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Second Circuit Affirms $400 Million FINRA Arbitration Award

Late last week, the Second Circuit affirmed a denial of a vacatur motion in the context of a $400 million FINRA arbitration award. In STMicroelectronics, N.V. v. Credit Suisse Securities (USA), LLC, Docket No. 10-3847-cv (2d Cir. June 2, 2011),
Credit Suisse moved to vacate an award against it arising out of its sale of auction-rate securities (“ARS”) to STMicroelectronics (“ST”), a semiconductor manufacturer. Credit Suisse sold ARS to ST, and, when the ARS market froze in August 2007, more than $400 million of ARS owned by ST failed at auction, rendering them illiquid and significantly lower in value.

ST filed a FINRA arbitration claim against Credit Suisse a few months later alleging a whole host of federal and common law claims. During the arbitration, Credit Suisse unsuccessfully sought to remove one of the arbitrators, who often testified as a financial expert on behalf of claimants, for purportedly failing to disclose details about his prior testimony as an expert. After the arbitration panel awarded ST more than $400 million in compensatory damages, financing fees, attorneys’ fees and interest, Credit Suisse moved to vacate the award on the grounds of “evident partiality,” “other [arbitrator] misbehavior,” and “manifest disregard of the law.” The district court (SDNY) refused to vacate the award, and also refused to partially offset the award by just under $75 million following ST’s post-arbitration sale of the ARS to a third party.

On appeal, the Second Circuit affirmed the district court with respect to the award vacatur. On the issue of arbitrator bias, the Court of Appeals noted that Credit Suisse had rightly abandoned its arguments under the “evident partiality” prong of the FAA (§10(a)(2)), because it could not meet the very high burden of showing a failure to disclose facts demonstrating partiality, which the court defined as a “relationship
with a party, a lawyer or another arbitrator.” Rather, Credit Suisse alleged only that the arbitrator had an unfavorable “predisposition.”

The court next rejected Credit Suisse’s contention that the arbitrator’s disclosure report was misleading in violation of FINRA rules. Notably, the appellate court faulted Credit Suisse for not having taken discovery on the issue of the arbitrator’s background, which Second Circuit precedent would have permitted. (“Although we have limited the availability of discovery regarding the completeness of an arbitrator’s disclosure, we have not forbidden it altogether.”) The fact that the arbitrator’s disclosures complied with FINRA’s own written “explication” of its disclosure requirements persuaded the appellate court further that the arbitrator had not engaged in “other misbehavior” within the meaning of FAA § 10(a)(3). The court concluded that the arbitrator’s alleged predisposition on issues of law could not be the basis for vacatur because, as the industry arbitrator, his prior testimony on and expertise with related issues of law is precisely what qualifies him to be an industry arbitrator.

The Court of Appeals also soundly rejected Credit Suisse’s manifest disregard of the law arguments for vacatur. (N.B. The Second Circuit still recognizes the manifest disregard ground of vacatur.) Finally, the Second Circuit reduced the award by $75 million – the amount ST received from the liquidation of its ARS, plus the corresponding amount of interest due on that money.

Perhaps the most interesting aspect of the Second Circuit’s opinion, particularly to securities arbitration afficionados, is its hostility (in footnote 6) to Credit Suisse for trying to avoid some of the consequences of the very arbitration process it imposed on its customer:

We note again that Credit Suisse could have chosen to permit its customers to resolve disputes in the courts, where legal issues such as these could be authoritatively resolved. It deliberately chose, however, to insist on a forum in which issues are resolved less formally, without the necessity for the adjudicator to explain its precise reasoning or the availability of appellate tribunals to review and assess that reasoning. Having chosen that process, with its attendant expedition and lower cost, Credit Suisse may not now impose on its adversary the very formalities it elected to eschew, simply because it does not like the outcome of the process.



Jill Gross

Professor Jill I. Gross has been a director of the Investor Rights Clinic (formerly the Securities Arbitration Clinic) since 1999. Professor Gross teaches the Investor Rights Clinic and Seminar, Mediation and Arbitration, and Securities Litigation and Enforcement. She has published numerous law review articles in the area of dispute resolution… MORE >

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