Appeal by a former registered representative of a New York Stock Exchange firm from a judgment of the District Court for the Southern District of New York, Edward Weinfeld, Judge, which denied appellant's motion to vacate an arbitration award in favor of his former employer and confirmed the award. Affirmed.
Before: BRIENDLY, MANSFIELD and OAKES, Circuit Judges.
This action, wherein federal jurisdiction was based on diversity of citizenship, was instituted in the District Court for the Southern District of New York by Barry Drayer against H. Hentz & Co., a New York Stock Exchange (NYSE) firm which had employed Drayer as a registered representative; Shearson Hayden Stone Inc. (Shearson), also a NYSE firm, which was alleged to be Hentz' successor in interest; and two individuals who had been officers of Hentz and had become officers of Shearson. The complaint alleged that defendants had wrongfully terminated Drayer's employment in January 1973 because of his refusal to sign a promissory note for $26,040.73 which Hentz claimed to be due to it; that they falsely represented to NYSE and others that Drayer had been terminated for violation of NYSE's Rule 405(1) (the "know your customer" rule); and that they had withheld wages, salary and commissions. Drayer demanded compensatory damages of $350,000, which included damages for loss of clientele, punitive damages of $150,000, an accounting and costs.
The defendants countered with a motion pursuant to § 3 of the Federal Arbitration Act, 9 U.S.C.§ 3, to stay the action pending arbitration "in accordance with the arbitration procedure prescribed in the Constitution and rules" of NYSE, a procedure to which Drayer had agreed in his application to NYSE when he sought employment with Hentz as a registered representative.*fn1 Drayer filed an affidavit opposing the stay on grounds no longer pressed and a memorandum of law which urged, inter alia, that despite the contrary decision by Judge Weinfeld in Rust v. Drexel Firestone Inc., 352 F. Supp. 715 (S.D.N.Y. 1972), and by the First Circuit in Dickstein v. DuPont, 443 F.2d 783 (1971), the arbitration clause, which he had been compelled to accept by NYSE Rule 347, was unenforceable as in violation of the antitrust laws.*fn2 Judge Weinfeld granted the stay in a brief memorandum in which he did not discuss the antitrust claim, doubtless because he had already rejected this in Rust, supra, 352 F. Supp. at 717-18.*fn3 Drayer made no attempt to appeal from the stay order.
In its answer filed with the NYSE's Arbitration Counsel, Shearson explained Drayer's termination as follows: Defendant Krasner, then a senior vice-president of Hentz, had instructed Drayer not to open a margin account for a particular customer, Corr. Despite this Drayer opened such an account for a firm in which Corr had an interest. The account had to be closed out for nonpayment, leaving an unsecured debit balance of some $36,000, later reduced to $26,000 by a $10,000 check from Corr to Roger Drayer which was deposited with Hentz. Hentz' compliance counsel and officers concluded that Drayer was responsible for the loss because of refusal to follow instructions and NYSE Rule 405(1), which required the exercise of due diligence "to learn the essential facts relative to every customer." Kraner thereupon fined Drayer for the amount of the loss. When Drayer refused to acknowledge the indebtedness and sign a note for the amount of the fine, he was discharged for violating Rule 405(1).
Subsequently, the activities of Messrs. Roger and Barry Drayer and Corr came under Federal investigation. The grand jury returned an indictment, 75 Crim. 803, (Exhibit "E") naming, inter alia, Corr, Roger Drayer and Barry Drayer. At trial, Corr and Roger Drayer were found guilty; see the attached court docket (Exhibit "F") which shows the convictions of Corr and Roger Drayer for market manipulation, fraud and conspiracy.
The jury was unable to reach a verdict with respect to Barry Drayer and a mistrial was ordered. The office of the U.S. attorney decided that in view of the tremendous amount of time and expense involved in retrying Barry Drayer, it would not be in the public interest to retry him. A motion of nolle prosequi was accordingly entered (Exhibit "G").
Hentz filed a counterclaim for $26,040.73.
At the start of the arbitration Drayer moved for a "mistrial" and the appointment of arbitrators who had not been subjected to the prejudice incident to reading the indictment.*fn4 The arbitrators requested that an offer of the indictment be withdrawn for the time being but denied the motion for a mistrial, stating that they were in no way prejudiced by what they had read and always made their decision on the facts presented at the particular hearing. In the course of the arbitration the parties exchanged briefs; defendant's brief made the statement:
Indeed, that Respondents [defendants] had just cause and were properly motivated to terminate Drayer's employment is best evidenced by the recent Second Circuit decision, United States v. Corr et al., 543 F.2d 1042 (2d Cir. 1976).
Drayer's counsel asked the arbitrators not to read the Corr opinion, which had affirmed the convictions of Corr and Roger Drayer. Defendants' counsel argued, as they had from the outset, that the naming of Drayer in the Corr indictment and in the court's opinion was relevant in the sense that this would have caused Drayer to lose his clientele quite apart from the allegedly wrongful termination of his services and thus would have reduced his damages. The arbitrators entered a unanimous award dismissing both the claims and the counterclaims and assessing costs of $2,450 against Drayer.
Drayer moved to vacate the award primarily because of the prejudice allegedly caused by references to the indictment and to this court's opinion in Corr. In a memorandum Judge Weinfeld denied the motion and confirmed the award. He pointed out that arbitrators were not bound by the rules of evidence; that courts were not to serve as appellate tribunals ruling "upon any questions of evidence that may arise in the course of the arbitration," citing, inter alia, American Almond Products Co.v. Consodated Pecan Sales Co., 144 F.2d 448 (2 Cir. 1944) (L. Hand, J.); and that in any event the indictment was never ...