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AOT USA v. MERRILL LYNCH PROFESSIONAL CLEARING CORP.

January 27, 2004.

AOT USA, a California corporation, Plaintiff
v.
MERRILL LYNCH PROFESSIONAL CLEARING CORPORATION, a Delaware corporation, Defendant



The opinion of the court was delivered by: WAYNE ANDERSEN, District Judge

MEMORANDUM, OPINION AND ORDER

This case is before the Court on the motion of the defendant, Merrill Lynch Professional Clearing Corporation ("Merrill Lynch") to dismiss plaintiff's complaint pursuant to Fed.R.Civ.P. 12(b)(6). For the following reasons, we grant the motion to dismiss plaintiff's complaint and thereby confirm the arbitration award.

BACKGROUND

  Plaintiff AOT USA's ("AOT") complaint seeks the vacation of an arbitration award rendered by the Chicago Board Options Exchange, Inc. ("CBOE") on or about January 30, 2003 (the "Award"). In January 2001, Plaintiff AOT commenced an arbitration before the CBOE against Defendant Merrill Lynch. The arbitration challenged Merrill Lynch's October 2000 actions in "buying-in" a position in Terra Networks, S.A. ('Terra").

  During the course of the arbitration proceeding, AOT argued that Merrill Lynch executed the buy-ins, which eventually were allocated to AOT's account by AOT's clearing firm, at a Page 2 commercially unreasonable price. Merrill Lynch countered that it had abided by Rule 11810 of the Uniform Practice Code of the National Association of Securities Dealers, Inc. ("NASD"), which governs the buying-in of undelivered securities. On or about January 30, 2003, the CBOE arbitration panel issued its Award denying AOT any relief.

  AOT now seeks to vacate the arbitration Award in this Court.

  DISCUSSION

  The Federal Arbitration Act, 9 U.S.C. § 1, et seq, "establishes `a federal policy favoring arbitration.'" Shearson/American Express, Inc. v. McMahon, 482 U.S. 220 (1987) (quoting Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1 (1983)). The corollary to this federal bias in favor of arbitration is that "judicial review of an arbitration award is extremely limited." E.I. DuPont de Nemours v. Grasselli Employees Independent Ass'n, 790 F.2d 611, 614 (7th Cir.), cert. denied, 479 U.S. 853 (1986).

  Section 10 of the Federal Arbitration Act ("FAA"), 9 U.S.C. § 10, sets forth the bases by which a District Court may vacate an arbitration award. These are:
a. In any of the following cases, the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration —
(1) Where the award was procured by corruption, fraud, or undue means.
(2) Where there was evident partiality or corruption in the arbitrators, or either of them,
  (3) Where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy, or of any Page 3 other misbehavior by which the rights of any party have been prejudiced.
 
(4) Where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.
9 U.S.C. § 10(a). See also IDS Life Insurance Co. v. Royal Alliance Associates, Inc., 266 F.3d 645, 649-50 (7th Cir. 2001).
  In this case, the Complaint does not allege any of the above-listed rationale as a basis for vacating the Award. Rather, Paragraph 15 of the Complaint identifies the following grounds for vacating the Award:
(a) To enforce said award would be contrary to the public policy of the United States; and
(b) The award rendered by the arbitrators was in manifest disregard of NASD rules.
  The following discussion will show that neither of these grounds warrants vacation of the Award in this case. See 9 U.S.C. § 10(a); IDS Life Insurance Co., Inc., 266 F.3d at 649-50.

  I. Manifest Disregard

  As set forth above, the FAA limits the bases for overturning and vacating an arbitration award. See 9 U.S.C, § 10. In addition to the rationale set forth in the Act however, the Supreme Court, in dictum, has implied that an additional, limited rationale may occasionally warrant the vacation of the an arbitration award. Wilko v. Swan, 346 U.S. 427, at 436-437 (1953) (dictum); First Options v. Kaplan, 514 U.S. 938, 942 (1995) (dictum). The Seventh Circuit has narrowly circumscribed the instances in which a party may invoke this non-statutory ground to situations in which the arbitration award directs the parties to violate the law or when the arbitral order does Page 4 not adhere to the legal principles specified by contract. See IDS Life Insurance Co. v. Royal Alliance Associates, Inc., 266 F.3d 645 (7th Cir. 2001); George Watts & Son, Inc. v. Tiffany & Co., 248 F.3d 577, 580 (7th Cir. 2001). As the Seventh Circuit observed in George Watts:
After Eastern Associated Coal the `manifest disregard' principle is limited to two possibilities: an arbitral order requiring the parties to violate the law (as by employing unlicensed truck drivers), and an arbitral order that does not adhere to the legal principles specified by contract, and hence unenforceable under § 10(a)(4).
248 F.3d at 581.;

  In this case, AOT is unable to plead that the arbitration Award directs the parties to violate the law. At the arbitration hearing, AOT challenged the procedure by which Merrill Lynch executed a buy-in and the CBOE found that Merrill Lynch had acted properly. AOT does not explain how the panel, by ...


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