Special Arbitration Process
This Appendix A sets forth terms and conditions of a special arbitration process that Lehman Brothers, Inc. ("Lehman") and SG Cowen Securities Corp. ("SG Cowen") (the "Firm" or "Firms") have agreed to make available to qualifying former customers of Frank Gruttadauria. This process is completely voluntary on the part of qualifying former customers, and does not preclude former customers who elect not to participate in this process from pursuing other remedies in any forum.
Qualifying Customers. Persons eligible to participate in this process are former customers of Frank Gruttadauria from whom Gruttadauria misappropriated funds or securities (including unauthorized transfers) and/or who received falsified account documents from or at the direction of Gruttadauria (whether or not they also received genuine account documents) during the period that Gruttadauria was employed at Cowen & Co. or the Firms ("Qualifying Customers"). A customer who has previously released his or her claims against either Firm in connection with a settlement of such claims is not a Qualifying Customer with respect to that Firm. All disputes, claims, or controversies ("Claims") of Qualifying Customers relating to any accounts or purported accounts for which Gruttadauria was or purported to be the account representative may be brought in this process. The arbitrator(s) assigned to hear a Claim shall also decide any disputes as to whether the person submitting that Claim is a Qualifying Customer. The arbitrator(s) shall render any such decision promptly and before proceeding with any other aspects of this special arbitration process. Qualifying Customers may only name as a Respondent in these proceedings those Firms at which Gruttadauria was employed when he misappropriated from the Qualifying Customer any funds or securities (including unauthorized transfers) and/or provided any falsified account documents to the Qualifying Customer. SG Cowen will pay all awards made for conduct during the period from May 12, 1989 to October 13, 2000 (the "SG Cowen Time Period"). Lehman will pay all awards made for conduct during the period from October 16, 2000 to January 18, 2002 (the "Lehman Time Period"). The arbitrator(s) will determine liability for conduct that occurred on October 14 or 15, 2000.
Arbitration Rules. Subject to paragraph 6, the Firms will make this special arbitration process available to Qualifying Customers at the New York Stock Exchange ("NYSE") pursuant to the NYSE Arbitration Rules. At the election of the customer, certain timeframes and deadlines may be modified as set forth in paragraph 3 below. However, nothing in this Appendix A is intended to preclude the parties in a particular case from agreeing, in consultation with the arbitrator(s) or the NYSE Director of Arbitration as appropriate, to resolving Claims under any other procedures or rules. A Qualifying Customer may elect to proceed under the Random List Selection or Enhanced List Selection alternatives contained in the NYSE Voluntary Supplemental Procedures for Selecting Arbitrators, and the Firms will not object to any such election. The Firms will also make mediation available to Qualifying Customers pursuant to NYSE Rule 638 or, if an arbitration proceeding is already in progress at the National Association of Securities Dealers ("NASD"), pursuant to NASD Code of Arbitration Procedure 10400.
Modified Timeframes and Deadlines. In order to expedite the hearing of Claims, customers may elect to proceed as set forth below. All other terms of this special arbitration process will apply whether or not customers elect to proceed in this manner.
The time period set forth in Rule 612(c)(1) shall be 20 calendar days.
Parties may serve requests under Rule 619(b) immediately upon service of the Statement of Claim. The time for satisfying or objecting to requests under Rule 619(b)(2) shall be twenty-five (25) calendar days.
Subject to other determination by the NYSE Director of Arbitration, a discovery conference to resolve discovery issues will be held within twenty (20) calendar days of the receipt of a written request by a party under Rule 619(b)(4).
Subject to other determination by the NYSE Director of Arbitration, the hearing will be held within 180 days from the date that the Statement of Claim is filed, and a decision or award will be rendered within thirty (30) days of the conclusion of the hearing.
The time period set forth in Rule 627(g) shall be twenty (20) calendar days.
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Notice.
Within ten (10) days of the date of the Commission's orders and the New York Stock Exchange Hearing Panel Decisions in these proceedings (collectively, "the Orders"), the Firms will send the following to the last known address of, or, if known, to counsel for, all persons whom they have reason to believe are or may be Qualifying Customers:
Copies of the Orders and the Commission's press release;
To the extent located by each Firm as of the date of the Orders, and not previously produced to the Qualifying Customer, with respect to any account or purported account of the customer from which Gruttadauria misappropriated funds or securities (including unauthorized transfers) and/or with respect to which a customer received falsified account documents from or at the direction of Gruttadauria (a "Qualifying Account"), all genuine account statements issued by the Firm during its Time Period for any Qualifying Account of the customer, and all falsified account statements and other falsified documents pertaining to the Qualifying Account.
The notice in paragraph 4.a. will also provide that the Qualifying Customer may request from the Firm sending the notice any of the following documents during the respective Firms' Time Periods with respect to transactions for which the Qualifying Customer seeks additional information:
(i) copies of checks, wire transfers, journals, or other transfers of cash or securities out of the Qualifying Account and letters of authorization relating to same;
(ii) copies of receipts for checks, cash, or securities received by the Firm from the Qualifying Customer and documents sufficient to show whether those checks, cash, or securities were actually deposited into the Qualifying Account;
(iii) documents sufficient to identify any checks, cash, or securities received by or for the benefit of the Qualifying Customer from a source other than his or her account; and
(iv) all account opening documents, all margin agreements for any customer's Qualifying Accounts at the respective Firms.
The Firm will respond to such a request by providing such documents or information to the extent located by each Firm as of the date of the Orders, and not previously produced to the Qualifying Customer. If a Firm seeks to satisfy such a request by reference to a prior production to the Qualifying Customer, the Firm must identify each responsive, previously produced document by Bates number. The Firms shall provide such documents or information within fourteen (14) days of receiving the request.
If at any time within 180 days of the date of this Order, the Firms learn of other persons whom they have reason to believe are or may be Qualifying Customers, the Firms will provide the notice described in paragraph 4.a. within seven (7) days of the date that they learn of such persons.
Initiation of Process.
Qualifying Customers who receive notice under paragraph 4.a. must file their Submission Agreement and Statement of Claim with the Director of Arbitration (as required by Rule 612 of the NYSE Arbitration Rules) along with a statement clearly setting forth their intention to take part in this process, whether the Qualifying Customer elects to proceed under any of the arbitrator selection options referred to in paragraph 2, and the bases for their status as Qualifying Customers, within 90 days of the date of mailing of such notice. Former customers of Gruttadauria who believe that they are Qualifying Customers but did not receive notice pursuant to paragraph 4.a must submit these materials within 180 days of the date of the Order. Any Qualifying Customer who elects to proceed under the modified timeframes and deadlines set forth in this Appendix A, must clearly state the election at the time of submission of the Claim.
As an alternative to refiling their Claim pursuant to paragraph 5.a Qualifying Customers with Claims pending against either of the Firms at the NYSE Department of Arbitration as of the date of the Order may elect to bring their existing proceeding under the terms and conditions of this special arbitration process by giving written notice to the Firms and the NYSE Director of Arbitration as described in paragraph 5.a. All of the terms and conditions of this Appendix A will apply, except that the provisions of paragraphs 2 and 3 above will apply only as determined to be practicable by the Director of Arbitration or arbitrator(s), as appropriate, given the stage of the existing proceedings.
Existing Arbitration Proceeding. Any Qualifying Customer who, at the time of the Orders, has an arbitration proceeding pending against either or both of the Firms at any forum other than the NYSE Department of Arbitration may elect to continue that proceeding under the principles set forth in this Appendix A. All of the terms and conditions of this Appendix A will apply, except that the provisions of paragraphs 2 and 3 above will apply only as determined to be practicable by the forum's Director of Arbitration or arbitrator(s), as appropriate, given the stage of the existing proceedings. The Firms will give all consents necessary to achieve this result.
Other Proceedings. Qualifying Customers who elect to take part in this process must unconditionally stay any other actions or proceedings seeking legal or equitable redress arising out of the same facts and circumstances described in the Statement of Claim, and dismiss with prejudice any such action or proceeding after a decision or award is rendered by the arbitrator and, if necessary, satisfied by the Firm(s). However, if the arbitrator(s) decide(s) that a person who elected to take part in this process is not a Qualifying Customer, that person's obligation under this paragraph 7 to stay or dismiss other actions or proceedings terminates upon issuance of that decision. Qualifying Customers who elect only to pursue arbitration of a matter referred to in paragraph 13(b) are not required to comply with this paragraph 7.
Fees and Expenses. All filing fees, forum fees, and fees and expenses of mediators and arbitrators, including reasonable travel expenses, shall be paid by the Firms and allocated among them pursuant to their agreement, or, if no agreement is reached, the decision of the arbitrator(s). The arbitrator(s) may otherwise determine the allocation of costs as provided for in the NYSE Arbitration Rules.
Certain Defenses. Solely for the purposes of this special arbitration process, and in consideration of the Qualifying Customers' agreements to submit their disputes for resolution hereunder, the Firms will not assert statutes of limitation or statutes of repose, and no other time bar principles, such as the claims eligibility requirements set forth in NYSE Rule 603, will apply, as to (a) Claims arising out of Gruttadauria's misappropriation of funds or securities (including unauthorized transfers), the receipt of falsified account documents from or at the direction of Gruttadauria, the unauthorized changing of the mailing address for the Qualifying Customer's account, or the Firm's conduct in relation to same, and/or (b) any other Claim permitted to be brought pursuant to this special arbitration process and which did not arise out of Gruttadauria's misappropriation of funds or securities (including unauthorized transfers), or the receipt of falsified account documents from or at the direction of Gruttadauria, or the Firm's conduct in relation to same, but for which the Qualifying Customer was not aware of the basis for such Claim because such customer received falsified account documents from or at the direction of Gruttadauria.
No Contest of Liability. Solely for the purposes of this special arbitration process, and in consideration of the Qualifying Customer's agreement to submit his or her disputes for resolution hereunder:
The Firm shall not contest its liability for (i) Gruttadauria's misappropriation of funds or securities (including unauthorized transfers) from the Qualifying Customer's account, (ii) the Qualifying Customer's receipt of falsified account documents sent by or at the direction of Gruttadauria, (iii) the unauthorized changing of the mailing address for the Qualifying Customer's account (collectively, (i), (ii), and (iii), "Unauthorized Act(s)"), and/or (iv) the Firm's conduct, as described in the Order, in relation to any such Unauthorized Act(s).
Except as set forth above and in Paragraphs 9 and 11, the Firm may contest claims alleging churning, unsuitable trading, or any other misconduct alleged by the Qualifying Customer to have been committed in the Qualifying Customer's account by or at the direction of Gruttadauria ("Additional Claims"). However, as to any Additional Claim(s) based on misconduct that allegedly occurred after the date of the first Unauthorized Act at the Firm in connection with the Qualifying Customer's account, the Firm will be liable to the Qualifying Customer for any such Additional Claim(s) based upon such misconduct of Gruttadauria, provided that the misconduct is established, except to the extent that the Firm can establish the defenses of waiver, estoppel and/or ratification based upon the Qualifying Customer's conduct.
Notwithstanding anything in subparagraphs (a) and (b) above, the Firm may contest the amount claimed by the Qualifying Customer, including contesting, to the extent relevant, the Qualifying Customer's claimed reliance on any misrepresentations or other unlawful conduct of Gruttadauria, the reasonableness of any such reliance, and the Qualifying Customer's factual proof supporting damages. Moreover, nothing contained herein precludes the Firm from contesting on any basis any claim that is brought in any judicial or arbitration forum outside of this process.
Counterclaims. Solely for the purposes of this special arbitration process, and in consideration of the Qualifying Customers' agreements to submit their disputes for resolution hereunder, any claims by the Firms against Qualifying Customers who proceed in this forum may be brought only in this forum and not in any other forum. Further, the only claims that the Firms may assert in this forum against Qualifying Customers are claims based on the Qualifying Customer's knowing participation in Gruttadauria's unlawful conduct.
Punitive Damages. Punitive, exemplary, treble, or other multiple damages will not be awardable.
Accelerated Payment Dispute.
A Qualifying Customer who elects to pursue a Claim under this special arbitration process and who also disputes the application of the Accelerated Payment formula to the facts and circumstances of their account in connection with a payment pursuant to Appendix B of the Orders against SG Cowen ("Appendix B"), may pursue both Claims under this special arbitration process.
In the event that a Qualifying Customer disputes under this process only the application of the Accelerated Payment formula to the facts and circumstances of their account in connection with a payment pursuant to Appendix B the Qualifying Customer may submit a Claim to have that issue alone resolved pursuant to, at the election of the Qualifying Customer, the special arbitration process set forth in this appendix, or the NYSE Rules governing Simplified Arbitration, within 45 days of SG Cowen's written explanation and response pursuant to a customer objection referred to in paragraph II.B.2 of Appendix B, without waiving any right to otherwise proceed against the Firms in any other proceedings. In the event that a Qualifying Customer elects to proceed pursuant to the Simplified Arbitration rules, the dollar amount limitation pertaining to such claims shall not apply, and the applicable fees to be paid by SG Cowen shall be determined by the arbitrator. All other provisions of this Appendix A shall apply.
1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.
2 Prior to the date of this Order, Lehman Brothers voluntarily repaid all of these misappropriated amounts to the affected customers.
3 At SGC, the administrative manager had the title "assistant branch manager." The administrative manager had a Series 8 registration, but the operations manager did not.
4 From the outset of Gruttadauria's employment with Lehman Brothers, the administrative manager and the operations manager reported directly to someone outside of the Cleveland branch at a level higher than Gruttadauria. In May 2001, Lehman Brothers devised certain other procedural safeguards designed specifically to address the supervision of a producing BOM. The preface to these safeguards observed that offices supervised by a producing manager "require careful supervision to ensure that client accounts handled by the producing manager receive independent review. In order to prevent any potential conflicts of interest, the following procedures must be followed with respect to producing managers." These safeguards required, among other things, that the regional manager conduct comprehensive semi-annual book reviews of Gruttadauria's retail client accounts, those book reviews having an emphasis on active accounts. Further, the procedures required the regional manager to visit the branch every three months to ensure the effectiveness of the supervision being done by the administrative manager. However, Lehman Brothers did not fully implement these procedures until nearly the end of 2001, shortly before Gruttadauria confessed to his fraud.
5 Respondent's procedures required the review by the branch administrative manager of all incoming correspondence before distribution to the registered representatives and an after-the-fact review each month of a random sample of outgoing correspondence, with each registered representative's correspondence subject to a review at least annually. The practice in the Cleveland branch was that the administrative manager actually reviewed outgoing correspondence before it was sent out. Once the administrative manager approved the correspondence, the broker or his or her assistant would place the correspondence in an unsealed envelope in a mail bin to be picked up by the mailroom staff, who would later seal the envelope and affix the postage using a machine.
6 To the extent that a broker or sales assistant used a personal computer to generate client correspondence, that correspondence was subject to the review procedures described in footnote 5.