New York Court Vacates International Arbitration Award Based Upon Fraud

In an extraordinary and well-reasoned decision, on May 6, 2019, a New York court vacated an arbitral award issued by the International Centre For Dispute Resolution based upon fraud.   The decision is a significant victory for Dai & Associates client Sorghum Investment Holdings Limited (“Sorghum”), which filed a petition to vacate the award.  Sorghum’s petition was argued by Dai & Associates’ head of litigation Amiad Kushner, with outstanding assistance from Aaron Foldenauer and Katherine Kramer on the brief.  

The decision represents a rare example of a court vacating an arbitral award under the Federal Arbitration Act (“FAA”) based upon fraud or undue means.  Indeed, in the decision, Justice Andrew Borrok of the Commercial Division of the New York Supreme Court noted the “high bar” for vacating arbitral awards under the FAA and that “judicial review of an arbitration award is extremely limited.” 

The underlying arbitration related to a contemplated “reverse merger” transaction between Sorghum and China Commercial Credit, Inc. (“CCCR”), a company traded on Nasdaq.  In connection with the transaction, a Sorghum affiliate entered into an escrow agreement in which it agreed to deposit $3.5 million with a New York attorney, Yi Lin, who was acting as an escrow agent. 

In December 2017, Sorghum terminated the transaction after discovering that Mr. Yang Jie, an executive at CCCR and its largest shareholder, was under criminal investigation for securities fraud in the People’s Republic of China.  Sorghum also discovered that the $3.5 million escrow payment was diverted by a rogue employee who was colluding with Mr. Jie. 

In January 2018, CCCR filed an arbitration against Sorghum under the parties’ merger agreement. The whereabouts of the $3.5 million escrow payment was an issue in the ensuing arbitration.  CCCR submitted to the arbitrator a declaration from Mr. Lin denying that he had signed the escrow agreement or received the $3.5 million escrow payment.  The arbitrator found Mr. Lin’s declaration to be credible and relied on it when she issued an award in favor of CCCR in July 2018.

After the arbitration concluded, Sorghum obtained records from Mr. Lin’s bank demonstrating that Mr. Lin had actually received a $3.5 million payment from Mr. Jie.  In October 2018, Sorghum filed a petition to vacate the award on the basis that Mr. Lin’s declaration concealed the existence of the $3.5 million payment. 

In its decision, the Court found that Mr. Lin’s declaration “omitted the material fact” that he had in fact received the $3.5 million escrow payment.  The Court found that Mr. Lin’s representations in his declaration were “critical” to the arbitrator’s findings and “require vacatur of her decision as the Award was procured by fraud or undue means.”

A copy of the Court’s decision is available here.