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Parties alleging fraud in the procurement of an arbitration award due to a failure to respond to document requests must show by “clear and convincing evidence” that the failure to produce was intentional or made in bad faith, according to the Sixth Circuit Court of Appeals.
In Bauer v. Carty & Co., Inc., No. 06-5390, 2007 WL 2492415 (6th Cir. Sept. 4, 2007), Carty filed a arbitration claim with the National Association of Securities Dealers (NASD) against former employee Bauer, alleging that Bauer was indebted to Carty for bond-related trading losses. Before the arbitration hearing, Bauer submitted certain document requests to Carty. Carty agreed to comply with one request, but objected to the second request. Bauer did not further challenge Carty’s objection. The arbitration then proceeded, ending with an award in Carty’s favor.
Later, Bauer filed for personal bankruptcy protection. As part of the bankruptcy proceedings, Carty produced two letters indicating that Carty had improperly priced some bonds and had been deficient in its supervisory and reporting duties.
Bauer then brought an action to vacate Carty’s arbitration award, alleging that Carty, in bad faith, had failed to produce the two letters during the arbitration proceedings upon Bauer’s request, and that this failure to produce constituted fraud on which the award could be vacated.
In holding that Bauer had failed to show fraud in Carty’s actions that would warrant vacatur, the Court noted that the only evidence of fraud through intentional misrepresentation or bad faith conduct by Carty was the fact that the letters were not produced for the arbitration hearing. The Court found that the inference drawn by Bauer from the failure to produce the letters was not the clear and convincing evidence of fraud required to justify vacating the arbitration award. To the Court, it was just as likely that the failure to produce “was merely due to oversight or forgetfulness.”
The Court also noted that Bauer did not establish that the failure to produce the letters was in fact non-responsive to Bauer’s requests. While the Court acknowledged that Carty had narrowly interpreted the document requests and had objected to the production of the letters, the Court found its objection to and interpretation of the requests to be plausible, and did not constitute clear and convincing evidence of bad faith. Since the district court’s findings as to Carty’s responsiveness to the requests were not clearly erroneous, the Court refused to set aside those findings.
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