Second Circuit Restricts Manifest Disregard of the Law

Second Circuit Restricts Manifest Disregard of the Law

On questions of law, arbitrators will be viewed as a blank slate, unless the parties educate the applicable legal principles.

GMS Group & Costa v. Benderson, No. 02-7129 (2nd Cir., 4/7/03). Award Challenge * Confirmation of Award * Manifest Disregard of Law * Rationale of Award * Expert Testimony/Opinions.

On questions of law, arbitrators will be viewed as a “blank slate, unless the parties educate the applicable legal principles.

In confirming the Award below against a manifest disregard challenge, the District Court applied an “any justification” or “barely colorable justification” standard, which GMS and broker Costa challenge on appeal. Appellants assert that the “manifest disregard” standard requires greater judicial scrutiny when federal statutory rights are implicated, citing the Court’s 1998 Halligan v. Piper Jaffray (9 SAC 12(13)) decision.

In that regard, Appellants, who were Respondents in the NASD Award under review (NASD ID #98-02618, Buffalo, 4/26/01), point out that claims against them included alleged violations of the 1934 Act.

The Court responds, first, that the lack of a reasoned Award leaves uncertain whether the 1934 Act claims were the basis for the $150,000 award amount, but, interested perhaps in the opportunity to clarify Halligan’s place in its case law, the Court proceeds as if federal statutory rights are implicated here. Accepting Appellants’ premise arguendo, the Court rejects their conclusion that Halligan and DiRussa v. Dean Witter Reynolds, 9 SAC 2(13) promoted a greater level of scrutiny for Awards relating to federal statutory claims. The Halligan Opinion contained language that suggests that “strong” or “overwhelming” evidence contradicting an arbitrator’s decision could suffice, Appellants argue, but the Court claims that “GMS takes those words out of context” and maintains that the Court’s extensive fact-finding in that Opinion did not manifest an independent judicial review leading to vacatur. Rather, it stresses, “we reached this conclusion applying the traditional manifest disregard standard” and “since our decisions in DiRussa and Halligan, we have continued to apply the same manifest disregard standard that pre-dated those decisions…..”

Next, the Court applies the traditional standard to this case and finds that the District Court did not err in upholding the Award. It reviews the expert testimony on the record of the arbitration proceeding and finds ambiguities. Where, as here, the law is unclear and the facts are complex, “we will not find manifest disregard of the law.” (ed: In a backhanded slap, the Court intimates that, were it to apply the requested heightened scrutiny, it would not benefit GMS, as the 1934 Act was not designed to protect broker-dealers. What this challenge did achieve was an insistent reiteration by a senior Panel of the Second Circuit of its adherence, at least henceforth, to a strict review standard for arbitration Awards, no matter what the nature of the underlying dispute.) (SAC Ref. No. 03-15-02)

Copyright 2003 Securities Arbitration Commentator, Inc. P.O. Box 112, Maplewood, NJ 07040; t: 973-761-5880 f: 973-761-1504. Materials denoted with a SAC Reference No. (e.g. SAC Ref. No. 99-01-001) are on hand at SAC and may be obtained by calling the Securities Arbitration Commentator, or by email to help@sacarbitration.com. The Securities Arbitration Commentator is the leading publication for securities arbitration news and information, and maintains the most complete database of arbitration awards availalble anywhere. For more information regarding their services, visit their website at www.sacarbitration.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. 

Mark J. Astarita is a veteran securities attorney representing investors and financial professionals nationwide in securities investigations and arbitrations. Have a question? Email him at mja@sallahlaw.com, call his office at 212-509-6544, or visit The Securities Lawyer