Rich v. Spartis

516 F.3d 75, 2008 U.S. App. LEXIS 2815, 2008 WL 343330
CourtCourt of Appeals for the Second Circuit
DecidedFebruary 8, 2008
DocketDocket 06-1723-cv (L), 06-1814-cv (XAP)
StatusPublished
Cited by74 cases

This text of 516 F.3d 75 (Rich v. Spartis) is published on Counsel Stack Legal Research, covering Court of Appeals for the Second Circuit primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Rich v. Spartis, 516 F.3d 75, 2008 U.S. App. LEXIS 2815, 2008 WL 343330 (2d Cir. 2008).

Opinions

Judge STRAUB concurs in a separate opinion.

MINER, Circuit Judge:

Plaintiffs-appellants, Elizabeth H. Rich and her husband, Donald Rich (the “Riches”), appeal from a judgment entered in the United States District Court for the Southern District of New York (Cote J.) vacating an award made in their favor by an arbitration panel established under rules adopted by the National Association of Securities Dealers (“NASD”). See In re Worldcom Sec. Litig., No. 02-3288, 2006 WL 709101 (S.D.N.Y. Mar.21, 2006). The award was made against defendant-appel-lee Salomon Smith Barney, Inc. (“SSB”), now known as Citigroup Global Markets, Inc. (“Citigroup”), and against Philip L. Spartis and Amy Jean Elias, stockbroker representatives employed by SSB. Id. at *1. Spartis and Elias cross appeal from the judgment insofar as it confirms the arbitration panel’s dismissal of their cross claims for indemnity against Citigroup. The District Court determined, inter alia, that the arbitration award was solely for losses sustained by the Riches that were released by a court order approving settlement of a class action. See In re Worldcom Sec. Litig., 2006 WL 709101, at *1. Accordingly, the District Court concluded that “the award of damages to the Riches must be vacated on the ground that the arbitrators exceeded their authority when they granted damages to the Riches.... ” Id. at *4. As to the arbitration panel’s dismissal of the cross-claim, the District Court concluded that Spartis and Elias failed to show any basis for vacating the arbitration panel’s decision. Id. We find that the District Court could not have determined that the arbitration award relied solely on WorldCom losses based on the record before us. We remand to the District Court to order the arbitration panel to clarify the award.

BACKGROUND

The Riches are residents of Louisville, Kentucky. As a long-term employee of WorldCom, Inc. (“WorldCom”), Mrs. Rich was provided with stock options as part of her compensation. Beginning in 1998, employees of WorldCom desiring to exercise them stock options were required to do so through the Atlanta, Georgia office of SSB. On July 2, 1998, and again on July 17, 1999, Mrs. Rich exercised stock options and immediately sold the acquired shares. Thereafter, SSB proposed an “exercise and hold” Plan (the “Plan”) for WorldCom employees. Through the Plan, the employees would exercise their options and hold the shares for later sale pending anticipated increases in share prices. By holding the shares long enough, the employee shareholders would be able to have [77]*77the increase in value taxed at capital gain rates.

In August of 1999, the Riches subscribed to the Plan by opening an account with SSB. They allege that they were advised in all matters relating to their account by Mr. Spartis and Ms. Elias. On August 5, 1999, Mrs. Rich exercised options for 10,012 shares of WorldCom stock at $4.60 for 6,012 shares and $17.87 for 4,000 shares. The closing price for each share that day was $83.19. The Riches held their shares after financing the acquisition with funds borrowed from SSB by means of a margin account. On October 6, 1999, Mrs. Rich exercised options for 6,000 shares of WorldCom stock at an acquisition cost of $8.94 per share. The closing price per share on that date was $70.87. The Riches again paid for the shares through the margin account that they had established and again held the acquired shares as they claim they were advised to do.

On August 7,1999, Mrs. Rich sold 10,012 shares of WorldCom stock and used the proceeds to purchase 11,700 shares of Sprint, Inc. (“Sprint”) on that date. Allegedly, Mrs. Rich was advised that the “exercise and hold” strategy would be advanced by the Sprint purchase, since it was anticipated that Sprint would be merged into WorldCom. On January 31, 2000, Mrs. Rich exercised options to purchase 11,514 shares of WorldCom at $5.82 per share. The closing price per share on that day was $45.94. To finance this purchase, the Riches again used their margin account to borrow the necessary funds from SSB. Mrs. Rich exercised options through the SSB Plan one more time. On April 18, 2000, she exercised options for 13,500 shares of WorldCom at $9.00 per share, with the closing price on that day being $41.25 per share. This transaction also was financed through the margin account.

The Riches received margin calls in August and September of 2000 and responded with cash and securities, including liquidation of securities held in their account, to meet the calls. They first liquidated their 11,700 shares of Sprint and then began to sell the WorldCom shares to meet the margin calls. The Riches sold a total of 12,450 shares of WorldCom between September 13 and September 25, 2000. On September 26, they directed the sale, pursuant to a stop-loss order, of the remaining 22,030 shares of WorldCom in their account. The stock was sold that day for $25.50 per share. The Riches paid SSB over $25,000 in brokerage commissions and nearly $100,000 in margin interest during the thirteen months they maintained their account at SSB. The Riches saw their WorldCom stock fall from $83.00 to $25.50 per share during that period. They saw the price of their Sprint stock fall from $64.00 per share on the date of purchase to $33.75 on the date of sale, August 11, 2000. Attributing their losses to the investment advice provided by SSB and its registered representatives, Spartis and Elias, the Riches demanded arbitration of their claims for the losses sustained by filing a “Statement of claims” against SSB with NASD Dispute Resolution, Inc. Named as respondents in the arbitration were SSB, Spartis, Elias, and three other employees of SSB who were dismissed as respondents prior to the arbitration award.

The Statement of claims was filed on June 19, 2002, and included, generally, the historical facts described above. As claimants in the arbitration, the Riches sought compensation from the respondents for failing to advise them, inter alia, as to: the facts that would enable them to “adequately assess the risks of the SSB Option Plan”; the risks of drops in the stock [78]*78prices of WorldCom and Sprint presented by the Plan; the risks posed by failing to diversify their stock holdings; the risks of utilizing a margin account; a suitable investment strategy other than the SSB Option Plan; and the conflict of interest stemming from the relationship between WorldCom and SSB as underwriter, market maker, and employer of Telecommunications Analyst Jack Grubman. The Riches also charged SSB and the manager of the Atlanta office with failing to adequately supervise Spartis and Elias. Detailed bases for the Riches claims were set forth in six separate “Counts” of the Statement of claims. They included: (i) Lack of Suitability; (ii) Lack of Supervision; (iii) Dishonest and Unethical Practice; (iv) Breach of Fiduciary Duty; (v) Negligence; and (vi) Gross Negligence. Compensatory damages of $1,312,141.08 were claimed, along with punitive damages, attorneys’ fees and costs, and interest.

Substantially denying the allegations made in the Statement of claims, SSB filed its Statement of Answer with Affirmative Defenses on September 6, 2002. A Statement of Answer with Motion to Dismiss and Cross-Claim, filed by Spartis and Elias on September 6, 2002, included affirmative defenses, denials of the allegations in the Statement of claims, an application for dismissal of the claim, and a request for indemnification relief from SSB. All parties concerned executed Uniform Submission Agreements submitting the Riches’ claims to arbitration in accordance with the Rules of the NASD.

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Bluebook (online)
516 F.3d 75, 2008 U.S. App. LEXIS 2815, 2008 WL 343330, Counsel Stack Legal Research, https://law.counselstack.com/opinion/rich-v-spartis-ca2-2008.