Cross-posted from
Securities Law Prof Blog
(authored by Prof. Barbara Black, Dec. 3, 2010):

Judge Jed Rakoff (S.D.N.Y.) denied Goldman Sach’s motion to vacate a $20.580 million arbitration award obtained by the Official Unsecured Creditors’ Committee of Bayou Group on Nov. 8, 2010 and promised that a written opinion would follow.  The opinion was filed on Nov. 30, and Judge Rakoff offers some observations about, and comparisons between, the arbitration process and the courts.

In the arbitration, the Creditors Committee challenged certain transfers between the Bayou Fund LLC margin account and the margin accounts of four new hedge funds in the Bayou family, made at the direction of Samuel Israel.  After Israel closed the hedge funds, it was revealed that he had been operating a Ponzi scheme.  The Committee alleged that these transfers were fraudulent conveyances and that Goldman Sachs, because of its failure to conduct due diligence, was jointly and severally liable.  The arbitration panel issued an award in favor of the Creditors Committee the full amount it sought from Goldman Sachs and, as is typical, did not provide any reasons for its award.

Judge Jed Rakoff essentially tells Goldman that it got what it asked for — since it “voluntarily chose[] to avail itself of this wonderous alternative to the rule of reason,” it “must suffer the consequences.”  Noting that “a court, unlike an arbitrator, must state its reasons and subject them to appellate scrutiny,” the Judge describes the “high hurdle” a party seeking vacatur must clear to meet the “manifest disregard of the law” standard (which standard, as he notes, is in some doubt itself after the Supreme Court’s Hall St. Associates decision, although the Second Circuit has concluded that “manifest disregard” remains a valid ground for vacatur). 

After setting forth the Second Circuit test, he reviews the record and the applicable law on fraudulent conveyances and finds that Goldman has not even come close to establishing “manifest disregard of the law.”  At most Goldman disputes the arbitration panel’s likely factual findings from which there is no judicial relief.

Fascinating that a District Court judge would tell a broker-dealer and FINRA member firm that it must “suffer” as a consequence for choosing arbitration, and imposing it on its customer. Another brand of “be careful what you wish for”?

(Thanks to Barbara for her insightful analysis.)