BARCLAYS CAPITAL INC v. SHEN (2008)

Petitioner Barclays Capital Inc. (Barclays) has brought this petition seeking an order vacating the award by an arbitration panel of the National Association of Securities Dealers (NASD), only to the extent it awarded respondent Elizabeth Bing Shen, (Shen), its former employee, punitive damages.   Shen has answered the petition and now cross moves for an order confirming the award in its entirety.

The petition and cross motion before the court focus on whether the NASD arbitration panel's award of punitive damages to Shen was rendered in manifest disregard of the law, as the law was recently established in the Court of Appeals case of Rosenberg v. MetLife, Inc., 8 N.Y.3d 359, 834 N.Y.S.2d 494, 866 N.E.2d 439 (2007) (“Rosenberg II ”).   Barclays contends that the arbitrators knew about and then proceeded to ignore the holding in Rosenberg II, which precludes any monetary damages, not alone punitive damages, for defamatory statements made about a terminated employee in a U-5 filing.   Shen argues that the award of punitive damages is legally consistent with Rosenberg II and not made in manifest disregard of the law.

Applicable Law

The NASD is a self-regulatory organization and quasi-governmental entity that has been delegated the authority to enforce the requirements of the Securities Exchange Act and it is the primary regulator of the broker-dealer industry.   Rosenberg v. MetLife, Inc., 8 N.Y.3d 359, 366, 834 N.Y.S.2d 494, 866 N.E.2d 439 (2007).   Arbitration of disputes concerning employment in the securities industry are governed by the Federal Arbitration Act (FAA).  9 U.S.C.A. §§ 1-11;  Salvano v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 85 N.Y.2d 173, 623 N.Y.S.2d 790, 647 N.E.2d 1298 (1995).   The decisions and awards of the panel must be examined applying Federal law, and not Article 75.  Wien & Malkin LLP v. Helmsley-Spear, Inc., 6 N.Y.3d 471, 480, 813 N.Y.S.2d 691, 846 N.E.2d 1201 (2006).

 The FAA provides that an arbitration award may be vacated if:  (1) the award was procured by corruption, fraud or undue means;  (2) the arbitrators exhibited evident partiality or corruption;  (3) the arbitrators were guilty of misconduct;  or (4) the arbitrators exceeded their power.  9 U.S.C. § 10.   An arbitration award may also be vacated if it is rendered in manifest disregard of the law.  Wien & Malkin LLP v. Helmsley-Spear, Inc., 6 N.Y.3d 471, 480, 813 N.Y.S.2d 691, 846 N.E.2d 1201 (2006);  Halligan v. Piper Jaffray, Inc., 148 F.3d 197, 201-203 (2nd Cir.1998).

 “Manifest disregard of law”, however, is a severely limited doctrine, applied only in extremely rare situations and highly deferential to arbitration awards.  Porzig v. Dresdner, Kleinwort, Benson, North America LLC, 497 F.3d 133 (2nd Cir.2007).   The petitioner has a heavy burden and the arbitral award may be vacated only where a petitioner can demonstrate both that:[1] the arbitrator's knew of a governing legal principle, yet refused to apply it or ignored it altogether and [2] that the law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case.  Wallace v. Buttar, 378 F.3d 182 (2nd. Cir.2004).   It is best described as a doctrine of last resort where some egregious impropriety on the part of the arbitrators is apparent, but where none of the provisions of the FAA apply.  Duferco Int'l Steel Trading v. T. Klaveness Shipping A/S, 333 F.3d 383, 389 (2d Cir.2003).   The doctrine is not intended to supercede the more widely recognized rule that mere errors of law are insufficient to set aside an arbitration award.  Bear Stearns & Co. Inc. v. 1109580 Ontario, Inc., 409 F.3d 87, 92 (2nd Cir.2005);  New York Correctional Officers and Police Benevolent Ass'n v. State, 94 N.Y.2d 321, 704 N.Y.S.2d 910, 726 N.E.2d 462 (1999).   The court cannot simply disregard or vacate the panel's award because it would have decided the matter differently, or it believes the panel arrived at the wrong conclusion.   Moreover, the arbitrators' decision must be upheld even if there is only a barely colorable justification for the outcome the arbitrators reached.  Landy Michaels Realty Corp. v. Local 32B-32J, 954 F.2d 794, 797 (2d Cir.1992).

Arguments

Respondent Shen was terminated from employment by Barclays on January 26, 2006.   Prior to her termination, Shen received as C grade for her year 2005 performance.   She was graded at her year end performance review on January 18, 2006.   At that review, Shen was rebuked for not having checked certain factual data in materials sent to investors.   After her review Shen provided an email to her superiors purportedly from an outside accounting firm that showed she had checked the materials for accuracy before sending them out.   The email proof Shen provided, however, was (admittedly) a composite of two emails from the accountant that she cut and pasted into a single document.   Barclays conducted an investigation and shortly thereafter Shen was terminated.   Following her termination, Barclays filed the required U-5 termination notice with the NASD in February 2006.   In that U-5, Barclays stated that Shen had been terminated for gross misconduct-non securities related, based upon the composite email.

Shen then filed a claim with the NASD in August alleging that Barclays had engaged in the following illegal acts:

A.  Making a false, malicious, defamatory (i.e. libelous) U-5 filing with the [NASD] ․

B. Attempting overtly and nefariously, in pre-meditated fashion, to impugn [Shen's] reputation and destroy her burgeoning career in the securities industry;  and

C. Being unjustly enriched as a result of its failure to pay [Shen] a bonus for Calendar year 2005 (payable in early 2006).

In her Statement of Claim Shen sought the following relief:

“A. An expungement of the false language contained in the U-5;

B. Libel Damages of $5,000,000.00, representing damage to the Claimant's Reputation and damage to the claimant's career emanating from Respondents false, malicious, defamatory filing;

C. Quantum Meriut Damages of approximately $163,000.00, emanating from the Respondent's unjust enrichment as a result of its failure to pay the Claimant a bonus for Calendar Year 2005, notwitstanding the fact that the Claimant worked at Barclay for the entire year in 2005 the exact amount of said unjust enrichment to be quantified at a hearing of this matter;

D. Punitive damages of $5,000,000.00, resulting from the Respondent's malicious and egregious U-5 filing and attempt to destroy Claimant's career in the securities industry;  and

E.  Such other an further relief as this Panel deems just and proper under the circumstances including, but not limited to, Attorneys' fees, statutory interest, and the reimbursement of all filing fees, disbursements, and expenditures that the Claimant as incurred and will continue to incur, in connection with the prosecution of this matter.”

In June 2007, following the Court of Appeals decision in Rosenberg II, Barclays brought motions to dismiss before the panel, presenting arguments that are identical to those now before this court.   The motions were made both orally and in writing.   They were made pre and post hearing.   Copies of the relevant Court of Appeals case were put before the panel.   Barclays made arguments virtually identical to those it now makes in connection with this petition, including that the statements on the U-5 notice were absolutely privileged.   The record on this petition does not show the nature of the opposition posed by Shen to those motions.   The panel ordered that the testimonial hearing proceed.   The hearing took place over the course of three days.

Following the hearing, the panel made the following awards:

1.  Respondent is liable for and shall pay to [Shen] compensatory damages in the amount of $90,000.

2. Respondent is liable for and shall pay to [Shen] punitive damages in the amount of $95,000.

3. The Panel recommends the expungement of the accompanying explanation under the Reason for Termination entered on the Form U-5 and Internal Review Disclosure filed by Barclays Capital Inc., from [Shen's] registration records maintained by the NASD Central Depository (CRD).  The panel further recommends that [Shen's] Form U-5 and Internal Review Disclosure be corrected to reflect that [Shen's] accompanying explanation for her Reason for Termination From [Barclays] was due to a regrettable act of misjudgment-non securities related.   The expungement is based upon the defamatory nature of the information contained in [Shen's] CRD record.

In support of its petition, Barclays contends the panel misapplied the law, refused to apply it or ignored it altogether, and therefore the award of punitive damages it made was in manifest disregard of the Court of Appeals decision in Rosenberg II and it must be vacated.  Greenberg v. Bear Stearns & Co., 220 F.3d 22, 28 (2nd Cir.2000) cert. den. 531 U.S. 1075, 121 S.Ct. 770, 148 L.Ed.2d 669 (2001).   Petitioner contends that application of the legal principles set forth in Rosenberg II is a complete bar to Shen from recovering punitive damages on any statement in the U-5 because the contents of that form are absolutely privileged.   Barclays contends that the award of punitive damages violates public policy because it has a chilling effect on the free and open disclosure of information relevant to potential securities violations.  Dunn v. Ladenburg Thalmann & Co., 259 A.D.2d 544, 686 N.Y.S.2d 471 (2nd Dept.1999) lv. app. dism. 93 N.Y.2d 810, 694 N.Y.S.2d 632, 716 N.E.2d 697 (1999).

In opposition to Barclays' motion and in support of her cross motion to confirm the NASD's award in its entirety, Shen argues that the NASD did not, in fact, award her punitive damages on her defamation claim, but ordered the expungement of her records, which is wholly consistent with Rosenberg II. Further, Shen contends that the panel did not give a reason why it awarded Shen punitive damages, nor was it under any obligation to do so.  Hoeft v. MVL Group, Inc., 343 F.3d 57, 64 (2d Cir.2003).   Shen argues further that the arbitration panel have the broad authority to make awards, including punitive damages awards.   Finally, Shen argues that in the absence of any punitive damages award by the panel specifically for her defamation claim, they could have been awarded for any number of reasons, and therefore, this court must defer to the panel.

In response to these arguments, Barclays contends that the award had to be for defamation because that was the only claim Shen sought such relief for.   Assuming the award was made for some other reason, Barclays argues that the panel exceeded its authority because Shen's attorney only identified two claims his client seeking redress for:  defamation and the failure to pay Shen a bonus for the year 2005.   Thus Barclays contends the punitive damages could not possibly have been on the contract/quasi-contract claim for the bonus because punitive damages are unavailable for contract based claims.   Rocanova v. Equitable Life Assurance Society of the U.S., 83 N.Y.2d 603, 612 N.Y.S.2d 339, 634 N.E.2d 940 (1994);  Carvel Corp. v. Noonan, 350 F.3d 6 (2nd Cir.2003).

Discussion

 The bedrock of Barclays' claim is that:  1) the Court of Appeals decision in Rosenberg II bars Shen from receiving any monetary recovery for claims related to U-5 filings Barclays made about her with the SEC because they are absolutely privileged, and 2) Shen's only redress is expungement.   Barclays argues that the panel had been made aware of the applicable law in oral and written motions and that they simply chose to ignore controlling legal precedent.

A proper analysis of these arguments begins with an analysis of the Court of Appeals decision in Rosenberg II.¹ The case of Rosenberg v. MetLife started out in the Federal District Court of the Southern District of New York. After being fired, Chaskie Rosenberg, a financial services representative with an affiliate of MetLife (“MetLife”), commenced a plenary action alleging, among other things, that he had been defamed because of libelous statements in the U-5 notice of termination that MetLife filed with the NASD. In connection with motions before it, the District Court dismissed Rosenberg's defamation action, but allowed other claims to proceed to trial before a jury, which ultimately rendered a defense verdict.   Rosenberg appealed.   The United States Court of Appeals certified the following question to the New York Court of Appeals:  are statements by an employer on an NASD employee termination notice (Form U-5) subject to an absolute or a qualified privilege in a suit for defamation?   The New York Court of Appeals provided the following certified answer:

[t]he Form U-5's compulsory nature and its role in the NASD's quasi-judicial process, together with the protection of public interests, lead us to conclude that statements made by an employer on the form should be subject to an absolute privilege.   Analogously, close to 40 years ago in Wiener [v. Weintraub, 22 N.Y.2d 330, 292 N.Y.S.2d 667, 239 N.E.2d 540 (1968) ] we determined that complaints involving attorneys should be accorded an absolute privilege because of the necessity of maintaining the high standards of our bar” (Wiener, 22 N.Y.2d at 332 [292 N.Y.S.2d 667, 239 N.E.2d 540) ].   The regulation of registered brokers in the securities industry is of no less importance. [fn7] We further note that registered employees who are maliciously defamed on a Form U-5 are not wholly without remedy as they may commence an arbitration proceeding or court action to expunge any alleged defamatory language.

Accordingly, the certified question should be answered as follows:  Statements made by an employer on a NASD termination notice are subject to an absolute privilege in a suit for defamation.”

Rosenberg v. MetLife, 8 N.Y.3d at 368, 834 N.Y.S.2d 494, 866 N.E.2d 439 (a/k/a Rosenberg II)

 Following this answer by the New York Court of Appeals, the U.S. Court of Appeals affirmed the District Court's dismissal of the defamation claim:

It is now clear that the statements on which Rosenberg bases his libel claim are absolutely privileged under New York law.   See:  Rosenberg II, 8 N.Y.3d at 368 [834 N.Y.S.2d 494, 866 N.E.2d 439].   Absolute privilege shields the speaker or writer from liability for an otherwise defamatory statement, regardless of the speaker or writer's motive in making the statement.  Park Knoll Assocs. v. Schmidt, 59 N.Y.2d 205 [464 N.Y.S.2d 424, 451 N.E.2d 182 (1983) ]. Rosenberg advances no argument that the statements might escape the privilege.  (Fn1) Because a libel action on an absolutely privileged statement is barred as a matter of New York law, see e.g. Cicconi v. McGinn, Smith & Co., 27 A.D.3d 59 [808 N.Y.S.2d 604 (2005) ], the district court properly granted summary judgment to MetLife.

Rosenberg v. MetLife, 493 F.3d at 291-292

Rosenberg II is explicit and directly applicable to this case.   It unequivocally rules out monetary damages, of any kind, for a claimed defamation in a required U-5 filing.   The Court of Appeals decision makes it clear that the holding was based upon compelling and strong public policy reasons.   Greenberg v. Bear Stearns & Co., Inc., 220 F.3d 22, 27 (2nd Cir.2000);  New York Correctional Officers and Police Benevolent Ass'n v. State, supra.

It is beyond dispute that the panel was familiar with the Rosenberg II decision.   The decision and its impact on the pending arbitration had been vigorously argued before the panel in both oral and written motions by petitioner.   The records does not reveal the substance of the opposition by Shen. While there is some indication about the parties having orally argued the motion to the arbitrators in a phone conversation, there is no other indication that Shen actually opposed the application.

Thus, the court holds that this is one of those rare cases where the panel, aware of the applicable law and attendant public policy considerations, chose to ignore it.   The two prongs of the manifest disregard doctrine are satisfied in this case.  Halligan v. Piper Jaffray, Inc., supra.

Shen argues that because the NASD did not expressly state that the punitive damages were for her libel claim, the court cannot and should not assume that it was for her libel claim.   Arbitrators are not required to provide an explanation for their arbitration award.  Hoeft v. MVL Group, Inc., 343 F.3d 57, 64 (2d Cir.2003);  Halligan v. Piper Jaffray, Inc., 148 F.3d 197, 204 (2d Cir.1998) cert. denied, 526 U.S. 1034, 119 S.Ct. 1286, 143 L.Ed.2d 378 (1999).   Moreover, the failure to state the reasons for an award cannot form the basis for vacatur if any ground for the arbitrators' decision can be gleaned from the factual record.  Sobel v. Hertz, Warner & Co., 469 F.2d 1211, 1216 (2d Cir.1972).

The court, however, has carefully considered this case and it cannot discern any colorable basis to otherwise support punitive damages.   The conclusion is inescapable that the punitive damages must have been awarded for the defamation claim, because that is the only basis on which Shen sought such damages.   Shen made this point clearly in he own Statement of Claim.   The arbitrators were bound to and this court must conclude they did rule only on matters presented to them by the parties.  Fahnestock & Co. v. Waltman, 935 F.2d 512 (2nd Cir.1991).   Even were the court to consider whether there is another basis for the award, none can be found, Shen's conjecture notwithstanding.

Conclusion

In accordance herewith, it is hereby

ORDERED that the petition to vacate that part of the arbitration award which awarded respondent punitive damages in the amount of $95,000 is hereby granted and the award of sam is vacated, and it is hereby

ORDERED that except as to punitive damages the cross-motion to confirm the arbitration award is granted.

Any relief requested that has not been expressly addressed has nonetheless been considered and is hereby denied.

This constitutes the decision and order of the court.

So Ordered.

FOOTNOTES

1.   The complete citation for the Rosenberg v. MetLife case is as follows:  Rosenberg v. MetLife, 2005 WL 356821 (S.D.N.Y.2005) Rosenberg v. MetLife, 453 F.3d 122 (2nd Cir.2006) cert. question 8 N.Y.3d 359, 834 N.Y.S.2d 494, 866 N.E.2d 439 (2007) (“Rosenberg II”) cert. answer;  Rosenberg v. MetLife, 2005 WL 356821 (S.D.N.Y.2005) affirmed 493 F.3d 290 (2007).   The U.S. Court of Appeals identified the New York Court of Appeals decision on the certified question as “Rosenberg II.”

JUDITH J. GISCHE, J.