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In an unusual and contentious ruling examining the court’s role in reviewing arbitration awards, the New York Appellate Division, 1st Department, has reinstated a $1.25 million award that it had previously rejected. The split decision in In re Roffler, 4698, included two vigorous dissents that urged the court to stick by its original ruling. One of the dissenters expressed dismay over the way the court arrived at its conclusion, saying it should have never vacated the award in the first place but was now constrained to follow its original ruling. The case involves a dispute between Joseph Roffler and Spear, Leeds & Kellogg, a Wall Street securities firm that was bought by Goldman Sachs in 2000. Roffler was once a managing director at Spear. Roffler left the firm to start Bullseye, a securities trading firm, with his wife, Eva. Spear provided securities clearing services to Bullseye, and Bullseye was allowed to open sub-accounts under Spear’s master account. In July 1995, Bullseye’s account fell below the amount of minimum equity the company was supposed to maintain. Spear then liquidated Bullseye’s account and sought arbitration to recover what it said was a $350,000 deficit. Bullseye filed its own arbitration claim, alleging that Bullseye went below its minimum because of unauthorized trading by Pasquale Schettino, Spear’s managing director at the time. Roffler said that Schettino had guaranteed that any losses incurred by the Rofflers through the Spear account would later be covered by Spear. Roffler sought $3 million in compensation and $1 million for defamation. A three-member arbitration panel from the National Association of Securities Dealers ruled 2-1 in favor of Bullseye, saying Roffler was owed $1.25 million. Its decision, which was delivered in 1999, did not include written reasons. Spear sued to invalidate the award. In March 2000, Manhattan Supreme Court Justice Walter B. Tolub said that the award amounted to an “overt disregard” for federal law that governs arbitrations. Two years later the 1st Department affirmed Justice Tolub, saying the award was irrational and violative of federal arbitration principles. The court said that “individual claimants, as a matter of law, cannot assert a cause of action to recover for wrongdoing done to a corporation.” It also blamed the arbitrators for failing to explain their determination. It returned the dispute to the arbitrators. AWARD UPHELD The arbitrators subsequently issued the same award in favor of Roffler, again in a 2-1 ruling. This time, however, the panel included a brief explanation for its determination. Since Schettino had given the Rofflers a guarantee, the two arbitrators said, Spear was liable for its employee’s actions. It pointed out that Spear could in turn sue Schettino. Justice Tolub again rejected the award in February, setting the stage for last week’s 1st Department ruling. In an unsigned opinion, a three-justice majority of Betty Weinberg Ellerin, Alfred D. Lerner and James M. Catterson said the latest arbitration award should be confirmed. “The present determination � provides an explanation sufficient to cure the previous defects in that the panel found [Spear] responsible for the actions of its partner, and that Schettino had guaranteed any losses incurred by petitioners would be ‘made good’ by respondent,” the majority wrote. In a dissent, Justice Peter Tom said he was constrained to dissent, even though he believed the award should not have been disturbed in the first place. “Our ruling that the award of corporate damages to the individual share owners is offensive to federal arbitration principles cannot simply be explained away in disregard of the spirit and letter of our decision,” Tom wrote. In a separate dissent, Justice Milton L. Williams, said this award should have been rejected for the same reasons as the last one. “The arbitrators’ subsequent rendering, presently before us, of an identical award with a cursory explanation of their reasoning, is not sufficient to cure the award’s essential fault,” Williams wrote. “The panel’s reliance on this explanation in support of an award to petitioners not only evidences, at best, a grievous misinterpretation of our earlier decision, but ignores the fact that both this Court and the [trial] court clearly rejected the same explanation, and others, when offered by petitioners earlier in this litigation as a possible rationale for such an award.” Raymond A. Bragar of Bragar Wexler Eagel & Morgenstern, who represented Roffler, said the final result was correct and practical, though it took nearly 10 years to reach. “I see this ruling as a return to the mainstream law of arbitration, which recognizes that arbitrator decisions are due deference and that any colorable justification is sufficient,” Bragar said. Michael J. McAllister of Satterlee Stephens Burke & Burke, who represented Spear, was on vacation and could not be reached for comment. Schettino of Spear was fined and barred from the securities industry by the American Stock Exchange (the Securities and Exchange Commission confirmed those penalties in 2001). The exchange also fined Spear $1 million for failing to respond to or curb Schettino’s “extensive misconduct,” according to an SEC press release. In barring Schettino, the exchange found that he initiated unlawful stock option trades for Bullseye accounts, with Bullseye’s knowledge. Bragar said Bullseye contests that finding and maintains that it did not know about the illegal trades.

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