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Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued January 22, 2007 Decided March 16, 2007

No. 06-7067

MICHAEL LESSIN,

APPELLANT

v.

MERRILL LYNCH, PIERCE, FENNER & SMITH, INC. AND

BRETT BERNSTEIN,

APPELLEES

Appeal from the United States District Court

for the District of Columbia

(No. 05cv00171)

Robert A. Kantas argued the cause and filed the briefs for

appellant.

Mary Gail Gearns argued the cause and filed the brief for

appellees. Edward L. Powers and Lauren C. Gould entered

appearances.

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Before: ROGERS and KAVANAUGH, Circuit Judges, and

EDWARDS, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge ROGERS.

ROGERS, Circuit Judge: During a ten-month period in

2000, Michael Lessin lost $5.6 million in his brokerage account

with Merrill Lynch, Pierce, Fenner & Smith, Inc. He appeals

the district court’s denial of his motion to vacate an arbitration

award in his favor for $32,975. Lessin contends vacation is

required because the arbitrators refused to hear one of his expert

witnesses and demonstrated a manifest disregard of the law in

awarding compensatory damages. In the absence of any

prejudice as a result of the evidentiary ruling and in light of the

record support for the award, we affirm.

I. 

Lessin opened a brokerage account with Merrill Lynch in

mid-January 2000. When he opened the account, Lessin held

almost $5.3 million in Yahoo! securities and a $2.1 million

margin balance. Previous to this, Lessin had worked at

Broadcast.com and exercised options of $99,000 in

Broadcast.com stock. A few months later, Yahoo! acquired

Broadcast.com. Lessin then opened a brokerage account at

Ferris, Baker Watts, Inc., executing a New Account Form

specifying that his priority investment strategies were

speculation and aggressive growth. His broker at Ferris was

Robert Jones. As a result of the acquisition, Lessin was able to

exchange his Broadcast.com stock for shares in Yahoo! worth

approximately $2.3 million. By January 2000, after just seven

months, Lessin’s account had increased in value to

approximately $4.9 million. 

In January 2000, Lessin transferred his account to Merrill

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Lynch, which charged a flat rate per year instead of a

commission on each trade. At Merrill Lynch he executed a

Retail Account Profile stating that his investment objective was

“growth” and that his risk tolerance was “aggressive.” In his

Option Agreement he specified that his objective was

“speculation” and that he had five years experience trading

equities and options. He also signed a transfer form on which he

wrote: “DO NOT LIQUIDATE ANYTHING.” His broker at

Merrill Lynch was Brett S. Bernstein. By October 2000,

Lessin’s account had lost almost 100% of its value.

In February 2003, pursuant to a standard brokerage contract

to arbitrate disputes before a panel of the National Association

of Securities Dealers (“NASD”), Lessin filed a statement of

claim against Merrill Lynch and Bernstein for between $5 and

$10 million in compensatory damages as well as for punitive

damages. A panel of three NASD arbitrators heard evidence

over a six-day period. The panel found Merrill Lynch, but not

Bernstein, liable to Lessin for compensatory damages of

$32,975. Lessin filed a motion to vacate the award in the

Superior Court of the District of Columbia, which Merrill Lynch

removed to the federal district court. The district court denied

the motion to vacate, and Lessin appeals. This court reviews a

district court’s confirmation of an arbitration award for clear

error as to findings of fact and de novo as to questions of law.

Kurke v. Oscar Gruss & Son, 454 F.3d 350, 355 (D.C. Cir.

2006).

II.

Judicial review of arbitration awards is limited. In addition

to the grounds under the Federal Arbitration Act (“FAA”) on

which an arbitration award may be vacated, an award may be

vacated only if it is in “manifest disregard of the law” or is

contrary to an “explicit public policy.” LaPrade v. Kidder,

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Peabody & Co., 246 F.3d 702, 706 (D.C. Cir. 2001) (internal

quotation marks omitted); cf. Cole v. Burns Int’l Sec. Servs., 105

F.3d 1465, 1486-88 (D.C. Cir. 1997). Lessin’s appeal invokes

both the statutory and non-statutory grounds for vacation.

Under the FAA, an arbitration award may 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) (emphasis added). 

Lessin contends that the arbitration panel engaged in

misconduct by refusing to hear pertinent and material evidence

from one of his designated expert witnesses. In considering this

contention, the court is mindful of the fact that “[i]n making

evidentiary determinations, an arbitrator ‘need not follow all the

niceties observed by the federal courts.’” Tempo Shain Corp. v.

Bertek, Inc., 120 F.3d 16, 20 (2d Cir. 1997) (quoting Bell

Aerospace Co. Div. of Textron v. Local 516, UAW, 500 F.2d

921, 923 (2d Cir. 1974)). The arbitrator “need only grant the

parties a fundamentally fair hearing.” Bell Aerospace, 500 F.2d

at 923; accord Sheldon v. Vermonty, 269 F.3d 1202, 1206 (10th

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Cir. 2001); see Hoteles Condado Beach, La Concha &

Convention Ctr. v. Union De Tronquistas Local 901, 763 F.2d

34, 39 (1st Cir. 1985); Nat’l Post Office Mailhandlers v. U.S.

Postal Serv., 751 F.2d 834, 841 (6th Cir. 1985); Totem Marine

Tug & Barge v. N. Am. Towing, 607 F.2d 649, 651 (5th Cir.

1979); Newark Stereotypers’ Union No. 18 v. Newark Morning

Ledger Co., 397 F.2d 594, 599 (3rd Cir. 1968). It is well within

an arbitrator’s authority to refuse to hear evidence that is

cumulative, see, e.g., Hoteles Condado Beach, 763 F.2d at 40;

Nat’l Post Office Mailhandlers, 751 F.2d at 841, or of little

relevance, see, e.g, Hoteles Condado Beach, 763 F.2d at 40;

Grahams Serv. Inc. v. Teamsters Local 975, 700 F.2d 420, 422-

23 (8th Cir. 1982); see also SEC. INDUS. CONFERENCE ON

ARBITRATION, THE ARBITRATOR’S MANUAL 26 (May 2005). 

At the arbitration proceedings, Lessin testified that

Bernstein had misrepresented his experience as a broker and had

never cautioned him regarding the excessive risk in his accounts.

Lessin also elicited testimony that Merrill Lynch had failed to

supervise Bernstein, and he presented evidence that both

Bernstein and Merrill Lynch had encouraged the use of

excessive margin loans, and that Merrill Lynch had maintained

a “buy” recommendation on Yahoo! during the period when

Lessin lost $3.7 million on the stock. According to Lessin, this

loss was compounded by a $1.1 million loss on Be Inc.

(“BEOS”), a stock that Bernstein had continuously

recommended. While acknowledging that he had received

monthly statements on the status of his account and written

confirmations of each security trade, and that he had tracked his

stocks on Merrill Lynch’s website, Lessin claimed that he did

not study these materials and only did what Bernstein

recommended.

Both Bernstein and Robert Jones, Lessin’s broker at Ferris,

testified that they had advised Lessin to diversify his account.

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Jones testified that Lessin had said from the beginning that he

wanted to trade on margin and did not want to sell the Yahoo!

stock. Jones had advised Lessin that he had too much Yahoo!

stock, but Lessin “loved Yahoo! [and] he thought it was going

higher [in value].” Bernstein testified to the same effect and that

he had advised Lessin to pay off some of his margin debt, but

that Lessin had repeatedly “made it very clear . . . he did not

want to sell Yahoo!; it wasn’t an option.” Bernstein also

testified that he had made notations of his advice to Lessin on

his computer in a program called Gold Mine. Those notations

included an entry dated October 11, 2000 that:

Howard [Rothman, another Merrill Lynch broker] and

I had spoken to [Lessin] numerous times about being

so aggressive, especially on margin. Also, we were

discussing that he wouldn’t take losses on the [stocks]

that were on margin [because] he felt they would come

back. Now, [after a large margin call,] he was forced

to sell them. He thought he knew it all. 

Lessin proffered two expert witnesses in an attempt to show

that the Gold Mine notes were fabricated after the fact. The first

was Kenneth Bradley, an independent computer forensic

examiner trained at the Defense Department in techniques of

evidence recovery. He opined, based on his examination of the

hard drive on Bernstein’s computer, that many of the Gold Mine

entries appeared to have been made at the same time. Merrill

Lynch’s expert, Michael William Finnie, who also had

examined the hard drive, testified that a maintenance function,

which indexes a database by sorting entries into files, had been

run on the hard drive and explained the compression of the Gold

Mine data. While both experts ultimately agreed that certain

Gold Mine entries were genuine, they disagreed regarding the

genuineness of the October 11, 2000 note. 

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After hearing a full day of testimony from each party’s

expert, the panel announced the following morning that it had

decided it did not need to hear from Lessin’s second expert, Art

Ehuan, a certified forensics computer examiner with experience

in the private and public sectors, who taught at Georgetown and

George Washington Universities. The panel chairman explained

that the panel members thought they had sufficient information

about what had happened and how the Gold Mine program

worked. They also did not want to face the possibility of

hearing from a rebuttal expert witness called by Merrill Lynch

if Lessin were allowed to call a second expert. 

Lessin objected, stating that he had given notice of the

witness and that the second expert was important to his case in

chief because his first expert had not commented on the validity

of the Finnie report, which his second expert was designated to

do. Regarding the possibility of a rebuttal expert, he pointed out

that Merrill Lynch had already had two bites at the apple

because it had submitted a supplemental affidavit and Bradley

had given Finnie his notes on his examination of Bernstein’s

computer. Merrill Lynch responded that Lessin had proposed to

call the second expert to address its claim that Bradley had

performed his analysis in an unsound fashion, and since the

second expert had not personally examined the hard drive he

would simply be offering an opinion regarding the reports of the

two experts who had personally examined it, which was not

relevant. The panel chairman stated that Lessin’s objection was

noted and the panel proceeded to hear other testimony. 

As the First Circuit has explained, “[e]very failure of an

arbitrator to receive relevant evidence does not constitute

misconduct requiring vacatur of an arbitrator’s award.” Hoteles

Condado Beach, 763 F.2d at 40; see Flender Corp. v. TechnaQuip Co., 953 F.2d 273, 280 (7th Cir. 1992). Rather, a federal

court may vacate an award only if the panel’s “refusal to hear

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pertinent and material evidence prejudices the rights of the

parties to the arbitration proceedings.” Hoteles Condado Beach,

763 F.2d at 40; see Employers Ins. of Wausau v. Nat’l Union

Fire Ins. Co. of Pittsburgh, 933 F.2d 1481, 1490 (9th Cir. 1991)

(citing, e.g., Burchell v. Marsh, 58 U.S. (17 How.) 344, 350

(1854)). Thus, there is no statutory ground for vacation of the

arbitration award if the arbitrators refused to hear from Lessin’s

second expert because the evidence would be irrelevant or

merely cumulative. See Hoteles Condado Beach, 763 F.2d at

40; Nat’l Post Office Mailhandlers, 751 F.2d at 841; Grahams

Serv. Inc., 700 F.2d at 422-23; see also NASD Manual, Code of

Arbitration Procedure Rule 10323. There is, however, support

for Lessin’s position that his second expert’s testimony would

not have been cumulative because, unlike his first expert, his

second expert was retained to comment on the methodology

used by the other experts. Lessin points out that his first expert

did not opine on the issue of methodology or address the

significance of omissions in the Finnie report and that he had

anticipated addressing those issues through Ehuan’s expert

testimony. 

Expert testimony on methodology may be substantively

different from expert testimony expressing an opinion based on

personal observation and testing. Generally speaking, the

former might be described as concerning the application of a

specialized theory in a particular case while the latter concerns

specialized observations and the specialized translation of those

observations into theory. See Kumho Tire Co. v. Carmichael,

526 U.S. 137, 148-49 (1999); see also FED.R.EVID. 703. In the

instant case, expert testimony regarding the methodology

employed to determine the genuineness of Bernstein’s Gold

Mine notes would have been pertinent and material because the

two experts from whom the panel did hear reached opposite

conclusions about the validity of the October 11 note. Crossexamination had revealed omissions in the procedures used by

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each of the experts. Expert testimony on whether such

omissions raised doubts about either expert’s conclusion could

have assisted the panel in resolving whether Bernstein’s Gold

Mine notes were fabricated, and, thus, in determining

Bernstein’s credibility in testifying about the investment advice

he had given Lessin. As Lessin suggests, Bernstein’s testimony

was a key part of Merrill Lynch’s defense.

The ultimate question, however, is whether the panel’s

refusal to hear testimony from Lessin’s second expert deprived

Lessin of a fair hearing. See Hoteles Coronado Beach, 763 F.2d

at 40. On this record we find no evidence that it did. 

First, Lessin’s expert Bradley acknowledged on crossexamination that there were two genuine archived copies of

Bernstein’s Gold Mine entries: one file was last modified on

September 21, 2000 and the other file was last modified on

October 3, 2000. These copies included entries dated October

2 and 3, 2000 that contained similar information to the October

11 note. The October 2 note stated that Bernstein told Lessin

“several times to diversity his YHOO and not margin his acct.

so high . . . [but Lessin] didn’t see the value and hedge of

writing covered calls.” The October 3 note stated that Bernstein

“went over w/ [Lessin] more details on margin and where

YHOO has to drop for his acct. to be zero. [Lessin] is still

looking at depositing money from his business into his personal

acct. to cover his margin call. I recommended against it.” Even

if other Gold Mine entries were backdated, these genuine entries

provided contemporaneous support for Bernstein’s testimony

about his advice to Lessin. Merrill Lynch also points to

Bernstein’s email of November 15, 2000, but this

correspondence was prompted by a request from Bernstein’s

supervisor to explain the huge losses in Lessin’s account; it not

only came too late to have afforded any benefit to Lessin but it

was made at a time when it was in Bernstein’s self interest to

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paint a very favorable picture of his relations with Lessin.

Second, the testimony of Robert Jones, Lessin’s broker at

Ferris, corroborated Bernstein’s description of Lessin’s

investment conduct at Merrill Lynch and Lessin’s intention to

make his own investment decisions irrespective of his broker’s

advice. Third, the documentary evidence – Lessin’s New

Account Form at Ferris and his Retail Account Profile, Option

Agreement, and transfer form at Merrill Lynch – also

corroborated the testimony of his brokers to the extent that

Lessin’s rejection of the advice to diversify, to sell Yahoo!, and

to pay down his margin was consistent with his stated

investment objectives.

Together this evidence rendered immaterial whether

Bernstein had fabricated the October 11 note and, thus, also

rendered immaterial the testimony of Lessin’s second expert.

Lessin did not present evidence that challenged the genuineness

of the October 2 and 3 notes in the Gold Mine program on

Bernstein’s computer. He could hardly dispute his stated

preference for aggressive investment and the “DO NOT

LIQUIDATE” instruction in the brokerage documents that he

had executed. Even if Lessin’s second expert had persuaded the

panel that the methodology used by Merrill Lynch’s expert was

flawed, that testimony would have left unchallenged the other

computer notes supporting Bernstein’s version of events. Lessin

had opportunities to challenge Bernstein’s credibility, and did so

during cross-examination and by presenting emails he had

received from Bernstein that did not include the disputed advice,

but the corroborating evidence was nonetheless substantial.

Hence, it is unsurprising that Lessin’s objection to the panel’s

ruling not to allow him to present his second expert’s evidence

failed to identify the prejudicial effect to his case in chief.

Lessin thus fails to show that the panel’s refusal to hear

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evidence deprived him of a fair hearing. By the time it decided

not to hear from his second expert, the panel was in a position

to conclude that methodology was no longer material to the

question of Bernstein’s credibility. As the district court

concluded, the panel found that Lessin was responsible for his

own losses because his conduct in holding his Yahoo! stock

without diversifying and in trading on margin, notwithstanding

his continuous awareness of the status of his accounts, reflected

his stated investment objectives. 

Lessin’s other contention – that vacation is required because

the panel failed to adjudicate his claims against Bernstein,

rendering the award indefinite and incomplete under the FAA,

9 U.S.C. § 10(a)(4) – is frivolous: the October 8, 2006 award

stated that “[a]ny relief not specifically addressed herein,

including punitive damages, is denied in its entirety.” 

III.

 Lessin challenges the amount of the award on two grounds:

He claims that the panel exceeded or imperfectly executed its

powers by awarding him one-half of one percent of his

documented damages and that it disregarded the law on

negligent supervision by implicitly finding that Merrill Lynch

failed properly to supervise its broker and then awarding only a

fraction of the proven damages. Neither claim has merit.

A.

In the district court, Lessin argued that the panel had failed

to explain how it had arrived at $32,975 as the amount of

compensatory damages. The district court found, based on

inferences from the arbitration record, that the panel credited the

testimony of Lessin’s brokers but did not credit his testimony

and concluded, based on his preferred investment strategy as set

forth in the brokerage documents he executed, that Lessin, not

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Bernstein, was responsible for his losses. Further, citing Sargent

v. Paine Webber Jackson & Curtis, Inc., 882 F.2d 529, 532

(D.C. Cir. 1989), which held that arbitrators are not required to

explain the basis for their award when the grounds can be

gleaned from the record, the district court found no evidence the

arbitrators disregarded the law. The district court concluded that

the amount represented the $500 non-refundable filing fee that

Lessin paid upon submitting his claim to arbitration and $32,475

for management fees he paid to Merrill Lynch, noting that the

panel had found that Merrill Lynch had failed to supervise

Bernstein properly. 

Lessin’s claims of error on appeal are premised on the

flawed notion that his out-of-pocket losses at Merrill Lynch are

proof of the measure of his compensable damages. We find no

error in either the district court’s reasoning or its findings

rejecting that notion. As the district court succinctly put it, the

record supports the inference that the panel concluded that

“Lessin risked losses to his account, and his account suffered

losses as a result.” Lessin’s protests that the award was arbitrary

and capricious, see Lifecare Int’l, Inc. v. CD Med., Inc., 68 F.3d

429, 435 (11th Cir. 1995), and that the award was irrational, see

Brabham v. A.G. Edwards & Sons, 376 F.3d 377, 382 n.6 (5th

Cir. 2004) (citing cases), fare no better. Even assuming such

standards were consistent with this circuit’s scope of review, he

fails to show, given the panel’s determination that only Merrill

Lynch was liable, that the award was arbitrary and capricious or

irrational. 

B.

In LaPrade, the court explained that:

[m]anifest disregard of the law means more than error

or misunderstanding with respect to the law.

Consequently, to modify or vacate an award on this

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ground, a court must find that (1) the arbitrators knew

of a governing legal principle yet refused to apply it or

ignored it altogether and (2) the law ignored by the

arbitrators was well defined, explicit, and clearly

applicable to the case. 

246 F.3d at 706 (citations and quotation marks omitted).

Lessin’s contention that the panel acted in manifest disregard of

law is based primarily on the admissions of Bernstein’s

supervisor, who testified that a Merrill Lynch supervisor should

have contacted Lessin to be sure he understood the risks before

his account had decreased so greatly in value. His suggestion

that a failure to supervise claim can only exist where the person

being supervised has done something wrong ignores that there

was an independent basis for the panel to find Merrill Lynch

liable. Hence, his reliance on Spear, Leeds & Kellogg v.

Bullseye Securities, Inc., 738 N.Y.S.2d 27, 28-29 (App. Div.

2002), is misplaced. In that case there was no evidence,

independent of employee negligence, that the firm had failed to

perform contracted services. Here there was evidence that

Merrill Lynch failed to provide the supervision that it had

contracted to provide. 

To the extent Lessin also contends that equity demands

Merrill Lynch not be allowed to retain profits it made from his

account, he fails to show, in light of his contractual obligation to

submit any disputes with Merrill Lynch and Bernstein to

arbitration, that the panel acted beyond its authority. Our

limited scope of judicial review does not extend to reweighing

equities supported by the arbitration record. See Kurke, 454

F.3d at 357-58. Given the evidence before the panel, Lessin

fails to demonstrate that the award violated an explicit public

policy.

Accordingly, we affirm the denial of the motion to vacate

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the arbitration award.

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