Braintree Laboratories v. Citigroup Global Markets, Civil Action No. 09-10601-NMG.
| Decision Date | 22 December 2009 |
| Docket Number | Civil Action No. 09-10601-NMG. |
| Citation | 671 F.Supp.2d 202 |
| Parties | BRAINTREE LABORATORIES, INC., Braintree Holdings and Braintree Real Estate Management Company, LLC, Plaintiffs, v. CITIGROUP GLOBAL MARKETS, INC., Defendant. |
| Court | U.S. District Court — District of Massachusetts |
Barry S. Pollack, Phillip Rakhunov, Joshua L. Solomon, Sullivan & Worcester LLP, Boston, MA, for Plaintiffs.
Brandon L. Bigelow, Robert A. Buhlman, Bingham McCutchen LLP, Boston, MA, Susanna M. Buergel, Charles E. Davidow, Brad S. Karp, Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, NY, for Defendant.
Plaintiffs Braintree Laboratories, Inc. ("Braintree Labs"), Braintree Holdings and Braintree Real Estate Management Company, LLC (together, "plaintiffs") bring suit against defendant Citigroup Global Markets Inc. ("CGMI") for violation of federal and state securities laws in connection with the sale of auction-rate securities ("ARS") to plaintiffs.1 Plaintiffs allege that representatives of defendant made fraudulent statements and omissions and assert claims for 1) rescission and restitution under the Massachusetts Uniform Securities Act, M.G.L. c. 110A, § 410(a), 2) violation of federal securities laws and 3) various common law causes of action. Before the Court are CGMI's motion to stay or to compel arbitration and plaintiffs' motion for provisional remedies.
This dispute arises out of the sale of ARS. ARS are debt instruments, typically municipal or corporate bonds and preferred stock, with long-term maturities. Interest rates or dividend yields for ARS are reset through frequent auctions at which the securities are also sold.
Generally, potential customers (buyers of ARS) bid the lowest interest rate or dividend yield that they are willing to accept. The auction then "clears" at the lowest bid sufficient to cover all of the securities for sale and that rate is then applied and paid until the next auction. If the number of bids is insufficient to cover all of the securities for sale, the auction fails and ARS holders cannot resell. Broker-dealers who manage ARS auctions have generally made a practice of intervening to prevent failures but stopped that practice in 2008, leading to a large number of auction failures.
Plaintiffs maintain brokerage accounts with defendant CGMI, a broker-dealer. Through those accounts, plaintiffs bought $41,550,000 in ARS between June and August 2008. At the heart of this case lie plaintiffs' allegations that CGMI misled them when they made those ARS purchases. Specifically, plaintiffs assert 1) that CGMI never identified the securities as ARS, instead referring to them as "seven day rolls" and the equivalent of government-backed money market investments with strong liquidity, 2) that CGMI knew that plaintiffs' primary investment concern was liquidity but sold them ARS anyway and 3) that the illiquid ARS market has prevented plaintiffs from achieving desired liquidity and from selling their ARS. Defendants have not yet filed an answer but respond in their memoranda that plaintiffs knew about the risks of ARS at the time they made the purchases at issue.
On April 16, 2009, Plaintiffs filed their original complaint. Their suit is one of many filed against CGMI and other broker-dealers around the country due to the widespread nature of the ARS market freeze. In an attempt to consolidate those actions, CGMI initiated proceedings before the Judicial Panel on Multidistrict Litigation ("the MDL Panel") to transfer all ARS-related litigation against it to the Southern District of New York. As a part of those efforts, CGMI designated the instant suit as a potential "tag-along" action to an already-transferred case. On October 2, 2009, however, the MDL Panel issued a decision declining to transfer this case because it "raises distinctly different factual and legal questions."
On May 5, 2009, CGMI moved to stay litigation pending the MDL Panel's decision or to compel arbitration. Plaintiffs originally opposed the motion in its entirety but withdrew their opposition to the motion to stay after the MDL Panel agreed to consider a transfer. Simultaneously, plaintiffs moved for certain provisional remedies. They seek a preliminary injunction requiring rescission of ARS sales pursuant to M.G.L. c. 110A, § 410(a) or, in the alternative, an attachment of property of CGMI in the amount of $41,550,000. CGMI has opposed that motion.
This Court heard oral argument on the pending motions at a status conference on Friday, October 16, 2009.
In light of the MDL Panel's decision on October 2, 2009, CGMI's motion to stay will be denied as moot.
The Federal Arbitration Act embodies a "national policy favoring arbitration of claims that parties contract to settle in that manner." Preston v. Ferrer, 552 U.S. 346, 128 S.Ct. 978, 983, 169 L.Ed.2d 917 (2008) (citation and quotation marks omitted). The party moving to compel arbitration must show
that a valid agreement to arbitrate exists, that the movant is entitled to invoke the arbitration clause, that the other party is bound by that clause, and that the claim asserted comes within the clause's scope.
CGMI moves to compel arbitration under the Account Application and Client Agreement signed by plaintiffs. That agreement states that the signatories agree to arbitrate
all claims or controversies . . . concerning or arising from (i) any account maintained ... with [CGMI] ...; (ii) any transaction involving [CGMI] . . .; or (iii) the construction, performance or breach of this or any other agreement between [the parties].
The crux of plaintiffs' response is that CGMI's arbitration rights have been foreclosed by virtue of a settlement with the SEC ("the SEC Consent Order") and pursuant to a broker-dealer registration form ("Form BD") filed with the Commonwealth of Massachusetts. Their position is untenable. The SEC Consent Order requires CGMI to liquidate the investments of all ARS customers who purchased securities before February 12, 2008. Plaintiffs rely on the following clause:
All customers, including but not limited to Eligible Customers [i.e., pre-February 12, 2008 purchasers] who avail themselves of the relief pursuant to this Consent [i.e., voluntary special arbitration procedures], may pursue any remedies against [CGMI] available under the law.
Plaintiffs contend that 1) as ARS purchasers, they are included under "all customers" even if they are not "Eligible Customers" and 2) the term "any remedies" includes judicial remedies which bestows upon them the right to judicial relief.
Plaintiffs' argument is contrary to the plain meaning of the text of the SEC Consent Order because the provision does not grant new rights or remedies but only reinforces those that are already "available under the law." Plaintiffs' assertion that such a reading renders the provision meaningless surplusage is misplaced. As CGMI points out, without the clause, the SEC Consent Order would remain ambiguous as to whether a customer who elects to accept CGMI's offer to purchase ARS at par could pursue consequential damages in arbitration, in court or in other fora. Moreover, the provision clarifies that the SEC Consent Order does not impact the already-available rights of non-Eligible Customers. Accordingly, the SEC Consent Order does not affect the applicability of the arbitration agreement signed by plaintiffs.
Nor does the Form BD, which allows CGMI to sell securities in Massachusetts, alter CGMI's arbitration rights. It merely appoints the Secretary of the Commonwealth as CGMI's agent for receipt of service of process. Plaintiffs mistakenly rely on the following provision to support their argument:
the applicant . . . consents that any such action or proceeding against the applicant may be commenced in any court of competent jurisdiction and proper venue within [the state] by service of process upon said appointee ...
That language, however, concerns only service of process and pertains to courts "of competent jurisdiction and proper venue." The assertion that CGMI has "voluntarily surrendered any rights to deny Massachusetts customers a judicial forum" by signing the Form misconstrues any plausible reading of the text. Indeed, the Form itself contemplates the possibility of arbitration, referring elsewhere to "self-regulatory action[s] in connection with broker-dealer activities." The fact that CGMI agrees to comply with Massachusetts law does not mean that related disputes must be adjudicated in court despite a clear agreement to the contrary. Accordingly, the Form BD does not abrogate CGMI's right to arbitration.
Because plaintiffs remaining arguments against arbitration are equally unavailing, the Account Agreement controls. This dispute fits comfortably within its terms and thus CGMI's motion to compel arbitration will be allowed.
Plaintiffs move for a preliminary injunction ordering rescission of ARS sales or, in the alternative, an attachment of defendants' property to secure a judgment of $41,550,000 plus interest. Their motion is not rendered moot by this Court's allowance of defendant's motion to compel arbitration. Teradyne, Inc. v. Mostek Corp., 797 F.2d 43, 51 (1st Cir.1986) ()
A party seeking a preliminary injunction must prove:
(1) the likelihood of success on the merits; (2) the potential for irreparable harm [to the movant] if the injunction is denied; (3) the balance of relevant impositions, i.e., the...
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