Pershing LLC v. Kiebach et al
ORDER AND REASONS granting 151 MOTION for Summary Judgment by Pershing LLC; denying 154 MOTION for Summary Judgment by Louisiana Retirees. FURTHER ORDERED that the decision of the arbitration panel in favor of Pershing LLC and against the Louisiana Retirees is CONFIRMED. Pershing LLC shall provide the Court with a proposed judgment no later than 5/25/2017 at Noon. Signed by Judge Lance M Africk on 5/22/2017.(Reference: ALL CASES)(blg)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF LOUISIANA
REF: ALL CASES
THOMAS KIEBACH ET AL.
ORDER AND REASONS
In this consolidated action, Pershing LLC seeks to confirm an arbitration
panel’s decision in its favor. The defendants, Thomas Kiebach et al., the “Louisiana
Retirees,” seek to vacate the arbitration panel’s decision. Before the Court are cross
motions 1 for summary judgment filed by each side. For the following reasons, the
Court grants the motion filed by Pershing LLC and denies the motion filed by the
Louisiana Retirees. The Court therefore confirms the arbitration award.
The Louisiana Retirees are investors who suffered financial losses as a result
of R. Allen Stanford’s Ponzi scheme. Pershing is a limited liability company that
provides financial services to brokerage firms. Pershing was a clearing broker for
Stanford Group Company, a broker-dealer controlled by Allen Stanford which sold
worthless securities to the Louisiana Retirees. The Louisiana Retirees believe that
Pershing is liable to them for the $80 million in damages they allegedly sustained
due to the Ponzi scheme. They claim that Pershing, as Stanford Group Company’s
R. Doc. Nos. 151, 154.
clearing broker, failed to exercise due diligence in its business relationship with
Stanford Group Company and failed to disclose adverse financial information which
would have resulted in the Ponzi scheme being uncovered sooner than it was. 2
Because the contracts between Pershing and each of the Louisiana Retirees
required disagreements to be arbitrated before the Financial Industry Regulatory
Authority (“FINRA”), the Louisiana Retirees submitted their claims against Pershing
to a FINRA panel. After a two week hearing at which the panel heard over 1,600
pages of testimony from fifteen witnesses and considered over 900 separate exhibits,
the panel ruled in Pershing’s favor. After the ruling, the Louisiana Retirees and
Pershing each filed actions to vacate and confirm the arbitration panel’s decision,
respectively. Those lawsuits were ultimately consolidated before this Court.
While the Louisiana Retirees advance several arguments for vacating the
panel’s decision, their primary argument centers on whether the panel arbitrarily
and improperly denied the Louisiana Retirees documents to which they were entitled.
The Stanford Ponzi scheme has given rise to numerous lawsuits which were the
subject of review by the Fifth Circuit and the Supreme Court. The Supreme Court
has summarized the scheme as follows:
Essentially, Stanford and his companies sold . . . certificates of deposit in
Stanford International Bank. Those certificates were debt assets that promised
a fixed rate of return. The plaintiffs expected that Stanford International Bank
would use the money it received to buy highly lucrative assets. But instead,
Stanford and his associates used the money provided by new investors to repay
old investors, to finance an elaborate lifestyle, and to finance speculative real
Chadbourne & Parke LLP v. Troice, 134 S. Ct. 1058, 1064 (2014) (internal citations
and quotation marks omitted).
As explained in the next section, an arbitration panel’s decision cannot be overturned
simply because it was incorrect. Cooper v. WestEnd Capital Mgmt., L.L.C., 832 F.3d
534, 546 (5th Cir. 2016). But under the Federal Arbitration Act (FAA), an arbitration
panel’s refusal to hear evidence material and pertinent to the controversy can result
in vacatur of the arbitration award when the refusal deprived a party of a
fundamentally fair hearing. Karaha Bodas Co. v. Perusahaan Pertambangan Minyak
Dan Gas Bumi Negara, 364 F.3d 274, 300-01 (5th Cir. 2004).
Although discovery in the context of a motion to confirm or vacate an
arbitration award is extremely limited, see Legion Ins. Co. v. Ins. Gen. Agency, Inc.,
822 F.2d 541, 542-544 (5th Cir. 1987), the district court may allow limited discovery
at its discretion, see Karaha Bodas Co., 364 F.3d at 304-05. This Court allowed the
Louisiana Retirees to engage in limited discovery in order to determine whether the
documents denied the Louisiana Retirees during the arbitration proceeding fell
within the scope of the privileges claimed by Pershing. After an in camera review of
the documents by the U.S. Magistrate Judge, the Court ultimately ordered that
Pershing produce to the Louisiana Retirees some of the documents which the
Louisiana Retirees were denied by the arbitration panel. See R. Doc. No. 137. The
Court found—under the specific facts of this case—that a review of those documents
not produced in arbitration would best allow this Court to measure whether and, if
so, the extent to which the Louisiana Retirees were prejudiced by the omission of such
That covers the proceedings thus far. Now the question is simply whether,
considering the produced documents in conjunction with the record of the arbitration
proceeding, the Louisiana Retirees have satisfied one of the recognized grounds for
vacating an arbitration award. The Court sets forth the standard which governs that
“In light of the strong federal policy favoring arbitration, judicial review of an
arbitration award is extraordinarily narrow.” McKool Smith, P.C. v. Curtis Int’l, Ltd.,
650 F. App’x 208, 211 (5th Cir. 2016) (internal quotation marks omitted). “Under this
review, an award may not be set aside for a mere mistake of fact or law.” Id. (internal
quotation marks omitted). “Instead, Section 10 of the FAA provides the only grounds
upon which a reviewing court may vacate an arbitrative award.”
quotation marks omitted). Section 10 of the FAA provides the following grounds for
vacating an award:
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).
The burden of proof is on the party seeking to vacate the award, and any doubts
or uncertainties must be resolved in favor of upholding it. Cooper, 832 F.3d at 544.
Vacating an arbitration award is an unusual and “draconian remedy.”
Software Sols., Inc. v. New Century Mortg. Corp., 476 F.3d 278, 286 (5th Cir. 2007).
The Louisiana Retirees assert three bases for vacatur in this lawsuit.
According to their motion, they contend “(1.) that the arbitration proceeding was
fundamentally unfair because severe prejudice occurred to the Louisiana Retirees
when Pershing did not disclose to the Louisiana Retirees [certain documents which
were not produced by Pershing until this Court ordered them produced in this
lawsuit]; (2.) the obvious partiality and bias of the arbitrators because of the apparent
‘assumed veracity’ of Pershing when the Panel allowed Pershing to serve as the judge
and jury on defining the scope of the documents withheld under attorney client
privilege and the SARs/AML privilege; and (3.) that the Panel committed manifest
error reviewing the evidence that was actually presented to the arbitration hearing
based upon the review standard of the Second Circuit because of the application of
New York Law.”
R. Doc. No. 154-7, at 3-4.
The Court addresses each of the
arguments in turn.
The Louisiana Retirees first argue that the panel’s decision should be vacated
pursuant to section 10(a)(3) of the FAA because the panel denied the Louisiana
Retirees access to key documents, and the withholding of the documents was
prejudicial to the Louisiana Retirees to the extent it rendered the arbitration
proceeding fundamentally unfair. Their position is essentially that the Louisiana
Retirees were unable to prove their case and were unable to refute false testimony
offered by Pershing witnesses during the arbitration proceeding because they did not
have certain documents which they have now had an opportunity to review.
When considering arguments for vacatur such as this one, the Fifth Circuit has
instructed as follows:
An arbitrator is not bound to hear all of the evidence tendered by the parties.
He must give each of the parties to the dispute an adequate opportunity to
present its evidence and arguments. It is appropriate to vacate an arbitral
award if the exclusion of relevant evidence deprives a party of a fair hearing.
Every failure of an arbitrator to receive relevant evidence does not constitute
misconduct requiring vacatur of an arbitrator’s award. A federal court may
vacate an arbitrator’s award only if the arbitrator’s refusal to hear pertinent
and material evidence prejudices the rights of the parties to the arbitration
See Karaha Bodas Co., 364 F.3d at 300-01. (internal quotation marks omitted). “The
court may not refuse to enforce an arbitral award solely on the ground that the
arbitrator may have made a mistake of law or fact.” Id. at 288.
The arbitration panel held that Pershing was not required to produce to the
Louisiana Retirees certain categories of documents which Pershing claimed were
privileged. The documents consist inter alia of emails which Pershing claimed were
protected under the attorney-client privilege and “Incident Reports” which Pershing
says it uses to begin the process of internally investigating potential suspicious
activity. Pershing claims the second category of documents are protected by the SAR
privilege. See R. Doc. Nos. 114, 132, and 137 (discussing the SAR privilege). The
prejudice claimed by the Louisiana Retirees really stems from two separate decisions
of the arbitration panel: (1) the decision not to review the documents in camera before
deciding whether Pershing should produce them; and (2) the decision on the merits
of the claimed privileges.
With respect to the first decision—not to review the documents in camera—the
Court observes that nothing in the FINRA arbitration rules requires in camera
review prior to ruling on a discovery motion. To the extent the Louisiana Retirees
claim that the manner in which the panel resolved discovery issues rendered the
proceeding fundamentally unfair, the Court rejects that argument. Even if this Court
would have proceeded differently, this Court cannot conclude that the entire
arbitration proceeding was tainted because of it. See Bain Cotton Co. v. Chesnutt
Cotton Co., 531 F. App’x 500, 501 (5th Cir. 2013) (“Regardless whether the district
court or this court—or both—might disagree with the arbitrators’ handling of Bain’s
discovery requests, that handling does not rise to the level required for vacating
under any of the FAA’s narrow and exclusive grounds.”).
“A FINRA arbitration panel has great latitude to determine the procedures
governing their proceedings and to restrict or control evidentiary proceedings.”
Rubenstein v. Advanced Equities, Inc., 2014 WL 1325738, at *15 (S.D.N.Y. Mar. 31,
2014). Indeed, even in federal court the decision whether to conduct an in camera
inspection is wholly within the discretion of the district court. See Kean v. Jack Henry
& Assocs., Inc., 577 F. App’x 342, 348 (5th Cir. 2014). The record reveals that
discovery was extensively litigated before the panel, which decided six motions to
compel, received multiple rounds of briefing from the parties, and held a telephonic
hearing to address the SAR privilege and the request for an in camera review. See
R. Doc. No. 151-2, at 4-7. Ultimately, the Louisiana Retirees received over 121,000
documents from Pershing totaling over 635,000 pages. See R. Doc. No. 151-2, at 5.
The discovery process was not fundamentally unfair. See Prestige Ford v. Ford Dealer
Computer Servs., Inc., 324 F.3d 391, 395 (5th Cir. 2003) (abrogated on other grounds)
(“In the case at hand, hearings were held and each disputed item was given
consideration by the panel; thus, more than adequate opportunity was afforded to the
parties and the minimum standards of fundamental fairness were met.”).
With respect to the second decision complained of by the Louisiana Retirees—
the panel’s decision that the attorney-client privilege and the SAR privilege shielded
all of the documents withheld by Pershing—the Court also concludes that the decision
did not render the arbitration proceeding fundamentally unfair. “The court may not
refuse to enforce an arbitral award solely on the ground that the arbitrator may have
made a mistake of law or fact.” See Karaha Bodas Co., 364 F.3d at 288. Even if this
Court disagrees with the arbitration panel regarding the appropriate scope of those
privileges, the Court does not find that the Louisiana Retirees were deprived of a fair
hearing as a result of the decision.
The documents produced to the Louisiana Retirees in this litigation are
cumulative of the documents produced to the Louisiana Retirees in the arbitration
proceeding. A review of the record shows that Pershing produced a vast amount of
material during the arbitration proceeding which evidenced that high-level Pershing
employees were aware as early as 2006, to one degree or another, of potential “red
flags” regarding Stanford Group Company. See R. Doc. No. 161-5, at 21-22; R. Doc.
The Louisiana Retirees marshaled this evidence in support of their
position that Pershing knew or should have known that there were serious questions
about Stanford Group Company’s legitimacy during the period that the Ponzi scheme
was in operation, and that Pershing should have done more sooner to raise the alarm
regarding Stanford Group Company. The arbitration panel rejected the Louisiana
There is no reasonable basis to suggest that if the new
documents had been produced during the arbitration proceeding, the result would
have been different.
Because the Louisiana Retirees were able to introduce comprehensive evidence
supporting their theory of the case, the deprivation of additional arguably relevant
evidence did not deprive the Louisiana Retirees of a fair hearing. See Karaha Bodas
Co., 364 F.3d at 302 (arbitrators’ refusal to grant a continuance and additional
prehearing discovery did not deprive losing party of a fair hearing where he “was able
to present comprehensive evidence” on the topics for which the additional discovery
was sought); see also Householder Grp. v. Caughran, 354 F. App’x 848, 851 (5th Cir.
2009) (“Similarly, prohibiting Caughran from admitting the tapes or transcripts of
his conversations with Horvath did not deprive Caughran of a fair hearing. Horvath
testified at the arbitration hearing. Thus, Caughran had the opportunity to crossexamine him on the perjury allegations.”).
To the extent the Louisiana Retirees argue that the newly produced documents
directly contradict the testimony of Pershing witnesses in the arbitration, the Court
finds the Louisiana Retirees’ position to be a mischaracterization of the record.
Pershing witnesses acknowledged that there were concerns raised regarding
Stanford Group Company as early as 2006. The primary focus of the arbitration
proceeding was not whether Pershing had notice of suspicious behavior by Stanford
Group Company, but rather whether Pershing acted reasonably to address their
concerns and—more importantly—even if Pershing acted unreasonably, whether
Pershing violated any legal duty owed to the Louisiana Retirees. (Pershing argued
during the arbitration that Pershing could have no liability for fraud committed by
Stanford Group Company even if Pershing should have discovered that fraud or done
more to prevent it). All of these issues were exhaustively litigated.
In any event, to the extent that the record is ambiguous, any doubts or
uncertainties must be resolved in favor of upholding the arbitration award. See
Cooper, 832 F.3d at 544.
Having reviewed the record, the recently produced
documents, the briefs, and considering the applicable legal standard, the Court
concludes that the deprivation of the newly produced documents during the
arbitration process did not result in a fundamentally unfair proceeding.
Louisiana Retirees’ first argument for vacatur pursuant to section 10(a)(3) of the FAA
The Louisiana Retirees next argue that the panel’s decision should be vacated
pursuant to section 10(a)(2) of the FAA because there was evident partiality or
corruption by the arbitrators. They say the bias was made evident in three ways.
First, the Louisiana Retirees claim that the panel’s failure to conduct the in camera
review proves the panel was biased in favor of Pershing. Second, the Louisiana
Retirees argue the panel was biased because the CEO of Pershing during the relevant
time period, Richard Brueckner, was a former member of the FINRA Board of
Governors. Third, the Louisiana Retirees contend that the panel was inclined to rule
in favor of Pershing because Pershing asserted a so-called “FINRA defense,” in which
Pershing supposedly argued to the panel that regulator misconduct or negligence
served as a defense to Pershing, i.e. that if Pershing was liable to the Louisiana
Retirees then FINRA and the SEC must be deemed equally culpable for failing to
discover the Ponzi scheme sooner.
Pershing argues that the Louisiana Retirees have waived the right to challenge
the arbitration award on the basis of bias. “A party seeking to vacate an arbitration
award based on an arbitrator’s evident partiality generally must object during the
arbitration proceedings. Its failure to do so results in waiver of its right to object.”
Dealer Computer Servs., Inc. v. Michael Motor Co., 485 F. App’x 724, 727 (5th Cir.
2012). There is an exception to the rule where the party seeking to vacate was not
on notice of the bias during the arbitration proceeding. Id. at 727-28. The exception
does not come into play here.
The Louisiana Retirees attempt to cobble together an objection on the basis of
partiality during the arbitration proceeding by citing to various other objections they
voiced during the arbitration. The Louisiana Retirees point out that they objected to
the panel’s failure to conduct an in camera review, that they strenuously objected to
Mr. Brueckner not testifying in person in the order desired by the Louisiana Retirees
during the arbitration proceeding, and that they objected to Pershing advancing the
FINRA defense. See R. Doc. No. 160-6, at 18-19. But those objections to discrete
decisions of the arbitration panel are distinct from objections to the arbitration panel
itself. In order to preserve an objection that the arbitration panel was biased against
them, the Louisiana Retirees had the obligation to make an objection to the bias of
the panel during the arbitration hearing. See Dealer Computer, 485 F. App’x at 727.
The Louisiana Retirees did the opposite.
At the beginning of the arbitration hearing, counsel for the Louisiana Retirees
stated that they accepted the panel. At the end of the arbitration hearing, counsel
for the Louisiana Retirees agreed that they had enjoyed “a full and fair opportunity”
to present their case. See R. Doc. No. 151-6, at 1787. Counsel for the Louisiana
Retirees even thanked the panel for its time. See R. Doc. No. 151-6, at 1791 (“We
appreciate y’all’s efforts.”). At that point, the Louisiana Retirees already knew of all
the panel’s decisions described above, yet they failed to object. It was only once the
arbitration panel ruled against them that the bias argument emerged. The waiver
rule is designed to prevent just such a circumstance from occurring. Cf. Merrill
Lynch, Pierce, Fenner & Smith, Inc. v. Clemente, 272 F. App’x 174, 176 n.4 (3d Cir.
2008) (“The defendants argue that the plaintiffs waived their right to argue that the
arbitrators were biased because they did not raise their objections to the arbitrators,
and in fact, thanked the arbitrators for conducting the proceedings. Other Courts of
Appeals would agree that the plaintiffs have waived this argument.”). The Louisiana
Retirees have waived the right to seek vacatur based on the alleged bias of the panel.
Even if the Louisiana Retirees had not waived the argument, however, it is
clear that they cannot meet the standard for vacating the arbitration award. “To
establish evident partiality based on actual bias, the party urging vacatur must
produce specific facts from which a reasonable person would have to conclude that
the arbitrator was partial to one party.” Caughran, 354 F. App’x at 852 (internal
quotation marks omitted). “This is an onerous burden, because the urging party must
demonstrate that the alleged partiality is direct, definite, and capable of
demonstration rather than remote, uncertain or speculative.” Id. (internal quotation
The Court has already addressed the Louisiana Retirees’ argument that the
panel should have reviewed Pershing’s documents in camera. The FINRA rules do
not require such an in camera review, and placed in the context of the lengthy
discovery proceedings as a whole the panel’s decision not to review the documents
does not suggest bias.
As for Mr. Brueckner’s relationship with FINRA, the U.S. District Court for
the Southern District of New York recently rejected an identical argument by a losing
party to an arbitration, and the Court finds its reasoning persuasive and applicable
here. See Freedom Inv’rs Corp. v. Hadath, 2012 WL 383944, at *5 (S.D.N.Y. Feb. 7,
2012) (“Blumenschein’s service on FINRA’s Board of Governors is insufficient to meet
the objective test for assessing bias. Pinter has not made any showing that an
individual member of the FINRA Board of Governors, or indeed the Board of
Governors as a whole, has any influence over the selection of FINRA [Dispute
Resolution] arbitrators, their compensation, or their assignment to panels. At the
very most, he has raised the specter of an appearance of bias, insufficient grounds for
disturbing an arbitration award.” (internal quotation marks omitted)).
Finally, with respect to the alleged bias created by the FINRA defense, the
Court finds the Louisiana Retirees’ characterization of the defense somewhat
misleading. This defense—one of many advanced by Pershing—was essentially a
causation argument: Even if Pershing had notified the regulators of any concerns it
had regarding Stanford Group Company, it would not have made a difference in
terms of shutting down the Ponzi scheme because the regulators and law enforcement
agencies already knew far more about Stanford Group Company than anything
Pershing could have reported. However the defense is characterized, the Court is not
at all convinced that Pershing’s assertion of a particular legal theory demonstrates
that the arbitration panel was biased.
Even when all of the decisions of the arbitration panel are considered
collectively, the Louisiana Retirees’ allegations fall far short of meeting the “onerous
burden” required to prove panel bias. See Caughran, 354 F. App’x at 852. 3 At most,
the Court is “left with nothing more than speculative assertions in [the Louisiana
Retirees’] brief, which are insufficient to establish that vacatur is warranted under
Section 10(a)(2).” See id. The second argument advanced by the Louisiana Retirees
for vacating the arbitration award is rejected.
The Louisiana Retirees’ final argument is that “the Panel committed manifest
error reviewing the evidence that was actually presented to the arbitration hearing
based upon the review standard of the Second Circuit because of the application of
New York Law.” R. Doc. No. 154-7, at 4. Essentially, the Louisiana Retirees argue
here that the Court should vacate the arbitration award because the arbitrators
reached the wrong result.
It is absolutely clear in the Fifth Circuit that “Section 10(a) does not provide
for vacatur of an arbitration award based on the merits of a party’s claim.” Caughran,
354 F. App’x at 851. Under the FAA, federal courts “do not have authority to conduct
a review of an arbitrator’s decision on the merits.” Id. While at one point in time the
Fifth Circuit permitted vacatur based on “manifest disregard of the law,” it expressly
To the extent the Louisiana Retirees also rely on other, less fully briefed decisions
of the arbitration panel to demonstrate bias, the Court also finds that those decisions
are not sufficient to constitute “direct, definite” evidence of partiality. See Caughran,
354 F. App’x at 852.
rejected that ground for reversing a panel’s decision in Citigroup Glob. Markets, Inc.
v. Bacon, 562 F.3d 349 (5th Cir. 2009). There, the Fifth Circuit confirmed that “[i]n
the light of the Supreme Court’s clear language that, under the FAA, the statutory
provisions are the exclusive grounds for vacatur, manifest disregard of the law as an
independent, nonstatutory ground for setting aside an award must be abandoned and
rejected.” Id. at 358.
In an effort to avoid the Fifth Circuit’s rule, the Louisiana Retirees argue that
the New York choice-of-law provision in their contract with Pershing calls for the
application of Second Circuit law to this decision. In the Second Circuit, manifest
disregard of the law remains a basis for vacating an arbitration panel’s decision in
certain limited circumstances. See T.Co. Metals, LLC v. Dempsey Pipe & Supply, Inc.,
592 F.3d 329, 339 (2d Cir. 2010). But Second Circuit law does not govern this action.
The Fifth Circuit holds that “a choice-of-law provision is insufficient, by itself,
to demonstrate the parties’ clear intent to depart from the FAA’s default rules.”
Action Indus., Inc. v. U.S. Fid. & Guar. Co., 358 F.3d 337, 342 (5th Cir. 2004). If the
arbitration agreement does not expressly reference New York arbitration law but
instead contains only a generic choice-of-law provision, the Fifth Circuit applies the
vacatur standards of the FAA. See Cooper, 832 F.3d at 544. There is no dispute in
this case that the choice-of-law provision in the contract is a general choice-of-law
provision and that it does not refer to New York arbitration law. See R. Doc. No. 1547, at 32 n.35. As such, the FAA’s rules for vacatur apply. This Court is guided by the
FAA as interpreted by the Fifth Circuit, irrespective of what courts located in the
Second Circuit must be guided by. 4
For the foregoing reasons,
IT IS ORDERED that the motion for summary judgment filed by the
Louisiana Retirees is DENIED and that the motion for summary judgment filed by
Pershing is GRANTED.
IT IS FURTHER ORDERED that the decision of the arbitration panel in
favor of Pershing LLC and against the Louisiana Retirees is CONFIRMED.
Pershing LLC shall provide the Court with a proposed judgment no later than
Thursday, May 25, 2017 at Noon.
New Orleans, Louisiana, May 22, 2017.
LANCE M. AFRICK
UNITED STATES DISTRICT JUDGE
Regardless, this Court finds no circumstances evidencing manifest disregard of the
law by the arbitration panel.
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