Monday, February 18, 2008
In Rich v. Spartis (2d Cir. Feb. 8, 2008), the Second Circuit affirmed the district court's vacatur of a securities arbitration award in favor of customers, but instructed the the district court to order the NASD panel that issued the award to clarify it. In its opinion the Second Circuit directs some critical words to the panel, two of whom (including the Chair), it notes, were lawyers and presumably should have known better. The problem was that the customers, a married couple, suffered losses because of their brokers' "exercise and hold plan" for Worldcom stock options that the wife had received through her employment. The customers, however, had not opted out of the Worldcom Securities class action, which barred them from arbitrating the Worldcom claims. Although this was called to the attention of the panel before the conclusion of the hearing, the Chair determined to go ahead with the arbitration and leave it to the respondents to go to court to void the arbitration award. The Chair also said that it would break out any damages awarded into Worldcom and non-Worldcom securities. The award, however, entered a lump sum damages award. At the hearing, the customers conceded that they could not enforce any portion of the award related to their Worldcom securities. Accordingly, the district court issued an injunction that nevertheless permitted the panel to clarify whether any portion of the award relates to non-Worldcom claims. However, the panel, without explanation, denied the motion to clarify the award. The Second Circuit found that some, indeed all, of the damages could relate to non-Worldcom securities and that the customers were entitled to the benefit of the burden of proof that the FAA imposes on the challengers of the award to establish that the panel exceeded its authority. Accordingly, the Second Circuit instructed the district court to order the panel to clarify the award and specify the amount of the award, if any, attributable to the Worldcom losses.