Second Circuit Restricts Manifest Disregard of the Law

Second Circuit Restricts Manifest Disregard of the Law

On questions of law, arbitrators will be viewed as a blank slate, unless the parties educate the applicable legal principles.

GMS Group & Costa v. Benderson, No. 02-7129 (2nd Cir., 4/7/03). Award Challenge * Confirmation of Award * Manifest Disregard of Law * Rationale of Award * Expert Testimony/Opinions.

On questions of law, arbitrators will be viewed as a “blank slate, unless the parties educate the applicable legal principles.

In confirming the Award below against a manifest disregard challenge, the District Court applied an “any justification” or “barely colorable justification” standard, which GMS and broker Costa challenge on appeal. Appellants assert that the “manifest disregard” standard requires greater judicial scrutiny when federal statutory rights are implicated, citing the Court’s 1998 Halligan v. Piper Jaffray (9 SAC 12(13)) decision.

In that regard, Appellants, who were Respondents in the NASD Award under review (NASD ID #98-02618, Buffalo, 4/26/01), point out that claims against them included alleged violations of the 1934 Act.

The Court responds, first, that the lack of a reasoned Award leaves uncertain whether the 1934 Act claims were the basis for the $150,000 award amount, but, interested perhaps in the opportunity to clarify Halligan’s place in its case law, the Court proceeds as if federal statutory rights are implicated here. Accepting Appellants’ premise arguendo, the Court rejects their conclusion that Halligan and DiRussa v. Dean Witter Reynolds, 9 SAC 2(13) promoted a greater level of scrutiny for Awards relating to federal statutory claims. The Halligan Opinion contained language that suggests that “strong” or “overwhelming” evidence contradicting an arbitrator’s decision could suffice, Appellants argue, but the Court claims that “GMS takes those words out of context” and maintains that the Court’s extensive fact-finding in that Opinion did not manifest an independent judicial review leading to vacatur. Rather, it stresses, “we reached this conclusion applying the traditional manifest disregard standard” and “since our decisions in DiRussa and Halligan, we have continued to apply the same manifest disregard standard that pre-dated those decisions…..”

Next, the Court applies the traditional standard to this case and finds that the District Court did not err in upholding the Award. It reviews the expert testimony on the record of the arbitration proceeding and finds ambiguities. Where, as here, the law is unclear and the facts are complex, “we will not find manifest disregard of the law.” (ed: In a backhanded slap, the Court intimates that, were it to apply the requested heightened scrutiny, it would not benefit GMS, as the 1934 Act was not designed to protect broker-dealers. What this challenge did achieve was an insistent reiteration by a senior Panel of the Second Circuit of its adherence, at least henceforth, to a strict review standard for arbitration Awards, no matter what the nature of the underlying dispute.) (SAC Ref. No. 03-15-02)


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Mark J. Astarita is a veteran securities attorney representing investors and financial professionals nationwide in securities investigations and arbitrations. Have a question? Email him at, call his office at 212-509-6544, or visit The Securities Lawyer

Securities Attorney at Sallah Astarita & Cox | 212-509-6544 | | Website | + posts

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.