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]]> Home | Message Board Home Search Arbitration Investors Brokers Finance Law Compliance Archives California Standards Disputes Continue; Mayo vs. Dean Witter Winds Through the Courts

Mayo has become a lightning rod in the controversy over the California Judicial Council Standards, attracting filings and affidavits from both the NASD and the NYSE.

This case (No. 01-20336), currently pending before Judge Fogel of the Northern District of California, has become a lightning rod in the controversy over the California Judicial Council Standards. In Mayo, investor Richard Mayo sued Dean Witter in federal court and Dean Witter quickly won an order compelling arbitration. However, that order is now under attack by Mr. Mayo, because of the so-called California Standards. After filing with the NYSE, Mr. Mayo was assigned a hearing location in Reno, Nevada. Later, he was offered a California situs, but he has refused to waive the California Standards and wants to return to court.

The Judge, reputed to be an excellent jurist, requested supplemental briefing on the issue of the applicability of the California Standards to SRO arbitration and also invited amici Briefs from the NASD, NYSE and the Judicial Council.

The NASD and NYSE filed a joint Memorandum in early January “In Opposition to Plaintiff’s Motion to Vacate Order Compelling Arbitration.” Accompanying the legal memo are affidavits from Robert S. Clemente and George H. Friedman, the NYSE and NASD Directors of Arbitration, respectively, and numerous exhibits that catalog the history of this highly charged dispute.

NASD-NYSE lost in their attempt to challenge the constitutionality of the California Standards directly in federal court (SAA 02-45), as the Eleventh Amendment barred their way to a hearing on the merits.The SROs have appealed that decision, NASD & NYSE v. Judicial Council, but review by the Ninth Circuit could be long delayed.

The Mayo case provides a platform for debate on the preemption issue, where the Eleventh Amendment will not deflect a decision, where consideration will be expedited, and where a federal court, not a state court, will weigh the issue. Judge Fogel has set February 10, 2003 as the date to hear Plaintiff’s Motion to Vacate. A summary of the NASD-NYSE papers follows.

Memo in Opposition: Milbank Tweed for NYSE and Gibson Dunn for NASD filed a 26-page Brief that devotes 12 pages to educating the Court regarding the history of the dispute and the regulatory scheme under which the SROs operate and the rest to arguing the primary point: “The California Standards Are Preempted by the FAA.” As the principal regulators of securities broker-dealers in the United States, the two SROs are subject to close oversight by the SEC. They are also the leading dispute resolution providers in the industry, but the new California Standards have placed the SRO providers in quandary: “Compliance with the California Standards,even if possible, would impose substantial burdens on the SROs and their arbitrators without any corresponding benefit to investors. Noncompliance, however, would jeopardize the SRO arbitration process.”

Mr. Mayo has objected to arbitration if the California Standards are not applied, but the “conflicting requirements” between that regime and the NYSE’s arbitration rules are manifest. NYSE could not conform with the California Standards without ignoring its own rules, rules that have been approved by the SEC. Indeed, the SEC has taken the position, reinforced by the Perino Report’s conclusions (SA 02-45), that the SROs may proceed with arbitrations in California without application of the California Standards.

The Perino Report makes the point that there a problem exists with undisclosed conflicts, so little benefit can be expected from applying the California Standards. Moreover, the costs and other burdens of implementation present potential downsides. The Judicial Council revised the July 1 Standards in December 2002, but the “revisions do not eliminate the manifold conflicts between the California Standards and the NYSE and NASD arbitration rules.”

These conflicts, the SROs submit, create an impermissible intrusion on the congressionally mandated federal regulatory scheme that underlies the SRO programs. It also interferes with the policies of the Federal Arbitration Act, because Mr. Mayo undertook, in signing the Uniform Submission Agreement, to abide by NYSE arbitration rules. “Mayo cannot insist on application of the California Standards because he contractually agreed to arbitrate pursuant to the NYSE Arbitration Rules, which are exclusive of the California Standards.”

Finally, the Brief offers a technical out to the Court, arguing that the Judicial Council overreached statutory limitations in defining the scope of its Standards.

Clemente Affidavit: NYSE practices are the focus of the Mayo dispute, so we chose the NYSE Director’s affidavit to summarize. It is also the more commonly quoted in the legal memo.

Mr. Clemente’s 21-page statement provides an interesting description about how securities arbitration works and how it has been affected by the California Standards. The Exchange, he indicates, currently has approximately 141 arbitrations pending in California. Arbitration in the securities world is overseen by all three federal branches of government: by the SEC, the GAO and Congress, and the federal judiciary. Parties in NYSE arbitration are provided disclosures and background information about arbitrators, the last three NYSE Awards of the Arbitrator, and specific arbitration rules govern disclosures and challenges. The Panelists are paid a “modest stipend,” the program is subsidized to lower party costs, and the neutrals have no financial interest in the forum. On at least two occasions, the NYSE submitted formal comments to the Judicial Council, seeking an exemption for the SROs, but all “efforts were unsuccessful.”

Implementation of the California Standards would mean that “similarly situated investors would be treated differently” and arbitrators who serve in multiple jurisdictions would be subject to different standards for disqualification. “Such a divergence undermines the uniformity that is one of the goals of federal securities regulation.”

The conflicts would also “supplant the authority of the Director of Arbitration to rule on disqualifications” and “would impose undue burdens on NYSE arbitrators to collect, maintain, and update information regarding the parties (and their attorneys) whose disputes they have resolved long in the past.” As a consequence, NYSE has adopted the waiver procedures, with the SEC’s approval, which “protect [NYSE] arbitrators from disqualification motions (and possible lawsuits) and insulate arbitration awards from collateral attack….” Mr. Mayo has been offered this option or a hearing in Reno. “This action,” Mr. Clemente asserts, “comported with NYSE Arbitration Rule 613,” which leaves discretion in the hands of the Director regarding the time and place of hearing. Again, Mr. Mayo agreed that those rules would apply to his arbitration when he signed the Submission Agreement. (SAC Ref. No. 03-02-01)



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