Rich v. Spartis

06-1723-cv
Rich v. Spartis

1 UNITED STATES COURT OF APPEALS
2 FOR THE SECOND CIRCUIT

3 August Term 2007

4 Docket Nos. 06-1723-cv(L); 06-1814-cv(XAP)

5 Argued: September 18, 2007 Decided: February 8, 2008

6 __________________________________________________________

7 ELIZABETH H. RICH and DONALD RICH,

8 Plaintiff-Appellants,

9 v.

10 PHILLIP L. SPARTIS and AMY JEAN ELIAS,

11 Defendants-Appellees-Cross-Appellants,

12 SALOMON SMITH BARNEY, INC., FORMERLY KNOWN AS
13 CITIGROUP GLOBAL MARKETS, INC.,

14 Defendants-Appellees.

15 __________________________________________________________

16 Before: MINER, CABRANES, and STRAUB, Circuit Judges.

17 Appeal and cross appeal from a judgment entered in the
18 United States District Court for the Southern District of New
19 York (Cote, J.) vacating NASD arbitration panel award of damages
20 for brokerage account losses against individual stock brokers and
21 their employer and confirming the panel’s dismissal of the cross-
22 claims of the brokers for indemnification from their employer,
23 the District Court having determined, inter alia, that the claims
24 for losses sustained by plaintiff in their brokerage account were
25 released by a court order approving settlement of a class action.

26 Judgment vacated and remanded with instructions.

27 Judge Straub concurs in a separate opinion.

1
1 CULVER V. HALLIDAY (Kathryn V.
2 Eberle, on the brief), Stoll,
3 Keenon, & Ogden PLLC,
4 Louisville, Kentucky, for
5 Appellants.

6 SUSANNA BUERGEL (Eric S.
7 Goldstein, on the brief),
8 Paul, Weiss, Rifkind, Wharton
9 & Garrison, New York, NY,
10 for Appellees.

11 DAVID I. GREENBERGER, Liddle &
12 Robinson, New York, New York,
13 for Appellees-Cross-
14 Appellants.

15

2
1 MINER, Circuit Judge:

2 Plaintiffs-appellants, Elizabeth H. Rich and her husband,

3 Donald Rich (the “Riches”), appeal from a judgment entered in the

4 United States District Court for the Southern District of New

5 York (Cote J.) vacating an award made in their favor by an

6 arbitration panel established under rules adopted by the National

7 Association of Securities Dealers (“NASD”). See In re WorldCom

8 Sec. Litig., No. 02-3288, 2006 WL 709101 (S.D.N.Y. Mar. 21,

9 2006). The award was made against defendant-appellee Solomon
10 Smith Barney, Inc. (“SSB”), now known as Citigroup Global

11 Markets, Inc. (“Citigroup”), and against Philip L. Spartis and

12 Amy Jean Elias, stockbroker representatives employed by SSB. Id.

13 at *1. Spartis and Elias cross appeal from the judgment insofar

14 as it confirms the arbitration panel’s dismissal of their cross

15 claims for indemnity against Citigroup. The District Court

16 determined, inter alia, that the arbitration award was solely for

17 losses sustained by the Riches that were released by a court

18 order approving settlement of a class action. See In re WorldCom
19 Sec. Litig., 2006 WL 709101, at *1. Accordingly, the District

20 Court concluded that “the award of damages to the Riches must be

21 vacated on the ground that the arbitrators exceeded their

22 authority when they granted damages to the Riches. . . . ” Id.

23 at *4. As to the arbitration panel’s dismissal of the cross-

24 claim, the District Court concluded that Spartis and Elias failed

25 to show any basis for vacating the arbitration panel’s decision.

26 Id. We find that the District Court could not have determined

3
1 that the arbitration award relied solely on WorldCom losses based

2 on the record before us. We remand to the District Court to

3 order the arbitration panel to clarify the award.
4 BACKGROUND

5 The Riches are residents of Louisville, Kentucky. As a

6 long-term employee of WorldCom, Inc. (“WorldCom”), Mrs. Rich was

7 provided with stock options as part of her compensation.

8 Beginning in 1998, employees of WorldCom desiring to exercise

9 their stock options were required to do so through the Atlanta,
10 Georgia office of SSB. On July 2, 1998, and again on July 17,

11 1999, Mrs. Rich exercised stock options and immediately sold the

12 acquired shares. Thereafter, SSB proposed an “exercise and hold”

13 Plan (the “Plan”) for WorldCom employees. Through the Plan, the

14 employees would exercise their options and hold the shares for

15 later sale pending anticipated increases in share prices. By

16 holding the shares long enough, the employee shareholders would

17 be able to have the increase in value taxed at capital gain

18 rates.
19 In August of 1999, the Riches subscribed to the Plan by

20 opening an account with SSB. They allege that they were advised

21 in all matters relating to their account by Mr. Spartis and Ms.

22 Elias. On August 5, 1999, Mrs. Rich exercised options for 10,012

23 shares of WorldCom stock at $4.60 for 6,012 shares and $17.87 for

24 4,000 shares. The closing price for each share that day was

25 $83.19. The Riches held their shares after financing the

26 acquisition with funds borrowed from SSB by means of a margin

4
1 account. On October 6, 1999, Mrs. Rich exercised options for

2 6,000 shares of WorldCom stock at an acquisition cost of $8.94

3 per share. The closing price per share on that date was $70.87.

4 The Riches again paid for the shares through the margin account

5 that they had established and again held the acquired shares as

6 they claim they were advised to do.

7 On August 7, 1999, Mrs. Rich sold 10,012 shares of WorldCom

8 stock and used the proceeds to purchase 11,700 shares of Sprint,

9 Inc. (“Sprint”) on that date. Allegedly, Mrs. Rich was advised
10 that the “exercise and hold” strategy would be advanced by the

11 Sprint purchase, since it was anticipated that Sprint would be

12 merged into WorldCom. On January 31, 2000, Mrs. Rich exercised

13 options to purchase 11,514 shares of WorldCom at $5.82 per share.

14 The closing price per share on that day was $45.94. To finance

15 this purchase, the Riches again used their margin account to

16 borrow the necessary funds from SSB. Mrs. Rich exercised options

17 through the SSB Plan one more time. On April 18, 2000, she

18 exercised options for 13,500 shares of WorldCom at $9.00 per
19 share, with the closing price on that day being $41.25 per share.

20 This transaction also was financed through the margin account.

21 The Riches received margin calls in August and September of

22 2000 and responded with cash and securities, including

23 liquidation of securities held in their account, to meet the

24 calls. They first liquidated their 11,700 shares of Sprint and

25 then began to sell the WorldCom shares to meet the margin calls.

26 The Riches sold a total of 12,450 shares of WorldCom between

5
1 September 13 and September 25, 2000. On September 26, they

2 directed the sale, pursuant to a stop-loss order, of the

3 remaining 22,030 shares of WorldCom in their account. The stock

4 was sold that day for $25.50 per share. The Riches paid SSB over

5 $25,000 in brokerage commissions and nearly $100,000 in margin

6 interest during the thirteen months they maintained their account

7 at SSB. The Riches saw their WorldCom stock fall from $83.00 to

8 $25.50 per share during that period. They saw the price of their

9 Sprint stock fall from $64.00 per share on the date of purchase
10 to $33.75 on the date of sale, August 11, 2000. Attributing

11 their losses to the investment advice provided by SSB and its

12 registered representatives, Spartis and Elias, the Riches

13 demanded arbitration of their claims for the losses sustained by

14 filing a “Statement of claims” against SSB with NASD Dispute

15 Resolution, Inc. Named as respondents in the arbitration were

16 SSB, Spartis, Elias, and three other employees of SSB who were

17 dismissed as respondents prior to the arbitration award.

18 The Statement of claims was filed on June 19, 2002, and
19 included, generally, the historical facts described above. As

20 claimants in the arbitration, the Riches sought compensation from

21 the respondents for failing to advise them, inter alia, as to:

22 the facts that would enable them to “adequately assess the risks

23 of the SSB Option Plan”; the risks of drops in the stock prices

24 of WorldCom and Sprint presented by the Plan; the risks posed by

25 failing to diversify their stock holdings; the risks of utilizing

26 a margin account; a suitable investment strategy other than the

6
1 SSB Option Plan; and the conflict of interest stemming from the

2 relationship between WorldCom and SSB as underwriter, market

3 maker, and employer of Telecommunications Analyst Jack Grubman.

4 The Riches also charged SSB and the manager of the Atlanta office

5 with failing to adequately supervise Spartis and Elias. Detailed

6 bases for the Riches claims were set forth in six separate

7 “Counts” of the Statement of claims. They included: (i) Lack of

8 Suitability; (ii) Lack of Supervision; (iii) Dishonest and

9 Unethical Practice; (iv) Breach of Fiduciary Duty; (v)
10 Negligence; and (vi) Gross Negligence. Compensatory damages of

11 $1,312,141.08 were claimed, along with punitive damages,

12 attorneys’ fees and costs, and interest.

13 Substantially denying the allegations made in the Statement

14 of claims, SSB filed its Statement of Answer with Affirmative

15 Defenses on September 6, 2002. A Statement of Answer with Motion

16 to Dismiss and Cross-Claim, filed by Spartis and Elias on

17 September 6, 2002, included affirmative defenses, denials of the

18 allegations in the Statement of claims, an application for
19 dismissal of the claim, and a request for indemnification relief

20 from SSB. All parties concerned executed Uniform Submission

21 Agreements submitting the Riches’ claims to arbitration in

22 accordance with the Rules of the NASD. On April 19, 2004, the

23 NASD convened a three-person arbitration panel in Louisville,

24 Kentucky. The panel, constituted according to NASD Rules,

25 consisted of Robert P. Ross, Esq., designated “Public Arbitrator,

26 Presiding Chair,” Amelia F. Adams, Esq., designated “Public

7
1 Arbitrator,” and Todd Parker Lowe, designated “Non-Public

2 Arbitrator.” Testimony was taken and various motions were made

3 at hearings that were held from April 19 to April 22, 2004 and on

4 December 13 and 14, 2004. Sworn as witnesses were Spartis;

5 Elias; William Hobby and Michael Grace, employees of SSB; Mrs.

6 Rich; Dr. Craig J. McCann, a securities consultant; and John

7 Fazio, Senior Vice President of Citigroup.

8 On December 14, 2004, counsel for Spartis and Elias brought

9 to the panel’s attention the lack of any evidence that Mrs. Rich
10 had opted out of the WorldCom Securities Class Action, a

11 necessary element to succeed in her arbitration claim. See In re

12 WorldCom Sec. Litig., 2006 WL 709101, at *1. The District Court

13 had certified the plaintiff class in the WorldCom Securities

14 litigation on October 24, 2003. See In re WorldCom, Inc. Sec.

15 Litig., 219 F.R.D. 267 (S.D.N.Y. 2003). A Notice of Class Action

16 was disseminated to the plaintiff class on December 11, 2003.

17 The Citigroup defendants, including SSB, entered into a proposed

18 class settlement with the lead plaintiff on or about July 1,
19 2004, and a Notice of Proposed Settlement was distributed to the

20 class on August 2, 2004. The District Court in the Southern

21 District of New York ultimately set September 1, 2004 as the firm

22 date for potential class members to seek exclusion from the

23 plaintiff class.

24 On November 12, 2004, approximately one month prior to the

25 final session of the arbitration panel considering the claims of

26 the Riches, the District Court issued its “Judgment Approving

8
1 Settlement and Dismissing Action Against the Citigroup

2 Defendants” in the securities class action case. See In re

3 WorldCom Sec. Litig., No. 02-cv-3288 (S.D.N.Y. Nov. 12, 2004).

4 The judgment enjoined class members “from instituting, commencing

5 or prosecuting, either directly or in any other capacity, any

6 claim arising out of the matters giving rise to this Action.”

7 Id. at ¶ 10. “Released Claims” is defined in the Judgment to

8 include:

9 [A]ll claims . . . arising out of or relating to
10 investments (including, but not limited to, purchases,
11 sales, exercises, and decisions to hold) in securities
12 issued by WorldCom, and/or in options or derivative
13 instruments based in whole or in part on the value of
14 securities issued by WorldCom . . ., including without
15 limitation all claims arising out of or relating to any
16 analyst research reports or other statements made or
17 issued by the Citigroup Defendants concerning WorldCom
18 . . . .

19 Id. at ¶6 (a). “Released Parties” was defined to include SSB as

20 well as its former employees.

21 After hearing arguments on December 14, 2004 regarding the

22 effect of the foregoing judgment on the arbitration proceeding,

23 the Presiding Chair of the Arbitration Panel stated as follows:
24 Here’s my ruling: We’ll go ahead, and we will finish
25 this arbitration and we will reach a decision. I
26 presume that the respondents can go to the court in the
27 class action and say, “Here’s the arbitrators’
28 decision; hold it void, because she’s a member of the
29 class.” That being so, we will attempt to reach our
30 decision based upon, one, it not be void; and, two, it
31 being void. So we will have — I’m thinking right now,
32 we are going to reach a decision, and I’m thinking
33 right now we will have two decisions. One as it
34 relates to WorldCom and everything else in the account;
35 one as it relates not to WorldCom and the class action
36 suit, so that if they do go to void, there will be a
37 remainder of the decision that remains valid.

9
1 The Arbitration Panel issued its Award on January 20, 2005,

2 finding SSB, Spartis, and Elias jointly and severally liable to

3 the Riches for $315,000 in compensatory damages, $63,000 in pre-

4 judgment interest, $50,000 in attorneys’ fees, and $20,000 in

5 costs, with post-judgment interest to be paid at the rate of 12%

6 per annum if the Award were not paid within 30 days. The Panel

7 dismissed with prejudice the cross-claims of Spartis and Elias

8 for indemnification. Although the Panel did not provide a

9 statement of the reasoning behind its compensatory damages
10 determination, it did include in its Award a Case Summary that

11 included the following language: “Claimants alleged that

12 Respondents gave them unsuitable investment advice to purchase

13 WorldCom stock by means of a margin account with money borrowed

14 from Salomon Smithy [sic] Barney, Inc. Claimants also alleged

15 that Respondents never discussed the risks associated with the

16 holding of the WorldCom shares.”

17 By an action filed in the Circuit Court of the Commonwealth

18 of Kentucky, Jefferson County, on January 31, 2005, the Riches
19 sought confirmation of the Award. On February 7, 2005 the action

20 thereafter was removed to the United States District Court for

21 the Western District of Kentucky at the behest of Spartis and

22 Elias. On February 2, 2005, while the action to confirm was

23 pending in federal court in Kentucky, counsel for Spartis and

24 Elias, by letter to Judge Cote of the Southern District of New

25 York, who had directed the entry of judgment approving the

26 settlement in the WorldCom Class Securities Action, advanced the

10
1 argument that the judgment barred the enforcement of the

2 Arbitration Award and requested the court to schedule a

3 conference. In response, the District Court in New York on

4 February 9, 2004, ordered the Riches to show cause “why they

5 should not be enjoined from enforcing their NASD arbitration

6 award against Mr. Spartis and Ms. Elias.” By letter dated

7 February 11, 2005, Citigroup sought to join in the application

8 made by Spartis and Elias.

9 At the show cause hearing held before the District Court on
10 February 25, 2005, the Riches conceded that they should be

11 enjoined from enforcing any portion of their Award that related

12 to their investments in WorldCom securities. Accordingly, the

13 District Court, by Order dated March 3, 2005, enjoined the Riches

14 “from seeking to enforce the Award with respect to all claims of

15 every nature and description, known and unknown, arising out of

16 or relating to investments (including, but not limited to,

17 purchases, sales, exercises, and decisions to hold) in securities

18 issued by WorldCom.” The injunction order included the following
19 provision: “IT IS HEREBY . . . ORDERED that the arbitration panel

20 that issued the award is not enjoined from clarifying whether any

21 portion of the Award relates to claims not covered by the Rich

22 Injunction.”

23 It appears that the NASD provided the Panel with a copy of

24 the foregoing order. Upon application of Citigroup, and after

25 receiving the submissions of the parties in connection with their

26 quest for clarification as permitted by the District Court, the

11
1 Panel on March 15, 2005 issued, without explanation, a one-line

2 decision “determin[ing] that the Motion for Clarification is

3 denied.” Thereafter, the United States District Court for the

4 Western District of Kentucky, where the action to confirm the

5 Award remained pending, transferred the action to the Southern

6 District of New York by Order dated April 12, 2005. The Kentucky

7 court, citing 28 U.S.C. § 1404, determined that the interest of

8 justice and the convenience of parties would be served by the

9 transfer because “the New York court could decide both issues of
10 whether to confirm the award and whether confirmation violates

11 the injunction. It would be inconvenient and a waste of the

12 parties’ time to litigate these issues in two separate cases.”

13 Spartis and Elias thereafter moved in the Southern District

14 of New York to vacate the Arbitration Award in its entirety. On

15 March 21 2005, the District Court issued its Memorandum, Order

16 and Opinion vacating the Award insofar as it provided for

17 recovery of damages by the Riches and confirming the Award

18 insofar as it denied the cross-claims of Spartis and Elias. The
19 District Court determined that the Award to the Riches was

20 intended to compensate them only for losses arising out of the

21 advice that Mrs. Rich exercise her options and hold the stock in

22 WorldCom. See In re WorldCom Sec. Litig., 2006 WL 709101, at *4.

23 According to the District Court, that advice “was the focus of

24 the claim, the evidence at the hearing, and the summation

25 arguments of counsel.” Id.

26 Turning to the Award itself, the District Court found that

12
1 “[t]he award’s own description of the claims focused exclusively

2 on WorldCom and described no other stock.” Id. In the opinion

3 of the District Court, the decision of the Arbitration Panel to

4 issue just one Award, having recognized its power to issue two

5 Awards, and then to decline to clarify the Award after the

6 Arbitrators were informed that no recovery could be had for

7 WorldCom losses, provided “further evidence that the entirety of

8 the award was for WorldCom trading losses.” Id. The District

9 Court concluded that “the award of damages to the Riches must be
10 vacated on the ground that the arbitrators exceeded their

11 authority when they granted damages to the Riches based on their

12 WorldCom trading losses.” Id. In confirming the dismissal of

13 the cross-claims of Spartis and Elias, the District Court

14 concluded that, “[g]iven the strong presumption of regularity to

15 which an arbitration award is entitled, Spartis and Elias have

16 not shown that the Panel lacked authority to issue an award and

17 that the dismissal of their cross-claim should be vacated.” Id.

18 This timely appeal and cross-appeal from the judgment of the
19 District Court followed.
20 ANALYSIS

21 On appeal, the Riches again acknowledge that they cannot

22 recover for their losses in WorldCom, but they contend that other

23 losses in their SSB account justify the Award made by the

24 arbitration panel. Although ultimately vacating the arbitration

25 award in their favor, the District Court recognized that “as a

26 theoretical matter, the losses sustained by the Riches were large

13
1 enough to permit the $315,000 to be attributed to non-WorldCom

2 losses.” Id. But there is more than a theoretical basis for

3 seeing the Award as encompassing losses attributable to

4 securities in the Riches’ account other than WorldCom. For one

5 thing, Dr. McCann, damages expert for the Riches, testified

6 before the panel that his report, with exhibits showing the

7 losses in the Riches’ account, would enable the panel to separate

8 the WorldCom losses from losses attributable to other securities.

9 For another, Citigroup’s expert, John Fazio, testified before the
10 panel that losses in the Sprint transactions totalled $448,000.

11 This sum equals the precise total of the panel’s Award — $315,000

12 (compensatory damages) plus $63,000 (pre-judgment interest) plus

13 $50,000 (attorneys’ fees) plus $20,000 (costs).

14 The Riches are also aided by the general rule that

15 “[a]rbitration awards are subject to very limited review in order

16 to avoid undermining the twin goals of arbitration, namely,

17 settling disputes efficiently and avoiding long and expensive

18 litigation.” Willemijn Houdstermaatschappij, BV v. Standard
19 Microsystems Corp., 103 F.3d 9, 12 (2d Cir. 1997). We have noted

20 that the Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1–307,

21 creates a “strong presumption in favor of enforcing arbitration

22 awards” and have gone so far as to say that courts have an

23 “extremely limited” role in reviewing arbitration awards. Wall

24 Street Assoc., L.P. v. Becker Paribas, Inc., 27 F.3d 845, 849 (2d

25 Cir. 1994) (citations omitted). Put another way,

26 “an arbitration award should be enforced, despite a court’s

14
1 disagreement with it on the merits, if there is `a barely

2 colorable justification for the outcome reached.’” Landy

3 Michaels Realty Corp. v. Local 32B-32J Serv. Employees Int’l, 954

4 F.2d 794, 797 (2d Cir. 1992) (quoting Andros Compania Maritima,

5 S.A. v. Marc Rich & Co., 579 F.2d 691, 704 (2d Cir. 1978)).

6 When an arbitration panel makes a lump sum award without

7 further explanation, “courts generally will not look beyond the

8 lump sum award in an attempt to analyze the reasoning processes

9 of the arbitrators.” Barbier v. Shearson Lehman Hutton, Inc.,
10 948 F.2d 117, 121 (2d Cir. 1991) (internal quotations omitted);

11 see also, Sobel v. Hertz, Warner & Co., 469 F.2d 1211, 1214 (2d

12 Cir. 1972) (stating that “there is no general requirement that

13 arbitrators explain the reasons for their award.”) The

14 determination by the NASD panel in the case at bar is,

15 essentially, a lump sum award even though the sum is broken down

16 into component parts.

17 The Riches also are entitled to the benefit of the burden of

18 proof that the FAA imposes upon SSB, Spartis, and Elias as
19 challengers of the Award. See Wall Street Assoc., 27 F.3d at

20 848. According to the FAA, challenges to an arbitration award

21 “upon the application of any party to the arbitration,” are

22 limited to the following grounds:

23 (1) where the award was procured by corruption, fraud,
24 or undue means;

25 (2) where there was evident partiality or corruption in
26 the arbitrators, or either of them;

27 (3) where the arbitrators were guilty of misconduct in
28 refusing to postpone the hearing, upon sufficient cause

15
1 shown, or in refusing to hear evidence pertinent and
2 material to the controversy; or of any other
3 misbehavior by which the rights of any party have been
4 prejudiced; or

5 (4) where the arbitrators exceeded their powers, or so
6 imperfectly executed them that a mutual, final, and
7 definite award upon the subject matter submitted was
8 not made.

9 9 U.S.C. § 10(a).

10 The District Court concluded that the arbitrators exceeded

11 their powers by granting damages to the Riches for their WorldCom

12 trading losses. In re WorldCom Sec. Litig., 2006 WL 709101, at
13 *4. That conclusion, of course, is grounded in the finding that

14 the Award encompassed only losses in WorldCom, any claim for such

15 losses having been released by the WorldCom Securities Litigation

16 Judgment. In addition to arguing on appeal that the District

17 Court correctly determined that the arbitration panel exceeded

18 its authority, SSB, Spartis, and Elias contend that the panel

19 acted in manifest disregard of applicable law. Although

20 “manifest disregard” is not included in § 10(a) of the FAA as a

21 ground for vacating an arbitration award, we have noted that “if
22 the arbitrators simply ignore the applicable law, the literal

23 application of a `manifest disregard’ standard should presumably

24 compel vacation of the award.” Sobel, 469 F.2d at 1214.

25 In the same vein, we have said that “where a reviewing court

26 is inclined to find that arbitrators manifestly disregarded the

27 law or the evidence and that an explanation, if given, would have

28 strained credulity, the absence of an explanation may reinforce

29 the reviewing court’s confidence that the arbitrators engaged in

16
1 manifest disregard.” Halligan v. Piper Jaffray, Inc., 148 F.3d

2 197, 204 (2d Cir. 1998); see also NLRB v. Bristol Spring Mfg.

3 Co., 579 F.2d 691, 704 (2d Cir. 1978). In a recent decision in

4 which we affirmed a finding that a panel award was issued

5 partially in manifest disregard of the law, we opined that “an

6 arbitral award may be vacated for manifest disregard only where a

7 petitioner can demonstrate `both that (1) the arbitrators knew of

8 a governing legal principle yet refused to apply it or ignored it

9 altogether, and (2) the law ignored by the arbitrators was well-
10 defined, explicit, and clearly applicable to the case.’” Porzig

11 v. Dresdner, Kleinwort, Benson, N. Am., LLC, 497 F.3d 133, 139

12 (2d Cir. 2007) (internal citations omitted).

13 We simply are not yet in a position to determine whether the

14 Award of the NASD arbitration panel either exceeded its powers or

15 was in manifest disregard of the law. And that is because of the

16 confusion occasioned by the circumstances surrounding the

17 delivery of the unexplained lump sum award in this case.

18 Although, as has been shown, an arbitration panel may render a
19 lump sum award without explaining its reasons, the unique

20 situation presented here dictates that the Award be clarified.

21 All parties agree that the Riches cannot recover for their

22 WorldCom trading losses, but it is not clear whether those losses

23 are reflected in all, part, or none of the Award. What is

24 missing is an assessment by the arbitration panel sufficient to

25 enable us to determine the validity of the Award in this unusual

26 case. The confusion in the Award arises from the actions of the

17
1 panel itself.

2 Before the Award was made, and on the last day of the

3 arbitration panel hearing, the WorldCom Securities Litigation

4 Judgment releasing all claims against SSB and its employees was

5 brought to the attention of the panel. Two of the panel members,

6 including the Presiding Chair, apparently are lawyers.

7 Confronted with the judgment, however, the Presiding Chair failed

8 to recognize the force of the Judgment and ruled that the panel

9 would “go ahead, and . . . finish this arbitration and . . .
10 reach a decision.” The Chair “presume[d] that [SSB, Spartis, and

11 Elias] can go to the court in the class action and say” that the

12 arbitrators’ decision is void. The Chair went on to say that the

13 panel would “attempt to reach our decision based upon, one, it

14 not be void; and two, it being void.” By the foregoing, the

15 panel, speaking through its Chair, seemed to leave to the

16 district court the decision as to whether the Award would be

17 barred by the WorldCom judgment.

18 Continuing with his ruminations, the Chair then introduced
19 further confusion into his Ruling by speaking in terms of two

20 decisions by the panel as follows:

21 I’m thinking right now we will have two decisions. One
22 as it relates to WorldCom and everything else in the
23 account; one as it relates not to WorldCom and the
24 class action suit, so that if they do go to void, there
25 will be a remainder of the decision that remains valid.

26 Despite the “thinking” of the Chair, the Award was made in terms

27 of one, unexplained lump sum. While it is true, as noted by the

28 District Court, that only WorldCom was mentioned in the panel

18
1 decision, that mention was made only in the context of the Case

2 Summary discussing the contentions of the parties. However, the

3 Summary of the contentions of the parties clearly was not

4 complete, since the Statement of claims, as well as testimony at

5 the hearing, referred to trading losses in Sprint.

6 Evidence that the parties were confused by the Award is

7 found in the application by Citigroup to the panel for

8 clarification of the Award and the submissions of the parties in

9 connection therewith. Although the District Court found that the
10 denial of the motion without explanation, combined with the two-

11 decision comments of the Presiding Chair, demonstrated that the

12 entirety of the Award represented WorldCom trading losses, see In

13 re WorldCom Sec. Litig., 2006 WL 709101, at *4, these findings

14 also support the proposition that the Award was not for WorldCom

15 losses or not for WorldCom losses alone.

16 Ample authority supports our conclusion that the District

17 Court should remand this case to the arbitration panel for

18 clarification. In Ottley v. Schwartzberg, 819 F.2d 373 (2d Cir.
19 1987), we declared that “[i]ndefinite, incomplete, or ambiguous

20 awards are remanded ‘so that the court will know exactly what it

21 is being asked to enforce.’” 819 F.2d at 376 (quoting Am. Ins.

22 Co. v. Seagull Compania Naviera, S.A., 774 F.2d 64, 67 (2d Cir.

23 1985)). In ordering a remand for clarification here, we do not

24 require the arbitrators to state their reasons, but only to

25 explain their indefinite, incomplete, and ambiguous award in a

26 way sufficient to allow effective judicial review. See Siegel v.

19
1 Titan Indus. Corp., 779 F.2d 891, 894 (2d Cir. 1985). We

2 emphasize that the difficulty here lies not alone in the fact

3 that a lump sum has been awarded without explanation but in the

4 unique circumstances of this case where, as recognized by the

5 parties previously, it is impossible to tell what the lump sum is

6 for.

7 Because the lack of clarity in the arbitration panel’s award

8 does not permit us at this time to determine whether the Award

9 was issued in manifest disregard of the law, see Hardy v. Walsh
10 Manning Sec., L.L.C., 341 F.3d 126, 129–30, 134 (2d. Cir. 2003),

11 or exceeded the powers of the arbitrators, see Siegal, 779 F.2d

12 at 894, we will remand this case to the District Court with

13 instructions to remand to the NASD arbitration panel for

14 clarification of the Award. See Colonial Penn Ins. Co. v. The

15 Omaha Indemnity Co., 943 F.2d 327, 335 (3d Cir. 1991).

16 Specifically, the panel should be ordered to specify whether the

17 WorldCom trading losses suffered by the Riches are represented in

18 all, part, or none of the lump-sum Award and, if part, the amount
19 thereof. We recognize that the District Court permitted the

20 parties to seek clarification before it ruled on the motion to

21 confirm but believe the better practice would have been, as we

22 now require, to order rather than permit clarification by the

23 NASD arbitration panel. The District Court should then review

24 the clarified award, reconsider its earlier decision in light

25 thereof, and make such further determination as it may deem

26 proper. The foregoing is not intended to express any opinion as

20
1 to what that determination should be or as to the merits of the

2 claims and cross-claims submitted to the arbitrators.
3 CONCLUSION

4 For the reasons set forth above, the judgment of the

5 District Court is vacated, and the case is remanded to the

6 District Court for further proceedings consistent with this

7 opinion. In view of the foregoing, we do not rule on the

8 challenges made by Spartis and Elias to the District Court’s

9 confirmation of the arbitration panel’s denial and dismissal of
10 their cross claims for indemnification. Under the procedure set

11 forth in United States v. Jacobson, 15 F.3d 19, 21-22 (2d Cir.

12 1994), we direct that the mandate shall issue forthwith and that

13 jurisdiction shall be restored to this Court upon a letter

14 request from any party. Upon such a restoration of jurisdiction,

15 the case is to be sent to this panel.

21
 1 STRAUB, Circuit Judge, concurring:

2 I agree with the majority with respect to the disposition of

3 this case. I write separately to emphasize that while our role in

4 reviewing an arbitration award is extremely limited, this case

5 presents the type of extraordinary circumstances that warrant

6 remand.

7 The majority reasons that remand is required here because
8 “the lack of clarity in the arbitration panel’s award does not

9 permit us at this time to determine whether the Award was issued

10 in manifest disregard of the law or exceeded the powers of the

11 arbitrators.” (internal citations omitted). Our caselaw suggests

12 that such “lack of clarity” should result in upholding the award.

13 We have held that even if it is “probable” that a panel based its

14 award on legally erroneous grounds, the award should be upheld so

15 long as there is a “plausible” legal basis for the award. See

16 Duferco Int’l. Steel. v. T. Klaveness Shipping, 333 F.3d 383, 392
17 (2d Cir. 2003) (“In construing an arbitral award we look to only

18 plausible readings of the award, and not to probable readings of

19 it. Even absent a plausible reading free of error, we would

20 confirm the award if we independently found legal grounds to do

21 so.”). We have also stated, however, that in some limited

22 circumstances, arbitration awards may be remanded “so that the

23 court will know exactly what it is being asked to enforce.”

24 American Ins. Co. v. Seagull Compania Naviera, S.A., 774 F.2d 64,

22
 1 67 (2d Cir. 1985). I believe remand is appropriate here because

2 this case presents such “limited circumstances.”

3 Here, the arbitration panel heard testimony with respect to

4 securities losses sustained by the Riches. Due to an intervening

5 class action settlement, some of those losses became ineligible

6 for arbitration. The arbitration panel acknowledged this fact,

7 and even indicated an intent to award for both the eligible and

8 ineligible losses and to leave it to the District Court to void

9 the award as it pertained to ineligible losses. However, in
10 issuing the Award, the panel failed to specify the amount awarded

11 for eligible losses versus the amount awarded for ineligible

12 losses. Accordingly, the District Court was faced with an award

13 that it could not enforce without further information. See id.;

14 see also New York Bus Tours, Inc. v. Kheel, 864 F.2d 9, 12 (2d

15 Cir.1988) (“When an arbitration award provides no clear

16 instruction as to how a court asked to enforce the award should

17 proceed, the court should remand to the arbitrator for

18 guidance.”). Given the unique facts of this case, I agree with
19 the majority that remand in order to direct the arbitration panel

20 to provide a breakdown of its award is the proper course of

21 action.

22 I also emphasize that in ordering a remand here, we do not

23 require the arbitrators to state the reasons for their award, but

24 only to state the precise amount of the award attributable to

25 WorldCom losses as well as the precise amount of the award

26 attributable to non-WorldCom losses. We in no way intend to

23
 1 preclude the panel from answering that the award was intended to

2 compensate solely for WorldCom losses or solely for non-WorldCom

3 losses. “A remand for clarification in such circumstances would

4 not improperly require arbitrators to reveal their reasons, but

5 would instead simply require them to fulfill their obligation to

6 explain the award sufficiently to permit effective judicial

7 review.” Siegel v. Titan Indus. Corp., 779 F.2d 891, 894 (2d Cir.

8 1985). “Such a limited review of an arbitrator’s award is

9 necessary if arbitration is to serve as a quick, inexpensive and
10 informal means of private dispute resolution.” Id. (internal

11 quotation marks and citation omitted). Remand for the limited

12 purpose of asking the arbitration panel to provide a breakdown of

13 the award will ensure that the District Court “will know exactly

14 what it is being asked to enforce.” American Ins. Co., 774 F.2d

15 at 67.

16 Accordingly, I concur in the judgment.
17

24