McDaniel v. Bear Stearns & Co., Inc.

Bear Stearns & Co, Inc. (Bear Stearns) was a New York investment bank that offered clearing services for other broker-dealers through its subsidiary Bear Stearns Securities Corporation (BSSC) (collectively, Bear) (defendants). BSSC was the clearing firm for broker-dealer A.R. Baron (Baron). Richard Harrington and Andrew Bressman were the presidents of BSSC and Baron, respectively, and Peter Murphy was the managing director of BSSC. According to Murphy, Bressman had “free access to Harrington’s office,” and the two men had a good relationship. Murphy intimated though his demeanor that he knew more about Harrington and Bressman than he was willing to say outright. In 1995 and 1996, Bernard and Maureen McDaniel (plaintiffs) opened brokerage accounts with Baron. Roman Okin was the McDaniels’ broker. Bear had certain obligations to Baron’s customers and earned commissions and fees from Baron. While the McDaniels were Baron’s customers, Baron engaged in criminal and fraudulent activity and violated securities laws. The Securities and Exchange Commission (SEC) intervened and filed charges of criminal securities fraud. John McAndris, a former Baron officer, was criminally tried and found guilty. The SEC investigated Bear’s role and made certain findings. Without admitting or denying the SEC’s findings, Bear consented to the entry of an order (the Bear order) under which Bear was required to pay $35 million. Subsequently, the McDaniels initiated an arbitration against Bear, alleging fraud. The arbitration panel ultimately made an award in the McDaniels’ favor. The panel supported its finding of Bear’s fraud through Murphy’s testimony. The panel also admitted in evidence a Bear report, the “Wells Submission,” but excluded from evidence an attached trial transcript of John LaFond, a securities regulator, as well as a deposition transcript of Okin that was used in McAndris’s criminal trial. The panel stated that the specified testimony was mostly hearsay and/or given for a non-arbitration purpose and that the witnesses could be called during the arbitration if necessary. Finally, the panel admitted the Bear order for a limited purpose, which it explained. In court, Bear filed a motion to vacate the arbitration award based on the panel’s evidentiary rulings.