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Vacatur of an Arbitration Award: Petitioner Bears Significant Burden Under FAA and CPLR

On September 23, 2016, in Pershing LLC v. Rochdale Securities, LLC, No. 651604, 2016 N.Y. Misc. LEXIS 3448 (Sup. Ct. N.Y. Cnty.), Justice Saliann Scarpulla of the Commercial Division issued a decision that reinforces the very significant burden a petitioner faces in order to successfully vacate an arbitration award under CPLR Article 75 and section 10 of the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1 et seq.

The dispute arose from a 2012 fraudulent scheme in which a trader at Respondent Rochdale Securities, LLC (“Rochdale”) purchased over 1.6 million shares of Apple Inc. stock in the hours leading up to the release of Apple’s quarterly earnings.  Petitioner Pershing LLC (“Pershing”) cleared the trades.  The next day when the stock price dropped, Pershing insisted that Rochdale sell any remaining shares, which it did at a final loss of $5.3 million.  Due to Rochdale’s resulting net capital violation, the Financial Industry Regulatory Authority (“FINRA”) ordered it to cease operations.  Rochdale since has filed for bankruptcy.

Rochdale filed a FINRA arbitration claim against Pershing in April 2014 on the grounds that “Pershing’s panicked, illegal and self-serving reaction [to the Rochdale trader’s fraudulent activity] inflicted unnecessary and devastating harm that destroyed Rochdale’s business.”  Rochdale asserted multiple claims, including a claim for breach of the parties’ Fully Disclosed Clearing Agreement (“FDCA”).  After a hearing, the FINRA arbitration panel issued an award that required Pershing to pay Rochdale approximately $7.6 million.

Pershing petitioned to vacate the award under CPLR Article 75 and section 10 of the FAA on the grounds that the panel acted in “manifest disregard of governing legal principles and exceeded [its] powers by: (a) ignoring the provisions of the parties’ FDCA; (b) issuing an award that is fundamentally irrational and lacks any support in the record; and (c) issuing an award that is grossly disproportionate, punitive, and in contravention of public policy.”  Rochdale cross-petitioned to confirm the award.

In denying the petition to vacate, Justice Scarpulla explained that “[w]hether this court agrees or disagrees with the panel is irrelevant.”  The court noted that vacatur of an award is only appropriate under the FAA in “exceedingly rare instances” where the arbitrators have engaged in “egregious impropriety”—i.e., where “the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether.”  The court explained that “[w]here the parties’ dispute is focused on the terms of a contract, the sole question for [the court] is whether the arbitrator[s] (even arguably) interpreted the parties’ contract, not whether [they] got its meaning right or wrong.”  Further, even if the court is convinced that the panel erred, the award should be enforced “as long as there is a barely colorable basis for the decision.”  The Commercial Division further noted that the burden to vacate an award under the CPLR is similarly difficult, and an arbitration award is not subject to vacatur unless it is “totally irrational and violative of a strong public policy.” 

Applying this heavy burden, the court concluded that the arbitration award was not irrational and did not manifestly disregard the law of contracts.

This ruling adds to the myriad decisions that have imposed a stringent burden on a party seeking to vacate an arbitration award whether under the FAA or the CPLR.