## Facts

- Bernard and Maureen McDaniel maintained brokerage accounts at A.R. Baron in 1995–1996.
- Bear Stearns Securities Corp. (a Bear Stearns subsidiary) served as Baron’s clearing firm and earned fees and commissions from that relationship.
- During the relevant period, Baron engaged in widespread fraudulent and criminal securities conduct, later investigated by the SEC and leading to criminal proceedings against a former Baron officer.
- The SEC also investigated Bear’s role and entered a consent order requiring Bear to pay $35 million, without Bear admitting or denying the SEC’s findings.
- In an NASD arbitration, the McDaniels asserted claims against Bear including breach of contract and aiding and abetting Baron’s fraud.
- The arbitration panel issued a detailed written award finding Bear jointly and severally liable for breach of contract and for aiding and abetting fraud.
- In the arbitration record, testimony from a Bear/BSSC managing director supported an inference of a close relationship between senior Bear personnel and Baron’s president.
- The panel admitted certain SEC-related materials for limited purposes, admitted a Bear internal submission to the SEC, and excluded attached criminal-trial/deposition transcripts based on hearsay and the availability of live witnesses.

## Issues

1. Whether the arbitration panel exceeded its powers or acted in manifest disregard of the law or evidence through its evidentiary rulings and fact-finding, including reliance on witness testimony and limited use of SEC materials.
2. Whether Bear satisfied the stringent FAA standard for vacating an arbitration award in light of the deferential scope of judicial review.

## Decision

- The court denied Bear’s motion to vacate the arbitration award and left the award in place.
- The court held Bear failed to show the panel exceeded its authority or acted in manifest disregard of law or evidence.
- The court rejected challenges aimed at reweighing witness credibility, reassessing inferences, or treating the court as an appellate forum on the merits.
- The court found the panel’s evidentiary decisions (admitting some materials, limiting purposes, and excluding certain transcripts) fell within arbitral discretion and did not deprive Bear of a fair hearing.

## Legal Principles

- Federal courts apply a highly deferential standard when reviewing arbitration awards under the Federal Arbitration Act, reflecting a strong federal policy favoring arbitration.
- “Manifest disregard of the law” is a severely limited ground for vacatur requiring proof that arbitrators knew a clearly governing, explicit, and applicable legal rule and deliberately ignored it; an award supported by a colorable legal basis must be confirmed.
- Arbitrators are not bound by formal rules of evidence; evidentiary rulings receive exceptional deference and will not justify vacatur absent extraordinary circumstances or fundamental unfairness.
- Courts do not reweigh evidence, reassess credibility, or second-guess reasonable inferences drawn by arbitrators from the record.

## Conclusion

The court refused to vacate the NASD arbitration award because Bear’s objections amounted to merits-based disagreement with the panel’s evidentiary choices and credibility assessments, and Bear did not meet the FAA’s narrow standards for showing the panel exceeded its powers or acted in manifest disregard of governing law or the evidentiary record.


McDaniel v. Bear Stearns & Co., 196 F. Supp. 2d 343 (S.D.N.Y. 2002)