Creative Securities Corp. v. Bear Stearns & Co.

• Decision Date: 13 October 1987
• Docket Number: No. 87 Civ. 2188 (RJW).,87 Civ. 2188 (RJW).
• Citation: 671 F. Supp. 961
• Parties: CREATIVE SECURITIES CORP., et al., Plaintiffs, v. BEAR STEARNS & CO., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

671 F. Supp. 961

CREATIVE SECURITIES CORP., et al., Plaintiffs, v. BEAR STEARNS & CO., et al., Defendants.

No. 87 Civ. 2188 (RJW).

United States District Court, S.D. New York.

October 13, 1987.

Charles J. Hecht, P.C., New York City, for plaintiffs; Charles J. Hecht and Jacob H. Zamansky, of counsel.

Parker Chapin Flattau & Klimpl, New York City, for Bear Stearns, defendants; Alvin M. Stein, Charles P. Greenman and Katherine C. Ash, of counsel.

Gibson, Dunn & Crutcher, New York City, for defendant Alan Abelson.

Kaye, Scholer, Fierman, Hays & Handler, New York City, for defendants M.A. Berman Co. and Meyer Berman.

Scheffler Karlinsky & Stein, New York City, for defendants Starr Securities, Inc., Martin Vegh and Fagenson & Co., Inc.

OPINION

ROBERT J. WARD, District Judge.

Defendants Bear, Stearns & Co., Bear, Stearns & Company, Bear, Stearns & Co. Inc., (collectively "Bear Stearns defendants"), the former general partners of Bear Sterns who were served with a summons and complaint in this action, ("Bear Sterns Partners"),¹ Richard Harriton ("Harriton"), William Gangey ("Gangey"), and Joseph Thomas, Sr. ("Thomas"), filed this motion pursuant to the Federal Arbitration Act, 9 U.S.C. §§ 3, 6, to compel arbitration of plaintiffs' claims and to stay this action in accordance with the Arbitration Procedures of the National Association of Securities Dealers, Inc. ("NASD"), or pursuant to various agreements to arbitrate between defendants and plaintiffs Creative Securities Corporation ("Creative"), Fred Mazzeo ("Mazzeo"), Charles J. Dedde, Jr. ("Dedde"), William J. Mayer, John H. Steinkampf, Jr., Arnold Kuppersmith, and Dr. Leonard Venezia (the "Customers").² For the reasons that follow, defendants' motion is granted in part and denied in part.

BACKGROUND

Plaintiff Creative, a member of the National Association of Securities Dealers ("NASD"), acted as a market maker for various securities listed on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") and in the "pink sheets" published by the National Quotation Bureau between 1982 and 1985. Creative's role as a market maker was to provide an organized market for securities it sponsored in which the securities could be readily purchased or sold. In its capacity as a market maker, Creative would at various times purchase or sell the securities it sponsored at a quoted ask or bid price.

In furtherance of its role, Creative entered into two contracts with Bear Stearns, another member of the NASD. On June 25, 1984, Bear Stearns and Creative entered into an Agreement for Securities Clearance Services ("Clearing Agreement") pursuant to which Bear Stearns performed various functions³, including the maintenance of all pertinent books and records for Creative and Creative's customers. Creative subsequently introduced over 16,000 customers to Bear Stearns. Upon the introduction of a customer, Bear Stearns and the customer would enter into the Bear Stearns Customer Agreement ("Customer Agreement"). This document opened an account in the customer's name, and Bear Stearns would issue monthly statements and confirmations of the securities transactions. On July 6, 1984, Bear Stearns and Creative entered into an identical Customer Agreement under which the same services were provided for accounts held on Creative's own behalf.

In the action before this court, plaintiffs Creative, Mazzeo (its president and sole shareholder), Dedde (an employee of Creative), and four former Customers of Creative allege that Bear Stearns, Harriton (a managing director and general partner), Gangey and Thomas (both assistant directors), and other defendants not parties to this motion, conspired to fraudulently manipulate downward the price of the securities Creative sponsored to artificially created price levels.

The alleged conspiracy entered into by Bear Stearns and others was a device whereby certain defendants ("Short Sellers") would sell stock they did not own in anticipation that the price would decline. However, since the Short Sellers were required by the Exchange's rules to deliver the stocks they sold within a limited period of time, the usual practice was for the Short Sellers to borrow the stock from another broker. In this case Bear Stearns allegedly improperly loaned their customers' stock to the Short Sellers, thus converting the customers' securities for Bear Stearns' own use. In exchange, the Short Sellers deposited with the lender an amount of cash equivalent to the securities' market value. When the Short Sellers covered — bought the stock at the lower price — they returned the borrowed stock to Bear Stearns who repaid the sum on deposit and closed the transaction. Bear Stearns allegedly earned risk-free profits from use of the cash collateral and margin interest. The Short Sellers allegedly profited when the securities' value in fact declined, at which point they bought the securities and were able to cover.

According to plaintiffs' allegations, during the time of the short selling scheme, the volume of sell orders for the securities at issue increased. Many of the securities sold were sold to Creative. The increase in sell orders resulted in a decline in the subject securities' market value. Because NASD members were not required to report or publish their short positions, Creative was unaware that the increase in sell orders was due to short sales. Thus, unknowingly, Creative was continuously buying securities that were declining in value. As a result of the short selling scheme, plaintiffs assert that Creative's net worth decreased drastically and, after taking out loans, the company, on July 9, 1985, was eventually forced to cease operations. The Customers claim they lost money because the value of their security holdings decreased.

Alleging loss and indebtedness, plaintiffs brought an action against Bear Stearns,⁴ its former general partners, and some of its employees.⁵ Defendants, however, move under the Arbitration Act to stay this action and compel arbitration of plaintiffs' claims pursuant to the arbitration rules of the NASD or various arbitration agreements contained in other contracts between the parties.

DISCUSSION

The Federal Arbitration Act ("the Act" or "Arbitration Act"), 9 U.S.C. §§ 1-14, 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). The Act, "reversing centuries of judicial hostility to arbitration agreements," Scherk v. Alberto-Culver Co., 417 U.S. 506, 510-511, 94 S.Ct. 2449, 2453, 41 L.Ed.2d 270 (1974), was designed to enable parties to avoid "the costliness and delays of litigation," and to place arbitration agreements "upon the same footing as other contracts ..." H.R.Rep. No. 96, 68th Cong., 1st Sess. 1, 2 (1924) (quoted in Genesco, Inc. v. T. Kakiuchi & Co., 815 F.2d 840, 844 (2d Cir.1987)).

To accomplish these purposes, the Act provides that arbitration agreements "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2.⁶ The Act also mandates that a court must stay its proceedings if it is satisfied that an issue before it is arbitrable under the agreement, 9 U.S.C. § 3, and it empowers a federal district court to issue an order compelling arbitration if there has been a "failure, neglect, or refusal" to comply with an arbitration agreement. 9 U.S.C. § 4. "By its terms, the Arbitration Act leaves no place for the exercise of discretion by a district court, but instead mandates that district courts shall direct the parties to proceed to arbitration on issues as to which an arbitration agreement has been signed." Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 218, 105 S.Ct. 1238, 1241, 84 L.Ed.2d 158 (1985).

Arbitration, however, is purely a matter of contract, and a party cannot be required to submit a dispute to arbitration unless he has agreed to do so. Fils et Cables D'Acier de Lens v. Midland Metals Corp., 584 F.Supp. 240, 244 (S.D.N.Y.1984). "Ordinary principles of contract and agency determine which parties are bound by an agreement to arbitrate." McAllister Bros. Inc. v. A & S Transportation Co., 621 F.2d 519, 524 (2d Cir.1980). As noted above, a party need not have signed the agreement to be bound by it as long as the arbitration provision itself is in writing. Fisser v. International Bank, 282 F.2d 231, 233 (2d Cir.1960). Rather, the reach of the arbitration clause must be interpreted according to the parties' intentions and by ascertaining and examining the context in which it was made. S.A. Mineracao da Trindade-Samitri v. Utah International, Inc., 576 F.Supp. 566, 570 (S.D.N.Y.1983), aff'd, 745 F.2d 190 (2d Cir.1984).

Because of the strong federal policy favoring arbitration, "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability." Moses H. Cone Memorial Hospital v. Mercury Construction Corp., supra, 460 U.S. at 24-25, 103 S.Ct. at 941. "Language excluding certain disputes from arbitration must be `clear and unambiguous' or `unmistakably clear' and ... arbitration should be ordered `unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute.'" S.A. Mineracao da Trindade-Samitri v. Utah Int'l, Inc., supra, 745 F.2d at 194 (quoting Wire Service Guild v. United Press International, 623 F.2d 257, 260 (2d Cir.1980)).

When considering a motion to stay proceedings and compel arbitration under the Act, a court has four tasks: first, it must determine whether the parties agreed to arbitrate; second, it must determine the scope of that agreement; third, if federal statutory claims are asserted, it must...