Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Moore

• Citation: 590 F.2d 823
• Parties: Fed. Sec. L. Rep. P 96,723 In the Matter of the Application of MERRILL LYNCH, PIERCE, FENNER & SMITH, INC. to Compel Arbitration, pursuant to the United States Arbitration Act, Title 9 U.S.C. § 4, Petitioner, v. Milton M. MOORE and Sue Kendall Moore, Respondents. Milton M. MOORE and Sue Kendall Moore, Plaintiffs-Appellants, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., a corporation, and Chuck Buland, an individual, Defendants-Appellees. No 77-1887.
• Decision Date: 24 January 1979
• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)

Page 823

590 F.2d 823

Fed. Sec. L. Rep. P 96,723

In the Matter of the Application of MERRILL LYNCH, PIERCE,

FENNER & SMITH, INC. to Compel Arbitration,

pursuant to the United States

Arbitration Act, Title 9

U.S.C. § 4, Petitioner, v. Milton M. MOORE and Sue Kendall Moore, Respondents.

Milton M. MOORE and Sue Kendall Moore, Plaintiffs-Appellants, v. MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., a corporation, and Chuck Buland, an individual, Defendants-Appellees.

No 77-1887.

United States Court of Appeals, Tenth Circuit.

Submitted Nov. 14, 1978.

Decided Dec. 29, 1978.

Rehearing Denied Jan. 24, 1979.

Frank Gregory and Benjamin P. Abney, of Chapel, Wilkinson, Riggs, Abney & Keefer, Tulsa, Okl., for plaintiffs-appellants.

John S. Athens and Douglas L. Inhofe of Conner, Winters, Ballaine, Barry & McGowen, Tulsa, Okl., for defendants-appellees.

Before McWILLIAMS, DOYLE and LOGAN, Circuit Judges.

WILLIAM E. DOYLE, Circuit Judge.

The question involved in this case is the enforceability of an arbitration clause in an investment contract entered into by the plaintiffs-appellants, the Moores, with Merrill Lynch, Pierce, Fenner & Smith, Inc. Named as a defendant-appellee is one Chuck Buland, an account executive with the Merrill Lynch organization. The particular stipulation provided that "(a)ny controversy between us arising out of such option transactions of this agreement shall be settled by arbitration before the National Association of Securities Dealers, Incorporated, or the New York Stock Exchange, or the American Stock Exchange * * *."

The suit filed by the appellants is alleged to arise under 15 U.S.C. § 77q(a) and § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b). However, we need not determine whether the stipulation embraced this type of suit sounding as it does in tort rather than in contract, because it turns on the related question, that is, whether remedies arising under the Securities Act of 1933 and the Securities Exchange Act of 1934 are waived as a result of the stipulation providing for arbitration.

The action herein was originally brought in the State District Court at Tulsa, Oklahoma. The complaint alleged negligence and breach of fiduciary duty by Merrill Lynch in the handling of the plaintiffs' investments. Further allegations were that the defendants had violated rules of the National Association of Securities Dealers and the New York Stock Exchange. Merrill Lynch was a member of both organizations. This original suit was started on January 19, 1976.

On April 2, 1976, Merrill Lynch brought the matter to a head by filing a petition in the U.S. District Court, which sought an order which would have required the plaintiffs to submit the controversy to arbitration pursuant to § 4 of the United States Arbitration Act, 9 U.S.C. § 1, Et seq. This was a diversity action.

The next move came from the Moores, who on April 29, 1976, dismissed their claim in State Court and filed a new complaint in the United States District Court. It was this complaint that alleged that the defendants had violated § 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a); § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b); and Rule 10b-5, 17 C.F.R. § 240.10b-5.

The District Court described the complaint as alleging that the device, scheme and artifice to defraud was employed toward plaintiffs, who were not sophisticated business people. ¹

After a variety of hearings before the District Court an order was entered directing the parties to proceed to arbitration before a National Association of Securities Dealers tribunal. It is this judgment which the appellants seek to reverse.

The position of the Moores on this appeal is that under the current case law arbitration clauses such as this are not enforceable, but are void insofar as the federal securities laws are concerned. ²

I. THE REMEDY UNDER THE 1933 ACT

There are a good many decisions which deal with the present question whether securities claims are available to a plaintiff in the face of a waiver provision in a contract calling for arbitration. The situation is also complicated by the Arbitration Act, which itself is based on favorable policy considerations pitted against the Securities Act of 1933, which on its part grants strong remedies to an aggrieved person, See § 22, and which contains also a provision, § 14, which in essence declares that an attempted waiver of the remedy under the Act is void.

The leading authority on the question is that of the Supreme Court in Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953). The difference between Wilko and the case at bar is that the former considered a violation of § 12(2) of the Securities Act of 1933. The case at bar is concerned with claims allegedly arising under both the 1933 and 1934 Acts.

Merrill Lynch would have us limit the Wilko decision to the § 12(2) case and would have us hold that it does not apply to the Securities Exchange Act of 1934, § 10(b), and Rule 10b-5. However, it is impossible to distinguish the Wilko case in this manner, for, as will appear below, the parallel considerations applicable to the two Acts make it impossible to draw such a distinction.

Merrill Lynch seeks to assert other contentions including, first, that the plaintiffs' complaint fails to state a claim upon which relief may be granted under § 17 of the 1933 Act or § 10(b) of the 1934 Act; second, that no relief can be granted as to claims based on the rules of the National Association of Securities Dealers or the New York Stock Exchange; third, that the trial should be stayed pending the outcome of the arbitration proceeding. None of these questions are before us at this time, and the only matter which we are reviewing is the order of the trial court referring the case to arbitration.

The Wilko v. Swan opinion, Supra, written by Justice Reed, was concurred in by six other Justices, with Justices Frankfurter and Minton dissenting, and Justice Jackson filing a special concurring opinion. Involved in that case was a § 12(2) violation of the Securities Act of 1933, which allows a recovery for misrepresentation in the sale of stock. It differs from fraud at common law in that the burden of proof as to lack of scienter is placed on the seller.

In Wilko, the action was by a customer against a securities firm seeking damages for alleged misrepresentations in the sale of securities. As in the case at bar there was an agreement for arbitration of any controversy arising in the future between the parties. However, this was ruled to be void under § 14 of the Securities Act of 1933, which provides as follows:

Contrary Stipulations Void

Sec. 14. Any condition, stipulation, or provision binding any person acquiring any security to waive compliance with any provision of this subchapter or of the rules and regulations of the Commission shall be void.

The Supreme Court determined that § 14 above rendered the stipulation for arbitration void. It said that § 22(a) of the 1933 Act could not be waived since it gave the aggrieved person the right to select the judicial forum under the Securities Act, and because attempts to circumvent § 14 were void. The Second Circuit ruling which had determined that the Securities Act did not prohibit the agreement to refer future controversies to arbitration was set aside.

The Court reasoned (in Wilko ) that Congress intended to assure that sellers could not maneuver buyers into a weakened position under the Securities Act. The Court described the petitioner's position as being that arbitration lacks the certainty of a suit under the Act to enforce his rights; that the arbitration paragraph of the margin agreement constituted a stipulation that waives "compliance with" the conditions of the Securities Act. The Court distinguished fact situations in which payment for the commodity or disputes as to the amount of money under a contract are involved. Clearly this was not the situation at bar. This claim required findings on the purpose and knowledge of the alleged violator of the law. Arbitrators are less capable of determining this than judges. Furthermore, arbitration awards may be made without explaining reasons, thereby limiting the power to vacate the award. Also, unrestricted submission to an arbitrator does not provide complete review by the court of appeals. Finally, the Court said that:

As the protective provisions of the Securities Act require the exercise of judicial direction to fairly assure their effectiveness, it seems to us that Congress must have intended § 14, note 6, Supra, to apply to waiver of judicial trial and review.

346 U.S. at 437, 74 S.Ct. at 188.

The Supreme Court did not overlook the policies that favor arbitration, but it finally concluded that the Securities Act policies outweigh those favoring arbitration so that the Securities Act had to prevail.

Section 14 was applied with full force to render the stipulation void.

The remaining question is whether Wilko v. Swan, supra, applies also to the Securities Exchange Act of 1934, to § 10(b) of that Act, and to Rule 10b-5 promulgated pursuant thereto.

The decision in Wilko is fully applicable to the § 12(2) remedy under the 1933 Act contained in the case before us, because there is no difference between Wilko and the § 12(2) remedy here.

The decisions are virtually unanimous in following the Wilko opinion. Weissbuch v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 558 F.2d 831 (7th Cir. 1977); ³ Sibley v. Tandy Corp., 543 F.2d 540, 543 (5th Cir.), Cert. denied, 434 U.S. 824, 98 S.Ct. 71, 54 L.Ed.2d 82 (1977); Ayres v. Merrill Lynch, Pierce, Fenner & Smith, 538 F.2d 532 (3rd Cir.), Cert. denied, 429 U.S. 1010, 97 S.Ct. 542, 50 L.Ed.2d 619 (1976); Laupheimer v. McDonnell & Co., Inc., 500 F.2d 21, 26 (2d Cir. 1974); Axelrod & Co. v. Kordich, Victor & Neufeld, 451 F.2d 838, 842-843 (2d Cir. 1971); Greater Continental Corporation v. Schecter, 422 F.2d 1100 (2d Cir. 1970); ...