this mode of dispute resolution." (Sprinzen v. Nomberg, 46 NY2d 623 [1979]). An award will not be vacated because the arbitrator exceeded her authority "unless the limitation on the arbitrator's power is contained, explicitly or by reference, in the arbitration clause itself . . ..(Silverman v. Benmor Coats, Inc., 61 NY2d 299 [1984]).Additionally, an award may be vacated on the ground of "manifest disregard" for the law where the court finds "both 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." (Wein & Malkin LLP v. Helmsley-Spear, Inc., 6 NY3d 471 [2006] quotations omitted). Arbitrators in commercial matters, by virtue of having worked in the same industry, sometimes have had prior business dealings with one or both of the parties to the arbitration. "[M]ere proof of prior business relations with one party is insufficient to disqualify an arbitrator where that relationship is known to the opposing party. Thus knowledge, on the part of a party, of the existence of a disqualifying relationship . . . coupled with a failure to make timely objection, will be deemed a waiver of the right to press the objection." (Millikens Woolens, Inc. v. Weber Knit Sportswear, Inc., 11 AD2d 166 [1st Dept. 1960]).
Pursuant to the NASD Code of Arbitration Procedure, section 10308, Selection of Arbitrators, the Director has the discretion to appoint arbitrators who are not on the parties' preference list. If a party objects to an arbitrator, or if it is discovered that an arbitrator has failed to make the required disclosures, he may be disqualified and removed by the Director. FINRA's rules require arbitrators to
[N]otify the parties of the names, current affiliations, and 10 years' business histories of the proposed arbitrator. In addition, parties will be informed of any [*6]information disclosed pursuant to the Uniform Code and the Code of Ethics for Arbitrators by any arbitrator. The arbitrators will be informed of the names of the parties to the dispute, counsel, witnesses and the nature of the issues raised. If any arbitrator determines that he or she cannot render a fair and impartial award, the Director will appoint a substitute arbitrator.
When Leder was substituted for another arbitrator, he was required to disclose his prior associations and each party received a copy of his CV before the hearing began. Leder's disclosure report reveals that he was employed by Franklin Tempelton from March, 1989 until January, 2003, and it describes his most recent employment as "a retirement job, after my career with Franklin Tempelton." The disclosure further states, in relevant part,
From 1989 through 2002, I was employed by Franklin Tempelton group, working as a Regional Manager and Wholesaler of Mutual Funds and Annuities, in the NY Metro area. I called on all types of financial representatives, including Wirehouse FC's, Independent Financial Planners, Insurance Representatives, and Bank Representatives. I gave seminars to Broker/Dealer meetings regarding use of our products, asset allocation, client expectations, and appropriate regulatory issues. I called on offices of the regional B/D's and Planning firms representing Franklin Tempelton's business relationships. I gave client seminars to the public for the purpose of business development and planning on matters including retirement planning, college funding, market expectations and dealings with their planner.
This arbitration hearing consisted of fourteen separate sessions over the course of five months which resulted in a transcript of over one thousand pages. Petitioners submit a twelve page transcript of the recording of the hearing (uncertified and unsworn) in which arbitrator Leder has a very brief exchange with an MVP witness that extends for five pages of the transcript, one and a half pages of which Leder is reading from an NASD manual. Leder's questions were pointed, but obviously meant for clarification. They do not demonstrate any bias on Leder's part but rather seek to ascertain how MVP's handling of Ferrucci's account comports with NASD and MVP rules for such investors. Petitioners provide no other evidence of alleged arbitrator partiality or bias. Further, despite petitioners' repeated claims here that Leder failed to disclose his former employment with Franklin Tempelton, counsel admitted on the record at the December 14, 2007, session, "It turns out that I knew from the outset [*7]that you were Franklin Tempelton . . .." Here, there is no proof, but only speculation, of a prior business relationship. (Millikens Woolens, Inc. v. Weber Knit Sportswear, Inc., supra).
FINRA rules permit the removal of a panel member, but the objecting party is required to raise its objection prior to the first pre-hearing conference, or prior to the hearing, or upon disclosure of information that was not previously disclosed. Here, petitioners were aware of Leder's prior business relationships before the hearing commenced but did not object to his appointment. "It is well settled that occasional associations between an arbitrator and a party or witness will not warrant disqualification of the arbitrator . . . [for] bias or partiality. It must be shown that the arbitrator and the party or witness have some on going relationship."(Artists and Craftsman Builders, Ltd., v. Schapiro, 232 AD2d 265 [1st Dept. 1996] internal citations omitted). Additionally, the party seeking vacature of an award on these grounds must meet a heavy burden. (Id.)
The paltry evidence provided by petitioners, coupled with a review of Leder's allegedly offensive questioning is insufficient to warrant the court signing a subpoena for Leder's employment records as it indicates that petitioners are on the proverbial "fishing expedition." Nor is petitioner's request for an order directing respondent to produce "certain documents" appropriate. In fact, petitioners want the respondent to provide it with the arbitration hearing transcript which they failed to get transcribed. The hearing was tape recorded in accordance with FINRA rules and a transcript is equally available to all parties.
Petitioners offer sweeping generalizations and conclusory statements. They do not meet their burden of submitting sufficient evidence to demonstrate that the arbitration award is "completely irrational" or "shows a manifest disregard for the law." An award will not be found "wholly irrational" absent a showing that there was "no proof whatever to justify the award." (Peckerman v. D & D Associates, 165 AD2d 289 [1st Dept. 1991]). Here, petitioners have failed to even provide the transcript of the hearing and, in the absence of evidence, cannot meet their burden of proof. (Artists and Craftsman Builders, Ltd., v. Schapiro, supra).
Petitioners' complaints regarding FINRA's handling of it's letters regarding [*8]Leder's former employment, that respondent "saved" his entire summation for rebuttal and that respondent inappropriately submitted to the panel demonstrative exhibits are similarly without merit, as each situation was handled in accordance with NASD/FINRA rules and guidelines.
Petitioners argue that the panel exceeded its authority by awarding attorneys' fees absent a statute, agreement or request by the parties (Matter of Matza v. Oshman, Helenstein & Matza, 33 AD3d 493 [1st Dept. 2006]). FINRA's guidelines state
Attorney's fees are frequently requested in arbitration. Arbitrators have the authority to consider awarding attorney's fees, but the procedure varies from state to state. It is appropriate for the arbitrators to request the parties to brief the issue.
CPLR § 7513 states
Unless otherwise provided in the agreement to arbitrate, the arbitrators expenses and fees, together with other expenses, not including attorney's fees, incurred in the conduct of the arbitration, shall be paid as provided in the award. The court, on application, may reduce or disallow any fee or expense it finds excessive or allocate it as justice requires.
The arbitration clause in the parties "CUSTOMER AGREEMENT" states
AGREEMENT TO ARBITRATE ALL CONTROVERSIES
I represent that I understand the terms of the arbitration clause, as follows:
(a) Arbitration is final and binding on the parties.
(b) The parties are waiving their right to seek remedies in court, including the right to a jury trial.
( c) Pre-arbitration discovery is generally more limited than and different from court proceedings. [*9]
(d) The arbitrators' award is not required to include factual findings or legal reasoning and any party's right to appeal or to seek modification of rulings by the arbitrator is strictly limited.
(e) the panel of arbitrators will typically include a minority of arbitrators who were or are affiliated with the securities industry.
I agree, and by carrying my account you agree, that all controversies which may arise between us, including but not limited to those involving any transaction or the construction, performance or breach of this or any other agreement between us, whether entered into either prior, on or subsequent to the date hereof, shall be determined by arbitration. Any arbitration under this agreement shall be conducted before the National Association of Securities Dealers, Inc. ("NASD"), and in accordance with its rules then in force. (Bold in the original.)
Petitioners argue that there is no authority under New York law to award attorneys' fees because, they claim, it is "clear" that the written agreement of the parties does not specifically authorize the awarding of attorneys' fees. Additionally, it is apparent from petitioners' submissions to FINRA that they studiously avoided the subject of attorneys' fees in order that they could argue that they did not seek attorney fees nor did they acquiesce to the panel deciding that controversy. (See, U.S. Offshore Ltd.v. Seabulk Offshore Ltd., 753 F.Supp 86 [SDNY 1990]); Synergy Gas Co. v. Sasso, (853 F2d 59 [2nd Cir. 1988]).
However, the issue of attorneys' fees was raised by Ferrucci in his claim and it was argued by his attorney during her closing argument. Moreover, the arbitration clause between the parties states that "all controversies" concerning the agreement "shall be determined by arbitration." The court notes that if there was any actual ambiguity in the agreement, it would be construed against its drafter, MVP. (Merrill Lynch, Pierce, Fenner & Smith Inc., et al. v. Adler, 234 AD2d 139 [1st Dept. 1996]). Accordingly, as the award of attorneys' fees is contemplated by the agreement which calls for arbitration of all controversies, that portion of the award is also confirmed. (Id.; see also Stewart Tabori 7 Chang, Inc. v. Stewart, 282 AD2d 385 [1st Dept. 2001]; Americorp Securities, Inc. v. Sager, 239 AD2d 115 [1st Dept. 1997]).
Finally, petitioners seek discovery tools in order to conduct an "investigation." Respondent opposes, urging that petitioners are actually trying to reopen the [*10]arbitration. More specifically, petitioners seek subpoenas and documentation in order to show that more than ten years prior to this arbitration, Leder was engaged to lecture MVP employees. As MVP "knew from the outset" of Leder's association with Franklin Tempelton, any objection to his being a panel member should have been raised before the hearing began. Having failed to timely raise the objection, it has been waived. (Millikens Woolens, Inc. v. Weber Knit Sportswear, Inc., supra). Wherefore, it is hereby
ORDERED that the petition to vacate the arbitration award is denied; and it is further
ORDERED that the cross motion to dismiss the petition is granted; and it is further
ORDERED and ADJUDGED that respondent, ROBERT FERUCCI, having have judgment and recover against petitioners McLaughlin, Piven, Vogel Securities, Inc. in the amount of $300,000.00, plus interest at the rate of 9 % per annum from the date of January 29, 2008, as computed by the Clerk in the amount of $ _________, together with costs and disbursements in the amount of $ _______________ as taxed by the Clerk, and attorneys' fees in the amount of $117,000.00, plus interest at the rate of 9 % per annum from the date of June 20, 2008, as computed by the Clerk in the amount of $ _________, together with costs and disbursements in the amount of $ _______________ as taxed by the Clerk, along with forum fees in the amount of $18,450.00, for the total amount of $__________, and that the respondent, ROBERT FERRUCCI, have execution therefor; and it is further
ORDERED and ADJUDGED that respondent, ROBERT FERUCCI, having have judgment and recover against petitioner Lawrence T. Tulenko in the amount of $50,000.00, plus interest at the rate of 9 % per annum from the date of January 29, 2008, as computed by the Clerk in the amount of $ _________, together with costs and disbursements in the amount of $ _______________ as taxed by the Clerk, for the total amount of $__________, and that the respondent, ROBERT FERRUCCI, have execution therefor; and it is further [*11]
ORDERED that petitioner's motion for an order issuing a non-party, informational subpoena is denied; and it is further
ORDERED that petitioner's motion for an order directing respondents to produce a copy of the arbitration hearing is denied.
This constitutes the decision and order of the court.
All other relief requested is denied.
Dated: June 20, 2008
______________________________EILEEN A. RAKOWER, J.S.C.
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