WASHINGTON -- The Supreme Court agreed yesterday to review whether courts can second-guess arbitration decisions in securities disputes, including those involving municipal bonds.

National securities exchanges told the high court that if a lower court decision is allowed to stand, the ability of securities arbitrators to make final, binding decisions will be "dramatically undercut."

The case, First Options of Chicago Inc. v. Kaplan, involves a dispute between two members of the Philadelphia Stock Exchange who agreed to submit to arbitration by a seven-member panel of exchange members.

First Options of Chicago sought an arbitration award against MK Investments and its president and sole shareholder, Manuel Kaplan, and his wife, Carol, for losses arising out of the stock market crash of October 1987. MK Investments was a customer of First Options during the crash and suffered heavy losses in its trading account.

First Options held MK Investments and the Kaplans liable for an account deficit of about $6.2 million, and the two sides reached a workout agreement. However, First Options alleged that MK Investments and the Kaplans breached the agreement by refusing to pay over to it certain tax refunds.

The arbitration panel decided in favor of First Options, but affer the ruling, MK Investments and the Kaplans challenged the arbitrators' jurisdiction over them and went to court.

The resulting decision by a U.S. district court that the arbitrators' decision was binding was reversed by the U.S. Court of Appeals for the Third Circuit. The appeals court ruled that "district courts should independently determine whether an arbitration panel has jurisdiction over the merits of any particular dispute."

In a brief supporting First Options' petition for Supreme Court review, the Philadelphia Stock Exchange Inc., Chicago Board Options Exchange Inc., and Pacific Stock Exchange Inc., said that if the Third Circuit decision is allowed to stand, it "will inevitably have a deleterious impact" on the exchanges' arbitration programs.

The exchanges are self-regulatory organizations, or SROs, that are subject to oversight by the Securities and Exchange Commission.

These organizations, including the Municipal Securities Rulemaking Board, have developed an effective securities arbitration system that resolves "thousands" of disputes each year that otherwise would clog the courts, the exchanges told the high court.

The MSRB and other self-regulatory organizations were invited to join the friend-of-the-court petition by the three securities exchanges, but they did not do so generally because of time or procedural constraints, said William Uchimoto, first vice president and general counsel of the Philadelphia Stock Exchange.

The MSRB, which like other SROs could be affected by the outcome of the case, has been invited to join the exchanges in a brief on the merits now that the case has been granted review, Uchimoto said. MSRB officials could not be reached for comment.

Securities arbitrators appointed by exchanges hear cases without pay, Uchimoto said. "It's completely disheartening for the whole process to be undercut," he said.

In its order granting review, the Supreme Court said it would consider the issue of whether a court reviewing an arbitration award should review the decision on the merits and as if no decision had already been rendered by arbitrators.

The high court also said it would review the issue of whether a federal appeals court should review a district court ruling on an arbitration judgment in the same way -- as if the case were being heard for the first time.

But the high court said it will not address a third issue raised by First Options of whether an "associated person" of a member of a stock exchange is subject to arbitral jurisdiction of the exchange.

Oral argument has been set for Jan. 19.

In other action yesterday, the high court let stand a decision by the Utah Supreme Court that affirmed an income tax imposed on Hercules Inc., an aerospace manufacturer, for rocket motor sales that took place from 1977 through 1980.

Hercules sold the motors to Lockheed Missiles & Space Co. and shipped them from Utah to military seaports in California and Washington State where Lockheed used them to build missiles. The title to the motors was transferred in Utah, where Hercules paid $457,000 in income tax and subsequently claimed a refund.

Hercules said it was subjected to double taxation for the motor sales, because California and Washington charged Hercules franchise taxes in the same years that it was taxed by Utah for the motor sales.

California and Washington based their taxes on a formula using payroll, property, and sales to determine the portion of the company's income that could be taxed by the states.

Hercules said high court review was needed to resolve multistate apportionment of the same income generated in interstate commerce. The court issued no comment in declining to hear the case, Hercules Inc. v. Utah State Tax Commission.

The Supreme Court also denied review of a case, Bunce v. U.S., involving tax treatment of public housing bonds in the estate of Hazel Bunce, who died in 1984. The case did not raise generic issues regarding estate tax treatment of the bonds, but instead involved a trial court's handling of the process for gathering relevant information and the Internal Revenue Service's handling of specific settlement issues between it and the estate.

The high court also refused to review a challenge to the Federal Aviation Administration's 1992 approval, with conditions, of a $3.5 billion expansion of the Dallas/Fort Worth International Airport.

The city of Grapevine, Texas, said the FAA did not adhere to procedural requirements of the National Historic Preservation Act and the National Environmental Policy Act in approving the expansion.

The FAA rebutted the challenge, emphasizing that its approval of key features of the expansion plan depended on further analysis under the two acts.

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