Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: TUESDAY, March 7, 1995 TAG: 9503070098
SECTION: BUSINESS PAGE: B5 EDITION: METRO
SOURCE: ASSOCIATED PRESS
DATELINE: WASHINGTON LENGTH: Medium
In a decision of potentially great importance for the securities industry, the court reinstated a $400,000 punitive-damages award two Illinois investors had won, and then lost, against the brokerage firm Shearson Lehman Hutton.
The court's decision was 8-1, with Clarence Thomas the sole dissenter.
Punitive damages, aimed at punishing and deterring bad conduct, are not available in arbitration cases under New York law. And the securities industry routinely requires investors to sign contracts binding them to arbitration under New York law when disputes arise.
That's the type of contracts Winnetka, Ill., residents Antonio and Diana Mastrobuono signed with Shearson in 1985.
The couple closed their account in 1987, and two years later sued Shearson. They alleged that their former Shearson broker, Nick Diminico, had subjected their account to unauthorized trading and other misconduct.
Shearson invoked its contract with the Mastrobuonos to compel arbitration. A panel of arbitrators in Chicago awarded the couple $159,327 in actual damages and $400,000 in punitive damages.
A federal trial judge, upheld by the 7th U.S. Circuit Court of Appeals, invoked the New York law in ruling that no punitive-damage award was possible.
Monday's decision reversed those rulings.
Writing for the court, Justice John Paul Stevens said allowing punitive damages was in keeping with federal arbitration law. Barring such damages would unduly punish the Mastrobuonos for signing an ambiguous contract, he said.
Nothing in the court's decision, however, appeared to preclude securities brokers from drafting contracts that explicitly exclude the possibility of punitive-damage awards in arbitration.
by CNB