While “manifest disregard” may still be a viable basis for challenging an Award in New York State, that burden is very difficult to prove absent an explained Award, says a New York trial court.
At a high level, the headline from NSB Advisors, LLC vs. C.L. King & Assoc., Inc., No. 657034/2017, 2018 N.Y. Slip Op. 32533(U) (N.Y. Sup. Ct., NY Cty., Oct. 2, 2018), is: “New York trial court confirms FINRA arbitration award in favor of RIA for clearing broker’s breach of parties’ services agreement.” We offer a full analysis in our online SOLA sister publication, but we focus here on just one aspect: proving “manifest disregard” without an explained Award.
NSB Advisors, a Registered Investment Advisor, entered into a services agreement with C.L. King, a non-discretionary custodial broker, pursuant to which King provided custody, clearing and other back office services to NSB for the benefit of NSB’s customer accounts. King also served as a margin lender to NSB customers, one of which was William Nicklin, NSB’s Managing Member and Chief Investment Officer. NSB monitored and executed trades in its customers’ accounts and made investment recommendations. After several months of NSB incurring large losses in customer accounts and borrowing hundreds of millions of dollars, in March 2012 King terminated the NSB services agreement and issued margin calls, one of which went to Nicklin. When Nicklin’s margin balance remained uncovered, King initiated a FINRA arbitration against Nicklin. NSB brought breach of contract and tort claims against King in response, which originally were consolidated with the “Nicklin” arbitration, but then were dismissed when NSB filed for bankruptcy. The Nicklin arbitration panel awarded King more than $13 million, and that Award was confirmed by New York Supreme Court. After being appointed, the bankruptcy trustee reinstated the NSB arbitration claims against King, and pursued them to a $1,750,000 award. Notably, two of the three arbitrators on the NSB award were also on the Nicklin panel.
“Manifest Disregard” Not Shown
NSB petitioned the Supreme Court of New York County to confirm its FINRA Arbitration Award and King cross-moved to vacate. The Court confirmed the Award, holding that King could not meet the high hurdle necessary to show the panel manifestly disregarded the law. Says the Court: “While the Award does not describe how the Panel arrived at its conclusions, the Panel was nonetheless entitled to make its own factual and legal findings. In challenging the Award, CL King has presented mere conjecture as to what the Panel could have been thinking in issuing a decision, and offered a way for that reasoning to have been incorrect. Such speculation is inconclusive and fails to show that the Panel lacked colorable justification for its decision…. Moreover, FINRA Rule 13904(g) relating to explained decisions provides that the paragraph only applies when the parties jointly request an explained decision. CL King has not alleged that the parties jointly requested an explained decision, and were not issued one” (emphasis in original).
(ed: *The New York Supreme Court is a trial court of original jurisdiction. **Professor Jill Gross, who authored the SOLA analysis on this case, writes: “The trial court assumed without analysis that the Federal Arbitration Act (FAA) governs the confirmation of FINRA arbitration awards in New York State court. However, the U.S. Supreme Court has never ruled that the FAA grounds for confirmation and vacatur apply in state court. This is a complex issue of conflict preemption over which state courts are divided.”) (SAC Ref. No. 2018-45-02)
Like what you see here?
Twice a week we present blog posts consisting of one write-up from each of our two flagship weekly online Alert services. Consider a subscription to these publications to receive the full array of coverage right on your desktop every week. Give it a try and sign up for a free trial to the Securities Arbitration Alert and the Securities Litigation Alert.