Ottenritter v. Shearson Lehman Hutton, Inc.

• Citation: 727 F. Supp. 980
• Decision Date: 06 November 1989
• Docket Number: Civ. A. No. HAR 89-1309.
• Parties: Edith H. OTTENRITTER, Plaintiff, v. SHEARSON LEHMAN HUTTON, INC., Defendant.
• Court: U.S. District Court — District of Maryland

727 F. Supp. 980

Edith H. OTTENRITTER, Plaintiff, v. SHEARSON LEHMAN HUTTON, INC., Defendant.

Civ. A. No. HAR 89-1309.

United States District Court, D. Maryland.

November 6, 1989.

MEMORANDUM OPINION

HARGROVE, District Judge.

Currently pending before this Court is defendant Shearson Lehman Hutton, Inc.'s ("Shearson") Motion to Stay Judicial Proceedings and Compel Arbitration. The issues have been fully briefed. A hearing on the issues was held on September 26, 1989.

FACTS

Plaintiff Edith H. Ottenritter ("Ottenritter") opened a nondiscriminatory individual brokerage account with Shearson on October 30, 1984. On November 7, 1984, Ottenritter and her husband opened a joint brokerage account with Shearson. Plaintiff claims that at all times pertinent to her complaint she was an unsophisticated investor whose purpose was to preserve capital and generate income through a conservative investment strategy.

Apparently no trades were made in either account in 1984. In 1985, plaintiff alleges that her broker Peter Gibson ("Gibson") recommended that she buy and sell securities in her account. Plaintiff claims that Gibson would call with recommendations which he and the plaintiff would discuss before she approved the transaction.

Plaintiff now claims that throughout 1986, 1987, and 1988, Gibson engaged in an intentional pattern of unauthorized trading in order to generate excessive and unjustified revenue through a per trade mark-up or commission. Ottenritter claims losses in 1986, totaling approximately $358,502.74, losses in 1987, totaling approximately $113,986.38, and losses in 1988, totaling approximately $14,141.78.

Plaintiff alleges that her husband had a meeting with Gibson in November of 1987, in which Gibson represented that plaintiff's individual account was not only sound, but that there were sufficient assets in plaintiff's account to pay her $1,200 per month from dividend and interest income. Plaintiff claims that Gibson did not mention any margin debt or margin interest owed by plaintiff during that meeting.

In January, 1988, Ottenritter claims that Gibson contacted her and recommended that she purchase securities in "The Ship, Inc." According to Ottenritter, Gibson told her that she must buy these securities directly from the issuer and that he would send her money from her individual account with which to buy the stocks. Plaintiff now claims that the money that Gibson sent to her came from the joint account instead.

Ottenritter claims that when she inquired about the status of her investment in "The Ship, Inc.," she was sent a check for a return on her investment plus profit. Plaintiff alleges that this money was not earnings on her investment in "The Ship, Inc.," but money which Gibson withdrew from her individual account. According to Ottenritter, the money originally withdrawn from the joint account by Gibson, and sent to her to buy securities in "The Ship, Inc.," has never been accounted for.

Plaintiff's account was charged with margin debt and interest. Ottenritter claims that she first learned of the margin debt and interest owed on September 30, 1988. Following notification to plaintiff of the margin debt in her account, Ottenritter was required to make cash payments to Shearson to cover margin calls.

Plaintiff charges that Shearson churned her account and committed fraud in the purchase and sale of securities in violation of section 10(b) of the Securities Exchange Act of 1934, (15 U.S.C. 78j) (1934 Act); Securities Exchange Commission Rule 10b-5 (17 C.F.R. section 240.10b-5); section 15(c) of the Securities Exchange Act of 1934 (15 U.S.C. 78o); and Securities and Exchange Commission Rules 15c-1 and 15c-2 promulgated thereunder (17 C.F.R. section 240.15c-1 and 240.15c-2); and sections 20(a) and (b) of the Securities Exchange Act of 1934 (15 U.S.C. sections 78t(a) and (b)). In response, Shearson has moved to compel arbitration.

When plaintiff opened her accounts in 1984, she signed customer agreements. The agreements signed by Ottenritter contained an arbitration clause which states in pertinent part:

Unless unenforceable due to federal or state law, any controversy arising out of or relating to my accounts, to transactions with you for me or to this Agreement or the breach thereof, shall be settled by arbitration in accordance with the rules then in effect.... This Agreement to arbitrate does not apply to any controversy with a public customer for which a remedy may exist pursuant to an express or implied right of action under certain of the federal securities laws.

Customer Agreement at paragraph 13. Defendant argues that paragraph thirteen entitles it to have all disputes arising out of this contract arbitrated. Conversely, plaintiff argues that the last sentence of paragraph thirteen mandates litigation of her federal securities law claims.

The law in this area has changed drastically since the customer agreements were signed in 1984. At that time, the legal landscape was defined by Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953). In Wilko, the Supreme Court held that a predispute agreement to arbitrate claims arising out of section 12(2) of the Securities Act of 1933, (1933 Act) was not enforceable. The Court's decision rested upon a mistrust of the arbitration process. See Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 228-29, 107 S.Ct. 2332, 2338-39, 96 L.Ed.2d 185 (1987) ("Wilko must be understood, therefore, as holding that the plaintiff's waiver of the `right to select the judicial forum' ... was unenforceable only because arbitration was judged inadequate to enforce the statutory rights created by section 12(2)," citing Wilko, 346 U.S. at 435, 74 S.Ct. at 186).

By 1984, federal courts were divided on whether to apply Wilko to claims arising under the Securities Exchange Act of 1934 (1934 Act). See, e.g., Raiford v. Buslease, Inc., 745 F.2d 1419 (11th Cir.1984) (1934 Act claims not arbitrable); Surman v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 733 F.2d 59 (8th Cir.1984) (1934 Act claims not arbitrable); West v. Drexel Burnham Lambert, Inc., 623 F.Supp. 26 (W.D.Wash. 1985) (1934 Act claims are arbitrable); Finkle and Ross v. A.G. Becker Paribas, Inc., 622 F.Supp. 1505 (S.D.N.Y.1985) (1934 Act claims are arbitrable); see also Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 215-16, n. 1, 105 S.Ct. 1238, 1240, n. 1, 84 L.Ed.2d 158 (1985) (lists cases holding 1934 Act claims not arbitrable).

The split between the courts on whether to apply Wilko to the 1934 Act was not resolved until the Supreme Court's ruling in Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987). In McMahon, the Supreme Court upheld predispute agreements to arbitrate claims brought under both the 1934 Act and the Racketeer Influenced and Corrupt Organizations Act (RICO). The Court's decision made clear that its prior mistrust of arbitration had evaporated.

The Arbitration Act¹ thus establishes a "federal policy favoring arbitration," Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983), requiring that "we rigorously enforce agreements to arbitrate." Dean Witter Reynolds, Inc. v. Byrd, supra, 470 U.S. at 221 105 S.Ct. at 1242. This duty to enforce arbitration agreements is not diminished when a party bound by an agreement raises a claim founded on statutory rights. As we observed in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc.,² "we are well past the time when judicial suspicion of the desirability of arbitration and of the competence of arbitral tribunals" should inhibit enforcement of the Act "`in controversies based on statutes.'" 473 U.S., at 626-627 105 S.Ct. at 3353-54, quoting Wilko v. Swan, supra, at 432 74 S.Ct. at 185. Absent a well-founded claim that an arbitration agreement resulted from the sort of fraud or excessive economic power that "would provide grounds `for the revocation of any contract,'" 473 U.S., at 627 105 S.Ct. at 3354, the Arbitration Act "provides no basis for disfavoring agreements to arbitrate statutory claims by skewing the otherwise hospitable inquiry into arbitrability." Ibid.

McMahon, 482 U.S. at 226, 107 S.Ct. at 2337.

McMahon did not expressly overrule Wilko, leaving the lower courts to determine whether Wilko, which held that 1933 Act claims could not be arbitrated, was still good law. See, e.g., Chang v. Lin, 824 F.2d 219 (2d Cir.1987) (1933 Act claims not arbitrable); Continental Service Life and Health Ins. Co. v. A.G. Edwards & Sons, Inc., 664 F.Supp. 997 (M.D.La.1987) (1933 Act claims not arbitrable); Staiman v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 673 F.Supp. 1009 (C.D.Cal.1987) (1933 Act claims are arbitrable).

In May of 1989, the Supreme Court finally overruled Wilko in Rodriguez de Quijas v. Shearson/American Express, Inc., ___ U.S. ___, 109 S.Ct. 1917, 104 L.Ed.2d 526 (1989). In Rodriguez, the Supreme Court held that 1933 Act claims were in fact arbitrable.

The only conceivable distinction in this regard between the Securities Act and the Securities Exchange Act is that the former statute allows concurrent federal-state jurisdiction over causes of action and the latter statute provides for exclusive federal jurisdiction. But even if this distinction were thought to make any difference at all, it would suggest that arbitration agreements, which are "in effect, a specialized kind of forum selection clause," Scherk v. Alberto-Culver Co., 417 U.S. 506, 519 94 S.Ct. 2449, 2457, 41 L.Ed.2d 270 (1974), should not be prohibited under the Securities Act, since they, like the provision for concurrent jurisdiction, serve to advance the objective of allowing buyers of securities a broader right to select the forum for resolving disputes whether it be judicial or otherwise.

Rodriguez, 109 S.Ct. at 1921.

After the Court's decision in Rodriguez, there can be no question that all claims under the 1933 and ...