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Friedman v. Citigroup Global Markets

July 24, 2007


The opinion of the court was delivered by: Hon. Thomas J. Whelan United States District Judge


On March 2, 2004, Petitioners Melvin I. Friedman, Individually, and Melvin I. Friedman and Joan L. Friedman, as Trustees of the Friedman Family Trust dated 12/10/98 ("the Friedmans") instituted arbitration proceedings against Respondent Citigroup Global Markets, Inc. ("Citigroup"). The arbitration panel ("the Panel") denied all of the Friedmans' claims. On June 4, 2007, the Friedmans moved this Court to vacate the Panel's decision for violating the Federal Arbitration Act (FAA), 9 U.S.C. § 10. The Court decides the matter on the papers submitted and without oral argument pursuant to Civil Local Rule 7.1(d.1). Because the Friedmans failed to show that the arbitrators improperly excluded evidence or were biased, the Court DENIES the Friedmans' motion to vacate the Panel's decision.

I. Background

From October 1999 through January 2002, the Friedmans invested nearly $1.8 million with Citigroup. While they invested, the balance decreased by approximately $625,000. The Friedmans allege that Citigroup's mismanagement and market speculation caused the decrease. (Pet'rs' P. & A. at 2.) Citigroup points to the market downturn during this time period. Because of the loss, the Friedmans began transferring their investments to another brokerage in San Francisco. By April 2002, they had transferred the entire remaining balance of their IRA fund to that brokerage.

Because the account agreement and the National Association of Dealers (NASD) rules required arbitration for account disputes, the Friedmans filed a Statement of Claim for arbitration with NASD Dispute Resolution, Inc. (DR) against Citigroup. (Pet'rs' P. & A. at 3.) The Friedmans alleged breach of fiduciary duty; failure to supervise; violation of federal and state securities laws, NASD Rules of Fair Practice, and NYSE Rules; elder abuse; and unfair and deceptive practices against senior citizens. (Bonnheim Decl., Ex. 8.) They requested approximately $625,000 in damages, their actual losses while they held accounts with Citigroup. (Id.) The Friedmans and their counsel waived all rights and benefits under California Civil Code Section 1542 and the California Ethical Standards for Neutral Arbitrators. (Id.)

The Panel of arbitrators was selected according to NASD Code of Arbitration Procedure. Rule 10308 of the NASD Code requires one non-public and two public arbitrators. Parties rank and strike arbitrators until a mutually agreeable panel remains. To assist in ranking, NASD-DR provides a list of arbitrators along with profiles containing the arbitrators' professional and educational background, previous NASDDR awards, and any potential bias or conflict of interest that the arbitrator has disclosed to NASD-DR. Suzanne Viau Chamberlain was selected as a public arbitrator and the presiding chair, with George Hubner as the other public arbitrator and J.A. Dutcher as the non-public arbitrator. (Bonnheim Decl., Ex. 8.)

The arbitration hearings took place from November 30, 2005, through December 9, 2005, and on December 21 and 22, 2005, in San Diego, California. On December 2, 2005, a witness mentioned an additional manual not submitted during discovery in his testimony. The Friedmans then moved (1) to reopen discovery to obtain the manual, and (2) to allow testimony about the manual by two witnesses who had already been cross-examined and excused. (Bonnheim Decl., Ex. 8.) Citigroup agreed to produce the manual. On December 21, 2005, the Panel heard arguments regarding the need for witness testimony on the materials. The Panel ruled that the prior testimony by the excused witnesses was sufficient, but permitted the Friedmans to refer to the manual in closing. Additionally, the Panel ruled that an expert could later discuss the manual to the extent he was qualified. The Friedmans' counsel did not object.

On December 22, 2005, Citigroup disputed the qualifications of the Friedmans' expert, Mr. Grosnoff. (Bonnheim Decl., Ex. 8.) During extensive questioning from both sides, Mr. Grosnoff revealed that he had not participated in the brokerage industry for over twenty years and did not have a brokerage license. Noting these findings, the Panel ruled that the expert did not qualify to testify to matters regarding portfolio or account management, supervision, damage calculation, suitability, or compliance issues. He did, however, qualify as to other matters-including portfolio performance, in whole or in part, relative to the market's performance based on whatever indices he was prepared to discuss. The Panel further ruled that counsel could direct the Panel's attention to any other aspect of the manual in their closing statements. Because the Friedmans had not prepared any other expert witnesses, closing argument was the only remaining opportunity to discuss the manual. During closing arguments, the Friedmans' counsel discussed the manual at some length. (Tr. in Supp. of Opp. at 147--152.)

Following closing arguments and before the Panel's ruling, both parties stated for the record that they had a full and fair opportunity to be heard-though the Friedmans' counsel stated that he believed he should have been able to cross-examine the two excused witnesses. (Tr. in Supp. of Opp. at 109.) On January 17, 2006, the Panel issued an award denying all of the Friedmans' claims. On April 10, 2006, the Friedmans filed a motion to vacate the arbitration award alleging that the Panel acted with evident partiality and improperly excluded evidence pertinent and material to the controversy.

II. Legal Standard

The Federal Arbitration Act (FAA) reflects a strong federal policy favoring arbitration. A.G. Edwards & Sons, Inc. v. McCollough, 967 F.2d 1401, 1404 n.2 (9th Cir. 1992). When parties agree to resolve their dispute through arbitration, courts generally defer to the decisions of the arbitration panel. See Todd Shipyards Corp. v. Cunard Lines, 943 F.2d 1056, 1060 (9th Cir. 1991) ("It is generally held that an arbitration award will not be set aside unless it evidences a 'manifest disregard for the law.'"); Catz Am. Co. v. Pearl Grange Fruit Exch., Inc., 292 F. Supp. 549, 551(S.D.N.Y. 1968) ("Since one of the fundamental purposes of resorting to arbitration is to reduce the cost and delay of litigation, the role of the court must be limited in reviewing an arbitration award."). Section 10(a) of the FAA, however, provides that the court may vacate an arbitration award when there is either "evident partiality . . . in the arbitrators" or when the arbitrators are guilty of misconduct in refusing to hear "evidence pertinent and material to the controversy." 9 U.S.C. § 10(a).

Evident partiality results when an arbitrator (1) fails to disclose relevant information, or (2) harbors actual bias. Woods v. Saturn Distrib. Corp., 78 F.3d 424, 427 (9th Cir. 1996). In nondisclosure cases, an arbitrator's failure to disclose information that gives the impression of bias in favor of one party warrants vacatur. Id. (citing Commonwealth Coatings Corp. v. Cont'l Cas. Co., 393 U.S. 145, 149 (1968); Schmidtz v. Zilveti, 20 F.3d 1043, 1047 (9th Cir. 1994) (stating that the standard for determining evident partiality in nondisclosure cases is "whether there is a reasonable impression of partiality").

In actual-bias cases, though, a reasonable impression of bias does not establish evident partiality because the arbitrator's decision is directly at issue. Woods, 78 F.3d at 427. Therefore, "the party alleging evident partiality [in actual-bias cases] must establish specific facts which indicate improper motives." Sheet Metal Workers Int'l Ass'n Local 420 v. Kinney Air Conditioning Co., 756 F.2d 742, 745 (9th Cir. 1985). In both types of cases, the party challenging the arbitration decision bears the burden of showing partiality. Woods, 78 F.3d at 427.

A district court may also vacate an arbitration award if the arbitrator is "guilty of misconduct . . . in refusing to hear evidence ...

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