Bass, Berry & Sims attorney Chris Lazarini commented on a case in which a former trader fraudulently purchased $1 billion in Apple shares that ultimately forced the closure of the trader’s firm, Rochdale Securities. Rochdale then filed and won a FINRA arbitration against its clearing firm, Pershing, which had refused to reverse the trades despite the fraud. The Court rejects Pershing’s argument that the Panel acted in manifest disregard of the law and exceeded its powers by ignoring the clearing agreement’s bar of consequential damages.

Chris provided the analysis for Securities Litigation Commentator (SLC). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SLC, please visit the SLC website to sign up for the newsletter.

Pershing, LLC vs. Rochdale Securities, LLC, No. 651604/2016 (N.Y. Sup. Ct., NY Cty., 9/23/16) 

*An Award may be vacated for manifest disregard of the law only where some egregious impropriety by the arbitrators is apparent.
**As long as there is a barely colorable basis for the arbitrators’ decision, an Award should be enforced.
***Where the parties’ dispute relates to the terms of a contract, the question for a reviewing court is solely whether the arbitrators interpreted the contact, not whether they got its meaning right or wrong. 

Rochdale Securities was the victim of a fraud perpetrated by one of its former traders. The scheme involved his purchase, at the request of a co-conspirator at another firm, of 125,000 Apple shares every half hour until the total reached 1,625,000 shares at a cost of approximately $1 billion. Then, when earnings disappointed, the other trader claimed that he only ordered 125 shares every half hour. Rejecting Rochdale’s requests to reverse the trades due to the fraud, Pershing cleared them into Rochdale’s account. The next day, Rochdale sold its Apple shares, first at a slight profit, but then at a loss, as rumors of the fraudulent trades spread on Wall Street, and Pershing demanded the immediate sale of the remaining shares. When the dust settled, Rochdale still owed Pershing over $5.3 million. Faced with a net capital violation, FINRA closed Rochdale. To offset the debt, Pershing sold Rochdale’s fixed income portfolio, reducing the debit balance to $513,000.

As a result, Rochdale filed a FINRA arbitration against Pershing, which counterclaimed for the debit balance. The Panel awarded Rochdale $5.6 million in damages, including $2 million in compensatory damages on the Apple position and $2 million in consequential damages for the loss of Rochdale’s business, plus interest from October 2012, but awarded Pershing $513,000, plus interest, on its counterclaim (FINRA #14-01061 (NYC, 2/23/16)). The Panel also awarded both parties their attorneys’ fees. The net result was a $7.6 million award in Rochdale’s favor. Pershing paid the net award, then filed this vacatur action, and Rochdale cross-petitioned for confirmation.

Pershing first argued that the Panel acted in manifest disregard of the law and exceeded its powers by ignoring the clearing agreement’s bar of consequential damages. The Court rejects this argument. Where the parties’ dispute is focused on the terms of a contract, the Court states, the sole question for the reviewing court is whether the arbitrators even arguably interpreted the contract, not whether they did so rightly or wrongly. The Court finds ample evidence that the parties argued their respective positions on the consequential damages issue to the Panel. That the arbitrators accepted Rochdale’s version of the facts and law, the Court concludes, is neither irrational nor in manifest disregard of the law.

Pershing next argued that it was completely irrational for the Panel to assess liability to both parties on the same transactions. The Court disagrees, finding nothing irrational about the Panel awarding Pershing the debit balance owed to it, while simultaneously holding Pershing accountable for what the Panel viewed as Pershing’s willful misconduct.

Finally, Pershing challenged the award of attorneys’ fees to Rochdale as violating the American Rule (which requires each party to pay its own attorneys’ fees in the absence of a contractual or statutory basis for assessing them against the opposing party). Pershing asserted that there was no such basis, as it withdrew its own request for fees. The Court, again, disagrees, finding that Pershing did not timely object to Rochdale’s attorneys’ fee request and did not properly withdraw its own request for fees (which the Panel awarded) and further finding that the terms of the clearing agreement provides a basis for the award of such fees.