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Lawyers trying to defend state ethics rules for neutral arbitrators were behind the eight ball when they arrived Tuesday at the California Supreme Court. And they likely stayed there. Exactly one week after the Ninth Circuit U.S. Court of Appeals ruled that the state’s heightened disclosure standards were trumped by federally sanctioned rules, San Francisco attorney Cliff Palefsky and two allies tried to convince the Supreme Court to take a different position. “The Ninth Circuit was wrong,” Sacramento-based Deputy Attorney General Amy Winn argued, while noting that the state Supreme Court was not bound by the federal court’s decision. But the justices seemed inclined to believe that the Ninth Circuit got it right. The few questions they asked hinted at finding no way around federal pre-emption. The state’s new standards went into effect in July 2002. Self-regulating organizations, such as the National Association of Securities Dealers and the New York Stock Exchange, immediately objected, especially to requirements that arbitrators must disclose all financial or personal conflicts. SROs operate under their own rules, which are approved by the Securities and Exchange Commission, and they claimed that the state standards would defeat the federal goal of uniformity of rules. The SROs fought back by suing the Judicial Council of California, which wrote the rules. They lost. The groups also resorted to writing contracts forcing litigants to waive the state standards. In, Jevne v. Superior Court (JB Oxford Holdings Inc.), S121532, Southern California investor Jack Jevne refused to waive the standards in his suit against Sherman Oaks investment bank JB Oxford Holdings Inc. for allegedly misappropriating funds. But one week before his case reached the state Supreme Court, the Ninth Circuit ruled in Credit Suisse First Boston Corp. v. Grunwald, 05 C.D.O.S. 1751, that the SRO rules trump state standards. On Tuesday, Winn, Palefsky and Eric Woosley, a partner in Santa Barbara’s Zilinskas & Woosley, tried to distinguish their case from Grunwald. The Ninth Circuit case, they said, involved an employment dispute, which required arbitration under SRO rules. “That is not true of customer disputes [such as Jevne],” Woosley argued. “There is no exchange rule requiring arbitration.” “Arbitration over customer disputes is nothing Congress ever intended the SROs to handle,” Winn agreed. Justices Joyce Kennard, Ming Chin and Fifth District Court of Appeal Justice Steven Vartabedian, sitting by assignment, tried to find some way for aspects of the state standards to survive. Each wanted to know whether the state’s rules could survive if the court found that only the disclosure standards were severed. Surprisingly, Woosley found himself on the opposite side of that answer from Palefsky. He said no, but Palefsky argued that they are “very severable.” “There is a difference [in the state and SRO rules], but there isn’t a conflict,” Palefsky said. “All we are giving is a layer of extra protection,” he said. “And the states are allowed to make the rules stricter and protect the public.” On the opposing side, Jeffrey Kob, a partner in San Diego’s Miller Milove & Kob, insisted that the SEC has the power to oversee the SROs and their rules, and that the state court “should give deference.” Washington, D.C., lawyer Mark Perry, representing NASD Dispute Resolution Inc. as an intervener, went further and said that all the state rules conflict with the SRO rules and can’t stand. “The conflict is real. It is inescapable. And it is irreconcilable,” he argued. Fourth District Justice James Ward joined Vartabedian in sitting by assignment. The two were replacing Chief Justice Ronald George and Justice Marvin Baxter, who had helped to craft the state arbitration rules. Earlier in the day, the justices took on two cases involving imperfect self-defense. That legal concept holds that defendants who kill someone in the actual, but unreasonable, belief that they’re in imminent danger cannot be convicted of murder because they didn’t act with malice. The cases on Tuesday attempted to stretch the boundaries. In People v. Wright, S119067, Donald Wright was convicted of second-degree murder after fatally shooting his Sacramento County neighbor, Eddie Sanchez, in November 1999. Wright claimed he was suffering delusions from extensive methamphetamine use and sincerely thought Sanchez was pulling a gun on him. In People v. Randle, S117370, Darryl Randle was also convicted of second-degree murder after killing Brian Robinson near his home in the Oakland hills in July 1999. Randle claimed he shot Robinson because he thought the man was going to beat to death his teenage cousin; Robinson had caught the two burglarizing a car at his residence. The appellate courts in each case reversed the convictions. Sacramento’s Third District said Wright was prejudiced when the trial court judge prevented the jury from hearing directly from witnesses who observed Wright’s bizarre behavior before the shooting. San Francisco’s First District ruled that the trial judge erred by not telling jurors they could convict on manslaughter if they believed Randle murdered his victim based on his unreasonable belief that he needed to defend his cousin. The high court’s thinking on the Wright case wasn’t clear, with a couple of the justices indicating that they could uphold the lower court by finding no evidentiary error. However, in Randle the court seemed to favor the attorney general’s argument that the defendant’s choice to kill was an “unjustified reaction” to the circumstances, that there had to be an objective reason for him to react with lethal force. “A third-party intervener cannot act on appearances alone,” San Francisco-based Deputy AG Amy Haddix argued. “A felony must actually be happening or attempted, and, then, only if the felony presents a threat on life.” Justice Baxter conceded that it was “kind of hard to feel sorry for the thief” in this case. Justice Janice Rogers Brown also seemed offended by allowing imperfect defense for a man who tried to burglarize a car and then flashed his gun before killing his victim. “We have a situation where the defendant knew exactly what was going on,” she said, “and I’m pretty sure it was the defendant who set this all into motion.” Rulings in all three cases are due in 90 days.

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