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2nd Circuit Sets Standard for Review of Arbitration Awards

Manifest Disregard of the Law Refined

By John M. Baker, Esq.


In a recent case, the U.S. Court of Appeals for the Second Circuit set out the standard for review of securities arbitrations in federal court. Greenberg v. Bear, Stearns & Co., No. 99-9041 (2d Cir. Aug. 7, 2000).

An unsuccessful claimant in an NASD arbitration sought to vacate the award in federal court on the basis that it violated public policy and manifestly disregarded the law. The defendant argued that there was no basis for federal subject matter jurisdiction and that, in any event, the arbitral award should easily withstand review.

The district court ruled for the defendant on the grounds that the petitioner had failed to demonstrate manifest disregard of the law in the arbitrators’ treatment of his claims.

On appeal, the Second Circuit ruled that

  1. the fact that the arbitration itself concerns issues of federal law does not, on its own, confer subject matter jurisdiction on a federal district court to review the award, but
  2. federal jurisdiction may lie where the petitioner seeks to vacate the award primarily on the ground of manifest disregard of federal law. Since this was indeed the petitioner’s claim, the court proceeded to the merits of the claim.

It ruled that, to vacate an award on the ground of manifest disregard, a reviewing court must find 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.

The court ruled that the petitioner had not met his “very stringent burden” and affirmed the refusal to vacate the arbitration award.

The court’s opinion is available online at http://www.law.pace.edu/lawlib/legal/us-legal/judiciary/second-ircuit/test3/99-9041.opn.html


Copyright 2000, John M. Baker, Esq., Stradley, Ronon, Stevens & Young, LLP, 1220 19th Street, N.W., Suite 700, Washington, DC 20036 – (202) 822-9611- Fax (202) 822-0140 This article was originally posted to the FundLaw List, http://www.egroups.com/group/fundlaw. To subscribe to FundLaw, send a blank e-mail to fundlaw-subscribe@egroups.com


Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.  


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