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MUTUAL SERV. CORP. v. SPAULDING

December 7, 1994

MUTUAL SERVICE CORPORATION, a Michigan corporation, and CAROL A. HOLESHA, Plaintiffs,
v.
MARGARET SPAULDING and JOSEPH P. O'CONNELL and JAMES WEBER, as Co-Trustees of the Helen Spaulding Trust, Defendants.


JAMES H. ALESIA, United States District Judge


The opinion of the court was delivered by: JAMES H. ALESIA

Mutual Service Corporation ("MSC") and Carol A. Holesha ("Holesha") have sued Margaret Spaulding and the co-trustees of the Helen Spaulding Trust, Joseph P. O'Connell and James Weber, seeking to vacate an arbitration award, and the defendants have in turn counterclaimed for enforcement of the award. Both MSC and Holesha now move to vacate the arbitration award. Defendants, meanwhile, move to confirm the arbitration award. For the reasons stated in this memorandum opinion and order:

 
1. MSC and Holesha's motions to vacate the arbitration award are granted. It is hereby ordered that the arbitration award on September 27, 1994 against the plaintiffs is vacated.
 
2. Defendants' motion to confirm the arbitration award is denied. Defendants' counterclaim to enforce the award is dismissed.

 BACKGROUND

 In the spring of 1986, Margaret and Helen Spaulding transferred their investment portfolios to Coleman Richards Equity, a Chicago-based broker-dealer firm. The accounts were assigned to Carol A. Holesha, a registered representative of Coleman Richards. The defendants in this case (claimants in the arbitration case) allege that Holesha then advised the sisters to liquidate substantial portions of their conservative investments and invest the proceeds in high-risk, ill-liquid limited partnerships in real estate, leasing, and oil and gas ventures.

 In 1987, Coleman Richards changed its name to River North but Holesha continued to service the two accounts. Later that year, MSC purchased the assets of River North, including the Spaulding accounts. Holesha, who had transferred her license to MSC, remained working on the accounts. The defendants allege that, despite the obvious unsuitability of the investments made by Holesha, MSC failed to make changes to the portfolios and allowed Holesha to continue to manage them. Defendants further allege that Holesha made material misrepresentations and omissions about the limited partnership investments, apparently to disguise the results of the disastrous investments.

 On March 2, 1993, Margaret Spaulding and the co-trustees of the Helen Spaulding Trust filed an arbitration demand against Holesha and MSC with the National Association of Securities Dealers ("NASD"). The claimants asserted that Holesha and MSC violated Section 10(b)(5) of the Securities and Exchange Act of 1934 and the NASD's Rules of Fair Practice. Also, they asserted state law claims based on negligence, fraud, and breach of fiduciary duty.

 In response to the demand for arbitration, Holesha and MSC filed a motion with the NASD seeking to dismiss the arbitration on the ground that the claim was barred by Section 15 of the NASD's Code of Arbitration Procedure. The plaintiffs argued that Section 15 precluded the claimants from arbitrating any issue relating to any security purchased more than six years before the arbitration was filed (i.e., before March 2, 1987). The Director of Arbitration rejected Holesha's and MSC's interpretation of Section 15. The Arbitration Panel agreed, holding:

 
"With respect to any purchases made outside of the six year period (purchases made before March 2, 1987), there are allegations of wrongdoing including misrepresentation and a scheme to defraud in the claimant's response to the motion and in the claim, falling within the six year eligibility period. Therefore, evidence regarding any purchases made prior to March 2, 1987, will be permitted to go to the Panel but only as it relates to allegations of wrongdoing made after March 2, 1987. All allegations of wrongdoing prior to that date relating to these purchases are ineligible for NASD Arbitration."

 Later, when Holesha and MSC filed a motion in limine, the Panel simply reiterated its former position.

 The Arbitration Panel then heard the testimony. On September 27, 1994, the Panel, without articulating its reasoning, awarded Margaret Spaulding $ 93,900 from Holesha and $ 23,600 from MSC and awarded the Helen Spaulding Trust $ 40,500 from Holesha and $ 21,000 from MSC. The Panel also awarded to the claimants $ 20,000 in attorneys' fees. The award totalled $ 199,000.

 Holesha and MSC have now filed a complaint seeking to vacate the Panel's award. Both have filed motions to vacate the arbitration award. They make three arguments. First, both Holesha and MSC allege that the arbitration panel clearly exceeded its authority by awarding damages for claims outside the jurisdiction of the NASD arbitration. Second, MSC alleges that the NASD Arbitration Panel exceeded its power by considering, in manifest disregard of the law, the Spaulding defendants' claim that MSC had a duty to determine the suitability of investments made by the Spaulding defendants prior to the time MSC had any account or other relationship with them. Finally, both plaintiffs allege that the Panel exceeded its authority by awarding attorneys' fees in the absence of a ...


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