Please ensure Javascript is enabled for purposes of website accessibility

Arbitration: Supreme Court Reverses a Refusal to Compel for Investors Who Wound Up in a Madoff Fund (Nov. 7).

The U.S. Supreme Court today reversed a Florida appeals court decision that the Court stated didn't follow Federal Arbitration Act caselaw by refusing to compel arbitration for investment fraud claims.

Two of four of the investors' claims may have been arbitrable, and without a determination on those claims, the lower court should not have declined to compel arbitration, according to this morning’s opinion.

A five-page per curiam decision in KPMG LLP v. Robert Cocchi, No. 10-1521 (Nov. 7), means that 19 parties that filed suit against investment funds that in turn invested with disgraced financier Bernard Madoff may have to go to arbitration with their claims.

The Court ordered the Florida courts to analyze the remaining two claims, concluding, specifically, that the Florida Court of Appeal "should examine the remaining two claims to determine whether either requires arbitration."

Accounting giant KPMG, which audited the feeder funds, had asked the Florida appellate and trial courts to compel arbitration in claims against the firm. The culpability of the investing funds and Madoff were not at issue in the case decided today. 

But the investors' arbitration would be based on the audit services agreement KPMG has with the funds--that is, the companies that provided the investors' money to Madoff--and not with the investors.

The Court notes at the outset that the FAA “has been interpreted to require that if a dispute presents multiple claims, some arbitrable and some not, the former must be sent to arbitration even if this will lead to piecemeal litigation,” citing Dean Witter Reynolds Inc. v. Byrd, 470 U. S. 213, 217 (1985).

The Court reversed the Florida Court of Appeal decision, which backed a trial court.  The appellate court had held that two of the investors’ claims against the feeder funds--negligent misrepresentation and violating the Florida Deceptive and Unfair Trade Practices Act—were direct claims against KPMG, rather than derivative under its audit services agreement.  

“A fair reading of the opinion reveals nothing to suggest that the court came to the same conclusion about the [other two claims,] professional malpractice and breach of fiduciary duty,” the Supreme Court opinion states, adding, “Indeed, the court said nothing about those claims at all.”

Therefore, the nation’s top Court concluded today, “By not addressing the other two claims in the complaint, the Court of Appeal failed to give effect to the plain meaning of the [FAA] and to the holding of Dean Witter.”

According to the per curiam decision, KPMG's petition to the Supreme Court notes that the firm's auditing agreement with the feeder funds provided that "'[a]ny dispute or claim arising out of or relating to . . . the services provided [by KPMG] . . . (including any dispute or claim involving any person or entity for whose benefit the services in question are or were provided) shall be resolved' either by mediation or arbitration."

--Russ Bleemer, Editor, Alternatives