Sawtelle Waddell Reed Punitve Damages Reinstated

On Remand, Arbitrators Continue to Award $25 Million in Punitive Damages, Despite Court Decision

UPDATE, SAWTELLE v. WADDELL & REED, INC., NASD ID #97-03642 (9/4/03).

Incredibly, the three Arbitrators who were directed to reconsider an excessive award of punitive damages have done so and have decided that they were right after all!

Persuaded, perhaps, that the New York Appellate Division’s vacatur of the Panel’s $25 million punitive damages award may have occurred because they did not provide an explanation in support, the Panel re-affirmed its original ruling and stated the following:

Respondents are “liable, jointly and severally, to Claimant for punitive damages in the amount of $25,000,000 (twenty-five million dollars US). The Panel awards punitive damages under CUTPA [Connecticut Unfair Trade Practices Act] as it found that Respondents Waddell & Reed and Robert Lee Hechler through agents of Waddell & Reed demonstrated reprehensible conduct that warrants an award of punitive damages. The Panel further found that after claimant was terminated, Respondents orchestrated and conducted a horrible campaign of deception, defamation and persecution of Claimant which included, among other things: giving clients the impression that claimant mishandled their investments; Claimant was untrustworthy; Claimant was no longer in the business; Claimant was not authorized to do business; and, Claimant was in some way involved in criminal activities and the embezzling of client funds. The Panel also found that Respondent Waddell & Reed, through its agents, re-routed Claimant’s mail and his telephone lines, as a result, telephone calls and mail intended for Claimant were received by Waddell & Reed and its agents.”

While these findings were not in the original Award, the charges were known to the Appellate Division when it found the $25 million award “grossly excessive” in February 2003 (SAA 03-06). Referring to the proportionality standards developed by the U.S. Supreme Court in BMW v. Gore, 517 U.S. 559, the Court ruled that constitutional due process standards, while not directly applicable to arbitrations, serve as benchmarks for determining that which is “arbitrary and irrational under the FAA.” Applying the Gore factors, the Court observed that the termination and post-termination conduct that quickened the Arbitrators’ ire did not ultimately affect anyone’s health or safety.

The dispute, which arose in 1997, was of limited duration, did not impact Mr. Sawtelle’s earnings significantly, and did not impair his ability to retain clients and gain subsequent employment. The Court terms it an “ordinary commercial dispute,” with no widespread impact, that primarily affected only two parties. The punitive award, which was expressly granted under the Connecticut Unfair Trade Practices Act, was the largest on record, whether in litigation or arbitration, and, with a 23 to 1 ratio, was “well above the four-to-one ratio that the Supreme Court regards as ‘close to the line,'” and the two-to one ratio more common in CUTPA cases. In monetary terms, the largest award of punitive damages under CUTPA in a Connecticut state court is only $168,000 and in federal court less than $1 million (See SLA 2003-07 for a further summary).

According to the supplementary Award, the Claimant urged the Panel “to leave its original award of punitive damages as is.” Respondents maintained that “the Appellate Division’s factual findings and legal holdings are binding on the Panel” and requested “that punitive damages in this case not exceed $400,000 or an “absolute maximum amount,” under the Supreme Court’s intervening State Farm decision (See Masucci article, 2003 SAC 3(1)), of $1,080,499. Surprise! (SAC Ed: We’re speechless. The Wall Street Journal (online ed., 9/8/03) reports that Waddell & Reed “plans to appeal the ruling.” Stay tuned!) (SAC Ref. No. 03-36-01)

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Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.


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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page -, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.