Notice: This opinion is subject to formal revision before publication in the
Federal Reporter or U.S.App.D.C. Reports. Users are requested to notify the
Clerk of any formal errors in order that corrections may be made before the
bound volumes go to press.
United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued January 22, 2007 Decided March 16, 2007
No. 06-7067
MICHAEL LESSIN,
APPELLANT
v.
MERRILL LYNCH, PIERCE, FENNER & SMITH, INC. AND
BRETT BERNSTEIN,
APPELLEES
Appeal from the United States District Court
for the District of Columbia
(No. 05cv00171)
Robert A. Kantas argued the cause and filed the briefs for
appellant.
Mary Gail Gearns argued the cause and filed the brief for
appellees. Edward L. Powers and Lauren C. Gould entered
appearances.
2
Before: ROGERS and KAVANAUGH, Circuit Judges, and
EDWARDS, Senior Circuit Judge.
Opinion for the Court filed by Circuit Judge ROGERS.
ROGERS, Circuit Judge: During a ten-month period in
2000, Michael Lessin lost $5.6 million in his brokerage account
with Merrill Lynch, Pierce, Fenner & Smith, Inc. He appeals
the district court’s denial of his motion to vacate an arbitration
award in his favor for $32,975. Lessin contends vacation is
required because the arbitrators refused to hear one of his expert
witnesses and demonstrated a manifest disregard of the law in
awarding compensatory damages. In the absence of any
prejudice as a result of the evidentiary ruling and in light of the
record support for the award, we affirm.
I.
Lessin opened a brokerage account with Merrill Lynch in
mid-January 2000. When he opened the account, Lessin held
almost $5.3 million in Yahoo! securities and a $2.1 million
margin balance. Previous to this, Lessin had worked at
Broadcast.com and exercised options of $99,000 in
Broadcast.com stock. A few months later, Yahoo! acquired
Broadcast.com. Lessin then opened a brokerage account at
Ferris, Baker Watts, Inc., executing a New Account Form
specifying that his priority investment strategies were
speculation and aggressive growth. His broker at Ferris was
Robert Jones. As a result of the acquisition, Lessin was able to
exchange his Broadcast.com stock for shares in Yahoo! worth
approximately $2.3 million. By January 2000, after just seven
months, Lessin’s account had increased in value to
approximately $4.9 million.
In January 2000, Lessin transferred his account to Merrill
3
Lynch, which charged a flat rate per year instead of a
commission on each trade. At Merrill Lynch he executed a
Retail Account Profile stating that his investment objective was
“growth” and that his risk tolerance was “aggressive.” In his
Option Agreement he specified that his objective was
“speculation” and that he had five years experience trading
equities and options. He also signed a transfer form on which he
wrote: “DO NOT LIQUIDATE ANYTHING.” His broker at
Merrill Lynch was Brett S. Bernstein. By October 2000,
Lessin’s account had lost almost 100% of its value.
In February 2003, pursuant to a standard brokerage contract
to arbitrate disputes before a panel of the National Association
of Securities Dealers (“NASD”), Lessin filed a statement of
claim against Merrill Lynch and Bernstein for between $5 and
$10 million in compensatory damages as well as for punitive
damages. A panel of three NASD arbitrators heard evidence
over a six-day period. The panel found Merrill Lynch, but not
Bernstein, liable to Lessin for compensatory damages of
$32,975. Lessin filed a motion to vacate the award in the
Superior Court of the District of Columbia, which Merrill Lynch
removed to the federal district court. The district court denied
the motion to vacate, and Lessin appeals. This court reviews a
district court’s confirmation of an arbitration award for clear
error as to findings of fact and de novo as to questions of law.
Kurke v. Oscar Gruss & Son, 454 F.3d 350, 355 (D.C. Cir.
2006).
II.
Judicial review of arbitration awards is limited. In addition
to the grounds under the Federal Arbitration Act (“FAA”) on
which an arbitration award may be vacated, an award may be
vacated only if it is in “manifest disregard of the law” or is
contrary to an “explicit public policy.” LaPrade v. Kidder,
4
Peabody & Co., 246 F.3d 702, 706 (D.C. Cir. 2001) (internal
quotation marks omitted); cf. Cole v. Burns Int’l Sec. Servs., 105
F.3d 1465, 1486-88 (D.C. Cir. 1997). Lessin’s appeal invokes
both the statutory and non-statutory grounds for vacation.
Under the FAA, an arbitration award may be vacated:
(1) where the award was procured by corruption, fraud,
or undue means;
(2) where there was evident partiality or corruption in
the arbitrators, or either of them;
(3) where the arbitrators were guilty of misconduct in
refusing to postpone the hearing, upon sufficient cause
shown, or in refusing to hear evidence pertinent and
material to the controversy; or of any other
misbehavior by which the rights of any party have been
prejudiced; or
(4) where the arbitrators exceeded their powers, or so
imperfectly executed them that a mutual, final, and
definite award upon the subject matter submitted was
not made.
9 U.S.C. § 10(a) (emphasis added).
Lessin contends that the arbitration panel engaged in
misconduct by refusing to hear pertinent and material evidence
from one of his designated expert witnesses. In considering this
contention, the court is mindful of the fact that “[i]n making
evidentiary determinations, an arbitrator ‘need not follow all the
niceties observed by the federal courts.’” Tempo Shain Corp. v.
Bertek, Inc., 120 F.3d 16, 20 (2d Cir. 1997) (quoting Bell
Aerospace Co. Div. of Textron v. Local 516, UAW, 500 F.2d
921, 923 (2d Cir. 1974)). The arbitrator “need only grant the
parties a fundamentally fair hearing.” Bell Aerospace, 500 F.2d
at 923; accord Sheldon v. Vermonty, 269 F.3d 1202, 1206 (10th
5
Cir. 2001); see Hoteles Condado Beach, La Concha &
Convention Ctr. v. Union De Tronquistas Local 901, 763 F.2d
34, 39 (1st Cir. 1985); Nat’l Post Office Mailhandlers v. U.S.
Postal Serv., 751 F.2d 834, 841 (6th Cir. 1985); Totem Marine
Tug & Barge v. N. Am. Towing, 607 F.2d 649, 651 (5th Cir.
1979); Newark Stereotypers’ Union No. 18 v. Newark Morning
Ledger Co., 397 F.2d 594, 599 (3rd Cir. 1968). It is well within
an arbitrator’s authority to refuse to hear evidence that is
cumulative, see, e.g., Hoteles Condado Beach, 763 F.2d at 40;
Nat’l Post Office Mailhandlers, 751 F.2d at 841, or of little
relevance, see, e.g, Hoteles Condado Beach, 763 F.2d at 40;
Grahams Serv. Inc. v. Teamsters Local 975, 700 F.2d 420, 422-
23 (8th Cir. 1982); see also SEC. INDUS. CONFERENCE ON
ARBITRATION, THE ARBITRATOR’S MANUAL 26 (May 2005).
At the arbitration proceedings, Lessin testified that
Bernstein had misrepresented his experience as a broker and had
never cautioned him regarding the excessive risk in his accounts.
Lessin also elicited testimony that Merrill Lynch had failed to
supervise Bernstein, and he presented evidence that both
Bernstein and Merrill Lynch had encouraged the use of
excessive margin loans, and that Merrill Lynch had maintained
a “buy” recommendation on Yahoo! during the period when
Lessin lost $3.7 million on the stock. According to Lessin, this
loss was compounded by a $1.1 million loss on Be Inc.
(“BEOS”), a stock that Bernstein had continuously
recommended. While acknowledging that he had received
monthly statements on the status of his account and written
confirmations of each security trade, and that he had tracked his
stocks on Merrill Lynch’s website, Lessin claimed that he did
not study these materials and only did what Bernstein
recommended.
Both Bernstein and Robert Jones, Lessin’s broker at Ferris,
testified that they had advised Lessin to diversify his account.
6
Jones testified that Lessin had said from the beginning that he
wanted to trade on margin and did not want to sell the Yahoo!
stock. Jones had advised Lessin that he had too much Yahoo!
stock, but Lessin “loved Yahoo! [and] he thought it was going
higher [in value].” Bernstein testified to the same effect and that
he had advised Lessin to pay off some of his margin debt, but
that Lessin had repeatedly “made it very clear . . . he did not
want to sell Yahoo!; it wasn’t an option.” Bernstein also
testified that he had made notations of his advice to Lessin on
his computer in a program called Gold Mine. Those notations
included an entry dated October 11, 2000 that:
Howard [Rothman, another Merrill Lynch broker] and
I had spoken to [Lessin] numerous times about being
so aggressive, especially on margin. Also, we were
discussing that he wouldn’t take losses on the [stocks]
that were on margin [because] he felt they would come
back. Now, [after a large margin call,] he was forced
to sell them. He thought he knew it all.
Lessin proffered two expert witnesses in an attempt to show
that the Gold Mine notes were fabricated after the fact. The first
was Kenneth Bradley, an independent computer forensic
examiner trained at the Defense Department in techniques of
evidence recovery. He opined, based on his examination of the
hard drive on Bernstein’s computer, that many of the Gold Mine
entries appeared to have been made at the same time. Merrill
Lynch’s expert, Michael William Finnie, who also had
examined the hard drive, testified that a maintenance function,
which indexes a database by sorting entries into files, had been
run on the hard drive and explained the compression of the Gold
Mine data. While both experts ultimately agreed that certain
Gold Mine entries were genuine, they disagreed regarding the
genuineness of the October 11, 2000 note.
7
After hearing a full day of testimony from each party’s
expert, the panel announced the following morning that it had
decided it did not need to hear from Lessin’s second expert, Art
Ehuan, a certified forensics computer examiner with experience
in the private and public sectors, who taught at Georgetown and
George Washington Universities. The panel chairman explained
that the panel members thought they had sufficient information
about what had happened and how the Gold Mine program
worked. They also did not want to face the possibility of
hearing from a rebuttal expert witness called by Merrill Lynch
if Lessin were allowed to call a second expert.
Lessin objected, stating that he had given notice of the
witness and that the second expert was important to his case in
chief because his first expert had not commented on the validity
of the Finnie report, which his second expert was designated to
do. Regarding the possibility of a rebuttal expert, he pointed out
that Merrill Lynch had already had two bites at the apple
because it had submitted a supplemental affidavit and Bradley
had given Finnie his notes on his examination of Bernstein’s
computer. Merrill Lynch responded that Lessin had proposed to
call the second expert to address its claim that Bradley had
performed his analysis in an unsound fashion, and since the
second expert had not personally examined the hard drive he
would simply be offering an opinion regarding the reports of the
two experts who had personally examined it, which was not
relevant. The panel chairman stated that Lessin’s objection was
noted and the panel proceeded to hear other testimony.
As the First Circuit has explained, “[e]very failure of an
arbitrator to receive relevant evidence does not constitute
misconduct requiring vacatur of an arbitrator’s award.” Hoteles
Condado Beach, 763 F.2d at 40; see Flender Corp. v. Techna-
Quip Co., 953 F.2d 273, 280 (7th Cir. 1992). Rather, a federal
court may vacate an award only if the panel’s “refusal to hear
8
pertinent and material evidence prejudices the rights of the
parties to the arbitration proceedings.” Hoteles Condado Beach,
763 F.2d at 40; see Employers Ins. of Wausau v. Nat’l Union
Fire Ins. Co. of Pittsburgh, 933 F.2d 1481, 1490 (9th Cir. 1991)
(citing, e.g., Burchell v. Marsh, 58 U.S. (17 How.) 344, 350
(1854)). Thus, there is no statutory ground for vacation of the
arbitration award if the arbitrators refused to hear from Lessin’s
second expert because the evidence would be irrelevant or
merely cumulative. See Hoteles Condado Beach, 763 F.2d at
40; Nat’l Post Office Mailhandlers, 751 F.2d at 841; Grahams
Serv. Inc., 700 F.2d at 422-23; see also NASD Manual, Code of
Arbitration Procedure Rule 10323. There is, however, support
for Lessin’s position that his second expert’s testimony would
not have been cumulative because, unlike his first expert, his
second expert was retained to comment on the methodology
used by the other experts. Lessin points out that his first expert
did not opine on the issue of methodology or address the
significance of omissions in the Finnie report and that he had
anticipated addressing those issues through Ehuan’s expert
testimony.
Expert testimony on methodology may be substantively
different from expert testimony expressing an opinion based on
personal observation and testing. Generally speaking, the
former might be described as concerning the application of a
specialized theory in a particular case while the latter concerns
specialized observations and the specialized translation of those
observations into theory. See Kumho Tire Co. v. Carmichael,
526 U.S. 137, 148-49 (1999); see also FED. R. EVID. 703. In the
instant case, expert testimony regarding the methodology
employed to determine the genuineness of Bernstein’s Gold
Mine notes would have been pertinent and material because the
two experts from whom the panel did hear reached opposite
conclusions about the validity of the October 11 note. Cross-
examination had revealed omissions in the procedures used by
9
each of the experts. Expert testimony on whether such
omissions raised doubts about either expert’s conclusion could
have assisted the panel in resolving whether Bernstein’s Gold
Mine notes were fabricated, and, thus, in determining
Bernstein’s credibility in testifying about the investment advice
he had given Lessin. As Lessin suggests, Bernstein’s testimony
was a key part of Merrill Lynch’s defense.
The ultimate question, however, is whether the panel’s
refusal to hear testimony from Lessin’s second expert deprived
Lessin of a fair hearing. See Hoteles Coronado Beach, 763 F.2d
at 40. On this record we find no evidence that it did.
First, Lessin’s expert Bradley acknowledged on cross-
examination that there were two genuine archived copies of
Bernstein’s Gold Mine entries: one file was last modified on
September 21, 2000 and the other file was last modified on
October 3, 2000. These copies included entries dated October
2 and 3, 2000 that contained similar information to the October
11 note. The October 2 note stated that Bernstein told Lessin
“several times to diversity his YHOO and not margin his acct.
so high . . . [but Lessin] didn’t see the value and hedge of
writing covered calls.” The October 3 note stated that Bernstein
“went over w/ [Lessin] more details on margin and where
YHOO has to drop for his acct. to be zero. [Lessin] is still
looking at depositing money from his business into his personal
acct. to cover his margin call. I recommended against it.” Even
if other Gold Mine entries were backdated, these genuine entries
provided contemporaneous support for Bernstein’s testimony
about his advice to Lessin. Merrill Lynch also points to
Bernstein’s email of November 15, 2000, but this
correspondence was prompted by a request from Bernstein’s
supervisor to explain the huge losses in Lessin’s account; it not
only came too late to have afforded any benefit to Lessin but it
was made at a time when it was in Bernstein’s self interest to
10
paint a very favorable picture of his relations with Lessin.
Second, the testimony of Robert Jones, Lessin’s broker at
Ferris, corroborated Bernstein’s description of Lessin’s
investment conduct at Merrill Lynch and Lessin’s intention to
make his own investment decisions irrespective of his broker’s
advice. Third, the documentary evidence – Lessin’s New
Account Form at Ferris and his Retail Account Profile, Option
Agreement, and transfer form at Merrill Lynch – also
corroborated the testimony of his brokers to the extent that
Lessin’s rejection of the advice to diversify, to sell Yahoo!, and
to pay down his margin was consistent with his stated
investment objectives.
Together this evidence rendered immaterial whether
Bernstein had fabricated the October 11 note and, thus, also
rendered immaterial the testimony of Lessin’s second expert.
Lessin did not present evidence that challenged the genuineness
of the October 2 and 3 notes in the Gold Mine program on
Bernstein’s computer. He could hardly dispute his stated
preference for aggressive investment and the “DO NOT
LIQUIDATE” instruction in the brokerage documents that he
had executed. Even if Lessin’s second expert had persuaded the
panel that the methodology used by Merrill Lynch’s expert was
flawed, that testimony would have left unchallenged the other
computer notes supporting Bernstein’s version of events. Lessin
had opportunities to challenge Bernstein’s credibility, and did so
during cross-examination and by presenting emails he had
received from Bernstein that did not include the disputed advice,
but the corroborating evidence was nonetheless substantial.
Hence, it is unsurprising that Lessin’s objection to the panel’s
ruling not to allow him to present his second expert’s evidence
failed to identify the prejudicial effect to his case in chief.
Lessin thus fails to show that the panel’s refusal to hear
11
evidence deprived him of a fair hearing. By the time it decided
not to hear from his second expert, the panel was in a position
to conclude that methodology was no longer material to the
question of Bernstein’s credibility. As the district court
concluded, the panel found that Lessin was responsible for his
own losses because his conduct in holding his Yahoo! stock
without diversifying and in trading on margin, notwithstanding
his continuous awareness of the status of his accounts, reflected
his stated investment objectives.
Lessin’s other contention – that vacation is required because
the panel failed to adjudicate his claims against Bernstein,
rendering the award indefinite and incomplete under the FAA,
9 U.S.C. § 10(a)(4) – is frivolous: the October 8, 2006 award
stated that “[a]ny relief not specifically addressed herein,
including punitive damages, is denied in its entirety.”
III.
Lessin challenges the amount of the award on two grounds:
He claims that the panel exceeded or imperfectly executed its
powers by awarding him one-half of one percent of his
documented damages and that it disregarded the law on
negligent supervision by implicitly finding that Merrill Lynch
failed properly to supervise its broker and then awarding only a
fraction of the proven damages. Neither claim has merit.
A.
In the district court, Lessin argued that the panel had failed
to explain how it had arrived at $32,975 as the amount of
compensatory damages. The district court found, based on
inferences from the arbitration record, that the panel credited the
testimony of Lessin’s brokers but did not credit his testimony
and concluded, based on his preferred investment strategy as set
forth in the brokerage documents he executed, that Lessin, not
12
Bernstein, was responsible for his losses. Further, citing Sargent
v. Paine Webber Jackson & Curtis, Inc., 882 F.2d 529, 532
(D.C. Cir. 1989), which held that arbitrators are not required to
explain the basis for their award when the grounds can be
gleaned from the record, the district court found no evidence the
arbitrators disregarded the law. The district court concluded that
the amount represented the $500 non-refundable filing fee that
Lessin paid upon submitting his claim to arbitration and $32,475
for management fees he paid to Merrill Lynch, noting that the
panel had found that Merrill Lynch had failed to supervise
Bernstein properly.
Lessin’s claims of error on appeal are premised on the
flawed notion that his out-of-pocket losses at Merrill Lynch are
proof of the measure of his compensable damages. We find no
error in either the district court’s reasoning or its findings
rejecting that notion. As the district court succinctly put it, the
record supports the inference that the panel concluded that
“Lessin risked losses to his account, and his account suffered
losses as a result.” Lessin’s protests that the award was arbitrary
and capricious, see Lifecare Int’l, Inc. v. CD Med., Inc., 68 F.3d
429, 435 (11th Cir. 1995), and that the award was irrational, see
Brabham v. A.G. Edwards & Sons, 376 F.3d 377, 382 n.6 (5th
Cir. 2004) (citing cases), fare no better. Even assuming such
standards were consistent with this circuit’s scope of review, he
fails to show, given the panel’s determination that only Merrill
Lynch was liable, that the award was arbitrary and capricious or
irrational.
B.
In LaPrade, the court explained that:
[m]anifest disregard of the law means more than error
or misunderstanding with respect to the law.
Consequently, to modify or vacate an award on this
13
ground, a court must find that (1) the arbitrators knew
of a governing legal principle yet refused to apply it or
ignored it altogether and (2) the law ignored by the
arbitrators was well defined, explicit, and clearly
applicable to the case.
246 F.3d at 706 (citations and quotation marks omitted).
Lessin’s contention that the panel acted in manifest disregard of
law is based primarily on the admissions of Bernstein’s
supervisor, who testified that a Merrill Lynch supervisor should
have contacted Lessin to be sure he understood the risks before
his account had decreased so greatly in value. His suggestion
that a failure to supervise claim can only exist where the person
being supervised has done something wrong ignores that there
was an independent basis for the panel to find Merrill Lynch
liable. Hence, his reliance on Spear, Leeds & Kellogg v.
Bullseye Securities, Inc., 738 N.Y.S.2d 27, 28-29 (App. Div.
2002), is misplaced. In that case there was no evidence,
independent of employee negligence, that the firm had failed to
perform contracted services. Here there was evidence that
Merrill Lynch failed to provide the supervision that it had
contracted to provide.
To the extent Lessin also contends that equity demands
Merrill Lynch not be allowed to retain profits it made from his
account, he fails to show, in light of his contractual obligation to
submit any disputes with Merrill Lynch and Bernstein to
arbitration, that the panel acted beyond its authority. Our
limited scope of judicial review does not extend to reweighing
equities supported by the arbitration record. See Kurke, 454
F.3d at 357-58. Given the evidence before the panel, Lessin
fails to demonstrate that the award violated an explicit public
policy.
Accordingly, we affirm the denial of the motion to vacate
14
the arbitration award.