In The News

COMPULSORY ARBITRATION IS A BITCH
Scott Graham
The Recorder
December 07, 2012

We associate that sentiment with plaintiffs and their counsel. But when corporate defendants get walloped with a big, virtually unreviewable judgment, their screams of pain can be just as loud — and futile.
San Francisco securities brokerage Stone & Youngberg went before the U.S. Court of Appeals for the Ninth Circuit on Monday, begging, pleading — one might even say whining — about a $750,000 judgment imposed by a FINRA arbitration panel. Stone & Youngberg had recommended that its client, Lenore Bleadon, invest part of her family trust in a hedge fund run by FutureSelect Portfolio Management of Seattle. It turned out — unbeknownst to Stone & Youngberg — that the hedge fund was in turn investing almost all of its funds with a guy named Bernard Madoff. When all of Bleadon's investment was lost to the biggest Ponzi scheme in history, she elected not to sue Madoff, but Stone & Youngberg for failing to perform sufficient due diligence.
Because, like most every securities brokerage, Stone & Youngberg includes an arbitration provision in its customer agreement, Bleadon brought the case to a panel of three arbitrators. Following a five-day hearing, they awarded her the full $750,000, giving no reasons whatsoever.
Before the Ninth Circuit, Keesal, Young & Logan partner Bernard 'Ben' Suter emphasized that Stone & Youngberg hadn't participated in any fraud, and that Madoff had fooled everyone, including the Securities and Exchange Commission. 'You have an investor who's happy at month 15, and then two months, three months later, a fraud's revealed that we had nothing to do with,' Suter said, 'and all of a sudden we have a group of three arbitrators dispensing their own industrial brand of rough justice.'
The problem for Stone & Youngberg, as it is for anyone who challenges an arbitration award in federal court, is that mere arbitrator error isn't grounds for throwing out the award. Instead, the losing party would have to show 'manifest disregard' of the law.
'Did they say anything like, 'We don't like your stinking laws?'' was how Judge Barry Silverman put it to Suter. 'Or 'tear it out of the book,' anything like that?'
'Not explicitly,' Suter acknowledged. But the arbitrators did promise to look at the cases Stone & Youngberg cited on causation, he said, and there's no way the brokerage caused Bleadon's loss — not under federal law or even California's looser standard for brokerage due diligence.
Silverman seemed unmoved. 'What did they say — 'the hell with your precedent'?' he asked.
'Well no, they didn't,' said Suter, acknowledging that 'there is some case law' that requires such a statement in the arbitration record. But, he emphasized, the Second and Eleventh circuits have found manifest disregard when arbitrators miss 'the only reasonable conclusion.'
That's where the arbitrators' failure to state their reasons actually cuts against Stone & Youngberg, Judge Susan Graber suggested. 'Because they don't explain themselves, aren't we in a position where we have to be able to exclude every possible way they could have reached that result?' she asked Suter. 'If they said, 'We've reached our result through this line of reasoning,' and it's completely bizarre, you'd be better off, it seems to me.'
Suter was under no illusions about the challenge he faced. 'I've got to tap ballet, I recognize that,' he said at one point. But he urged the court to take 'a commonsense look' at the case from '30,000 feet above the maze' and ask how the judgment could be rational. 'We're two or three levels removed from any connection here, and yet all of this falls into our lap? That doesn't instill confidence.'
Suter's opponent, plaintiffs securities attorney Cary Lapidus, would no doubt agree on most days, but on this occasion he was sounding themes more commonly associated with corporate defendants. 'Manifest disregard requires two things,' he told the court. 'One is that the arbitrators disregarded the law, and two, that there's a manifestation by the arbitrators. And Stone & Youngberg cannot prove either of these two requirements.'
To Suter, that position runs contrary to 85 years of causation law dating to Palsgraf v. Long Island Railroad, 'something that we all learned in law school. And all of that was ignored.'
It didn't sound as if his argument would sway the Ninth Circuit. But there was one consolation for him. 'I think you should at least get an honorable mention, if not a victory,' Judge Ronald Gould said, 'for being able to work Palsgraf into your argument.'

Please contact us for assistance with securities arbitration law, securities litigation, broker misconduct, investment advisor misconduct and investment losses.