In Goldman Sachs Execution & Clearing, L.P. v. The Official Unsecured Creditors' Committee of Bayou Group, LLC, et al., Slip Copy, 2010 WL 4877847 (S.D.N.Y. 2010), the court denied petitioner’s motion to vacate a $20.580 million award obtained in a FINRA arbitration by The Official Unsecured Creditors' Committee of Bayou Group (“OUCCBG”). At issue in the arbitration was whether Goldman Sachs failed to conduct due diligence with respect to certain transactions that were related to a Ponzi Scheme. The panel found in favor of OUCCBG for the full amount it sought from Goldman Sachs and, as is common, did not issue a reasoned award. Goldman Sachs then moved to vacate the panel’s award on the grounds that it was in “manifest disregard of the law,” relying upon the fact that the panel did not articulate the reason behind its ruling.

In denying the motion, the court noted that there was no requirement that the panel provide the parties with a basis for its ruling, and that arbitration awards are “essentially unappealable.” Having agreed to arbitrate its dispute, the court stated that Goldman Sachs must live with these “consequences” of the arbitral process.

Moreover, the court analyzed whether the doctrine of manifest disregard of the law constitutes an independent “fifth” ground for vacatur or modification of arbitral awards under the Federal Arbitration Act. Discussing the U.S. Supreme Court’s and the Second Circuit Court of Appeals recent treatment of the issue, the court noted as follows:

[T]he Supreme Court made “clear” that [manifest disregard was] either eliminated by the Court's decision in Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 586 (2008) — or not. As the Court so helpfully stated last term in Stolt-Nielsen S.A. v. Animalfeeds Int'l Corp., 130 S. Ct. 1758, 1768 n.3 (2010), [w]e do not decide whether 'manifest disregard' survives our decision in Hall Street [], as an independent ground for review or as a judicial gloss on the enumerated grounds for vacatur set forth at 9 U.S.C. §10. Nonetheless, the Second Circuit, divining clarity where others see only confusion, concluded that manifest disregard 'remains a valid ground for vacating arbitration awards.' T. Co Metals, LLC v. Dempsey Pipe & Supply, Inc., 592 F.3d 329, 340 (2d Cir. 2010).

Having held that this doctrine remains valid in the Second Circuit, the court examined whether the panel’s award was in manifest disregard of the law by applying the following three-prong test:

First, the court must determine “whether the law that was allegedly ignored was clear, and in fact explicitly applicable to the matter before the arbitrators.” Second, if the law is clear and plainly applicable, the court must find that the law "was in fact improperly applied, leading to an erroneous outcome.” Finally, the court must look to a “subjective element, that is, the knowledge actually possessed by the arbitrators. In order to intentionally disregard the law, the arbitrator must have known of its existence, and its applicability to the problem before him.” (citations omitted).

In denying Goldman Sach’s motion, the court found that the “suggestion that the decision of the arbitration panel … was in manifest disregard of the law is, in reality, a quarrel with the arbitration panel's likely factual finding, from which no appeal may be taken.”

For a complete copy of the opinion and order, click here.