$400 Million Finra Award Affirmed by Second Circuit

Just last week, the Second Circuit affirmed a denial of a vacatur motion of a $400 million FINRA arbitration award, according to Investment News and Bloomberg (STMicroelectronics, N.V. v. Credit Suisse Securities LLC, Docket No. 10-3847-cv (2d Cir. June 2, 2011).

The claim arose out of the sale of over $400 million worth of auction rate securities (ARS) to STMicroelectronics (ST), a semiconductor manufacturer, by Credit Suisse. When the ARS market froze in February 2008, the ARS owned by ST failed at auction causing them to be unable to access their cash or at best be worth pennies on the dollar. STMicro filed an arbitration claim against Credit Suisse for the ARS losses. During the arbitration, Credit Suisse attempted to remove one of the arbitrators for failing to disclose details about his prior testimony as a financial expert on the behalf of claimants. Following the panel’s decision that Credit Suisse was liable and ordered them to pay STMicro more than $400 million in compensatory damages, Credit Suisse moved to vacate the award on the grounds of “evident partiality”, “other arbitrator misbehavior” and “manifest disregard of the law.” The district court refused to vacate and refused to offset the award by nearly $75 million following STMicro’s sale of the ARS to a third party after the arbitration.

On appeal, the Second Circuit affirmed the district court with respect to the award vacatur. Regarding arbitrator bias, the Court of Appeals could not meet the very high burden of showing a failure to disclose facts demonstrating partiality, which the court defined as a “relationship with a party, lawyer or another arbitrator.” Rather, Credit Suisse alleged only that the arbitrator had an unfavorable “predisposition”, according to the ruling. In addressing Credit Suisse’s allegation that the arbitrator’s disclosure was misleading, the court stated that the disclosures complied with FINRA rules and any predisposition the arbitrator might have had could not be the basis for vacatur since his prior testimony and expertise were the very things that qualified him to be an industry arbitrator.

Most interestingly, the Court of Appeals scorched Credit Suisse for attempting to avoid some of the consequences of the arbitration process it had imposed on its customer, as follows:

We note again that Credit Suisse could have chosen to permit its customers to resolve disputes in the courts, where legal issues such as these could be authoritatively resolved. It deliberately chose, however, to insist on a forum in which issues are resolved less formally, without the necessity for the adjudicator to explain its precise reasoning, or the availability of appellate tribunals to review and assess that reasoning. Having chosen that process, with its attendant expedition and lower cost, Credit Suisse may not now impose on its adversary the very formalities it elected to eschew, simply because it does not like the outcome of the process.

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