United States District Court, N.D. Illinois, Eastern Division
May 4, 2005.
LANCE WISE AND NANCY WISE, Plaintiffs,
WACHOVIA SECURITIES LLC, NATIONAL ASSOCIATION OF SECURITIES DEALERS, Defendants.
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 defendants
Wachovia Securities LLC ("Wachovia") and National Association of
Securities Dealers ("NASD") to dismiss the plaintiffs' complaint
pursuant to Fed.R.Civ.P. 12(b)(6) and to confirm the arbitration
award pursuant to 9 U.S.C. § 9. For the reasons set forth below,
we grant the motion to dismiss and confirm the arbitration award.
For purposes of this motion, we assume the following facts as
true. Plaintiffs Lance and Nancy Wise commenced doing business
with Scott Winters ("Winters") during the 1990s when Winters was
employed with Merrill Lynch. When Winters became employed by
First Union, which later merged with Wachovia, Plaintiffs agreed
to and did become a customer of Wachovia. Plaintiffs entered into
an agreement with Wachovia whereby Wachovia agreed to provide
investment advisory services for the Plaintiffs and the
Plaintiffs agreed to submit all disputes to Binding Arbitration
conducted by NASD. In March of 2000, Winters contacted Plaintiffs concerning an
investment opportunity, the Titan Fund. Winters represented to
Plaintiffs that the investment would be capitalized with at least
ten million dollars and that he (Winters) was personally
investing $2,000,000 of his own money in the investment. Winters
further claimed Plaintiffs had a good account at Wachovia and
they were one of the few people being offered this investment
On or about April 10, 2000, Plaintiffs decided to invest in
this fund. On April 12, 2000 Winters resigned from Wachovia. The
following day, April 13, 2000 Lance Wise authorized the
liquidation of his account at Wachovia to the Titan Fund. In
November of 2000, Plaintiffs discovered the Titan Fund was a sham
and they had lost all of their investment. Shortly thereafter,
Plaintiffs sought reimbursement from Wachovia for their loss due
to Winters' misconduct. Following Wachovia's refusal of
reimbursement, Plaintiffs requested arbitration of the dispute
pursuant to their agreement and paid the fees required by the
NASD to arbitrate the dispute.
NASD followed its procedures by appointing arbitrators, setting
a hearing date and allowing discovery to proceed. During the
course of the arbitration proceeding, Wachovia filed a motion for
summary judgment. Plaintiffs filed their response, accompanied by
the affidavit of Plaintiff Lance Wise. Wachovia then filed its
reply. On April 28, 2004, the arbitration panel held a short
telephonic hearing on the motion. On October 15, 2004, NASD
issued its Award in favor of Wachovia, dismissing Plaintiffs'
claims against Wachovia "in their entirety with prejudice."
Plaintiffs filed a two-count complaint in this Court, alleging
that the arbitration award should be vacated pursuant
9 U.S.C. § 10 because NASD committed misconduct by granting summary judgment without holding an evidentiary hearing.
Plaintiffs further allege that defendant Wachovia induced the
decision of the arbitrators, and in doing so, defendants breached
Wachovia's fiduciary duty to the Plaintiffs and the covenant of
fairness implied in their contract. Defendants have moved to
dismiss the complaint and to confirm the arbitration award.
STANDARD OF REVIEW
When reviewing a motion to dismiss, the court must accept all
factual allegations in the complaint as true and draw all
reasonable inferences in favor of the plaintiff. Szumny v. Am.
Gen. Fin., Inc., 246 F.3d 1065, 1067 (7th Cir. 2001). The
purpose of a motion to dismiss is to test the sufficiency of the
complaint and not to decide the merits of the challenged claims.
Weiler v. Household Fin. Corp., 101 F.3d 519, 524, (7th
Cir. 1996). Dismissal is properly granted if it is clear that
plaintiff can prove no set of facts to support the allegations
set forth in the claim which would entitle her to relief.
Hernandez v. City of Goshen, 324 F.3d 535, 537 (7th Cir.
I. The Federal Arbitration Act Governs This Dispute
The Federal Arbitration Act ("FAA"), 9 U.S.C. § 10, governs the
grounds for vacating an arbitration award. Under § 10 of the FAA,
a district court is permitted to vacate an arbitration award if
it finds that: (1) the award was procured by corruption, fraud,
or undue means; (2) there was evident partiality or corruption in
the arbitrators; (3) the arbitrators were guilty of misconduct in
refusing to postpone a hearing, in refusing to hear relevant
evidence, or in misbehaving in some other way; or (4) the
arbitrators exceeded their powers or imperfectly executed them. 9 U.S.C. § 10 (a) (1)-(4) (2003); Sheldon v.
Vermonty, 269 F.3d 1202, 1206 (10th Cir. 2001). "Once a dispute
has been resolved through arbitration, the role of the reviewing
court is extremely limited." Sphere Drake Insurance Ltd. v. All
American Life Insurance Co., 2004 WL 442640, *1, 3 (N.D. Ill.
2004). Accordingly, federal courts must extend extraordinary
deference to the arbitration panel's decision. Id.
A. A Fundamentally Fair Hearing Was Afforded
Plaintiffs argue that NASD engaged in misconduct because the
arbitrators granted summary judgment without holding an
The Seventh Circuit has found that arbitrators are not required
to conduct a formal evidentiary hearing so long as the proceeding
is otherwise fundamentally fair. Generica Ltd. v. Pharm Basics,
Inc., 125 F.3d 1123, 1130 (7th Cir. 1997). In Generica, the
Seventh Circuit stated that, although an arbitrator is not bound
to hear all of the evidence presented by the parties, he is
required to give each party an adequate opportunity to present
its evidence and arguments. Id at 1130. The court found that
the arbitrator did not abuse his discretion when he denied to
re-open plaintiff's cross-examination of a witness. Id. at
1131. The court noted that it is appropriate to vacate an
arbitral award when "the exclusion of relevant evidence actually
deprived a party of a fair hearing." Id. at 1130. However, the
court concluded that the arbitrator had ample evidence before him
upon which to decide the dispute and thus the arbitral award was
upheld Id. at 1131.
Other courts have held that an arbitration panel has the
authority to dismiss facially deficient claims with prejudice
based solely on the parties' pleadings. Sheldon v. Vermonty,
269 F.3d 1202, 1206 (10th Cir. 2001). In that case, the Tenth
Circuit explained that under NASD's procedural rules, an
arbitrator may award any relief that would be available in a
court of law. Id. at 1206. Thus, the court found that the NASD provided the
plaintiff with a fundamentally fair proceeding because plaintiff
had the opportunity to fully brief and argue the motions to
dismiss. Id. at 1207. The court also found that there was no
evidence that NASD engaged in misconduct in conducting the
arbitration proceeding. Id.
This case is similar to Generica because, although NASD did
not conduct a formal evidentiary hearing, the Plaintiffs received
an otherwise fundamentally fair proceeding. The arbitration panel
had before it the parties' pleadings, discovery responses,
Plaintiff Lance Wise's affidavit and other materials.
Furthermore, on April 28, the arbitrators held a telephonic
hearing on Wachovia's summary judgment motion.
At the hearing, both parties were afforded an opportunity to
present their position. As noted by the court in Sheldon, under
NASD's procedural rules, an arbitrator may award any relief that
would be available in a court of law. Sheldon,
269 F.3d at 1206. In this case, Plaintiffs were afforded, at the very least,
the same opportunity as a court of law would have provided when a
summary judgment motion has been filed.
In this case, Plaintiffs fail to articulate any other evidence
they may have presented for consideration at an evidentiary
hearing. Therefore, Plaintiffs have not demonstrated that "the
exclusion of relevant evidence actually deprived [them] of a fair
hearing." See Generica Ltd., 125 F.3d at 1130. Accordingly, we
find that Plaintiffs have not, and cannot, allege facts
sufficient to establish one or more of the grounds required to
set aside an arbitration award pursuant to Section 10 of the
Federal Arbitration Act. Therefore, the award is confirmed in
accordance with the provisions of Section 9 of the FAA. CONCLUSION
For the foregoing reasons, NASD and Wachovia's motion to
dismiss the complaint is granted. The October 15, 2004
arbitration award is confirmed pursuant to Section 9 of the
Federal Arbitration Act. This is a final and appealable order.
It is so ordered.
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