Opinion
No C 03-2625 VRW
December 29, 2003
ORDER
Before the court is petitioner's petition to vacate the arbitration award entered against petitioner in NASD Case No 01-05583. See First Amended Pet (Doc #9). The respondents oppose this petition, and have filed a cross-petition seeking an order confirming the arbitral award. See Cross Pet (Doc #17). For the reasons set forth below, the court DENIES petitioner's petition to vacate the arbitration award, and GRANTS respondents' cross-petition confirming the arbitration award.
I
On September 30, 2001, petitioner, Lemoine Skinner III (Skinner), initiated arbitration proceedings against respondent, Donaldson, Lufkin Jenrette Securities Corporation (DLJ), with the National Association of Securities Dealers, Inc (NASD). See Cross Pet, ex A (Doc #17). The arbitration proceeding was originally brought against Credit Suisse First Boston (USA), Inc, but was later amended to be against Donaldson, Lufkin Jenrette Securities Corporation, an Affiliate of Credit Suisse First Boston Corporation (CSFB). See First Amended Pet, 2-3 (Doc #9); Cross-Pet, ex A B (Doc #17).Skinner and DLJ submitted the controversy to NASD for arbitration by signing Submission Agreements incorporating NASD arbitration rules. See Cross Pet, ex C (Doc #17). Following an arbitrator selection process that allowed the parties to investigate, evaluate, rank, strike, and mutually agree upon a panel of three arbitrators from a list of fifteen randomly selected potential arbitrators, the NASD duly appointed a panel consisting of two public arbitrators, Ferdinand Schoch (Schoch) and Paul Gutierrez (Gutierrez), and one industry arbitrator, Bradley Mitchell (Mitchell) (collectively, the Panel). See Cross Pet, 16.
In the arbitration proceedings, Skinner sought to recover damages against DLJ/CSFB for losses arising from an investment brokerage margin account Skinner maintained with DLJ from 1988 through March 15, 2001. See Cross-Pet, ex A B (Doc #17). Skinner alleged that investment advice purportedly provided to him by DLJ, Skinner's DLJ broker George Frankenstein, former DLJ/CSFB employee Thomas Galvin, and CSFB were negligent, grossly negligent, reckless, and were made without disclosure of conflicts of interests that violated DLJ/CSFB fiduciary duties to Skinner. See Cross-Pet, ex A B (Doc #17).
Skinner specifically alleged that on March 9, 2000, he had concerns about the direction of the technology sector, and questioned whether technology stocks were overvalued and whether he should sell his technology stock holdings. Skinner allegedly asked his DLJ broker George Frankenstein (Frankenstein) for DLJ's research on technology stocks, and was provided with DLJ's March 2000 Factbook, which contained DLJ's recommendations regarding technology stocks. Skinner alleges that based on the March 2000 Factbook, the extremely optimistic predictions of DLJ's chief investment officer, Tom Galvin (Galvin), and the failure of Frankenstein to advise Skinner to sell, Skinner decided not to sell his technology stock holdings.
Additionally, according to Skinner's allegations, after the NASDAQ decline began in April 2000, from May 2000 through August 2000, Skinner continued to purchase large cap technology stocks and exchange traded funds in the technology and biotech sectors on margin, based upon the optimistic projections for the technology section of Galvin, and the advice of Frankenstein, who relied on the research and recommendations of the analysts of DLJ and CSFB during this period. Furthermore, Skinner purported that from April 2000 to March 16, 2001, Skinner increased his technology stock holdings, increased the concentration of his portfolio in technology stocks, and decided not to liquidate his portfolio for the very same reasons. Id.
Before the commencement of the arbitration the Panel conducted three pre-hearing conferences to resolve various discovery and procedural issues. See Opp Mem. 5 (Doc #19). In these pre-hearing conferences, the Panel made several procedural rulings that were adverse to Skinner's interests. Most notably, the panel: refused to allow admission or discovery of evidence concerning an administrative complaint brought by the enforcement section of the securities division of the secretary of state of Massachusetts charging CSFB with securities fraud (the Administrative Investigation), Canning Decl 20 (Doc #7); rejected Skinner's discovery request for documents that showed the basis upon which DLJ analysts were compensated, Canning Decl 21 ex 4 (Doc #7); denied petitioner's request to file a second amendment to his statement of claim and for postponement of the hearing; denied Skinner's request for dismissal without prejudice of his claim, see id at 21; limited the number of witnesses Skinner was allowed to call, including the testimony of Tom Brown, a former DLJ analyst, see id at 35-38; and excluded newspaper articles, excepts from news programs and books detailing the supposed conflicts of interest at DLJ and CSFB. Id.
The arbitration hearing on the merits was held in San Francisco, California before the duly appointed Panel on February 24-26, 2003. And the Panel on March 11, 2003, dismissed all of Skinner's claims, stating: "After considering the pleadings, testimony, and evidence presented at the hearing, the Panel decided in full and final resolution of the issues submitted for determination as follows: (1) All claims by Petitioner, including the claim for punitive damages are dismissed. * * * (3) All other relief not expressly granted is denied." Takano Decl, Ex N (Doc #21). The Panel did not state any reasons for its decision. Skinner now seeks to have this award vacated. See First Amended Pet (Doc #9).
II
Before reaching the merits of the petition, the court must first address both parties numerous requests for judicial notice. See Requests for Judicial Notice (Doc #20, 24, 29).
DLJ and CSFB ask the court to take judicial notice of several documents regarding the legislative history of California Code of Civil Procedure § 1281.92(b). (Doc #20). Skinner has also asked the court to take judicial notice of several documents relating to the intent of the California legislature. (Doc #24) at II 12, 16, 17, 18. The court finds, for the reasons stated below, that California Code of Civil Procedure is preempted by federal law in this case, and therefore these documents are irrelevant. Both DLJ and CSFB's, and Skinner's requests for judicial notice of documents relating to the legislative history of California Code of Civil Procedure § 1281.92(b) are accordingly DENIED. See Fed Rule Evid 402.
Skinner also asks the court to take judicial notice of several documents relating to the Administrative Investigation brought against CSFB; several copies of newspaper articles, book excepts, and news reports detailing alleged conflicts of interest at CSFB; and several documents relating to the structure of NASD and its bylaws. See (Doc #24) at II 1-10; (Doc #29). The court finds that these documents are not appropriate documents to take judicial notice of, are irrelevant to the issues before the court, and are hearsay. See Fed Rule Evid 201(b), 602, 801, and 802. Skinner's requests for judicial notice of these documents are therefore DENIED.
III
Under federal law, review of arbitration awards is limited, and the award "will not be set aside by a court for error in law or fact."Todd Shipyards Corp v. Cunard Line, Ltd, 943 F.2d 1056, 1060 (9th Cir. 1991) (citation and internal quotation marks omitted). Reviewing courts may only overturn an arbitration award on specific statutorily enumerated grounds. 9 U.S.C. § 10(a); Kyocera Corp v. Lapine Technology Corp., 341 F.3d 987 (9th Cir 2003). An arbitration award may only be vacated:
(1) where the award was procured by corruption, fraud, or undue means;
(2) where there was evident partiality or corruption in the arbitrators, or either of them;
(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or
(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final and definite award upon the subject matter submitted was not made.9 U.S.C. § 10 (a).
Under Ninth Circuit jurisprudence: "Arbitrators are judges chosen by the parties to decide the matters submitted to them, finally and without appeal. As a mode of settling disputes, it should receive every encouragement from courts * * *. if the award is within the submission, and contains the honest decision of the arbitrators, after a full and fair hearing of the parties, a court * * * will not set it aside for error, either in law or fact * * *. It is not even enough that the Panel may have failed to understand or apply the law * * *. An arbitrator's decision must be upheld unless it is `completely irrational,' or it constitutes a `manifest disregard of law.'" Todd Shipyards Corp., 943 F.2d at 1060 (citations and internal quotation marks omitted); see alsoBarnes v. Logan, 122 F.3d 820, 821 (9th Cir 1997).
IV
Skinner makes several arguments in support of his contention that the award should be vacated:
1) the Panel refused to hear his claims against CSFB, and his claim that DLJ CSFB's analysts were subject to conflicts of interest concerning alleged investment banking compensation;
2) the Panel was guilty of misconduct for refusing to postpone the hearing and for their rulings on discovery and witnesses which excluded the introduction of pertinent and material evidence;
3) one of the arbitrators, Bradley Mitchell, failed to disclose that UBS Warburg, an affiliate of his employer UBS PaineWebber, was being investigated by federal and state securities regulators for similar matters alleged in the Arbitration in violation of 9 U.S.C. § 10(a)(2); and finally
4) the Panel lacked jurisdiction to decide the case because California Code of Civil Procedure § 1281.92(b) prohibited NASD from administering the arbitration.
See First Amended Pet (Doc #9).
A
Skinner first argues that the arbitral award should be vacated pursuant to 9 U.S.C. § 10(a)(4) because a definitive award upon the subject matter submitted was not made. Skinner argues that the Panel refused to hear his claims against CSFB, and his claim that DLJ/CSFB's analysts were subject to conflicts of interest. See First Amended Pet (Doc #9). Skinner argues that the following procedural rulings demonstrate that the Panel refused to hear his claims against CSFB and his claim that DLJ/CSFB analysts were subject to conflict of interests:
1) the Panel's ruling that DLJ/CSFB only has to produce its research reports during the period from March 1, 2000 through August 31, 2000, the day after CSFB announced its acquisition of DLJ, see Canning Decl, ex 15 (Doc #7);
2) the Panel's denial of discovery requests for documents showing the basis upon which DLJ analysts were compensated, Canning Decl 21 ex 4 (Doc #7);
3)the Panel's decision to limit the number of witnesses Skinner may call, including the testimony of Tom Brown, a former DLJ analyst, see id at 35-38
4)the Panel's failure to consider the Evidentiary Hearing, and its failure to allow discovery regarding the Evidentiary Hearing;
5) the Panel's failure to consider newspaper articles, excepts from news programs and books detailing the supposed conflicts of interest at DLJ and CSFB provided by Skinner.
6) the Panel's denial on or about January 29, 2003 of Skinner's request to file a Second Amendment to Claim and to postpone the evidentiary hearing dates; and,
7) the Panel's denial on or about February 6, 2003, of Skinner's request to dismiss Skinner's claims with out prejudice.
See First Amended Pet (Doc #9).
Skinner also claims that the Panel made several statements indicating that they were not considering his claims against CSFB and his claim that DLJ/CSFB's analysts were subject to conflicts of interest. First, when Skinner's counsel brought up the Administrative Investigation Schoch stated: "The reason we reacted — I reacted the way I did, Mr Canning, is that this [Administrative Investigation] has been dragged in and dragged in and we kept throwing it out and throwing it out and throwing it out." See Excepts of Testimony 13:15-18 (Doc #8). Next, at the close of Skinner's case, Skinner asked the panel to consider leaving the record open for six months until the completion of the Administrative Investigation. In response, Skinner alleges that Schoch stated that the panel was bifurcating the case and not considering Skinner's claims as to which the findings of the Administrative Investigation were related. See Sacks Decl ¶¶ 6-9 and 16 (Doc #6). Skinner further alleges, that Gutierrez stated that Skinner was free to raise these claims in a separate action. See id.
But in the arbitration award, the Panel stated that it "decided in full and final resolution of the issues submitted for determination * * * 1) All claims by [Skinner], including the claim for punitive damages." See Takano Decl Ex N (Doc #21). The language of an arbitral award is final and should not be second-guessed in a proceeding to vacate. SeeRemmey v. Paine Webber, Inc. 32 F.3d 143, 150-51 (4th Cir 1994); A G Edwards Sons, Inc v. McCullough, 967 F.2d 1401, 1403 (9th Cir 1992). The arbitral award makes clear that Panel reached all of the issues presented before it. The Panel's refusal to hear evidence regarding the Administrative Investigation, and its statements reflecting like intent, all reflect the Panel's procedural rulings attempting to control the scope of discovery and the trial. The validity of these holdings is discussed below.
In sum, Skinner's request to vacate the arbitration award because the Panel failed to reach a definitive reward upon the subject matter presented is DENIED.
B
Skinner next asserts that the award should be vacated under 9 U.S.C. § 10(a)(3) because the arbitrators were guilty of misconduct in refusing to postpone the hearing, and in refusing to hear pertinent and material evidence concerning Skinner's submitted claims. Id. Skinner points to the procedural rulings outlined above under subpart A as evidence of the Panel's refusal to hear pertinent and material evidence. Skinner alleges that these procedural rulings denied him an opportunity to present the following pertinent and material evidence:
1) CSFB's records of its securities research in fall and winter of 2000-2001;
2) evidence showing integration of DLJ and CSFB and transfer of DLJ's research department in fall 2000 to CSFB;
3)any evidence besides that information given to clients regarding the reasoning of DLJ and CSFB's recommendations after August 2000, or any information given to clients ending in September of 2000,
4) evidence showing compensation of DLJ and CSFB analysts;
5) any evidence of Tom Galvin's research and recommendations (other than in Fact Books, which ended in September 2000); and
6) any evidence showing how the research of DLJ and CSFB was disseminated to the public.
See Id. at 35.
In reviewing arbitrators' discovery and evidentiary rulings for "misconduct" by the arbitrators, a reviewing court does not review de novo the arbitrators' discovery and evidentiary rulings, but instead considers whether the arbitrators "grant[ed] the parties a fundamentally fair hearing" — one that provides "adequate notice, a hearing on the evidence, and an impartial decision by the arbitrator[s]." Sunshine Mining Co v. United Steelworkers of America, 823 F.2d 1289, 1295 (9th Cir 1987). Fundamental fairness only requires that the parties be provided "an adequate opportunity to present [their] evidence and arguments" and to present evidence "sufficient to enable the arbitrators to make an informed decision." Hotales Condado Beach, La Concha and Convention Center v. Union de Tronquistas Local 901. 763 F.2d 34, 39 (1st Cir 1985).
In the present case, Skinner was not deprived of an adequate opportunity to present his side, nor were the Arbitrators guilty of misconduct. Arbitration is intended to be efficient, expeditious, and economical, and arbitrators may restrict the scope of the arbitration accordingly. Sunshine Mining. 823 F.2d at 1293; see also Hunt v. Mobil Oil Corp. 654 F. Supp. 1487 (district court did not find grounds to vacate arbitration award where the court excluded certain documents, but allowed live testimony on the same subject). Although Skinner was restricted in the evidence that he was allowed to present, he was allowed to introduce adequate evidence on all his relevant claims in his complaint. He was allowed to call eight witnesses to testify, including himself, Frankenstein, Frankenstein's supervisor Carey Timbrell, DLJ/CSFB's former chief investment strategist Thomas Galvin, former DLJ analysts Harry Blount and Joseph Farley, and expert witnesses Irwin Stein and Dr. Burton Malkiel. (Doc #21) at ¶ 26. Skinner had a full opportunity to examine Galvin, and up to six analysts on matters related to his claims. Id. at ¶ 28. Skinner was also allowed to call Dr Malkiel, a Princeton professor, to testify as to the reasonableness of Galvin's recommendations. Id. at ¶ 21.
Likewise, the Panel's exclusion of evidence concerning, and discovery of information relating to the Administrative Investigation; the Panel's denial of Skinner's request to leave the record open, or postpone the arbitration proceedings to allow for introduction of evidence concerning these proceedings; and the Panel's refusal to allow Skinner to amend his complaint to allege additional claims against CSFB/DLJ do not justify vacating the arbitration award. "Absent exceptional circumstances, * * * a reviewing court may not overturn an arbitration award based on the arbitrator's determination of the relevancy or persuasiveness of the evidence submitted by the parties." Hotales Condado Beach, 763 F.2d at 39.
The Panel's determination that the Administrative Proceeding was irrelevant does not meet the high threshold established to justify the vacating of the arbitration award. Skinner only alleged that he relied on the March 2000 Factbook, the extremely optimistic predictions of Galvin, and the failure of Frankenstein to advise Skinner to sell. Therefore, the exclusion of evidence concerning alleged general conflicts of interest at CSFB/DLJ, can reasonably be determined to be irrelevant. Likewise, the Panel's denial of Skinner's request to postpone the hearing or leave the proceeding open until the conclusion of the Administrative investigation does not justify vacating the arbitration award.
Additionally, the Panel's denial of Skinner's petition to further amend his complaint, or to dismiss the complaint without prejudice do not justify vacating the arbitration award. As noted, arbitration is intended to be efficient, expeditious, and economical. Sunshine Mining, 823 F.2d at 1293. Skinner was already allowed to amend his arbitration claim once before, and Skinner stated that he would be ready to proceed at the February 24 hearing if his motion was denied. (Doc # 21) at I 22.
In sum, Skinner's request to vacate the arbitration award because he was not allowed to present evidence pertinent and material to the controversy, and because the arbitrators improperly refused to postpone the hearing is DENIED.
C
Skinner next claims that the arbitration award should be vacated for arbitrator Mitchell's failure to disclose that UBS Warburg, an affiliate of Mitchell's employer UBS PaineWebber, was being investigated by federal and state securities regulators for the very matters that Skinner alleged against DLJ/CSFB. Canning Dec, Ex 36 (Doc #7); Pet Decl, Ex 18 (Doc #4).
Under 9 U.S.C. § 10(a)(2), an arbitration award should be vacated for the evident partiality of one of the arbitrators. The United States Supreme Court has determined that "evident partiality" is present when an arbitrator has failed to disclose facts that show "a reasonable impression of partiality." Schmitz v. Zilveti, 20 F.3d 1043, 1046 (9th Cir 1994); citing Commonwealth Coatings Corp v. Continental Casualty Co., 393 U.S. 145, 149 (1968). In cases, in which the arbitrator has failed to disclose the relevant facts, a showing of a "reasonable impression of partiality" is sufficient, and actual partiality need not be shown, because "the policy of section 10(a)(2) instructs that the parties should choose their arbitrators intelligently" and a party cannot choose their arbitrators intelligently when facts showing potential partiality are not disclosed. Schmitz, 20 F.3d at 1047. But as pointed out by Justice White's concurring opinion in Commonwealth Coatings, non-disclosure of "trivial" or "remote" relationships is insufficient. Commonwealth Coatings, 393 US at 150-151 (White, J, concurring).
Mitchell's non-disclosure of any investigations of UBS Warburg was not sufficient to raise a reasonable impression of partiality. Mitchell's only relationship with DLJ and CSFB was a mere similarity of circumstances between an affiliate of Mitchell's employer and DLJ and CSFB. Neither Mitchell nor UBS Warburg stand to benefit from any determination in DLJ and CSFB's favor, as the arbitration proceeding would not have any precedential effect in a similar proceeding against UBS Warburg.
In Apusento Garden, 94 F.3d 1346 (9th Cir 1996), the Ninth Circuit reversed a lower court order vacating an arbitration award, which found that an arbitrator's failure to disclose that he and an expert witness were limited partners in a limited partnership owning an apartment complex in Hawaii like the apartment complex at issue in the litigation created an appearance of partiality. The Ninth Circuit focused on the fact that neither the parties nor the arbitrator were in any position to "curry favor with the other." Id at 1352. Similarly, in the present case, neither party is in a position to curry favors from the other. There is no evidence of any social, business or financial relationships between Mitchell or UBS Warburg and DLJ/CSFB that would be affected by the outcome of the arbitration. For these reasons, the court finds that Mitchell's non-disclosure of an investigation of UBS Warburg does not raise a reasonable probability of partiality.
The applicability of Schmitz and other non-disclosure cases in the present case is also dubious, because it is unclear whether Skinner had knowledge of the investigations of UBS Warburg prior to the arbitration proceedings. Mitchell was appointed to the Panel as an industry arbitrator, and he openly disclosed that he was an employee of UBS PaineWebber. Takano Decl, ex D (Doc #21). Skinner himself has consistently asserted that the alleged conflict of interest was endemic to the industry and "corrupted" all Wall Street research. Canning Decl, ex 29 (Doc #7). But Skinner did not challenge Mitchell's appointment for this reason prior to the hearing.
The court therefore DENIES Skinner's request to vacate the arbitral award because of arbitrator Mitchell's failure to disclose the investigation of UBS Warburg.
D
Skinner's final claim is that the arbitration award should be vacated because California Code of Civil Procedure section 1281.92(b) prohibited NASD from administering the arbitration. Cal Code Civ Pro section 1281.92(b) which came into effect on January 1, 2003 provides that: "No private arbitration company may administer a consumer arbitration, or provide any other services related to a consumer arbitration, if any party or attorney for a party has, or within the preceding year has had, any type of financial interest in the private arbitration company." Skinner argues that NASD Dispute Resolution Inc, a wholly-owned subsidiary of NASD, is a private arbitration company, and that Cal Code Civ Pro section 1281.92(b) operates to deprive the Panel of subject matter jurisdiction of the dispute.
Skinner's assertion that Cal Code Civ Pro section 1281.92(b) allows the court to set aside final arbitration decisions conducted by NASD is misplaced. The parties all signed Submission Agreements submitting to the jurisdiction of NASD, and incorporating NASD arbitration rules. Takano Decl Ex C (Doc #21). The Panel conducted the arbitration in accordance with these Agreements. In these situations the Federal Arbitration Act (FAA) sets out the exclusive grounds upon which an arbitration award may be vacated. See 9 U.S.C. § 9, 10(a); United Paperworkers International Union v. Misco, Inc., 484 U.S. 29 (1987). Any state law that allows for additional grounds for dismissal of an arbitration award would be preempted by the FAA.
Under the supremacy clause of the Constitution, state laws that interfere with or are contrary to federal laws are preempted and therefore are without effect. Fireman's Fund Ins Co v. City of Lodi, 302 F.3d 928, 941 (9th Cir 2002). "When considering preemption, no matter which type, the purpose of Congress is the ultimate touchstone.'" Ting v. ATT, 319 F.3d 1126, 1136 (9th Cir 2003) (citations omitted). "Where the statute does not speak directly to the issue, we look to `the goals and policies of the Act in determining whether it in fact preempts an action.'" Id (citation omitted). Although the FAA contains no express pre-emptive provision, nor does it reflect a congressional intent to occupy the entire field of arbitration, state law may nonetheless be pre-empted to the extent that it actually stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress. Volt Info Sciences, Inc v. Bd of Trustees of Leland Stanford Jr Univ, 489 U.S. 468, 474 (1989). The FAA was designed to overrule the judiciary's longstanding prejudice against arbitration proceedings. Volt, 489 US at 477 (citations omitted). Because California Code of Civil Procedure § 1281.92 targets specifically arbitration proceedings, any reading of that section which allows the court to vacate arbitral awards entered upon the agreements of the parties is preempted by the FAA.
Therefore, the court DENIES Skinner's request to vacate the arbitral award pursuant to California Code of Civil Procedure section 1281.92(b).
IV
For the reasons stated above, the petitioner's motion to vacate arbitral award is DENIED (Doc # 9), and respondent's cross-motion to confirm arbitral award is GRANTED (Doc # 17). AS this appears to dispose of all claims herein, respondents are DIRECTED to submit an appropriate form of judgment within twenty days hereof.
IT IS SO ORDERED.