Finkle and Ross v. AG Becker Paribas, Inc.

• Decision Date: 02 December 1985
• Docket Number: 85 Civ. 2284 (DNE).,No. 85 Civ. 1858 (DNE),85 Civ. 1858 (DNE)
• Parties: FINKLE AND ROSS, a Partnership; Juston Enterprises, Inc. Employees' Pension Plan; Joseph Neira; John Neira; Francisco Carvajal Navarez; Evan Levy and Carol Levy, Plaintiffs, v. A.G. BECKER PARIBAS, INC.; Mason Sexton and Michael Rose, Defendants. Louise MOCKRIDGE, Plaintiff, v. PRESCOTT, BALL & TURBAN, and Erhardt Schmidt, Defendants.
• Court: U.S. District Court — Southern District of New York

622 F. Supp. 1505

FINKLE AND ROSS, a Partnership; Juston Enterprises, Inc. Employees' Pension Plan; Joseph Neira; John Neira; Francisco Carvajal Navarez; Evan Levy and Carol Levy, Plaintiffs, v. A.G. BECKER PARIBAS, INC.; Mason Sexton and Michael Rose, Defendants.

Louise MOCKRIDGE, Plaintiff, v. PRESCOTT, BALL & TURBAN, and Erhardt Schmidt, Defendants.

Nos. 85 Civ. 1858 (DNE), 85 Civ. 2284 (DNE).

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

December 2, 1985.

Lippman & Lippman, New York City, for plaintiffs Finkle and Ross, a Partnership; Justin Enterprises, Inc. Employees' Pension Plan; Joseph Neira; John Neira; Francisco Carvajal Navarez; Evan Levy and Carol Levy; Harvey J. Lippman, David M. Hashmall & John T. Cushing, of counsel.

Bizar D'Alessandro & Shustak, New York City, for plaintiff Louise Mockridge; Gayle Sanders, of counsel.

Brown, Wood, Ivey, Mitchell & Petty, New York City, for defendant A.G. Becker Paribas, Inc.; Henry F. Minnerop and Deborah H. Frati, of counsel.

Gersten, Savage, Kaplowitz & Simensky, New York City, for defendant Mason Sexton; David O'Connor, of counsel.

Gordon Hurwitz Butowsky Weitzen Shalov & Wein, New York City, for defendants Prescott, Ball & Turban and Erhardt Schmidt; Allan R. Freedman, of counsel.

OPINION AND ORDER

EDELSTEIN, District Judge:

These civil actions allege violations of Section 10(b) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder. Plaintiffs in both actions also allege pendent state law claims for fraud and breach of fiduciary duty. Pursuant to Section 3 of the Federal Arbitration Act ("Arbitration Act"), 9 U.S.C. § 3, defendants in both actions have moved to compel arbitration of both the federal and state law claims. The court has consolidated these motions for the purpose of deciding common issues concerning the arbitrability of claims under the 1934 Act. The court finds that the federal and state law claims are arbitrable and that no other factors preclude arbitration in either instance. The motions are therefore granted.

FACTUAL BACKGROUND

A. Finkle and Ross v. A.G. Becker Paribas, Inc.

In March 1983, plaintiffs Finkle and Ross, a partnership; Juston Enterprises, Inc. Employees' Pension Plan; Joseph Neira; John Neira; Francisco Carvajal Navarez; Evan Levy and Carol Levy ("Finkle and Ross") engaged defendant Mason Sexton ("Sexton") as their personal broker. Defendant Sexton was an employee of A.G. Becker Paribas, Inc. ("Becker"), a securities brokerage firm. By written agreement, plaintiffs authorized defendants to engage in discretionary trading in plaintiffs' account. The agreement contained the following arbitration clause ("Becker Arbitration Clause"):

Any controversy between us arising out of, or relating to, any transaction for my account shall be settled by arbitration, in accordance with the rules, then obtaining, of either the National Association of Securities Dealers, Inc. or the Board of Arbitration of the New York Stock Exchange, as I may elect. If I do not make such election by registered mail addressed to you at your office within five (5) days after receipt of notification from you requesting such election, I authorize you to make such election on my behalf. Any arbitration hereunder shall be final, and judgment upon the award rendered may be entered in any court, state or federal, having jurisdiction. By this agreement to arbitrate future controversies, I understand that I do not waive any rights I may have under the Federal securities laws for controversies arising under such laws.

Plaintiffs Finkle and Ross allege that defendants engaged in churning, the, "excessive and unsuitable trading for the purpose of generating commissions,". Plaintiffs bring this action for violations of Section 10(b) of the 1934 Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. Plaintiff's further claim that defendants' acts constitute common-law fraud and breach of fiduciary duty.

B. Mockridge v. Prescott, Ball & Turban

In 1967, plaintiff Louise Mockridge, at the encouragement of defendant Erhard Schmidt ("Schmidt"), opened an account at Clark Dodge & Company, where Schmidt was a registered representative. In 1968, Schmidt became a broker with Vanden Broeck Liber & Co. and thereafter asked Mockridge to transfer her securities account to this firm. Vanden Broeck Liber & Co. subsequently became Prescott, Ball & Turban ("Prescott"). Plaintiff's contract with Schmidt and Prescott contained the following clause providing for arbitration of disputes arising out of the contract ("Prescott Arbitration Clause"):

Any controversy between you Prescott and the undersigned arising out of or relating to any transaction of this or any other contract or the breach thereof, shall be settled by arbitration .... Any arbitration hereunder shall be before at least three arbitrators and the award of the arbitrator or a majority of them shall be final, and judgment upon the award may be entered in any court, state or federal, having jurisdiction.

Defendant Prescott's Memorandum of Law at 4.

Plaintiff Mockridge alleges that defendants engaged in a course of business which would operate as a fraud against any person. Plaintiff's Memorandum in Opposition at 7-9. Thus, plaintiff brings this action for violation of Section 10(b) of the 1934 Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, as well as for common-law fraud.

Defendants in both actions contend that these claims fall within the scope of the respective arbitration clause and therefore have moved to compel arbitration and stay their respective action.

DISCUSSION

A. The Arbitrability of Claims Under the 1934 Act

Pursuant to the Supreme Court's decision in Dean Witter Reynolds, Inc. v. Byrd, ___ U.S. ___, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985), the state law claims raised in these actions are arbitrable. The question remains, however, whether the claims brought under the Securities Exchange Act of 1934 may be submitted to arbitration along with the state law claims. The first step in this analysis is to determine whether Congress has evinced an intention to override a parties' agreement, that is, whether arbitration of a plaintiff's claim under the 1934 Act is precluded by legislative exigencies. See Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, ___ U.S. ___, 105 S.Ct. 3346, 3355, 87 L.Ed.2d 444 (1985).

In Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953), the Supreme Court held that agreements to arbitrate claims arising under the Securities Act of 1933 ("1933 Act") were void. The court's determination was based on three interrelated provisions of the 1933 Act, sections 12(2), 22, and 14. Section 12(2) provides a "special right to recover for misrepresentation," 346 U.S. at 434-35, 74 S.Ct. at 186-87, and section 22 provides for state and federal jurisdiction and nationwide service of process for suits brought according to that right. Section 14 voids any "stipulation ... binding any person acquiring any security to waive compliance with any provision" of the 1933 Act. While noting the strong policy in favor of arbitration embodied in the United States Arbitration Act, 9 U.S.C. § 1 et seq., ("the Arbitration Act") the Court nevertheless held that because an agreement to arbitrate is a stipulation and because a provision of the 1933 Act grants a private right of action, agreements to arbitrate claims under the 1933 Act are invalid. Weighing heavily in the Court's decision was its observation that the special right to recover for misrepresentation under section 12(2) is substantially different from the common-law action, id. at 431 n. 10, 74 S.Ct. at 184 n. 10, thus requiring the exercise of judicial direction to assure its effectiveness, id. at 436, 74 S.Ct. at 187.

Lower federal courts have extended Wilko, ruling that agreements to arbitrate claims under the 1934 Act are also void. E.g., DeLancie v. Birr, Wilson & Co., 648 F.2d 1255 (9th Cir.1981); Greater Continental Corp. v. Schechter, 422 F.2d 1100 (2d Cir.1970). Recently, however, the basis for overriding the Arbitration Act by precluding the arbitration of claims under the 1934 Act has been subject to increasing criticism. See Dean Witter Reynolds, Inc. v. Byrd, 105 S.Ct. at 1244 (White, J., concurring); McMahon v. Shearson/American Express, Inc., 618 F.Supp. 384, 387-89 (S.D.N.Y.1985) (Opinion). This criticism parallels greater support for arbitration generally as a means of resolving disputes more simply and expeditiously than in court. See, e.g., Southland v. Keating, 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984); Moses H. Cone Memorial Hospital v. Mercury Constr. Co., 460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983).

In Scherk v. Alberto-Culver Co., 417 U.S. 506, 94 S.Ct. 2449, 41 L.Ed.2d 270 (1974), the Supreme Court pointed out important differences in the 1934 and 1933 Acts and the effect those differences have on the applicability of Wilko to the 1934 Act. The Court noted that the 1934 Act contains no analogue to section 12(2) of the 1933 Act, which provided a special right of a private remedy to defrauded purchasers. Id. at 513, 94 S.Ct. at 2454. The Court contrasted the express right of action of the 1933 Act, which was determinative in the Wilko holding, with the implied right that the lower courts have shaped under the 1934 Act. Id. at 513-14, 94 S.Ct. at 2454-55. Finally, the Court compared the broad jurisdiction of the 1933 Act, provided for in section 77v, with the restriction of forums found in section 78aa of the 1934 Act. Id. at 514, 94 S.Ct. at 2454.

In Dean Witter Reynolds Inc. v. Byrd, ___ U.S. ___, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985), the Supreme Court reviewed the arguments raised in Scherk. 105 S.Ct. at 1240 n. 1. The Court declined to confront directly the issue of Wilko's applicability to claims under the 1934 Act. However, by raising the...