McMahan Securities Co. L.P. v. Forum Capital Markets L.P., 1595

Citation35 F.3d 82
Decision Date09 September 1994
Docket NumberD,No. 1595,1595
Parties, Fed. Sec. L. Rep. P 98,391 McMAHAN SECURITIES CO. L.P.; D. Bruce McMahan; John R. Gordon; Saul Schwartzman; McMahan & Company, Plaintiffs-Appellees, v. FORUM CAPITAL MARKETS L.P.; Founders Financial Group L.P.; Forest Investment Management L.P.; Michael A. Boyd, Jr.; Michael A. Boyd, Inc.; Michael A. Boyd Pension; Terence M. York; John F. Lepore; Philip R. Platek; Michael F. McNulty; Walter K. McNulty; Steven B. Jones; Thomas Shea, Jr.; Edward Okine; Elizabeth Uhl; Arthur S. Raskin; Martha L. Raskin; Robert Blumenthal; Joyce Blumenthal; Alan D. Bunims; Roderick S. Boyd; Judith E. Doris, Defendants-Appellants. ocket 94-7087.
CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Benjamin H. Green, Stamford, CT (Taggart D. Adams, Paul F. McCurdy, Kelley Drye & Warren, of counsel), for defendants-appellants.

Deborah E. Lans, New York City (Fred H. Perkins, David A. Piedra, Morrison Cohen Singer & Weinstein, New York City, Christopher Rooney, Kevin C. Doyle, Carmody & Torrance, New Haven, CT, of counsel), for plaintiffs-appellees.

Before: WALKER and JACOBS, Circuit Judges, and CARMAN, Judge. *

WALKER, Circuit Judge:

This appeal addresses the extent to which parties involved in the securities industry must arbitrate certain disputes surrounding the departure of numerous members of an existing securities firm to start up their own securities firm. Plaintiffs filed a multicount complaint in federal district court alleging that defendants violated various federal and state laws by misappropriating certain of plaintiffs' assets when they left plaintiffs' firm to create their own. Defendants in turn sought to compel arbitration of the disputes pursuant to industry arbitration regulations. The United States District Court for the District of Connecticut (T.F. Gilroy Daly, Judge ), approving and adopting a recommendation of the magistrate judge (Thomas P. Smith, Magistrate Judge ), denied defendants' motion to stay the proceedings and compel arbitration, and defendants appealed this order pursuant to 9 U.S.C. Sec. 16. For the reasons that follow, we reverse that order and remand to the district court with instructions to stay the proceedings and direct the parties to proceed to arbitration.

BACKGROUND

Plaintiff-appellee McMahan Securities Co. L.P. ("McMahan Securities") is a registered broker-dealer and investment advisor engaged in the trading of convertible securities and a member of the National Association of Securities Dealers, Inc. ("NASD"). Plaintiff-appellee D. Bruce McMahan ("McMahan") is the controlling general partner and chief executive officer of McMahan Securities. In the summer of 1991, McMahan became embroiled in a controversy regarding the control and management structure of the firm with then-general While awaiting Forum's regulatory approval, McMahan persuaded the potential defectors to contribute an additional $8 million in capital to McMahan Securities with the assurance that this capital would subsequently be transferred to Forum once regulatory approval was obtained. Shortly thereafter in July of 1992, however, McMahan requested the resignation of defendant-appellant Terence M. York ("York"), who had also been pivotal in creating Forum and was slated to become its chief operating officer. Boyd, York, and the other individuals scheduled to depart now became convinced that McMahan had no intention of joining in their new venture and had only promised to do so to In January of 1993, the departing individuals began operation of Forum as a NASD member, and in May of 1993 they commenced an arbitration pursuant to NASD rules to recover the $610,000 plus related damages stemming from McMahan's allegedly tortious conduct. This arbitration is ongoing and not the subject of this appeal.

partner defendant-appellant Michael A. Boyd, Jr. ("Boyd"). After unsuccessful efforts to conciliate these differences in early 1992, Boyd announced plans to leave McMahan Securities and start his own brokerage firm also specializing in convertible securities. Numerous McMahan Securities employees and limited or general partners subsequently expressed an interest in joining Boyd in his new venture. Faced with these departures, McMahan relented. He agreed to participate with the departing individuals in forming a new firm with a different management structure and promised to contribute capital to this enterprise. As a consequence, those who were planning to leave McMahan Securities remained on the job pending the registration and regulatory approval of the new entity, Forum Capital Markets L.P. ("Forum") prolong their services with McMahan Securities. They demanded return of the $8 million recently solicited by McMahan and solidified their plans to leave McMahan Securities. McMahan returned the bulk of these funds, but withheld approximately $610,000.

In July of 1993, McMahan filed the federal complaint underlying this appeal. Named as plaintiffs were McMahan, McMahan Securities, McMahan & Company ("McMahan & Co."), a limited partner of McMahan Securities, and two other limited partners of McMahan Securities, John R. Gordon and Saul Schwartzman. Named as defendants were Boyd, York, and fifteen other individuals who were former limited or general partners or employees of McMahan Securities. Also named as defendants were Forum, Founders Financial Group L.P. ("Founders"), Forest Investment Management L.P. ("Forest"), Michael A. Boyd, Inc. ("Boyd Inc."), and Michael A. Boyd Pension ("Boyd Pension"). Founders is a general partner of Forum. Forest is a registered investment advisor affiliated with both Forum and Founders. Boyd Inc. and Boyd Pension were formerly limited partners of McMahan Securities; presently, Boyd Inc. is a general partner and Boyd Pension a limited partner of Founders.

Plaintiffs' complaint contains fifteen causes of action alleging federal statutory violations as well as state statutory and common law violations. According to the complaint, Boyd, York and the other defendants misappropriated a computer program belonging to and designed by McMahan Securities for use in its complex securities trading business. Further, the complaint alleges that defendants stole numerous other trade secrets of McMahan Securities, including client lists, research reports, reports of past investment performance of certain securities, and internal organizational material. In addition, the complaint charges a violation of Connecticut's state common law of unfair competition, a breach of fiduciary duty, a breach of contract, and violations of Connecticut's Unfair Trade Practices Act, Conn.Gen.Stat. Sec. 42-110(a), Uniform Trade Secrets Act, id. Secs. 35-52 to 35-54, and Uniform Securities Act, id. Sec. 36-498. Plaintiffs further allege that defendants' actions violated federal copyright laws and that their failure to disclose their intentions to misappropriate McMahan Securities' assets violated Sec. 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b), and SEC Rule 10b-5, 17 C.F.R. Sec. 240.10b-5.

Shortly after the complaint was filed in the district court, defendants moved to stay the proceedings and compel arbitration. The district court referred the matter to the magistrate judge, who recommended that defendants' motion be denied. The magistrate judge's recommended ruling, in its entirety, stated:

August 30, 1993. Defendants have not demonstrated that arbitration of Plaintiffs' claims is required. The motion to stay is therefore DENIED.

Defendants promptly objected to the recommended ruling, which the district court nevertheless adopted and approved in a brief endorsement:

January 4, 1994. Civ. No. 3:93CV01364 (TFGD). After careful review of the record, and over objection, Magistrate Judge Smith's Recommended Ruling is hereby AFFIRMED, APPROVED and ADOPTED. The Court does not reach the issue whether the instant decision requires "clearly erroneous" or "de novo" review, as Magistrate Judge Smith's Recommended Ruling warrants adoption under either standard.

This appeal followed.

DISCUSSION
I. Standard of Review

Under the Federal Arbitration Act ("FAA"), a district court must stay proceedings if satisfied that the parties have agreed in writing to arbitrate an issue or issues underlying the district court proceeding.

See 9 U.S.C. Sec. 3. The FAA leaves no discretion with the district court in the matter. See Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 218, 105 S.Ct. 1238, 1241, 84 L.Ed.2d 158 (1985). As a consequence, we review a district court's determination as to the arbitrability of a dispute de novo. See, e.g., Haviland v. Goldman, Sachs & Co., 947 F.2d 601, 604 (2d Cir.1991), cert. denied, --- U.S. ----, 112 S.Ct. 1995, 118 L.Ed.2d 591 (1992); Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 121 (2d Cir.1991). Furthermore, we are mindful of the Supreme Court's admonition that while "the FAA does not require parties to arbitrate when they have not agreed to do so," Volt Info. Sciences, Inc. v. Board of Trustees, 489 U.S. 468, 478, 109 S.Ct. 1248, 1255, 103 L.Ed.2d 488 (1989), we must construe "any doubts concerning the scope of arbitrable issues ... in favor of arbitration," Moses H. Cone Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983).

II. The Basis for Arbitration

While plaintiffs and defendants agree that their obligation to arbitrate, whatever it may be, is governed by the NASD Code of Arbitration Procedure ("NASD Code" or "NASD Code of Arbitration"), they disagree as to the NASD Code's scope. Plaintiffs characterize the action they filed as an employment dispute and argue that the NASD Code does not encompass such claims. They further argue that the copyright claims brought in their complaint are inherently nonarbitrable and that certain parties in the dispute are not subject to NASD arbitration. Conversely, defendants maintain that all of the...

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