## Facts

- James and Beverly Bonar opened a securities account at Dean Witter’s Orlando office in July 1982 with $16,436.77.
- Their account executive, Ed Leavenworth, stole $4,920 from the account in November 1982; by late 1983 the account was depleted and showed a small margin balance that Dean Witter did not attempt to collect.
- In February 1984, Leavenworth deposited funds into the Bonars’ account to clear the margin balance.
- In July 1984, Leavenworth stole $15,890.20 from another customer and deposited it into the Bonars’ account; the funds appeared on the Bonars’ statements and were used to buy securities.
- In September 1984, Leavenworth left Dean Witter; the Bonars closed their Dean Witter account and received securities valued at $11,489.90 after margin balances were cleared.
- In January 1985, Dean Witter audited Leavenworth’s accounts, discovered thefts, and reversed unauthorized transfers, including the transfer that had funded the Bonars’ closing securities position.
- The Bonars arbitrated claims under their customer agreement against Dean Witter, branch manager John S. McNally, Jr., and Leavenworth; the panel awarded compensatory and punitive damages against Dean Witter and McNally.
- At arbitration, the Bonars presented an expert witness who later was shown to have falsified academic credentials.

## Issues

1. Whether the punitive damages portion of the arbitration award had to be vacated under the Federal Arbitration Act because it was procured by fraud.
2. Whether arbitrators lacked authority to award punitive damages due to a New York choice-of-law clause and New York’s rule limiting punitive damages in arbitration.
3. Whether the customer agreement effected a contractual waiver of punitive damages.
4. Whether the punitive damages award was so irrational that vacatur was required.

## Decision

- The Eleventh Circuit held the district court abused its discretion by refusing to vacate the punitive damages award because it was procured by fraud within FAA § 10(a).
- The court reversed confirmation of the punitive damages portion and remanded for a new arbitration hearing limited to punitive damages.
- The court rejected the arguments that arbitrators lacked authority to award punitive damages, that punitive damages were contractually waived, and that the punitive award was vacatur-worthy due to irrationality.
- The compensatory damages portion of the arbitration award was left undisturbed.

## Legal Principles

- Under FAA § 10(a), an arbitration award may be vacated when procured by corruption, fraud, or undue means.
- Vacatur for fraud requires: (1) clear and convincing proof of fraud; (2) fraud not discoverable through due diligence before or during arbitration; and (3) materiality of the fraud to an issue in arbitration.
- A general choice-of-law clause selecting state law does not, without explicit contractual language, eliminate arbitral authority to award punitive damages in FAA-governed arbitration.
- Waiver of punitive damages must be clearly shown as a voluntary, intentional relinquishment of a known right; it will not be inferred from general contract terms.

## Conclusion

The court ordered vacatur of the punitive damages award because fraudulent expert credentials materially affected that issue and could not reasonably have been discovered earlier, while upholding the arbitrators’ general power to award punitive damages absent an explicit contractual restriction.


Bonar v. Dean Witter Reynolds, Inc., 835 F.2d 1378 (11th Cir. 1988)