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Great Eastern Securities, Inc. v. Goldendale Investments, Ltd., et al.

Issue Discussed: Security

Submitted by Thomas J. Kinney, Michael T. Carolan*

Date Promulgated: December 20, 2006

 

Great Eastern Securities, Inc. v. Goldendale Investments, Ltd., 2006 WL 385119 (S.D.N.Y. 2006)

Court: Southern District of New York

Issues Decided: 1) Whether an arbitration panel’s order to post pre-hearing security exceeded the scope of its authority in violation of Federal Arbitration Act (“FAA”) §10(a)(4); 2) Whether the order to post pre-hearing security was in “manifest disregard” for the law; and 3) Whether the pre-hearing security order was sufficiently final for judicial confirmation.

 

In Great Eastern Securities, Inc. v. Goldendale Investments, Ltd., the Southern District of New York affirmed an arbitration panel’s order directing a financial services company to post security pending resolution of its dispute with two investors.  The court ultimately found that the interim order to post security was within the scope of the panel’s authority, was not contrary to applicable governing law, and was sufficiently final for court review and confirmation.

The Arbitration

This case arose from a dispute between Great Eastern Securities (“Great Eastern”) and two of its investors – Goldendale Investments, Ltd. and Silverstein Investments, Ltd. (collectively “the Investors”).  The Investors deposited nearly $1,000,000.00 in brokerage accounts through Great  Eastern, and in turn paid Great Eastern a $12,000.00 commission.  Thereafter, the Investors sought to withdraw a portion of those funds, but Great Eastern refused to comply.  Instead, Great Eastern charged the Investors approximately $480,000.00 in allegedly fraudulent commission charges.  In response, the Investors commenced an arbitration proceeding against Great Eastern seeking a full reimbursement.

Citing concerns about Great Eastern’s financial solvency, the Investors moved the arbitration panel for an order directing Great Eastern to post pre-hearing security for the full amount in dispute.  The panel accepted written briefs on the issue from both parties and held a telephonic motion hearing.  Thereafter, the panel granted the Investors motion, and ordered Great Eastern to post pre-hearing security.

Rather than post security, Great Eastern filed a petition to vacate the panel’s order in the U.S. District Court for the Southern District of New York, arguing that the order exceeded the scope of the panel’s authority and otherwise constituted manifest disregard of the law.  The Investors filed a counter-petition seeking confirmation of the panel’s order.

The District Court Opinion

The District Court denied both of Great Eastern’s arguments.  With respect to the “scope of authority” argument, the court noted that the Second Circuit has traditionally been reluctant to vacate interim arbitration orders aimed at preserving a parties’ ability to pay a final award.  The court explained that arbitrators have the power to fashion equitable remedies as necessary.  It also found the order to post pre-hearing security to be reasonable given the stated concerns over the Great Eastern’s solvency.

With respect to the “manifest disregard” argument, the court first explained that the standard required evidence that an arbitrator was aware of a clearly governing legal principle and consciously decided to ignore it.  The court then noted that there was “simply no indication” that the panel consciously ignored a clearly governing legal principle with its order.  The court also was not persuaded by Great Eastern’s argument that the panel’s failure to consider the financial impact of its order on Great Eastern constituted manifest disregard, explaining that arbitration panels are permitted to order interim security awards even when doing so may harm a company’s financial stability.

With respect to the Investors motion to confirm the panel’s order, the court noted that an interim arbitration award is sufficiently final for confirmation if it “finally and definitely disposes of a separate independent claim.”  Because the panel’s order fully and finally addressed the issue of pre-hearing security, the court deemed the order sufficiently final for review and confirmed it.

 

* Thomas J. Kinney and Michael T. Carolan are associate and partner, respectively, in the Insurance & Reinsurance group of Crowell & Moring LLP. They each represent cedents and reinsurers in disputes involving a broad spectrum of i