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As a colleague once said: “if you put them to sleep, you have to wake them up”.

However, a New York state court confirmed an $880,000 arbitration award against Merrill Lynch, Pierce, Fenner & Smith Inc. despite allegations that one of the arbitrators repeatedly fell asleep during the hearings.

No Basis to Vacate the Award

Judge Joan B. Lobis of the Supreme Court of New York, New York County, held in Baker v. Merrill Lynch that there was no basis to vacate the award for arbitrator misconduct because Merrill Lynch had failed to provide by clear and convincing that the arbitrator had in fact been snoozing.

The award in question was entered by the Financial Industry Regulatory Authority (FINRA) on June 23, 2011. The three-person arbitration panel also assessed $34,800 in hearing fees to be paid by Merrill Lynch, a unit of Bank of America.

Claims Against Merrill Lynch

The claims in arbitration were filed by members of the Baker family in late 2009. The causes of action were violation of the Securities and Exchange Act of 1934, unsuitability, common law fraud, breach of fiduciary duty, breach of contract, failure to supervise, respondeat superior, negligence, gross negligence and negligent supervision, the opinion said.

The Bakers had invested their entire net worth of $6.5. million in the Merrill Lynch Phil Scott Team Income Portfolio, which rapidly declined during the economic crisis in late 2008 and early 2009, the opinion said.

Merrill Lynch advised the Bakers to keep their money where it was, but they decide to liquidate their positions on March 6, 2009, which turned out to be the market’s low point.

According to the Bakers, they were told that the Income Portfolio was a low risk, well-diversified investment. In reality, they said, the portfolio was concentrated in volatile equities heavily affected by the market downturn that began in October 2007, the opinion said.

Merrill Lynch mismanaged the money, the Bakers claimed, by recommending a high risk investment strategy that did not suit their risk tolerance or goals, the opinion said.

They also claimed that Merrrill Lynch failed to diversify their investment, and failed to meet their goals of preserving capital and safeguarding principal, among other things, the opinion said.

The Bakers sought $1.7 million in damages in the arbitration. Merrill Lynch countered that if the Bakers had left their money in the Income Portfolio as they had been advised to do, they would have eventually realized a profit of $1.25 million.

After FINRA entered the award, the Bakers moved to confirm and Merrill Lynch cross-moved to vacate, the opinion said. The Bakers also filed a cross motion for sanctions, alleging that Merrill Lynch’s cross-motion for vacatur was frivolous. Merrill Lynch in turn sought sanctions, arguing that the Bakers’ motion for sanctions was frivolous.

The court did not enter any sanctions, and confirmed the award in a brief opinion. The quick dispatch of the cross-motion to vacate is further evidence of the American judicial system’s strong preference to resolve disputes through arbitration, as reflected in the common law and in the Federal Arbitration Act.

In fact, the opinion cited the 2006 decision from the 2nd U.S. Circuit Court of Appeals in D.H. Blair & Co., Inc. v. Gottdiener, which said, “[o]nly a barely colorable justification for the outcome reached by the arbitrators is necessary to confirm the award.”

Merrill Lynch Obliged to Prove Misconduct Failed

Regarding the sleepy arbitrator, Merrill Lynch was obliged to prove his misconduct by clear and convincing evidence, the opinion said, citing the 2007 case In re Moran v. N.Y. City Transit Authority. It failed to meet the standard.

The opinion said that Merrill Lynch’s claim that the arbitrator “habitually” fell asleep was contradicted by the Bakers’ account of the arbitration proceedings.

In addition, the opinion said that the excerpts of the transcripts provided by Merrill Lynch did not show that the investment firm had ever objected to the arbitrator’s alleged sleeping during the hearings.

The court also shot down Merrill Lynch’s other grounds to have the award vacated. The firm had asserted that 1) the three-man arbitration panel improperly limited the evidence to what had transpired before the Bakers liquidated their position in the Income Portfolio, and 2) the arbitrators failed to explain the rationale for their award.

Merrill Lynch argued that it should have been able to present evidence of the risk profile of the Bakers subsequent investments, as well as evidence of the subsequent performance of the Income Portfolio, the opinion said. These two types of evidence were material to its defense, the firm said.

To overcome the authority that arbitrators have to limit the evidence as they see fit, however, Merrill Lynch needed to show the exclusion of evidence was so fundamentally unfair that it was deprived of a fair hearing, the opinion said. It was unable to meet this burden.

As for the arbitration panel’s failure to provide a reasoned opinion explaining the award, none is required, the opinion said.

Again quoting the 2nd Circuit in D.H. Blair, the opinion aid: “The arbitrator’s rationale for an award need not be explained, and the award should be confirmed if a ground for the arbitrator’s decision can be inferred from the facts of the case.”

Guiliano Law Group

If you have been the victim of securities fraud and you have a complaint, you should consult with an attorney. The practice of Nicholas J. Guiliano, Esq., and The Guiliano Law Group, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.

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