August 26, 2010
A New York lower court has denied a “feeder” hedge fund’s motion to vacate an arbitration award issued by a majority of an American Arbitration Association panel in connection with an investor’s claim against the fund for losses related to the Madoff Ponzi scheme. In Wiederhorn v. Merkin (601265/2010), New York Supreme Court, New York County, instead confirmed the $1.5 million award in favor of the investor, Noel Wiederhorn, and against J. Ezra Merkin’s hedge fund, Ascot Partners, which delegated management of the assets in the fund to Ponzi-man extraordinaire, Bernard Madoff. Wiederhorn had argued at the arbitration hearing that the feeder fund failed to disclose Madoff’s exclusive role in management of the invested funds, and thus should reimburse Wiederhorn for his losses. (In case you skipped all of 2009, Madoff has pled guilty to securities fraud and is serving a 150-year sentence in federal prison.)
A two-arbitrator majority of the panel wrote a 23-page opinion explaining its award. That opinion was authored by Chairperson David Robbins, a well-known voice in securities arbitration. As a result, the court had a clear roadmap into the factual and legal basis of the panel’s award. The court took pains to acknowledge that the Majority applied principles of equity in reaching its decision, and that arbitrators are free to use their equitable powers to achieve a just result.
In addition, the court found that the Majority did not manifestly disregard the law (query whether a state court should apply state law grounds or FAA grounds for a motion to vacate) by refusing to recognize the Martin Act preemption doctrine, since there is a split among the Departments of the Appellate Division in New York as to the doctrine’s applicability. The First Department has held that the Martin Act, New York State’s securities statute that does not provide a private right of action to aggrieved parties, preempts common law causes of action arising out of securities transactions, whereas the Second and Fourth Departments have disagreed. Thus, there is no “well-settled” principle of law for the panel to disregard.
I predict that other investors in Madoff feeder funds will press arbitration claims to shift responsibility for Madoff-related losses to those feeder funds, whose principals may still have substantial assets. If this court confirmation is any indication, arbitrators will feel free to apply equitable principles to force those with some assets left to pay restitution to investors whose life savings were decimated by Madoff.
JG (with H.T. to Ed Pekarek)
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