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The Sixth Circuit Court of Appeals found no "manifest disregard of the law" when a National Association of Securities Dealers (NASD) arbitration panel refused to find that a high rate of stock turnover evidenced "churning."
In Mitchell v. Ainbinder, No. 05-1497, 2007 WL 177896 (6th Cir. Jan. 24, 2007), Mitchell opened three accounts with stockbroker Ainbinder. After incurring significant losses on all three accounts, Mitchell filed a claim for NASD arbitration against Ainbinder. The NASD panel denied Mitchell's claims and issued an award in Ainbinder's favor.
The Sixth Circuit confirmed the award in Ainbinder's favor and rejected Mitchell's claim that the award should be vacated because the arbitrators "manifestly disregarded" the law.
To establish that the NASD arbitrators manifestly disregarded the law, Mitchell needed to show that: (1) that the applicable legal principle was clearly defined and not subject to reasonable debate; and (2) that the arbitrators refused to adhere to that legal principle. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Jaros, 70 F.3d 418, 421 (6th Cir. 1995).
Mitchell alleged that Ainbinder's high rate of stock turnover evidenced "churning," a practice where a broker abuses client confidence by making unnecessary stock trades for the purpose of racking up commission fees. However, a mere high rate of turnover is insufficient to establish legal elements of the broker's "intent to defraud" or "willful and reckless disregard of the customer's interest." M & B Contracting Corp. v. Dale, 795 F.2d 531, 533 (6th Cir. 1986).
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