Sav-A-Trip v. Jordan M. Belfort , 164 F.3d 1137 ( 1999 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 98-1729
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Sav-A-Trip, Inc., *
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Plaintiff-Appellee, *
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v. *
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Jordan M. Belfort, *
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Defendant-Appellant. * Appeals from the United States
* District Court for the
Daniel M. Porush; Kenneth S. Greene, * Western District of Missouri
Christopher F. Castaldo, *
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Defendants. *
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No. 98-1871
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Sav-A-Trip, Inc., *
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Plaintiff-Appellee, *
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v. *
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Jordan M. Belfort; Daniel M. *
Porush, *
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Defendants. *
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Kenneth S. Greene, *
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Defendant-Appellant. *
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Christopher F. Castaldo, *
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Defendant. *
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Submitted: November 19, 1998
Filed: January 8, 1999
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Before McMILLIAN, WOLLMAN and HANSEN, Circuit Judges.
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McMILLIAN, Circuit Judge.
Jordan M. Belfort and Kenneth S. Greene appeal from a final order entered in
the United States District Court1 for the Western District of Missouri confirming an
arbitration award against them and several co-defendants2 and denying their motions
to vacate the award. See Sav-A-Trip, Inc. v. Stratton Oakmont, Inc., Docket
No. 96-1251-CV-W-1(W.D. Mo. Dec. 30, 1997) (District Court Order) (hereinafter
“Slip Op.”). Jurisdiction was proper in the district court based upon 28 U.S.C. § 1332.
Jurisdiction on appeal is proper based upon 28 U.S.C. § 1291. We review district court
1
The Honorable Dean Whipple, United States District Judge for the Western
District of Missouri.
2
Co-defendants included: Stratton Oakmont, Inc. (appellants’ employer), and
Daniel M. Porush, Matthew L. Bloom, and Christopher F. Castaldo (appellants’ co-
workers). None of these co-defendants is a party to this appeal.
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decisions to confirm arbitration awards de novo, reviewing findings of fact for clear
error. See Witzman v. Gross, 148 F.3d 992, 998 (8th Cir. 1998). For the reasons stated
below, we affirm the order of the district court.
Appellee Sav-A-Trip, a corporation which operates a chain of convenience
stores in Kansas and Oklahoma, commenced arbitration proceedings before the
National Association of Securities Dealers (NASD) against Stratton Oakmont, a New
York brokerage firm, and five of its employees, including appellants Belfort and
Greene (collectively “defendants”). In its complaint, Sav-A-Trip accused defendants
of fraud, misrepresentation, negligence, and breach of contract. After a five-day
evidentiary hearing and after appellee filed notice that defendants had defaulted
settlement discussions, the arbitration panel held the defendants jointly and severally
liable for $712,000 in actual damages, $15,000 in punitive damages, and $12,850 in
filing and forum fees.3 Three of the defendants appealed directly to NASD to
withdraw the award, but NASD declined to do so. Sav-A-Trip filed a motion to
confirm the arbitration award in United States district court. Appellants and defendant
Porush opposed the motion to confirm, and the court filed default judgment against
Stratton Oakmont, Bloom, and Castaldo who submitted no response. Subsequently,
defendant Bloom filed for bankruptcy and Stratton Oakmont became subject to
liquidation under the Securities Investor Protection Act (SIPA). The bankruptcy and
SIPA liquidation automatically stayed Sav-A-Trip’s action against defendants Bloom
and Stratton Oakmont, respectively. On December 30, 1997 the District Court entered
an order confirming the award against all defendants but Stratton Oakmont and Bloom;
on February 7, 1998 it issued an order awarding Sav-A-Trip interest on the award.
For reversal, appellants advance three arguments: (1) the district court erred in
holding them liable for Sav-A-Trip’s damages because they were not controlling
3
The award also ordered Stratton Oakmont to pay the NASD Regulation Office
the NASD member surcharge of $500 and postponement fees of $1,000.
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persons, as defined in the Kansas Securities Act applied in arbitration, and had no
knowledge of any fraudulent activity with Sav-A-Trip’s account; (2) the district court
erred in holding that appellants’ rights were not prejudiced by the fact that the
arbitrators issued a decision before receiving appellants’ reply brief; and (3) the district
court erred in refusing to extend to them the bankruptcy automatic stay enjoyed by
defendants Stratton Oakmont and Bloom. Appellant Greene additionally argues that
the district court erred in confirming the punitive damages portion of the arbitration
award because the Kansas Securities Act does not permit punitive damages. After
careful consideration of the record and arguments presented, we hold that the district
court did not err in confirming the arbitration award.
First, there was sufficient evidence in the record to support the arbitrators’
decision that appellants were controlling persons who knew or should have known of
the fraudulent activity and thus liable under the Kansas Securities Act for the
fraudulent mismanagement of Sav-A-Trip’s account. See Kan. Stat. Ann. § 17-
1268(b). Appellants occupied various supervisory positions during their tenure at
Stratton Oakmont, including President and Vice-President, that gave them direct or
indirect control over defendants Castaldo and Bloom, who fraudulently mismanaged
Sav-A-Trip’s account. Furthermore, appellants did not carry their burden under the
Kansas Securities Act to prove they did not know nor could have known of fraud
committed against Sav-A-Trip by their subordinate employees. The principal evidence
appellants cite–testimony from Sav-A-Trip officers that they never interacted directly
with appellants–does not prove that appellants did not or could not have known of
Castaldo’s and Bloom’s malfeasance. As such, there was sufficient evidence for the
arbitrators to hold appellants liable as controlling persons for damages to Sav-A-Trip
under the Kansas Securities Act.
Second, the arbitrators’ failure to consider appellants’ reply brief when
determining the award did not constitute misconduct under the Federal Arbitration Act.
See 9 U.S.C. § 10(a)(3). Although appellants claim they submitted their reply brief in
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a timely fashion, it appears that they in fact submitted it well after the deadline without
notifying the arbitrators or requesting additional time. In any event, appellants’ rights
were not prejudiced because they had already presented their evidence and arguments
to the panel during the five-day evidentiary hearing. The arbitrators were familiar with
appellants’ arguments and even discussed them in their decision.
Third, the bankruptcy automatic stay enjoyed by defendants Stratton Oakmont
and Bloom does not properly extend to appellants. Extension of an automatic stay to
a debtor’s co-defendants is only proper in unusual circumstances. See Croyden
Assocs. v. Alleco, Inc., 969 F.2d 675, 676 (8th Cir. 1992). Appellants have not
demonstrated any unusual circumstances which would justify such an extension.
Finally, although it is true that punitive damages are not recoverable under the
Kansas Securities Act, see Woods v. Homes & Structures of Pittsburg, 489 F. Supp.
1270, 1289 (D.Kan. 1980), appellant Greene’s argument against the imposition of
punitive damages fails because the arbitrators and the district court did not rely solely
on the Kansas Securities Act in making and confirming the award. In its arbitration
complaint, Sav-A-Trip asserted federal, state, and common law claims which sustain
punitive damages awards, and it is clear that the district court did not limit its
confirmation of the award to the Kansas Securities Act. See slip op. at 2.
In short, we hold that the district court did not err in confirming the arbitration
award in favor of Sav-A-Trip and denying appellants’ motions to vacate the award.
We affirm the district court order. See 8th Cir. Rule 47B.
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A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
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