Stephen B. Sawtelle v. Waddell & Reed, Inc. et al. - 12/15/2005
Award Amount- $27,574,499.00
Case Summary: On August 7, 2001, a NASD arbitration panel awarded our client, Stephen B. Sawtelle, $27,574,499, including $25 million in punitive damages, against Waddell & Reed, Inc. for violation of the Connecticut Unfair Trade Practices Act (CUTPA) in the manner in which it competed with Mr. Sawtelle after it terminated him as a mutual fund broker and he went to work for another firm. The award is for $1,827,499 in actual damages and $747,000 in attorneys' fees against Waddell & Reed and 14 of its employees and agents and for $25 million in punitive damages against Waddell & Reed and Robert Hechler, its CEO. The punitive damages award is one of the largest ever in a securities industry arbitration. Waddell & Reed and the other Respondents were also ordered to pay all $110,300 of the NASD's forum fees, resulting in a refund to Mr. Sawtelle of the $21,440 in forum fees he had paid. The arbitrators denied Waddell & Reed's counterclaims against Mr. Sawtelle. In addition to awarding damages, the arbitrators ordered that defamatory information Waddell & Reed had placed on Mr. Sawtelle's Form U-5 be expunged. During the hearings, the arbitrators also granted our request to sanction the Respondents, ordering them to pay Mr. Sawtelle $2,000 each, for a total of $30,000, for violating an order of the arbitrators. Mr. Sawtelle was a mutual fund broker for Waddell & Reed, Inc. in Connecticut for 17 years until his termination in February 1997. Mr. Sawtelle had been the top-producing broker in the country for Waddell & Reed in 1996. In mid-1996, Waddell & Reed discovered that another broker, David Stevenson, had embezzled several million dollars from his customers. The SEC began an investigation in which Mr. Sawtelle testified. Mr. Sawtelle testified to the SEC that when Mr. Sawtelle was Mr. Stevenson's supervisor years before Mr. Stevenson's embezzlement was discovered, Waddell & Reed's upper management failed to follow Mr. Sawtelle's repeated recommendations that Mr. Stevenson's employment be terminated after other incidents of misconduct by Stevenson. When Waddell & Reed obtained a transcript of Mr. Sawtelle's testimony, Waddell & Reed terminated Mr. Sawtelle. Shortly after his termination, Mr. Sawtelle became a mutual fund broker for Hackett Associates, Inc. The Arbitration Panel found that "Respondent Waddell & Reed and Hechler through agents of Waddell & Reed demonstrated reprehensible conduct that warrants an award of punitive damages. The Panel further found that after Claimant [(Mr. Sawtelle)] was terminated Respondents orchestrated a campaign of deception which included, among other things, giving the impression to clients that Claimant had mishandled their investments, Claimant was untrustworthy, Claimant was no longer in business, Claimant was not authorized to do business, and Claimant was in some way involved with the embezzling of client funds. The Panel also found that Waddell & Reed, through its agents, re-routed Claimant's mail and his telephone lines, as a result, telephone calls and mail intended for Claimant were received by Waddell & Reed and its agents." On June 10, 2002, the New York State Supreme Court entered a judgment, on behalf of Sawtelle, in the amount of $28,671,410.18, against Waddell & Reed and Robert Hechler (the firm's former CEO). This follows the May 31, 2002 Decision and Order of New York State Supreme Court Justice Michael D. Stallman, which confirmed, in spite of Waddell & Reed's motion to vacate, almost all of the arbitration award. Justice Stallman upheld all of the arbitrators' $25 million punitive damages award, the $747,000 attorneys' fee award, and the expungement of information from Mr. Sawtelle's Form U-5, and upheld $1,080,499 of the $1,827,499 compensatory damages award. The Court modified the award and reduced it by $747,000, on grounds that the compensatory damages award included attorneys' fees which were also awarded as a separate item. The Court also ordered over $1.8 million in interest to be paid on the arbitration award. Notably, Justice Stallman wrote in his Decision and Order, in connection with the arbitration panel's punitive damages award, that "[s]uffice it to say, the Panel's findings find support in the record. For example, there was evidence before the Panel that Waddell representatives implied to certain customers that Sawtelle had been fired because, like Stevenson [a different Waddell broker], he had embezzled client funds. In light of the Panel's findings, it was not unreasonable for the Panel to impose punitive damages in an amount that would, in fact, be punitive." In November 2002, Mr. Sawtelle was selected by the National Employment Lawyers' Association as one of its Courageous Plaintiffs. On February 11, 2003, the Appellate Division, First Department modified the judgment entered by Justice Stallman to vacate the punitive damages award, "remanded to the original panel of arbitrators for reconsideration of the issue of punitive damages," and otherwise affirmed Justice Stallman's judgment. (Sawtelle v. Waddell & Reed, Inc., 304 A.D.2d 103, 754 N.Y.S.2d 264 (1st Dep't 2003).) On February 25, 2003, Mr. Sawtelle was paid $2,069,620.80, composed of the confirmed $1,080,499 in compensatory damages, the confirmed $747,000 attorneys' fee award, plus $242,121.80 in interest on those amounts. On September 4, 2003, after reviewing the parties' written submissions and holding a one-day hearing on remand from the Appellate Division, the Arbitration Panel issued an award for $25 million in punitive damages, and assessed the $2,000 in forum fees against Waddell & Reed and Hechler. In its award, the Arbitration Panel acknowledged that Waddell & Reed and Hechler argued to the Arbitration Panel on remand "that this case remains an 'ordinary commercial dispute' meriting a modest award of punitive damages," and added language to its award that was not in its original award that Waddell & Reed's and Hechler's "campaign of deception" was a "horrible campaign of deception, defamation and persecution of Claimant." On January 22, 2004, Justice Stallman of the New York State Supreme Court vacated the second arbitration award of $25 million in punitive damages and directed the parties to submit the issue to a new panel. Mr. Sawtelle then filed a motion before Justice Stallman requesting that he set a remittitur -- a maximum amount of punitive damages that the Court would approve -- which Mr. Sawtelle could then accept and avoid yet another arbitration, or which he could reject and proceed to a new arbitration hearing. While remittitur is a standard procedure in jury cases in court, and Justice Stallman recognized that remittitur would "make sense" to avoid multiple arbitrations to determine the amount of punitive damages, Justice Stallman denied Mr. Sawtelle's request in an Order on November 30, 2004. On September 22, 2005, the Appellate Division affirmed Justice Stallman's order vacating the punitive damages award and remanding to a new arbitration panel. (21 A.D.3d 820, 801 N.Y.S.2d 286 (1st Dep't 2005).) Mr. Sawtelle then appealed to the New York Court of Appeals, New York's highest court. The Court of Appeals declined to take the case at the time, on technical grounds, because it lacked jurisdiction over the appeal. On December 15, 2005, Waddell & Reed and Hechler and Mr. Sawtelle reached a settlement in which Waddell & Reed paid Mr. Sawtelle $7.9 million. In total, Mr. Sawtelle received about $10 million ($7.9 million in settlement of his punitive damages, $2,069,620.80 in compensatory damages, attorneys' fees, and interest, $30,000 in sanctions paid during the arbitration, and $21,440 refunded from the NASD pursuant to the arbitrators' first award ordering that Waddell & Reed and the other Respondents pay all of the forum fees).
Judge: Michael D. Stallman and 1st Department
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