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Laurence Stone v. Bear

May 29, 2012

LAURENCE STONE, PETITIONER
v.
BEAR, STEARNS & CO., INC., ET AL.
RESPONDENTS.



The opinion of the court was delivered by: Legrome D. Davis, J.

MEMORANDUM ORDER

AND NOW, this 29th day of May, 2012, upon consideration of Petitioner Laurence Stone's Amended Petition to Vacate (Doc. No. 19) and Respondents' Opposition to Petitioner's Petition to Vacate Arbitration Award and Cross-Petition to Confirm Arbitration Award (Doc. No. 20), it is hereby ORDERED as follows:

1. Petitioner Laurence Stone's Amended Petition to Vacate (Doc. No. 19) is DENIED.

2. Respondents' Cross-Petition to Confirm Arbitration Award (Doc. No. 20) is GRANTED.

3. Respondents' request for attorneys' fees and costs is DENIED.

4. The Clerk of Court is directed to close this matter for statistical purposes.

I. Introduction

This case requires us to address several interesting and open questions of law concerning judicial review of an arbitration award. Laurence Stone, a Pennsylvania businessman and investor, lost millions of dollars investing with Bear Stearns. Stone subsequently filed a $7.6 million FINRA arbitration claim seeking to hold Bear Stearns responsible for his losses. With the parties' input, FINRA appointed a three-person panel to hear the case. One of the arbitrators was Jerrilyn Marston.

Marston's FINRA biography, which the parties received prior to selecting the panel, cursorily noted that she had a "family member" associated with the "University of Pennsylvania." In fact, Marston's husband, Dr. Richard Marston, is a well-known professor of finance at the Wharton School who regularly lectures to brokerage firms, insurance companies, banks, and investors. Marston had previously disclosed to FINRA her husband's ties to the securities industry, but FINRA never incorporated the information into Marston's biography.

The arbitration did not go well for Stone. The panel unanimously sanctioned him $15,000 for discovery violations mere weeks before the first hearing, and in July of 2011, the three arbitrators unanimously rejected all of Stone's claims. A few days later, Stone started digging. He spent twenty (20) hours, more or less, painstakingly researching each of the three arbitrators, looking for evidence that they were biased against him. By his own admission, Stone had done no background investigation on the arbitrators at any time before he lost his case, although he certainly could have done so.

Stone's sleuthing uncovered the relationship between arbitrator Marston and Dr. Marston, as well as Dr. Marston's ties to the financial sector. Stone brought this information to his lawyers and eventually filed this lawsuit seeking to overturn the adverse arbitration award. In Stone's opinion, given Dr. Marston's close relationship with the securities industry, arbitrator Marston should never have heard his case. Further, according to Stone, Marston's alleged non-disclosure of her husband's professional dealings requires vacatur of the award on three separate grounds. First, Stone contends that Marston demonstrated "evident partiality" against him by virtue of her purported failure to disclose. 9 U.S.C. § 10(a)(2). Second, Stone argues that the aforementioned failure to disclose constitutes "misbehavior" by Marston under 9 U.S.C. § 10(a)(3). And finally, Stone asserts that Marston "exceeded [her] powers" as an arbitrator as provided in 9 U.S.C. § 10(a)(4) because FINRA improperly designated her as a "public arbitrator."

As explained herein, we reject Stone's invitation to overturn the panel's unanimous decision. Arbitration awards are entitled to extreme deference, Dluhos v. Strasberg, 321 F.3d 365, 370 (3d Cir. 2003), and the grounds for vacatur focus on "egregious departures from the parties' agreed-upon arbitration." Hall St. Assocs. v. Mattel, Inc., 552 U.S. 576, 586 (2008). As discussed in detail infra, Stone did disclose her husband's affiliation with the securities industry; unfortunately, that disclosure just never made it to Stone. Although Marston could have been more diligent in updating her disclosures, we cannot say that her conduct constitutes either "evident partiality" or "misbehavior" warranting vacatur under Section 10(a)(2) or 10(a)(3) of the Federal Arbitration Act (FAA). Additionally, even if Marston did not qualify as a "public arbitrator," her participation in Stone's case (1) did not fall so far outside the parties' agreed-upon arbitration as to require vacatur under Section 10(a)(4), and (2) constituted harmless error in any event because the three arbitrators rendered a unanimous decision. Finally, even if Stone could show proper grounds for vacatur, he waived any failure-to-disclose-based challenge to the award because he failed to investigate the arbitrators as diligently before the arbitration as he did after he lost. In this respect, Stone's admitted actions show him to be the quintessential sore loser improperly seeking a second bite at the apple.

II. Factual Background and Procedural History

Petitioner Laurence Stone ("Petitioner" or "Stone") lost millions of dollars investing in a Bear, Stearns*fn1 ("Bear Stearns" or "Respondent") hedge fund that held residential mortgage-backed securities before that market collapsed in 2007. Stone blames Bear Stearns (now J.P. Morgan) for his losses. In Stone's eyes, Bear Stearns fraudulently induced and misled him into investing in the fund. In April of 2008, Stone filed a FINRA*fn2 arbitration claim saying as much and seeking damages of $7.6 million. (See Doc. No. 20-8).

The FINRA rules then in effect called for the appointment of a three-person panel consisting of two "public arbitrators" and one "non-public arbitrator" to hear Stone's claim. See FINRA Rules 12400, 12401, 12403. FINRA provides detailed definitions of a "public arbitrator," see Rule 12100(u), and a "non-public arbitrator," see Rule 12100(p), but the general gist is this: public arbitrators should not be too closely tied to the securities industry, while non-public arbitrators should have significant securities-related experience.

In Stone's case, FINRA generated and provided to the parties random lists of arbitrators as follows: (1) a list of eight arbitrators from the FINRA non-public arbitrator roster; (2) a list of eight arbitrators from the FINRA public arbitrator roster; and (3) a list of eight public arbitrators from the FINRA chairperson roster. See Rule 12403. Along with these lists, FINRA sent an arbitrator disclosure report (ADR) for each of the twenty-four arbitrators, providing the employment history and other background information about each arbitrator, including education, prior awards, and conflict disclosures. (See, e.g., Doc. No. 19 Ex. B (ADR of Jerrilyn Marston)). Using this information, the parties ranked and/or struck the arbitrators on the lists. FINRA then assigned a three person panel to hear Stone's case based on ranking and availability.

By his own admission, Stone himself had absolutely nothing to do with the selection of the arbitrators in his case. (See Doc. No. 20-4 (Stone Tr. 21-25)). Even though Stone had over $7 million at stake and knew that the arbitration panel would act as his "jury, so to speak," Stone "didn't think about . . . if it was important who was on the panel" prior to the arbitration. (Id. 23:17-24:24). Indeed, Stone did no independent research on the arbitrators at that time. (Id. 29:4-15, 36:21-37:5). Instead, Stone relied on his attorneys to conduct due diligence on the arbitration panel candidates. (Id. 34:19-35:4). According to one of the lawyers who handled Stone's arbitration, he and his colleagues investigated the potential arbitrators by doing internet research, looking at their prior FINRA arbitration awards, and reviewing their ADRs. (Doc. No. 19 Ex. S).

In the end, with the parties' input, FINRA assigned Gordon Wase (public arbitrator and chairperson), Jerrilyn Marston (public arbitrator), and Dale Pope (non-public arbitrator) to Stone's case. (Doc. No. 20-8). The controversy here surrounds arbitrator Marston ("Marston"). Specifically, Stone alleges that Marston improperly failed to disclose information pertaining to her husband Dr. Richard Marston ("Dr. Marston"), a professor of finance at the Wharton School of the University of Pennsylvania, and his ties to the securities industry. As discussed infra, Stone unearthed this information about the Marstons while thoroughly and systematically digging for dirt on each of the three arbitrators shortly after they ruled unanimously against him. Stone could have done this research earlier, before the panel was selected, and certainly before he lost his case. (Stone Tr. 74:13-75:17). But he investigated the arbitrators only after the adverse decision because, at that point, his "disenchantment was extreme because [he] had lost." (Id. 76:1-5).

In any event, Stone contends that if Marston had disclosed this newly-discovered information beforehand, she never would have been eligible to serve as a public arbitrator at all.*fn3 Therefore, says Stone, Marston's failure to disclose her husband's relationship with the securities industry in general, and J.P. Morgan in particular, "created an impression of partiality and concealed Ms. Marston's lack of qualification to serve, thus requiring vacatur of the Award" under Sections 10(a)(2), 10(a)(3), and 10(a)(4) of the Federal Arbitration Act. (Doc. No. 19, at 3).

But Stone's argument is factually flawed because Marston did disclose her husband's affiliation with the securities industry to FINRA, at least in broad strokes. Stone (and his attorneys) just never received this disclosure because it did not show-up on Marston's ADR. Stone's counsel describes the circumstances surrounding Marston's disclosure-that-wasn't as a "perfect storm" of missteps by FINRA and Marston herself. The story begins in the mid-1990's, when a friend of Marston's approached her about becoming an arbitrator. (Doc. No. 19 Ex. E (Marston Tr. 20-23)). Marston then contacted the head of FINRA's Washington office and obtained an application form. Even before filling-out the application, Marston informed FINRA of her husband's securities-related dealings:

I called [the head of the Washington office] again and I said I want to get this out on the record with you, my husband teaches and is a very prominent professor at the University of Pennsylvania. He speaks widely in securities matters . . . And I said, frankly, these rules are opaque to me . . . Is this something that disqualifies me [from being an arbitrator]? (Marston Tr. 22:1-19).

The FINRA official essentially replied that she wasn't sure and advised Marston to disclose the potential conflict "as broadly as you can and then invite . . . questions." (Id. 22:13-19). So Marston did just that. In response to a question in the FINRA application about whether she had family in the securities business, Marston answered "Yes" and elaborated:

My husband is a Professor of Finance at the Wharton School of the University of Pennsylvania. In that capacity, he has spoken to brokers, traders, and financial consultants from various investment banks and brokerage houses, and Industry Groups such as the Securities Institute and IMCA. Should you wish more information, I would be happy to provide it. (Doc. No. 19 Ex. C).

But no one from FINRA followed-up with Marston about her husband's activities. (Marston Tr. 24:18-23). Instead, FINRA inexplicably translated Marston's relatively detailed disclosure about her husband into "Family Member has a relationship with [the] University of Pennsylvania" -- a single line on Marston's ADR. (Doc. No. 19 Ex. D). In 2005, Marston tried to amend this description in her ADR to read "Family Member is faculty member, Wharton School, University of Pennsylvania, and gives seminars to financial consultants and investors." (Id.; Marston Tr. 25-28). But again, for reasons unknown, this amendment never showed-up on FINRA's ADR for Marston. As a result, the ADR that Stone and his attorneys received for Marston noted only that Marston had a family member associated with the University of Pennsylvania; it did not reflect Dr. Marston's faculty position at Wharton or his securities-related dealings. (Doc. No. 19 Ex. B). Despite the fact that FINRA imposes an ongoing duty to disclose on its arbitrators, Marston did not clarify or supplement her ADR disclosures at any point throughout Stone's arbitration, even though she was given the opportunity to do so at the beginning of each hearing. (Doc. No. 19 Ex. G). In Marston's opinion, she had already disclosed her husband's professional activities to FINRA early-on, so there was no need for her to re-disclose old issues. (Marston Tr. 49:18-50:6).

Additionally, Marston made a specific effort to discover any potential conflicts once she learned FINRA had assigned her to Stone's case. In particular, Marston asked her husband if he had done any work for Bear Stearns, the respondent in Stone's arbitration. Dr. Marston said that Bears Stearns no longer existed because J.P. Morgan bought it, and he had not done work for J.P. Morgan since they "fired [him] in the late 1990s."*fn4 (Marston Tr. 53). More recently, in May of 2009,*fn5 Dr. Marston gave a paid keynote speech, arranged through a speaking agency, at a conference sponsored by J.P. Morgan. (Dr. Marston Tr. 12-13; Doc. No. 19 Ex. K). However, it is unclear whether Dr. Marston knew who sponsored the conference before he agreed to give the speech. (Id.). And while arbitrator Marston generally knew when her husband traveled to give speeches, she "doubts" she knew of J.P. Morgan's involvement with this event. (Marston Tr. 53:23-54:11).

Also, in the fall of 2009,*fn6 Dr. Marston took a position on the board of W.P. Carey. (Dr. Marston Tr. 35-41). In the fall of 2010, Dr. Marston was elected to the Investment Committee of Carey Asset Management, which reviews and approves Carey's real estate investments. (Doc. No. 19 Ex. N; Dr. Marston Tr. 39-40, 55-57). Carey has a complicated organizational structure, but it appears that Dr. Marston also sat on the board of Carey Asset Management, which owns Carey Financial LLC, a registered broker-dealer. (Doc. No. 19, at 13). Both Dr. Marston and arbitrator Marston aver that neither knew of the relationship between Carey Asset Management and Carey Financial LLC before Stone filed this lawsuit. (Dr. Marston Tr. 40-41; Marston Tr. 44, 51-52).

More generally, Marston described her husband's professional activities as follows:

He is an academic and a researcher. He is an expert on markets and he speaks very often on the state of the economy, on the state of the markets. He's got a very good track record. He has a lot of credibility . . . as his career developed, he became a real advocate for the investing public and a critic of a lot of practices in the securities industry and he spoke widely about that. (Marston Tr. 48). Dr. Marston's most recent book on investing confirms that he saw himself as someone with "perspective from the investor's side of the advisor-investor relationship." (Doc. No. 19 Ex. I, at xiv). In fact, Dr. Marston runs a program at Wharton counseling ultra-high net worth investors such as Stone. (Id.).

Coming back to the Stone arbitration, the panel was selected in late 2008 but did not hold its first evidentiary hearing until September of 2010. (Doc. No. 20-8). Just weeks prior to this first hearing, the panel sanctioned Stone to the tune of $15,000 for discovery violations. (Id.). Although Stone was upset and "mild[ly] concern[ed]" that this panel could give him a fair hearing, he did no background investigation on the three arbitrators and never objected to the composition of the panel until after he lost (Stone Tr. 44-53). Further, Stone admits that during the arbitration hearings, he saw nothing to suggest that Marston was biased against him:

Q. Okay. And was there ever any conduct exhibited by Jerrilyn Marston that led you to believe that she was not completely fair and impartial?

A. None that I could specifically think of. (Stone Tr. 53:12-17).

In July of 2011, the panel issued a unanimous decision dismissing Stone's claims in their entirety. (Doc. No. 20-8; Stone Tr. 53-54). A few days later, Stone started researching the backgrounds of all three arbitrators. (Stone Tr. 55). Stone hoped to get the decision overturned by finding "relationships or circumstances that might have created an appearance of bias" on the part of the arbitrators. (Id. 58). Stone estimates that he spent six to eight hours investigating each one of the three panelists. (Id. 61-64). This twenty or so hours of work, primarily on Google, yielded the connection between arbitrator Marston and Dr. Marston, and Dr. Marston and the financial industry. Stone then spent at least another eight hours delving deeper into Dr. Marston's background. (Id. 74:13-19). Stone admits that he could have ...


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