Deputy v. Lehman Bros., Inc.

Decision Date29 September 2003
Docket NumberNo. 02-4305.,No. 03-1155.,02-4305.,03-1155.
Citation345 F.3d 494
PartiesDoris DEPUTY, Plaintiff-Appellee, v. LEHMAN BROTHERS, INC., Defendant-Appellant.
CourtU.S. Court of Appeals — Seventh Circuit

Michael H. Schaalman (argued), Quarles & Brady, Milwaukee, WI, for Plaintiff-Appellee.

H. Nicholas Berberian (argued), Neal, Gerber & Eisenberg, Chicago, IL, Michael B. Apfeld, Godfrey & Kahn, Milwaukee, WI, for Defendant-Appellant.

Before BAUER, MANION, and EVANS, Circuit Judges.

MANION, Circuit Judge.

Doris Deputy sued Lehman Brothers, Inc., SG Cowen Securities Corporation, and Cowen & Company, alleging various state law claims stemming from the securities fraud allegedly perpetrated by one of the defendants' brokers. Lehman Brothers moved to stay the action and compel arbitration based on an arbitration clause contained in its Client Agreement with Deputy. The district court denied that motion, finding that Deputy had not signed the Client Agreement and that in any event the arbitration clause was against public policy. Lehman Brothers appeals. Because we conclude that the arbitration clause does not violate public policy and because the district court did not adequately consider the validity of the signature, we reverse and remand.

I.

Doris Deputy has been a client of Lehman Brothers, SG Cowen Securities Corporation and Cowen & Company since 1989. During this time, Deputy's investment advisor was Frank Gruttadauria; the now infamous Gruttadauria pleaded guilty in 2002 to federal securities fraud, bank fraud, wire fraud and identity theft, and he has been described as having perpetrated one of the "largest scam[s] of retail investors ever [committed] by an individual broker."

After learning of Gruttadauria's fraud, Deputy filed suit against Lehman Brothers, Inc., SG Cowen Securities Corporation and Cowen & Company, alleging various Wisconsin state law claims, including fraud, negligent and strict liability misrepresentation, negligent supervision, breach of fiduciary duty, and various other Wisconsin statutory causes of action. Lehman Brothers responded by filing a Motion to Stay Pending Arbitration or to Dismiss. In its motion, Lehman Brothers contended that Deputy's claims were subject to arbitration based on an arbitration clause contained in its Client Agreement with Deputy. Deputy argued in response that she had not signed the Client Agreement and thus had not agreed to arbitration.

The district court scheduled a hearing for November 21, 2002 on Lehman Brothers' Motion to Stay or Dismiss. Prior to this hearing, Lehman Brothers obtained an expert opinion from handwriting expert Diane Marsh. Marsh concluded that the Client Agreements of April 26, 2001 and July 26, 2001 contained the genuine signatures of Deputy. Conversely, in an affidavit presented to the court, Deputy maintained that she did not sign the Client Agreements. Both Marsh's expert report and Deputy's affidavit were submitted along with briefing on Lehman Brothers' Motion to Stay or Dismiss prior to the November 21, 2002 hearing, and the district court reviewed both prior to the hearing.

What actually transpired during the November 21, 2002 hearing, however, turned out to be much more significant than the briefing. We therefore excerpt at length from the hearing transcript, beginning with the district court's initial comments on convening court:

I'd like to commence the hearing by telling you what I expect to look at today and consider and to give you a preliminary view of how I have viewed the matters as submitted up to this point.... With regard to arbitration and whether this matter should be stayed, at this point I'm inclined to deny the request to stay and would like to hear from Lehman Brothers and Cowen1 as to why I should not come down with that decision. I've read your submissions. I've looked at the cases and have paid special attention to the decisions that were rendered in California and Ohio with respect to similar cases. I've also taken note of Miss Marsh's report and some of the requirements for considering opinion testimony, particularly the need to identify the basis for certain opinions and the absence of certain information underlying the opinion. I'm mindful of this Court's obligation as a doorkeeper with respect to opinion evidence and the need for parties offering opinion testimony to show that a particular discipline has been adhered to and that there is an objective slash scientific basis for certain types of opinion evidence. I'm also mindful of the terms that were utilized in the opinion evidence and the factual basis for the opinion offered by Miss Marsh, that being a review of a photocopy, the authenticity of which was not addressed, and the absence of any certification by Lehman Brothers that its document person knew anything about the authenticity of the photocopy or the circumstances in connection with which it was created.

I'm mindful that the submission[s] do not show that the so-called arbitration agreement was prepared by anyone operating in the ordinary course of business or that it was within, the person was operating within the scope of his or her authority when they created the so-called arbitration agreements. Having said all that I'd like to hear from Lehman Brothers and SG Cowen as to why this case should be stayed.

In response to the district court's expressed concerns as to Lehman Brothers' expert report, Lehman Brothers explained that "we have Miss Marsh here and prepared to testify and I believe, and very briefly, and I believe the testimony will address a number of the issues that Your Honor has raised with respect to the forgery, whether or not it is a forgery as raised by the claimant [Deputy]." At this point, Deputy's attorney objected to evidence being taken, stating "[t]his is a motion to dismiss. Such evidence is beyond obviously the written record. The parties had an opportunity to submit affidavits and so on. Miss Marsh's affidavit was submitted. We did not have an opportunity to submit an affidavit. We did not hire an expert." Deputy's attorney then noted that by taking evidence, the hearing was seemingly turning into a motion for summary judgment.

The district court then responded:

Well, I think you're accurate in saying that it does smack of a motion for summary judgment. You're also equally accurate that it's well beyond the usual scope of a motion to dismiss. And with those acknowledgments on the record I will give to Lehman Brothers and Cowen an opportunity to present this testimony. I am not going to preclude you, however, from offering whatever evidence you have. And if it is your desire to present expert testimony to counter that offered here today, we may certainly have the opportunity to hear that expert testimony. I know that this case is in an unusual posture and I know also that if the issue concerning arbitration is played out to its fullest in this forum we may in essence have what constitutes a trial on the issue as to whether or not the parties were, had a valid arbitration agreement. And so in a sense we're putting a little of the trial first as opposed to somewhere near the end. And I will tell you, Lehman Brothers and SG Cowen will not have two kicks at this portion of the cat.... So if they're presenting their testimony now they're not going to bootstrap it later.

The hearing then continued with Lehman Brothers calling Marsh to the stand. After introducing herself, Marsh testified that she was a forensic document examiner, that she had been involved in this profession for 21 years, that she belonged to the World Association of Document Examiners, the Independent Association of Questioned Document Examiners, and that she was a diplomat of the American Board of Forensic Examiners. Marsh then further elaborated on her experience, stating that she had testified in state or federal court as a forensic document examiner approximately 115 times. Lehman Brothers' attorney then asked Marsh whether "any court refused to accept you as an expert witness in this subject matter?" Marsh responded: "No."

The district court then inquired: "I'm curious Miss Marsh, did you testify in Leon S. Malachinski versus Commissioner of Internal Revenue Service?" Marsh responded, "I don't, it doesn't sound familiar," and that since she had testified over 115 times she would have to check her list and see. After the district court gave Marsh the legal citations to that case, Marsh responded, "it doesn't sound familiar, but I still can't say." The district court then told Marsh that the case involved a Dr. Malachinski and his ex-wife who had filed joint federal income tax returns in 1980 and 1981 and asked whether that sounded at all familiar. Marsh once again responded, "I'm sorry. It doesn't sound familiar but I don't, what, it doesn't sound familiar but—" The district court then broke in and stated, "Well, I have a copy of the decision and in this case it indicates that Dr. Malachinski introduced an expert report of Diane Marsh." Marsh responded, "Well, then apparently I must have been involved in some way," to which the district court stated that "if you are the same person it says that the court rejected your expert report." Marsh rejoined: "I'm not familiar with that." At this point the district court said, "I'll hear what you have to say," and Marsh then continued with her testimony concerning the disputed issue, namely whether the signatures on the Client Agreements were Deputy's.

In this regard, Marsh testified that Lehman Brothers had provided her with four documents containing a "Doris Deputy" signature for her review. These documents, identified as Q1, Q2, Q3, and Q4, were, respectively, an Option Approval Form and Agreement dated February 20, 1993; a Client Agreement dated April 26, 2001; a Client Agreement dated June 4, 2001; and a Client Agreement dated July 26, 2001. Marsh explained that she compared these...

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