Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_06-cv-03715/USCOURTS-cand-3_06-cv-03715-0/pdf.json

Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 28:1332 Diversity-(Citizenship)

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United States District Court

For the Northern District of California

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UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

DUNCAN FORTIER and JASCAN

INVESTMENTS, INC., a Canadian

corporation,

Plaintiffs,

v.

MORGAN STANLEY DW, INC., a Delaware

Corporation, ANTONY GORDON,

MARGARET BLACK, and WILLIAM LAPPAS, 

 Defendants. 

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No. C-06-3715 SC

ORDER DENYING 

PLAINTIFFS' MOTION TO

VACATE AND GRANTING

DEFENDANTS' MOTION TO

CONFIRM ARBITRATION

AWARD 

I. INTRODUCTION

Before the Court are opposing motions concerning NASD

Arbitration Award No. 04-00355 (the "Award"). Plaintiffs Duncan

Fortier and Jascan Investments, Inc. ("Plaintiffs") move to vacate

the Award. Defendants Morgan Stanley DW, Antony Gordon, Margaret

Black, and William Lappas ("Defendants" or "Morgan Stanley") move

to confirm the Award. For the reasons stated herein, the Court

DENIES Plaintiffs' Motion to Vacate and GRANTS Defendants' Motion

to Confirm.

II. BACKGROUND

The underlying dispute involves shares of an Internet startup

which Plaintiffs deposited in a securities account with Morgan

Stanley in early 2000. Plaintiffs contend that Defendants

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promised to deliver, but failed to implement, a hedging strategy

to protect the value of the shares. When the stock market

declined in the Spring of 2000, Plaintiffs' investment lost

roughly half its original value. See Wallis Decl., Exh. 1. 

Nearly four years later, on January 20, 2004, Plaintiffs filed

their Statement of Claim with the National Association of

Securities Dealers ("NASD") alleging that Defendants committed

fraud, negligence, breach of contract, and breach of fiduciary

duty. See Mot. to Vacate, Exh. A. The arbitration process

continued through the Winter of 2006 when arbitrators evaluated

Plaintiffs' claims. See Opp'n to Mot. to Vacate, 2-5. 

On March 16, 2006, the three-member NASD arbitration panel

(the "Panel") signed and served the Award that dismissed

Plaintiffs' claims as time-barred. See Mot. to Vacate, Exh. A. 

After a hearing on Defendants' motion to dismiss, the Panel

granted the motion based on its finding that the applicable

statute of limitations had run for each of Plaintiffs' legal

claims. See id. at 3. On June 9, 2006, Plaintiffs filed their

Petition and Application to Vacate the Award. See Mot. to Vacate. 

Plaintiffs alleged two general grounds for vacatur: (1) the Panel

was biased and (2) the Panel exceeded its powers by failing to

conduct a full hearing and dismissing the claims with prejudice. 

Id. at ¶¶ 24, 25, 28. Defendants opposed the motion and

subsequently filed their Motion to Confirm, which Plaintiffs

opposed. See Mot. to Confirm. In short, Defendants assert that

Plaintiffs received a fair hearing and that their claims of

arbitrator bias are unsubstantiated. See id. 

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III. LEGAL STANDARD

Under the Federal Arbitration Act ("FAA"), federal courts

have limited powers to vacate arbitration awards. Judicial review

of an arbitration award is “both limited and highly deferential.” 

Sheet Metal Workers' Int'l Ass'n Local 359 v. Madison Indus.,

Inc., 84 F.3d 1186, 1190 (9th Cir. 1996). The FAA states that

district courts may overturn an award under four conditions: 

(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 section 9 of the FAA, a district court must confirm the

award "unless the award is vacated, modified, or corrected as

prescribed in sections 10 and 11.” 9 U.S.C. § 9. The Ninth

Circuit has interpreted sections 9 and 10 narrowly, but has

indicated that vacatur is appropriate under subsection 10(a)(4)

when there has been a manifest disregard for law or the award is

completely irrational. See Lapine Tech. Corp. v. Kyocera Corp.,

130 F.3d 884, 888 (9th Cir. 1997) (“It is beyond peradventure that

. . . a federal court may vacate or modify an arbitration award

only if that award is 'completely irrational,' exhibits a

'manifest disregard of law,' or otherwise falls within one of the

grounds set forth in 9 U.S.C. §§ 10 or 11.”). Confirmation of an

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award is required even in the face of incorrect interpretations of

law. “It is not even enough that the Panel may have failed to

understand or apply the law." French v. Merrill Lynch, 784 F.2d

902, 906 (9th Cir. 1986). 

IV. ANALYSIS

1. Arbitrator Bias

The party challenging an arbitration award has the burden of

showing partiality by establishing "specific facts which indicate

improper motives on the part of the Board. The appearance of

impropriety, standing alone, is insufficient." Sheet Metal

Workers Int'l Ass'n Local 420 v. Kinney Air Conditioning Co., 756

F.2d 742, 746 (9th Cir. 1985). In this case, Plaintiffs bear the

burden because they allege that each of the three arbitrators

demonstrated bias by failing to disclose prior arbitration

decisions. See Mot. to Vacate at ¶¶ 21-23. 

In evaluating these claims, the FAA provides that the court

may vacate an arbitration award “where there was evident

partiality or corruption in the arbitrators.” 9 U.S.C. §

10(a)(2). In non-disclosure cases such as this, vacatur is

appropriate where the arbitrator's failure to disclose information

gives the impression of bias in favor of one party. See

Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S.

145, 150 (1968) (holding that the reasonable impression of bias is

sufficient to vacate an award pursuant to 9 U.S.C. § 10(a)(2));

Schmitz v. Zilveti, 20 F.3d 1043, 1047 (9th Cir. 1994) (stating

that the standard for determining evident partiality in nondisclosure cases is whether there is a “reasonable impression of

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partiality”). This standard is used because "[t]he parties can

choose their arbitrators intelligently only when facts showing

potential partiality are disclosed.” Id. Whether the Panel's

actual decision is faulty is not necessarily relevant. Id. 

Plaintiffs claim that arbitrator Stanford Hirata failed to

disclose that he arbitrated another case involving Defendant

Morgan Stanley. See Mot. to Vacate at ¶ 21. This argument fails

for two reasons. First, the information was disclosed to the

parties in a letter from the NASD Senior Arbitration Administrator

on July 15, 2005. See Wallis Decl., Exh. 11. The letter stated

that the other Morgan Stanley case was scheduled for hearing in

December 2005 and that Mr. Hirata believed it would not affect his

ability to be impartial in this case. Id. Plaintiffs later

acknowledged this fact in their Opposition to Defendants' Motion

to Confirm. See Pls.' Opp'n to Mot. to Confirm, 12. Thus, from

July 15, 2005 onward Plaintiffs were aware of the other case but

chose not to challenge and disqualify Mr. Hirata under NASD Rule

10308(d). Plaintiffs' actual knowledge of the potential conflict

waives their objection. See Fidelity Federal Bank, FSB v. Durga

Ma Corp., 386 F.3d 1306, 1313 (9th Cir. 2004). Second, Mr.

Hirata's arbitration of another Morgan Stanley case does not

create a reasonable impression of partiality. By arbitrating the

prior case, Mr. Hirata did not acquire a relationship to the

company that impugned his ability to be impartial in this case. 

See e.g., International Produce, Inc. v. A/S Rosshavet, 638 F.2d

548, 551-52 (2d Cir. 1981) (explaining that prior exposure to a

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party does not necessarily show bias). Thus, Plaintiffs have

failed to show that Mr. Hirata was a biased arbitrator. 

Plaintiffs also claim that arbitrator Kathryn Toronto failed

to disclose the December 2005 arbitration of Taylor v. Banc of

America Investment Services, NASD no. 04-08301. See Mot. to

Vacate at ¶ 22. Plaintiffs assert that non-disclosure of an award

which granted a motion to dismiss in favor of the NASD firm

demonstrates bias. Id. On the contrary, the Taylor award bears

no relationship to this case: it involved different parties and

different issues. Furthermore, NASD Rules did not require

arbitrator Toronto to disclose her participation in the Taylor

case because it did not create any potential conflict of interest. 

See NASD Code of Arbitration Procedure § 10312(a) (describing the

direct personal and financial interests and relationships that

mandate disclosure). Thus, Plaintiffs have failed to show that

Ms. Toronto's non-disclosure demonstrates a reasonable impression

of partiality. 

Plaintiffs also claim that arbitrator Mario Barsotti failed

to disclose that he had arbitrated cases for the Pacific Stock

Exchange, specifically the 1995 case of Turney v. Prudential

Securities, Pacific Stock Exchange no. 03173. See Mot. to Vacate

at ¶ 23. The Turney award was issued nearly ten years prior to

the filing of Plaintiffs' case. Moreover, it did not involve any

of the same issues or parties as the present case. As Justice

White wrote, an arbitrator "cannot be expected to provide the

parties with his complete and unexpurgated business biography." 

Commonwealth Coatings, 393 U.S. at 151 (White, J., concurring). 

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The non-disclosure of an old and unrelated arbitration fails to

create any reasonable impression of bias with respect to

Arbitrator Barsotti. 

Plaintiffs have failed to carry their burden under 9 U.S.C. §

10(a)(2) because they have been unable demonstrate any reasonable

impression of bias on the part of any of the arbitrators. Further

discovery on this issue is unnecessary as Plaintiffs have had

ample opportunity to examine the arbitrators' prior rulings. 

2. Arbitrator Powers

Under section 10 of the FAA, an award may be vacated if the

arbitrators exceeded their powers. 9 U.S.C. § 10(4). Plaintiffs

assert that the Panel exceeded its powers by failing to hold an

appropriate hearing and by dismissing the case with prejudice. 

See Mot. to Vacate at ¶ 25-28. 

Contrary to Plaintiffs' assertions, the Panel held sufficient

hearings. On February 24, 2006, both parties submitted Hearing

Briefs in anticipation of the commencement of arbitration

proceedings. See Wallis Decl., Exh. 14, 15. The hearing was then

held in San Francisco on March 7 and March 8, 2006. See Wallis

Decl. at ¶ 16. At the outset, Defendants moved to dismiss the

case asserting that the statute of limitations had expired. Id. 

Over the course of two days, the parties argued the motion,

Plaintiff Fortier testified, Plaintiffs submitted an additional

brief on the issue, and the matter was submitted for decision. 

Id. at ¶ 17-28. Plaintiffs do not dispute that this hearing was

held on the statute of limitations issue. Instead, they argue

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that the Panel should have also allowed a full hearing on their

substantive claims. See Pls.' Opp'n to Mot. to Confirm at 16. 

Under NASD regulations, any case requires a hearing unless

the parties waive their right, though the components of a

"hearing" are not specified. See NASD Code of Arbitration

Procedure ("NASD Code") § 10303(a). Section 10324 states that

"arbitrators shall be empowered to interpret and determine the

applicability of all provisions under this Code...." The Supreme

Court has stated that courts should defer to the arbitrators'

interpretation of procedural rules because "NASD arbitrators,

comparatively more expert about the meaning of their own rule, are

comparatively better able to interpret and to apply it." Howsam

v. Dean Witter Reynolds, Inc., 537 U.S. 79, 85 (2002). Viewed in

this deferential light, the hearings and procedures that the Panel

employed to decide Plaintiffs' claims were sufficient. 

Section 10305 of the NASD Code allows the Panel to dismiss a

case with or without prejudice based on its evaluation of the case

and the parties' behavior. In this case, the Panel determined

that Plaintiffs' claims were time-barred and dismissed the case

with prejudice. See Mot to Vacate, Exh. A at 3. The Ninth

Circuit has held that procedural issues are “part of the bundle of

issues committed to decision by the arbitrator.” Sheet Metal

Workers 420, 756 F.2d at 744; see also Toyota of Berkeley v. Auto.

Salesmen's Union, Local 1095, 834 F.2d 751, 754 (9th Cir. 1987)

(“[P]rocedural questions related to substantive issues that are

arbitrable under the agreement are for the arbitrator to decide in

the absence of a contrary provision.”). When dismissing the case,

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the Panel interpreted the NASD Code of Arbitration Procedure and

decided that a dismissal with prejudice was appropriate in light

of the circumstances. The Panel's actions were within their broad

procedural powers under the NASD Code. Thus, the Panel's decision

to hold a hearing on Defendants' motion and dismiss the case with

prejudice is not a basis for vacating the Award under section

10(a)(4) of the FAA.

V. CONCLUSION

For the foregoing reasons, Plaintiffs' Motion to Vacate the

Arbitration Award is DENIED and Defendants' Motion to Confirm the

Arbitration Award is GRANTED. The Award is hereby CONFIRMED. 

IT IS SO ORDERED.

Dated: October 23, 2006

 

UNITED STATES DISTRICT JUDGE

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