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Piano v. Lynch

November 3, 2004

GARY DEL PIANO, PLAINTIFF-RESPONDENT,
v.
MERRILL LYNCH, PIERCE, FENNER & SMITH INC., DEFENDANT-APPELLANT.



On appeal from Superior Court of New Jersey, Law Division, Middlesex County, L-26-03.

Before Judges Wefing, Fall and Payne.

The opinion of the court was delivered by: Payne, J.A.D.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued September 15, 2004

Both Federal and State law provide, among the statutorily limited grounds upon which an arbitrator's award can be vacated, that such can occur"[w]here there was evident partiality... in the arbitrators." See 9 U.S.C.A. §10(a)(2); N.J.S.A. 2A:24-8b.*fn1 The issue presented to us in this appeal is whether such evident partiality was demonstrated in this case. The trial court found that it was. We reverse.

Commencing in December 1999, plaintiff Gary Del Piano made a series of 1,000-share purchases of stock in Internet Capital Group (ICGE), eventually accumulating 14,000 shares in the company. The purchases were made through the brokerage unit of defendant Merrill Lynch, Pierce, Fenner & Smith (Merrill Lynch), and were initially recommended by its employee, Thomas Bishop, a broker. During the period of Del Piano's investments, the stock precipitously declined in value. Del Piano finally sold his accumulated shares in February 2001 at a price of eighteen cents per share, for a loss of $429,000.

On June 25, 2001, Del Piano filed a claim against Merrill Lynch and Bishop with the National Association of Securities Dealers (NASD), asserting the unsuitability of Bishop's recommendations, broker negligence and fraud. A panel of three arbitrators was selected by the parties following disclosure and review of their credentials. Among them was industry representative Joseph Guarino, Jr. A three-day arbitration hearing then ensued, commencing on November 5, 2002, that resulted in a unanimous decision in favor of Merrill Lynch and its broker. Del Piano's claims were dismissed in their entirety.

On January 2, 2003, Del Piano filed a complaint in the Superior Court, together with a motion to vacate the arbitration award on the ground that the panel had failed to consider certain evidence. The motion was later amended to include a claim of alleged conflict of interest on the part of arbitrator Guarino arising from the fact that Deutsche Bank had been a co-underwriter with Merrill Lynch and others in the initial public offering (IPO) of ICGE stock and had been fined, along with Merrill Lynch and other companies, following investigations by New York Attorney General Eliot Spitzer of conflict of interest in the conduct of the various companies' stock analysts. As stated in a letter by plaintiff's counsel to the court, dated February 5, 2003:

Before, during and after the relevant time period, Mr. Guarino worked (and still works) for Deutsche Bank as the Director (and former Vice President) of Compliance in the bank's Private Banking section. Deutsche Bank was Merrill Lynch's Co-Lead Underwriter for ICGE - the stock at issue in this lawsuit - and was fined $50 million by New York State Attorney General Spitzer in the same investigation in which Mr. Spitzer fined Merrill Lynch.... Yet, at the arbitration, Mr. Guarino expressly represented that neither he nor Deutsche Bank had a relationship with Merrill Lynch. Merrill Lynch filed a cross-motion to confirm the arbitration award and to dismiss Del Piano's complaint, which had been amended to assert causes of action against two of Merrill Lynch's analysts.

The motions were argued orally. At the conclusion, the court ruled that the disclosures made by Guarino regarding his employment background were insufficient to permit Del Piano to make an informed decision as to whether or not Guarino would be a fair and impartial member of the arbitration panel."[T]here's no indication of anything asked or anything volunteered regarding the specific relationship regarding the particular stock which was underwritten by the Deutsch Bank and -- touted by Merrill Lynch." As a consequence, the trial judge set aside the arbitration award and permitted Del Piano to proceed with a de novo arbitration.

Merrill Lynch then contacted Guarino through the NASD and, armed with his affidavit attesting to a lack of knowledge of any involvement by Deutsche Bank in the IPO, of any personal financial gain from Merrill Lynch's transactions on behalf of Del Piano or of any financial gain to Deutsche Bank, and of any insider knowledge of the Spitzer investigations, sought reconsideration. However, the motion judge did not find Guarino's sworn statements to be"dispositive of the issue of whether or not there should have been further disclosure, or whether it affects upon the impartiality of Mr. Guarino." Merrill Lynch's motion was denied.

On appeal, Merrill Lynch argues that the motion judge committed legal error in vacating the arbitration award in the absence of any evidence of"evident partiality." Within that argument, Merrill Lynch contends that the judge erred in basing his decision on"mere nondisclosure"; that his determination was erroneously based on an"appearance of impropriety"; and that the judge committed error in vacating the award in the absence of clear and convincing evidence of specific facts establishing a substantial relationship between Guarino and Merrill Lynch.

It argues additionally that the judge committed error in vacating the award when Del Piano had in his possession all necessary facts at the time of the arbitration and raised no objection to Guarino's service as an arbitrator. As a final matter, Merrill Lynch argues that the court committed error in failing to confirm the arbitration award and to dismiss Del Piano's amended complaint. ...


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