35 F.3d 82 (2nd Cir. 1994), 1595, McMahan Securities Co. L.P. v. Forum Capital Markets L.P.

Docket Nº:1595, Docket 94-7087.
Citation:35 F.3d 82
Party Name: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.
Case Date:September 09, 1994
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
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35 F.3d 82 (2nd Cir. 1994)

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.

No. 1595, Docket 94-7087.

United States Court of Appeals, Second Circuit

September 9, 1994

Page 83

Argued March 7, 1994.

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

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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").

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

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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 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.

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...

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