Ayres v. Merrill Lynch, Pierce, Fenner & Smith, Inc.

• Decision Date: 19 January 1973
• Docket Number: Civ. A. No. 71-2986.
• Citation: 353 F. Supp. 1084
• Parties: Percy D. AYRES v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC.
• Court: U.S. District Court — Eastern District of Pennsylvania

353 F. Supp. 1084

Percy D. AYRES v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC.

Civ. A. No. 71-2986.

United States District Court, E. D. Pennsylvania.

January 19, 1973.

David L. Grove, Montgomery, McCracken, Walker & Rhoads, Philadelphia, Pa., for plaintiff.

C. Clark Hodgson, Jr., Stradley, Ronan, Stevens & Young, Philadelphia, Pa., for defendant.

HIGGINBOTHAM, District Judge.

OPINION

The defendant, Merrill Lynch, Pierce, Fenner & Smith, Inc., (hereinafter referred to as "Merrill Lynch") moves to stay all proceedings in this action pending arbitration of the questions presented by the plaintiff, in accordance with the constitution and rules of the New York Stock Exchange (hereinafter referred to as "NYSE"). The underlying question raised by the defendant's motion is whether a non-member registered representative who purchases securities from an employer-member firm solely as a result of his employment is subject to Rule 347(b) of the New York Stock Exchange, which compels arbitration of employment-related disputes? Phrased differently, does a non-member registered representative have the same legal rights which a customer non-employee would have? For reasons which hereinafter follow, the Court concludes that defendant's motion shall be granted and this controversy shall be submitted to arbitration.

This action was brought by the plaintiff, Percy D. Ayres, pursuant to § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1970) ("the 1934 Act"), and Rule 10b-5 of the Securities Exchange Commission promulgated thereunder, 17 C.F.R. § 240.10b-5 (1972). Jurisdiction is vested in the Court under Section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa (1970) and 28 U.S.C. § 1332 (1970).

Ayres was employed as an account executive and registered representative in defendant's Philadelphia office from 1940 until his voluntary retirement on October 1, 1970, two days prior to his 68th birthday. The defendant's retirement policy required its employees attaining the age of 65 years to retire, provided, however, that at the discretion of the defendant those employees, who upon attaining the foregoing age but who remained productive employees, were thereafter permitted to continue in defendant's employ on a year-to-year basis, with mandatory retirement at the age of 70 years. Pursuant to this policy, plaintiff remained in defendant's employ after he had reached 65 years of age on October 3, 1967.

Merrill Lynch is a member of the NYSE and is subject to its constitution, rules and regulations. Under Rule 345(a) of the Rules of the Board of Governors of the Exchange no member or member organization shall:

"(1) Permit any persons to perform regularly the duties customarily performed by a registered representative, unless such person shall have been registered with and is acceptable to the Exchange."

In accordance with Rule 345, plaintiff submitted the required NYSE Form No. RE-1 on April 16, 1945, and his application to become a registered representative was accepted in May, 1945.

In becoming a registered representative, Ayres agreed to submit to the jurisdiction of NYSE.¹ On April 17, 1958, the Board of Governors adopted Rule 347(b) which required disputes pertaining to employment between registered representatives and members of the Exchange to be resolved by arbitration.² On December 19, 1961, plaintiff again pledged himself to be bound by the constitution and rules of the Board of Governors of the Exchange and any amendments thereto, when he applied to the Exchange for approval as a holder of 15 shares of non-voting common stock of Merrill Lynch, pursuant to Article IX, Section 7 of the Constitution of the Exchange; plaintiff's application was approved by the Exchange in January, 1962.

On January 26, 1962, and December 14, 1964, plaintiff purchased from Merrill Lynch 1500 shares and 500 shares, respectively, of its non-voting common stock at costs of $32,415 and $17,326.50. By reason of subsequent two-for-one stock splits in 1966 and 1969, plaintiff's original purchases of 2000 shares of non-voting common stock had increased to 8000 shares at the time of his retirement on October 1, 1970. With each acquisition of defendant's stock, plaintiff executed a Stock Subscription Agreement which provided, among other things, that Merrill Lynch reserved the right at any time to purchase all or any part of plaintiff's stock for a period of 90 days from the date defendant furnished plaintiff with written notice that it had elected to exercise its purchase rights.

The rules and regulations of the NYSE were further amended on March 26, 1970, so as to permit corporate members of the NYSE to offer their stock for sale to the public. As a result of this amendment, plaintiff's complaint alleges that on or about July 14, 1970, Merrill Lynch initially decided to become a publicly owned corporation, but wrongfully concealed from plaintiff and others this information until the summer of 1971, even though in July, 1970, defendant's management had set as its goal a public offering of its stock in the Spring of 1971. Moreover, in implementation of this July, 1970 decision, defendant established a secret "Going Public Task Force" to compile data for the preparation of a prospectus for defendant's stock that would be publicly offered for sale.

During the late summer of 1970 when plaintiff advised defendant of his intention to retire, he was informed by the Vice-President of Merrill Lynch and manager of its Philadelphia office that upon plaintiff's retirement he would be required to sell his 8000 shares of defendant's stock to defendant on or about October 1, 1970, for the price of $26.133 per share, or a total of $209,064. Had Ayres not sold the stock to Merrill Lynch, he contends that by June 23, 1971, when Merrill Lynch had its first public offering, he could have sold the same stock to the public for $672,000. Furthermore, due to a three-for-one stock split in April, 1971, plaintiff would have received a dividend payment of $2400, $0.10 a share on the 24,000 shares he then would have owned. Similarly, there were additional dividend payments in the amount of $0.10 per share in August, 1971 and November, 1971.

Finally, on or before June 23, 1971, Merrill Lynch removed from its owners of common stock all restrictions relating to transferability and acquisition rights of defendant, with the single exception being that the current owners of common stock could not sell, option for sale, or otherwise dispose of the shares for a period of one year from the termination of the public offering held in June, 1971. Plaintiff therefore contends that if Merrill Lynch had not breached its fiduciary duties owed to him by failing to disclose material facts affecting the value of the stock, then he would not have retired on October 1, 1970, and after June 23, 1971, he would have been subject only to the single restriction noted earlier in this paragraph.

In opposition to defendant's motion to stay these proceedings pending arbitration, plaintiff advances several arguments, viz.: (1) This controversy is not subject to arbitration under Rule 347(b) of the NYSE since it did not arise "out of the employment or termination of employment" of plaintiff as a registered representative by the defendant; and (2) he is not a "member" of the Exchange, as defined in § 3(a)(3) of the 1934 Act, 15 U.S.C. § 78c(a)(3) (1970), neither is he bound by § 28(b)(2) of the 1934 Act, 15 U.S.C. § 78bb(b)(2) (1970), and therefore § 29(a) of the 1934 Act, 15 U.S.C. § 78cc(a) (1970), rendering unenforceable prospective agreements to arbitrate, controls rather than the exemption provisions as contained in § 28(b) of the 1934 Act, 15 U. S.C. § 78bb(b) (1970).

I.

Plaintiff and defendant are essentially in agreement on most of the facts as previously recorded, but are at odds pertaining to the characterization of the dispute and the role to be served by the NYSE regarding arbitration. Ayres most vigorously asserts that the obligation owed to him by the defendant arose not from his association with Merrill Lynch as an employee, but instead stemmed from the fiduciary duties existing between a purchaser and seller of securities. In other words, as an owner of stock plaintiff was entitled to know about Merrill Lynch's decision to go public even though, as plaintiff concedes, this same information need not have been disclosed to other employees of the defendant who owned no stock.

As a discussion of the relevant cases will subsequently demonstrate, plaintiff's position is indeed unique in that (1) although Ayres is a registered representative of NYSE, the current controversy does not clearly and squarely relate to the business functions and commercial transactions normally engaged in by a registered representative of the Exchange in the performance of his prescribed duties; and (2) Ayres is not a member of the Exchange as has been true in most of the applicable cases. Notwithstanding the plaintiff's atypical circumstances there is one factor evident in this case which I deem to be particularly compelling and dispositive, and thus dictates the result which I herein reach today. That is, Ayres was initially permitted to purchase the shares of Merrill Lynch only because he was one of its employees. Moreover, Ayres' decision to retire when he did might have precipitated Merrill Lynch's exercising its re-purchase option and hence the Court is further confronted with a dispute which arose not only out of the course of employment of a registered representative, but additionally stemmed from the termination of that employment.³

In examining the Stock Subscription Agreement it appears that the defendant's decision to sell stock to Ayres was premised on Ayres' status as an employee. More specifically, the Agreement states:

"Whereas, the Purchaser is an employee of the Corporation or of another corporation controlled directly or indirectly by the Corporation, and the

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