WATTS v. MORGAN STANLEY SMITH BARNEY, LLC et al

Filing 12

MEMORANDUM AND/OR OPINION. SIGNED BY HONORABLE RONALD L. BUCKWALTER ON 5/13/2014. 5/14/2014 ENTERED AND COPIES E-MAILED.(sg, )

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
CARL STEPHEN WATTS

:
:
:
Petitioner,
:
v.
:
:
MORGAN STANLEY SMITH BARNEY, :
LLC, et al.
:
:
Respondents.
:

CIVIL ACTION

NO. 13-7369

MEMORANDUM
BUCKWALTER, S. J.

May 13, 2014

Pending before the Court is Petitioner Carl Stephen Watts (Watts)’s Petition to Vacate
Arbitration Award and Respondents Morgan Stanley Smith Barney, LLC, Steven Brettler,
Richard Braitman, and James Nastasi (collectively “Respondents” or “MSSB”)’s Cross-Petition
to Confirm Arbitration Award. For the following reasons, Watts’s Petition to Vacate Arbitration
Award is denied and Respondents’ Cross-Petition to Confirm Arbitration Award is granted.
I.

FACTUAL AND PROCEDURAL HISTORY
Petitioner Watts is an individual residing in Wayne, Pennsylvania. (Pet. to Vacate ¶ 7.)

Respondent Morgan Stanley Smith Barney, LLC is a Delaware limited liability company. (Id. ¶
8.) Respondents Brettler, Braitman, and Nastasi are individuals residing in Pennsylvania,
employed by MSSB as financial brokers. (Id. ¶ 9.) Petitioner brings this action under the
Federal Arbitration Act, 9 U.S.C. § 1 et seq. (Id. ¶ 10.)
On or about March 18, 2011, MSSB submitted a Statement of Claim against Watts to
binding arbitration before the Financial Industry Regulatory Authority (“FINRA”). (Pet. to
Vacate, Ex. A, FINRA Award, 1.) MSSB claimed that Watts had violated the terms of three

promissory notes and sought a total of $350,674.13 in compensatory damages plus interest, costs,
and attorneys’ fees. (Id. at 2.) Under FINRA’s Rule 13408, each potential arbitrator is required
to submit a “Disclosure Report” in which he or she must “make a reasonable effort to learn of,
and must disclose . . . any circumstances which might preclude the arbitrator from rendering an
objective and impartial determination[.]” (Resp. Opp’n Pet. to Vacate, Ex. 3, Arbitrator
Disclosure Checklist.)1 These circumstances include, but are not limited to, “[a]ny direct or
indirect financial or personal interest in the outcome[,]” “[a]ny existing or past financial,
business, professional, family, social, or other relationships . . . with any party, party’s
representative, or anyone . . . who may be a witness[,]” and “[a]ny such relationship or
circumstances involving members of the arbitrator’s family[.]” (Id.)
Some time after Watts filed his Answer on June 30, 2011, the parties selected a panel of
three FINRA arbitrators to hear the case. (Pet. to Vacate, Ex. B, FINRA Arbitration Panel Letter,
1–2.) After the parties had an opportunity to review the Disclosure Reports of various potential
arbitrators, the parties selected James W. Geiger, Jack H. McNairy, and Evelyn Boss Cogan.
(Pet. to Vacate, Ex. B, FINRA Arbitration Panel Letter, 1–2.) In a letter dated December 27,
2012, FINRA informed the parties that Evelyn Boss Cogan had “withdrawn from the arbitration
panel” and would be replaced by John C. McGovern, Jr. (“McGovern”). (Id. at 1.) FINRA also
gave the parties an opportunity to review McGovern’s “Disclosure Report.” (Id. at 4–6.) Neither
Watts nor MSSB objected to McGovern serving as an arbitrator in the case. (FINRA Award, 1.)
On September 3–4, 2013, McGovern, along with the other two members of the FINRA
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MSSB has titled its Response “Opposition to Petition to Vacate Arbitration Award and
Cross-Petition to Confirm Arbitration Award.” The Court will refer to this filing as the
“Response in Opposition to the Petition to Vacate.”
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arbitration panel, heard the parties’ case. (Id.) On September 17, 2013, the panel issued a sixpage decision awarding MSSB $350,673.71 in compensatory damages, plus interest, costs, and
attorneys’ fees.
Sometime on or after September 17, 2013, Watts discovered that McGovern had served
as the campaign treasurer for the 2010 election campaign of Sid Michaels Kavulich (“Kavulich”),
then a candidate for the Pennsylvania House of Representatives. (Pet. to Vacate, Ex. C, Kavulich
News Reports.) Currently, Kavulich represents the 114th District in the Pennsylvania House of
Representatives. (Pet. to Vacate, Ex. D., Kavulich Page on MSSB Gov’t Relations Website.)
McGovern had not disclosed his position as Kavulich’s campaign treasurer in his FINRA
Disclosure Report. (FINRA Arbitration Panel Letter, Disclosure Report, 1–3.) MSSB maintains
a page on its “Government Relations” website featuring a photograph of Representative Kavulich
and listing his web address, e-mail address, mailing address, phone and fax numbers, party
affiliation, and committee assignments. (Id.) MSSB maintains such a web page for many other
members of the Pennsylvania House of Representatives and other state and federal legislators in
an effort to provide its employees “easily accessible information [regarding] who [their] state and
federal legislators are and ways to contact them.” (Resp. Opp’n Pet. to Vacate, Ex. 1, MSSB
Gov’t Relations Website Homepage; Ex. 6, O’Brien Web Page on MSSB Gov’t Relations
Website.)
Watts initiated the present litigation when he filed the pending Petition to Vacate
Arbitration Award on December 17, 2013. MSSB filed its Response in Opposition and CrossPetition to Confirm Arbitration Award on January 27, 2014. Watts filed his Reply in Support of
the Petition to Vacate and Response in Opposition to MSSB’s Cross-Petition on February 12,
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2014. MSSB filed a Sur-Reply in Opposition to the Petition to Vacate and Reply in Support of
the Cross-Petition on February 19, 2014. The Petition and Cross-Petition are now ripe for
review.
II.

DISCUSSION
Watts asserts in his Petition that the FINRA panel’s arbitration award to MSSB should be

vacated because McGovern failed to disclose his position as treasurer for Representative
Kavulich’s 2010 campaign. Such an omission, Watts argues, “created a readily presumptive
conclusion that it was an intentional omission” and that “this relationship not only creates an
‘appearance of bias’ on behalf of the arbitrator, but also resulted in ‘actual bias’ that tainted the
entire FINRA arbitration process.” (Mem. Supp. Pet. to Vacate, 6.) MSSB responds that Watts
“cannot establish any evidence of partiality on the part of McGovern,” that “McGovern had no
duty to report his position as Kavulich’s 2010 campaign treasurer,” and that “McGovern’s
connection to Kavulich, a state representative with no cognizable relationship to MSSB, had no
effect on his ability to reach a fair and just award[.]” (Resp. Opp’n Pet. to Vacate, 4.)
Under the Federal Arbitration Act, a court may vacate an arbitration award where there is
“evident partiality or corruption in the arbitrators[.]” 9 U.S.C. § 10(a)(2). Petitions to vacate
arbitration awards on grounds of “evident partiality” may be granted “when an arbitrator fails to
disclose ‘any dealings that might create an impression of possible bias.’” Crow Constr. Co. v.
Jeffrey M. Brown Assoc., Inc., 264 F. Supp. 2d 217, 223–24 (E.D. Pa. 2003) (quoting
Commonwealth Coatings Corp. v. Cont’l Cas. Co., 393 U.S. 145, 149 (1968).)2 “[T]o show
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“Petitioner alleges a failed disclosure on behalf of . . . [the] arbitrators involved. The
Petitioner is challenging the arbitrator selection process as opposed to the arbitration process
itself. . . . [T]he actual bias standard is inapplicable and . . . the Commonwealth Coatings
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‘evident partiality,’ the challenging party must show ‘a reasonable person would have to
conclude that the arbitrator was partial’ to the other party to the arbitration.” Kaplan v. First
Options of Chi., Inc. 19 F.3d 1503, 1523 n.30 (3d Cir. 1994) (quoting Apperson v. Fleet Carrier
Corp., 879 F.2d 1344, 1358 (6th Cir. 1989)).
To support his claim of “evident partiality,” Watts points to the web page on MSSB’s
“Government Relations” website dedicated to listing Representative Kavulich’s contact
information. (Kavulich Page on MSSB Gov’t Relations Website.) Watts contends that, in light
of McGovern’s failure to disclose his relationship with Representative Kavulich, this web page
“create[s] an open question as to the neutrality and fairness of the arbitrator selection process”
and that “[t]here is no telling as to who funded the campaign contributions for [R]epresentative
Kavuluch in 2010 during his election campaign, and whether that could have been through
MSSB directly, through anyone with direct ties to MSSB, if any, and the financial connections
that may exist between MSSB, donors to the campaign of Sid Michaels Kavulich, and Arbitrator
McGovern.” (Mem. Supp. Pet. to Vacate, 22–23.) MSSB counters that “there is no factual basis
to support the finding of any connection between” Representative Kavulich and MSSB, and that
the web page “does not, in fact, connect [Representative] Kavulich and MSSB in any meaningful
way.” (Resp. Opp’n Pet. to Vacate, 11.)
There is no “evident partiality” for McGovern’s failure to disclose the fact that he was
treasurer for Representative Kavulich’s 2010 campaign because Watts has produced no evidence
from which a “a reasonable person would have to conclude that the arbitrator was partial.”

appearance of bias standard is the appropriate standard to apply here.” Crow Constr. Co., 264 F.
Supp.2d at 223–24.
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Kaplan, 19 F.3d at 1523 n.30 (quoting Apperson, 879 F.2d at 1358). MSSB has shown that its
web page detailing Representative Kavulich’s contact information, party affiliation, and
committee assignments is part of a larger effort to provide its employees “easily accessible
information [about] state and federal legislators and ways to contact them,” and not proof of any
subterfuge on McGovern’s part. (MSSB Gov’t Relations Website Home Page; O’Brien Page on
MSSB Gov’t Relations Website.) Watts offers no other proof to support his assertion that there
is “an open question as to the neutrality and fairness of the arbitrator selection process.” (Mem.
Supp. Pet. to Vacate, 22.) By itself, this informational web page about a state legislator cannot
form the entire foundation of a finding that “a reasonable person would have to conclude that the
arbitrator was partial.” Kaplan, 19 F.3d at 1523 n.30 (quoting Apperson, 879 F.2d at 1358).
Moreover, McGovern’s failure to disclose his role as Representative Kavulich’s
campaign treasurer is an insufficient ground on which to vacate the arbitration award because
McGovern’s association with Representative Kavulich was a matter of public record. In the
recent Third Circuit case of Freeman v. Pittsburgh Glass Works, LLC, 709 F.3d 240 (3d Cir.
2013), an arbitrator had failed to disclose the fact that one of the parties had donated to the
arbitrator’s election campaign for a seat on the Supreme Court of Pennsylvania. Id. at 254–55.
The Third Circuit ruled that the arbitrator’s failure to disclose the party’s campaign contribution
was an insufficient ground for vacating the arbitration award under the general rule that
“undisclosed election support does not establish ‘evident partiality,’ nor does it create an
appearance of bias.” Id. at 254 (internal citations omitted). Among the reasons the Third Circuit
articulated for its ruling was that “campaign funds are a matter of public record. . . . Because the
information is public, there can be no allegation that [the arbitrator] intended to somehow hide
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the fact that he had received contributions from [the party].” Id. at 255 (internal quotation
omitted).
Here, there is evidence to show that McGovern’s role in Representative Kavulich’s
campaign was even more public than the donations at issue in Freeman. As demonstrated by the
news accounts of Representative Kavulich’s 2010 campaign that Watts now attaches to his
Petition as Exhibit C, McGovern’s role as Representative Kavulich’s campaign treasurer was a
matter of public knowledge reported in at least two different, widely available publications.
Watts states that had McGovern disclosed his prior position as Representative Kavulich’s
campaign treasurer, such disclosure “would have led to an investigation and exploration into
Representative Kavulich’s ties to the securities industry[.]” (Mem. Supp. Pet. to Vacate, 8.)
Even so, the onus was on Watts to learn more about McGovern’s quite public relationship with
Representative Kavulich, not on McGovern to disclose it, since he could “have assumed that the
parties already knew about” his official duties as part of a campaign for elected office. Freeman,
709 F.3d at 255.
Watts has not met his burden to produce evidence from which “a reasonable person
would have to conclude that the arbitrator was partial” and, therefore, cannot show “evident
partiality.” Kaplan, 19 F.3d at 1523 n.30 (quoting Apperson, 879 F.2d at 1358). Accordingly the
Court will deny Watts’s Petition to Vacate Arbitration Award and grant MSSB’s Cross-Petition
to Confirm Arbitration Award.

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III.

CONCLUSION
For all of the foregoing reasons, the Court will deny Petitioner Carl Stephen Watts’s

Petition to Vacate Arbitration Award and grant Respondents’ Cross-Petition to Confirm
Arbitration Award.
An appropriate order follows.

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