The following e-filed papers read herein: NYSCEF Doc Nos.

Petitioner StoneX Financial Inc. ("StoneX") is registered with the federal Commodity Futures Trading Commission ("CFTC") as a futures commission merchant (an "FCM"). StoneX allows investors to access the commodity futures markets by providing them with custodial and clearing services. The individual respondents^[FN1] and DK Industries LLC (collectively, the "Accountholders") opened futures trading accounts at StoneX. Respondent OptionSellers.com, Inc. ("OptionSellers") is registered with the CFTC as a Commodity Trading Advisor ("CTA") and was a member of the National Futures Association ("NFA"). OptionSellers managed the Accountholders' accounts at StoneX.

StoneX asserts that the Accountholders had to open an account with StoneX to take part in OptionSellers' trading program. According to StoneX, the Accountholders had written agreements (the "Qualified Eligible Person Advisory and Fee Payment Authorization Agreement") with OptionSellers agreeing to open accounts with a brokerage firm, grant OptionSellers authority to trade those accounts on their behalf, and pay OptionSellers for the trading decisions it made.

The Accountholders also executed two agreements with StoneX. First, the Accountholders signed a Managed Account Agreement and Power of Attorney (the "Managed Account Agreement"). In this agreement, the Accountholders authorized OptionSellers as agent and attorney in fact to buy, sell and trade futures and options products. Second, Accountholders signed a Futures & Exchange-Traded Options Customer Agreement (the "Futures Account Agreement") in which they agreed to "indemnify, defend and hold harmless [StoneX] . . . from and against any Losses (including reasonable attorneys' fees) caused directly or indirectly by . . . any actions of any Agent or third party selected by Customer which affect Customer's account" (NYSCEF Doc No. 31, ¶ 7).

Pursuant to their Futures Account Agreements, StoneX avers that the Accountholders agreed that StoneX's duties were limited to maintaining futures accounts for them, holding their funds, and clearing their futures trades with the future exchanges. In addition, StoneX argues that the Accountholders agreed to maintain margin as required by StoneX. Pursuant to the agreement, if the accounts "are under-margined, have zero equity or are equity deficient . . . StoneX shall have the right in its sole discretion, to liquidate all or any part of [their] positions." The agreement also provided that the Accountholders must reimburse StoneX for the debit and all costs incurred, including reasonable attorneys' fees, in connection with collection actions.

On November 13, 2018, due to rising natural gas prices, StoneX claims that the Accountholders' futures trading accounts fell below the margin requirements. StoneX took steps to address the margin deficiencies, which resulted in StoneX liquidating all positions in the Accountholders' accounts by November 15, 2018.

StoneX initiated arbitration claims before the NFA against accountholders Charles and Deborah Mazza, John Lynch, DK Industries, LLC and Brian and Robin Kelly for breach of contract for failing to pay their margin debits. The Accountholders Nicholas Baxter and Harshada and Pranav Thaker paid their margin debits, but instituted negligence claims against StoneX. The Accountholders averred that OptionSellers fraudulently induced them into signing the agreements with OptionSellers and StoneX, rendering them void and unenforceable. In addition, the Accountholders asserted that StoneX was negligent in its risk procedures, controls and supervision of OptionSellers.

In each of the six arbitrations, StoneX also asserted a breach of implied warranty of agency claim against OptionSellers. Specifically, StoneX argued that if the NFA arbitration panel (the "Panel") determined that OptionSellers was not the Accountholders' agent, then OptionSellers breached the implied warranty that it was acting within the scope of its authority every time it made a trade at StoneX.

The Panel ultimately determined that (1) StoneX prevailed on its claim for breach of contract against the nonpaying accountholders; (2) the Accountholders prevailed on their claim of negligence against StoneX; and (3) StoneX prevailed on its claim of implied warranty against OptionSellers.

Now, StoneX moves, pursuant to CPLR 7511 and Section 10 of the Federal Arbitration Act ("FAA"), for an order vacating the six arbitration awards and remanding the arbitration to a Panel for a new hearing in Chicago, Illinois (Mot. Seq. No. 1). OptionSellers filed an order to show cause, seeking vacatur of the arbitration awards rendered against OptionSellers and in favor of StoneX (Mot. Seq. No. 5). Accountholders filed a cross-petition seeking to confirm the arbitration awards (Mot. Seq. No. 6).

In its petition (Mot. Seq. No. 1), StoneX argues that the awards must be vacated because (a) the arbitrators exceeded their powers, (b) the arbitrators rendered an award that was irrational and in manifest disregard of the law, (c) the penalty exceeded the arbitrator's authority, and (d) the award was procured through misconduct. According to StoneX, the arbitrators enforced the parties' agreement by awarding it damages, yet they also found it negligent. StoneX argues that these two findings are mutually exclusive since the written agreements provided that StoneX did not owe the Accountholders any duties that formed the basis of their negligence claims. Moreover, StoneX argues that the arbitrators disregarded well-settled New York and Illinois^[FN2] law, which state that clearing brokers such as StoneX owe no duty to warn of, or protect account holders from, the risks of their trading positions. In addition, StoneX alleges that the arbitrators conducted the arbitration in a manner that was inconsistent with the parties' written agreement by, for example, holding the arbitration in Brooklyn, which was a contrary location to the venue [*2]provision in the agreement,^[FN3] and considering claims that were outside the time periods provided for in the agreement.^[FN4] In addition, StoneX asserts that the Panel improperly allowed the Accountholders to introduce evidence from unrelated proceedings.

OptionSellers also moves (Mot. Seq. No. 5) to vacate the arbitration awards against it on StoneX's implied warranty claims.^[FN5] First, OptionSellers argues that there is no contract between it and StoneX from which a claim for breach of implied warranty could arise. Second, even if there was a contract, OptionSellers claims that the evidence presented by StoneX at the arbitration confirms that OptionSellers did not breach any warranty since it was authorized to manage the Accounterholders' accounts.

StoneX opposes OptionSellers' motion to the extent that it seeks to vacate only part of the Panel's award.^[FN6] Instead, StoneX argues that the Court should vacate the award in its entirety. In its opposition, StoneX maintains that Illinois's courts recognize a breach of implied warranty of agency claim. However, StoneX concedes that since the Panel found that OptionSellers was the Accountholders' agent and it was authorized to place trades on their behalf, there is no basis for the Panel to issue an award against OptionSellers for breaching an implied warranty of agency. In its reply, OptionSellers contends that since it could not have breached any implied warranty it does not bear any liability to StoneX and the Panel's finding that it was liable must be reversed.

The Accountholders filed a cross-petition (Mot. Seq. No. 6) asking the Court to confirm the arbitration awards. According to the Accountholders, the parties agreed that Illinois law applies and Illinois does not recognize a "manifest disregard of the law" ground for vacating arbitration awards. Even if New York's manifest disregard applied, the Accountholders argue that StoneX has not presented any evidence that the Panel refused to apply a governing legal principal or ignored it altogether and that the law it ignored or refused to apply was well defined, explicit and clearly applicable to the case.

The Accountholders further argue that under Illinois law, an arbitration award can only be challenged if the panel "violated the agreement to arbitrate, as by corruption, evident partiality, [or] exceeding their powers"—of which StoneX provides no evidence. Moreover, the [*3]Accountholders contend that the four grounds for vacatur under the FAA^[FN7] do not apply here. To the extent StoneX claims a violation of 9 USC § 10 (a) (3), the Accountholders aver that an award may be vacated only where there is a (i) refusal to postpone a hearing, (ii) refusal to hear material evidence, or (iii) other misbehavior by which the rights of any party have been prejudiced. Since StoneX's claims concern evidence that the Panel allowed in, rather than excluded, the Accountholders argue that this section does not apply. With respect to 9 USC § 10 (a) (4), the Accountholders contend that the Panel did not exceed their powers (a) by finding StoneX negligent because it reasonably interpreted the Futures Account Agreements as precluding StoneX's liability for others' negligence and (b) by conducting the arbitration hearing in Brooklyn because StoneX agreed to abide by the NFA's rules, including the NFA Code of Arbitration ("NFA Code") § 9 (b),which gives the NFA sole discretion to determine the location and time of the hearing.

In addition, the Accountholders claim that even if the findings of breach of contract and negligence are mutually exclusive, New York courts have found that inconsistencies within an award are not grounds for vacatur. Moreover, the Accountholders disagree with StoneX's assertion that the Panel's failure to explain the award must be considered when deciding if a manifest disregard of the law occurred since the NFA does not require the Panel to issue reasoned awards.

In its opposition to the cross-petition, StoneX argues that while the Accountholders assert that Illinois law applies, they concede that this action is governed by the FAA. Accordingly, StoneX contends that this Court is bound by the Court of Appeals case Wien & Malkin LLP v. Helmsley-Spear, Inc., 6 NY3d 471 [2006], which held that "an award may be vacated under federal law if it exhibits a 'manifest disregard of law.'" StoneX maintains that the awards manifestly disregard the law because (1) the Panel knew of clearly applicable precedent that holds there is no duty to manage risk for investors, but found that StoneX negligently breached this duty and (2) the awards against StoneX are in direct conflict with unambiguous terms of the Futures Accounts Agreements that the Panel found were valid and enforceable. Though the Accountholders argued that StoneX did not present any evidence that the Panel ignored or repudiated any law, StoneX contends that it presented caselaw that stands for the proposition that an FCM's duties are limited to executing orders at the direction of the CTA or customer and [*4]cannot be held liable for any breach of duty by a CTA or other agent hired by the customer. Further, StoneX avers that the Panel exceeded their authority by (a) refusing to apply Illinois law and (b) failing to enforce unambiguous provisions of the parties' contract, including the parties' agreements that (i) StoneX would not be liable except for gross negligence or willful misconduct; (ii) no party would bring claims more than one-year after they accrued; and (iii) arbitration would take place under the rules of an arbitral forum, which includes that forum's discovery rules.^[FN8]

In their reply, the Accountholders contend that StoneX cannot succeed under a manifest disregard theory because it failed to prove the required elements. First, the Accountholders argue that StoneX cannot prove the Panel accepted its arguments and thus knew the governing principle that FCMs have no duty to protect investors from unnecessary risks. Second, the Accountholders claim that StoneX cannot prove that the Panel explicitly rejected a legal principle. Accordingly, the Accountholders maintain that nothing in the record establishes that the Panel refused to apply Illinois law or abide by the terms of an agreement.

"A restrictive standard of review is necessary to preserve the[] benefits [of reduced delay and expense] and to prevent arbitration from becoming a preliminary step to judicial resolution" (Eljer Mfg. v Kowin Dev. Corp., 14 F3d 1250, 1254 [7th Cir 1994] [internal quotation marks and citations omitted]). "Under the Federal Arbitration Act (FAA), 'arbitration awards are largely immune from . . . scrutiny in court'" (Cwik v First Stop Health, LLC, 2023 US Dist LEXIS 97169, *8 [ND, Ill June 5, 2023, No. 15 C 6238], quoting Cont. Cas. Co. v Certain Underwriters at Lloyds of London, 10 F4th 814, 816 [7th Cir 2021]).^[FN9] "Factual or legal error, no matter how gross, is insufficient to support overturning an arbitration award" (Halim v Great Gatsby's Auction Gallery, Inc., 516 F3d 557, 563 [7th Cir 2008]; Renard v. Ameriprise Financial Services, 778 F3d 563, 567 [7th Cir 2015] ["An arbitral award cannot be vacated pursuant to the FAA merely because the petitioner 'show[s] that the panel committed an error—or even a serious error.'"]; Eljer Mfg., 14 F3d at 1254 ["Errors in the arbitrator's interpretation of law or findings of fact do not merit reversal"]). Instead, an award "may be set aside only if one of the criteria specified in 9 U.S.C. § 10 is present—as relevant here, only if the arbitrator deliberately disregards what he knows to be the law" (Renard, 778 F3d at 567 [internal quotation marks omitted]).^[FN10]

StoneX's arguments for vacatur can be broken down into two categories under 9 U.S.C. § 10 (4): (i) the Panel exceeded their powers by (a) admitting evidence from unrelated proceedings, (b) considering negligence claims and (c) allowing ineligible or time-barred claims; and (ii) the Panel's awards constitute a manifest disregard of the law, a non-statutory basis for vacatur. The Court will address each argument in turn.

The Court first considers StoneX's argument concerning the admission of evidence from unrelated proceedings, namely deposition excerpts. "[P]arties that have chosen to remedy their disputes through arbitration rather than litigation should not expect the same procedures they would find in the judicial arena" (Generica Ltd. v Pharm. Basics, 125 F3d 1123, 1130 [7th Cir 1997]). Thus, "[a]rbitrators are entitled to decide for themselves those procedural questions that arise on the way to a final disposition" (Trustmark Ins. Co. v John Hancock Life Ins. Co., 631 F3d 869, 874 [7th Cir 2011]; see Certain Underwriters at Lloyd's, London v BCS Ins. Co., 239 F Supp 2d 812, 817 [ND Ill 2003] ["Evidentiary determinations are within the discretion of the arbitrators"]). Here, the chairman articulated three sound reasons for allowing the Accountholders to introduce the deposition excerpts: StoneX can (1) "ask for the entire video of that case"; (2) "present transcripts of the case that they referred to earlier"; and (3) "call [James] Cordier[, the deponent,] as a witness" (NYSCEF Doc No. 37, tr at 5, lines 24-25; at 6, lines 1-17). Even if there were "errors in evidentiary determinations," these errors alone are insufficient to warrant vacatur (London v Fin. Indus. Regul. Auth., Inc., 2023 US Dist LEXIS 175334, *20 [ND Ill, Sep. 29, 2023, No. 1:21-CV-06434]). Thus, the Court finds StoneX's arguments with respect to the unrelated depositions unavailing.

The Court next addresses StoneX's arguments concerning the Accountholders' negligence claims. While StoneX argues that the Panel exceeded its authority by considering these claims, it ignores the plain language of the standalone arbitration agreement. The arbitration agreement provides that "[a]ny controversy or claim arising out of or relating to [the Accountholders'] accounts shall be settled by arbitration" (NYSCEF Doc No. 3). Since the Accountholders' claims related to their accounts, they fall within the scope of the arbitration provision and it cannot be said that the Panel exceeded its powers (see Hurn v Macy's, Inc., 2017 US Dist LEXIS 221514, at *12 [CD Ill Sep. 5, 2017, No. 17-1200], affd 728 F Appx 598 [7th Cir 2018]).

The Court will now examine StoneX's contention that the Panel improperly considered claims that were ineligible pursuant to the NFA Code or time-barred by the Futures Account Agreement. Here, the parties agreed that "no action in law, equity, arbitration or administrative proceeding arising out of any transactions effected pursuant to [the Futures Account] Agreement or the relationship of [Accountholder] with [StoneX], may be commenced more than one (1) year after either Party knew or should have known a cause of action existed" (NYSCEF Doc No. 3, § 29). Section 5 of the NFA Code provides that no claim may be arbitrated unless an arbitration claim or notice of intent to arbitrate is received "within two years from the date when the party filing the Arbitration Claim knew or should have known of the act or transaction that is the subject of the controversy" (NFA Code § 5).

StoneX asserts, without more, that the Panel considered claims that occurred more than one year before the arbitrations commenced. The cases cited by StoneX are inapposite. Both Geneva Sec. v Johnson (38 F3d 688 [7th Cir 1998]) and Mut. Serv. Corp. v Spaulding (871 F [*5]Supp 324 [ND Ill 1994]) concerned Section 15 of the NASD Code of Arbitration Procedure. This section provides that no dispute, claim, or controversy will be eligible for arbitration if six years had passed "from the occurrence or event giving rise to the act or dispute, claim, or controversy" (NASD Code § 15 [emphasis added]). Unlike the facts in those cases, on the face of the Accountholders' counterclaims it cannot be conclusively held that they were untimely. Pursuant to NFA Code, "[i]f, in the course of any arbitration, the Panel determines that the requirements of [Section 5] have not been met as to a particular claim, the Panel shall thereupon terminate the arbitration of the claim without decision or award" (NFA Arbitration Code § 5). The arbitration awards reiterated the parties' claims and defenses, including StoneX's affirmative defense that the Accountholders' counterclaims were ineligible or time-barred. Without a reasoned award, the Court is limited to assuming that the Panel considered StoneX's affirmative defenses and ultimately determined that all or some of the counterclaims were timely (Ray v Von Bergen, 2003 US Dist LEXIS 16560, *9 [ND Ill, Sep. 17, 2003, No. 03 C 1115] [holding that "whether defendants have complied with the NFA's time limit rule is a matter to be resolved by the arbitrators"]; Renard v Ameriprise Fin. Servs., 778 F3d 563, 569 [7th Cir 2015] [court "should not second-guess the arbitrators' decision based on speculation when it is possible for the panel to have reached the decision it did based on the evidence presented to it"]).

Lastly, the Court turns to StoneX's argument that the Panel's alleged inconsistent interpretation of the Futures Account Agreements and disregard of caselaw concerning a FCM's narrow duty to accountholders constitutes a manifest disregard of the law. "[T]he 'manifest disregard' principle is limited to two possibilities: an arbitral order requiring the parties to violate the law . . . , and an arbitral order that does not adhere to the legal principles specified by contract, and hence [is] unenforceable under § 10(a)(4)" (George Watts & Son v Tiffany & Co., 248 F3d 577, 581 [7th Cir 2001]; Affymax, Inc. v Ortho-McNeil-Janssen Pharms., Inc., 660 F3d 281, 285 [7th Cir 2011] ["Disregard of the law comes within §10(a)(4) if it also amounts to disregard of the contract that conveys the arbitrators' authority."]; Halim, 516 F3d at 563; see also Cwik, 2023 US Dist LEXIS 97169, at *15). With respect to the first scenario, the Court notes that StoneX does not argue that the awards require the parties to violate the law. Accordingly, to succeed under the second scenario, StoneX must establish that the awards did not adhere to the legal principles specified by the Futures Account Agreements.

StoneX's burden is high as a mere error in the law or failure to understand or apply the law does not rise to a manifest disregard for the law (Renard, 778 F3d at 568; Cremin v Merrill Lynch, Pierce, Fenner & Smith, Inc., 434 F Supp 2d 554, 564 [ND Ill 2006]; Tim Huey Corp. v Global Boiler & Mech., 272 Ill App 3d 100, 107 [4th Dist 1995] ["The 'manifest disregard of the law' standard provides an almost nonexistent standard of review."]). Further, as the Fourth District Appellate Court of Illinois aptly stated,

It is almost impossible to ascertain what an arbitrator knew to be the law, because the arbitrator is not required to give reasons, let alone legal analysis, for his decisions. . . Even if it could be shown what the arbitrator knew, it would be equally difficult to show that he intentionally disregarded it, as opposed to determining that the principle did not apply in the case before him" (Tim Huey Corp., 272 Ill App 3d at 107 [internal citations omitted]).

In this action, StoneX contends that the Panel correctly interpreted the Futures Account Agreements by finding that there was a breach of contract. At the same time, StoneX argues that the Panel's overall interpretation resulted in inconsistent findings. However, "[t]he question is [*6]not whether the arbitrator or arbitrators erred in interpreting the contract; it is not whether they clearly erred in interpreting the contract; it is not whether they grossly erred in interpreting the contract; it is whether they interpreted the contract" (Cont. Cas. Co., 10 F4th at 819 [internal citations and quotation marks omitted]). Here, StoneX does not argue that the Panel failed to interpret the Futures Account Agreement and a party's belief that arbitrators "erred in their interpretation by ignoring what [that party] deems plain language or by misinterpreting unambiguous contractual language. . . is an insufficient basis for overturning the Award" (Boldischar v Reliastar Life Insurance Co., 2016 US Dist LEXIS 97529, *9 [ND Ill, July 26, 2016, No. 14 C 6844]). In addition, StoneX's argument that the Panel disregarded caselaw and the terms of the Futures Account Agreements concerning the duties owed to the Accountholders is unavailing. An allegation, based on speculation, that the arbitration panel was presented with applicable law but they chose to ignore it does not meet the standard for vacatur (Vega Asset Recovery, LLC v Newedge USA, LLC, 2019 US Dist LEXIS 95882, at 17-18 [ND Ill, June 7, 2019, No. 17 C 1332]).

In sum, as in Renard v. Ameriprise Fin. Servs. (778 F3d 563, 569 [7th Cir 2015]), "[b]ecause the panel did not issue a written opinion, we do not know how it reached its conclusions. But nothing suggests that it strayed so far that the 'manifest disregard' standard has been triggered."

Turning to OptionSellers' order to show cause, the Court will address whether the Panel's finding of a breach of implied warranty is grounds for vacating StoneX's award. OptionSellers contends that the Panel's interpretation of the agreements was irrational since there can be no implied warranty where no applicable contract existed between it and StoneX. However, as StoneX avers, "an action for breach of an implied warranty of authority to act as an agent is cognizable under Illinois law" (Jefferson Natl. Bank v Cent. Natl. Bank, 700 F2d 1143, 1155 [7th Cir 1983]). Although it is not a statutory ground for vacatur, at least one Illinois court has interpreted a "fundamentally irrational" award as falling within the FAA's statutory ground where arbitrators exceeded their authority (Shearson Hayden Stone, Inc. v Liang, 493 F Supp 104, 108 [ND Ill 1980], affd 653 F2d 310 [7th Cir 1981] [citations omitted]). Like "manifest disregard of the law," "there must be something beyond and different from a mere error in the law or failure on the part of the arbitrators to understand and apply the law" (id.). After due deliberation, the Court finds that OptionSellers has not met its burden.

Accordingly, it is hereby

ORDERED, that StoneX's petition (Mot. Seq. No. 1) is denied; and it is

ORDERED, that OptionSellers' order to show cause (Mot. Seq. No. 5) is denied; and it is further

ORDERED, that Accountholders' cross-petition (Mot. Seq. No. 6) is granted.

This constitutes the decision and order of the Court.

FCM and Customer agree that no action in law, equity, arbitration or administrative proceeding arising out of any transactions effected pursuant to this Agreement or the relationship of Customer with FCM, may be commenced more than one (1) year after either Party knew or should have known a cause of action existed.

In any of the following cases the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration—

(1) where the award was procured by corruption, fraud, or undue means;

(2) where there was evident partiality or corruption in the arbitrators, or either of them;

(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or

(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made (9 USC § 10 [a]).