CANTOR FITZGERALD LP v. PREBON SECURITIES

• Decision Date: 08 February 1999
• Docket Number: C.A. No. 16769.
• Citation: 731 A.2d 823
• Parties: CANTOR FITZGERALD, L.P., Plaintiff, v. PREBON SECURITIES (USA) INC., Defendant.
• Court: Court of Chancery of Delaware

731 A.2d 823

CANTOR FITZGERALD, L.P., Plaintiff, v. PREBON SECURITIES (USA) INC., Defendant.

C.A. No. 16769.

Court of Chancery of Delaware, New Castle County.

Submitted: January 21, 1999.

Decided: February 8, 1999.

Rodman Ward, Jr., Thomas J. Allingham, II, Karen L. Valihura, Joseph M. Asher, Rosemary Goodier of Skadden, Arps, Slate, Meagher & Flom, Wilmington, Delaware; of counsel: Thomas J. Schwartz of Skadden, Arps, Slate, Meagher & Flom, New York City, John F. Cambria and Susan P. Rothwell of Christy & Viener, New York City, for Plaintiff.

Robert K. Payson and Arthur L. Dent of Potter Anderson & Corroon, Wilmington, Delaware; of counsel: P. Kevin Castle, David L. Barres and Matthew A. Leish of Cahill Gordon & Reindel, New York City, for Defendant.

OPINION

STEELE, Vice Chancellor.

I. Issue Presented

At issue is whether under the NASD Rules Plaintiff, a non-NASD member, must arbitrate before the NASD its claims against Defendant, a NASD member, because Plaintiff owns a 99.5% partnership interest in a NASD member, through which Plaintiff carries out its government securities brokerage business and which Plaintiff alleges in its Complaint has been injured as a result of Defendant's actions. Specifically, I must determine whether, under Rule 10201 of the NASD Manual — Code of Arbitration Procedure, Plaintiff is an "associated person," and whether common law agency and contract principles bind Plaintiff to its affiliate's agreement, as a NASD member, to arbitrate certain claims before the NASD. Because the status of "associated persons" is limited to natural persons and Plaintiff is a Limited Partnership, Plaintiff is not an "associated person." The NASD Rules, therefore, do not require Plaintiff to submit its claims against Defendant to NASD arbitration. Furthermore, because Defendant fails to convince me that a principal-agent relationship exists between Plaintiff and its affiliate and because Plaintiff does not rely on its relationship with its affiliate alone to make its claims in this action, common law agency and contract principles do not bind Plaintiff to its affiliate's arbitration agreement. Finally, while federal law generally applied to federally sanctioned arbitration agreements favors arbitration when doubt arises about a dispute being arbitrable, this law carries no weight when the issue focuses on whether a person or entity must submit to arbitration under an agreement to which it is not a party. I, therefore, deny Defendant's motion to dismiss or, alternatively, stay this action in favor of a NASD arbitration Defendant has commenced against Plaintiff.

II. Factual Background

Plaintiff CFLP is a Delaware limited partnership, governed by the Agreement of Limited Partnership of Cantor Fitzgerald, L.P., Amended and Restated as of August 28, 1996 (the "Partnership Agreement"). CFLP is not a member of the National Association of Securities Dealers (the "NASD"). CFLP owns, inter alia, a 99.5% interest in Cantor Fitzgerald Securities ("CFS"), a New York general partnership engaged in the inter-dealer and institutional brokerage of Treasuries and other government securities. CFS is a member of the NASD.

Defendant Prebon Securities (USA), Inc. ("Prebon") is a Delaware corporation. Prebon is an inter-dealer broker of repurchase and reverse-repurchase agreements (collectively "repos"). Prebon's repo trades of Treasuries clear through its account with Government Securities Clearing Corporation ("GSCC"). Prebon is a member of the NASD. By becoming NASD members, CFS and Prebon agreed to submit to NASD's arbitration rules set forth in the NASD Manual — Code of Arbitration Procedure (the "NASD Code").

On April 6, 1998, CFLP "collectively with its affiliates and predecessors-in-interest" commenced an action in this Court (the "Related Action") against Iris Cantor ("Cantor"), Rodney Fisher ("Fisher") and Cantor Fitzgerald Incorporated ("CFI"), all of whom are "Partners" of CFLP under the Partnership Agreement, as well as Chicago Board Brokerage, L.L.C. ("CBB") and Market Data Corporation ("MDC") (collectively, the "Related Action Defendants"). In the Related Action, CFLP has alleged that Cantor, Fisher and CFI breached fiduciary and contractual duties they owe to CFLP under the Partnership Agreement by developing an electronic system ("MarketPower") for trading and brokering U.S. Treasuries in direct competition with CFS, to the detriment of CFLP. CFLP has further alleged that MDC and CBB aided and abetted those breaches of duty by CFLP's partners and tortiously interfered with CFLP's contractual relationships with Cantor, Fisher and CFI under the Partnership Agreement. MDC is the entity through which Cantor, Fisher and CFI developed MarketPower. CBB contracted with MDC for MDC to develop MarketPower for CBB's use and to license MarketPower to CBB. Voluminous discovery has proceeded in the Related Action, and trial begins on March 8, 1999.

On November 9, 1998, CFLP "collectively with its affiliates and predecessors-in-interest" filed this action (the "Prebon Action"). In the Prebon Action, CFLP alleges that, by making its GSCC account available to customers of CBB for clearing trades done on MarketPower, Prebon has aided and abetted the Related Action Defendants in their breaches of fiduciary duty, has tortiously interfered with CFLP's contractual relationships with Cantor, Fisher, and CFI under the Partnership Agreement, and has unjustly enriched itself. CFLP filed the Prebon Action in response to Prebon's announcement that it would make its GSCC account available to customers of CBB to clear trades done on MarketPower.

On November 23, 1998, Prebon initiated an arbitration against CFLP and CFS before the NASD. Prebon's Statement of Claim in that arbitration seeks a declaratory judgment that it may use its GSCC account to clear trades made by CBB, and an order enjoining CFLP and CFS from interfering with lawful arrangements between Prebon and GSCC. Prebon also requests a declaratory judgment that it has no liability under the Complaint in this action. Prebon now seeks an order from this Court stating that CFLP is obligated to arbitrate its claims against Prebon before the NASD and dismissing this action or staying it pending arbitration before the NASD. Without a court order stating that CFLP is obligated to arbitrate its claims against CFLP before the NASD, the NASD will not serve a Statement of Claim on CFLP.

III. The Parties' Contentions

Prebon claims that under Rule 10201 of the NASD Code that Prebon and CFLP are bound to arbitrate the claims in the Prebon Action before the NASD because they are members, "associated persons" or "certain others" under the NASD Rules, and because their dispute arises out of and in connection with their respective businesses. Prebon also claims that even if CFLP is not an "associated person" or "certain other" that CFLP is bound by CFS's arbitration agreement under common law agency and contract principles and, therefore, is obligated to arbitrate before the NASD its claims against Prebon. Prebon further argues that federal law requires that all doubts be resolved in favor of arbitration.

CFLP claims it is not bound to arbitrate the claims in the Prebon Action before the NASD because (i) the claims are part and parcel to the litigation pending before this Court in the Related Action; (ii) the claims are outside the bounds of NASD arbitration; (iii) CFLP is not a member, "associated person," or "certain other" under the NASD Rules; and (iv) even if CFLP were a member, "associated person," or "certain other," mandatory arbitration of the claims would be impermissible because CFLP has not signed an arbitration agreement.

IV. Discussion

A. The NASD Rules

Rule 10201(a) of the NASD Code, entitled "Required Submission," sets forth the disputes, claims and controversies that must be submitted to NASD arbitration. It provides:

[A] dispute, claim or controversy eligible for submission under Rule 10100 Series between or among members and/or associated persons, and/or certain others, arising in connection with the business of such member(s) or in connection with the activities of such associated person(s), or arising out of the employment or termination of employment of such associated person(s) with such member, shall be arbitrated under this Code, at the instance of:

(1) a member against another member;

(2) a member against a person associated with a member or a person associated with a member against a member; and

(3) a person associated with a member against a person associated with a member.¹

1. Interpretation of Rule 10201(a)

Prebon interprets Rule 10201(a) to mean that all disputes between or among members and/or associated persons, and/or certain others must be submitted to the NASD for arbitration if they arise out of or in connection with the business of a member or associated person. I disagree with Prebon's interpretation. I find Rule 10201(a) more limited than Prebon suggests.

Rule 10201(a) requires the arbitration of the type of disputes, claims or controversies described within it "at the instance of²: (a) a member against a member; (b) a member against a person associated with a member or a person associated with a member against a member; [or] a person associated with a member against a person associated with a member." I interpret this unambiguous language to restrict the mandatory submission of claims, disputes or controversies to those instigated by (i) a member against another member, (ii) a member against a person associated with a member, (iii) a person associated with a member against a member or (iv) a person associated with a member against a person associated with a member. Where these distinct adversaries are parties to the arbitration, Rule 10201(a) requires that they submit to NASD arbitration those disputes, claims or controversies that (i) are eligible for submission under Rule 10100 Series, (ii) are between or among the members...