N. Donald & Co. v. American United Energy Corp.
| Citation | 746 F.2d 666 |
| Decision Date | 19 October 1984 |
| Docket Number | 83-2049,Nos. 83-2048,s. 83-2048 |
| Parties | Fed. Sec. L. Rep. P 91,807 N. DONALD & COMPANY and Securities Clearing of Colorado, Inc., Appellants, v. AMERICAN UNITED ENERGY CORPORATION; Winfield Moon, Sr. Winfield Moon, Jr.; Robert E. Jobes; Robert Hughes; Theoleme Moon; Enrienfried Liedich; Main Street Securities, Inc. Edward Brown Securities, Inc.; Western Capital & Securities, Inc.; Keith Wanlass; Terry Bradley; Jerry Vamiden; Richard L. Anderson; Paul T. Bucy; Richard Carey; J.M. Stoof; Steve Leishman; John Katter; John Does; Rooney, Pace, Inc., Appellees. |
| Court | United States Courts of Appeals. United States Court of Appeals (10th Circuit) |
David A. Zisser, Fishman, Gersh & Bursiek, P.C., Denver, Colo. (William R. Fishman, Fishman, Gersh & Bursiek, P.C., Denver, Colo., on brief), for appellant N. Donald & Co.
David Lichtenstein, Waldbaum, Corn, Koff & Berger, P.C., Denver, Colo. (Michael H. Berger, Waldbaum, Corn, Koff & Berger, P.C., Denver, Colo., with him on briefs), for appellant Securities Clearing of Colorado, Inc.
Hartley T. Bernstein, New York City (Cohen, Brame & Smith, Denver, Colo., with him on brief), for appellee Rooney, Pace, Inc.
Adam Duncan, Salt Lake City, Utah (David E. Halliday and S. Junior Baker, Snow & Halliday, P.C., Salt Lake City, Utah were on brief), for appellee Western Capital & Securities, Inc.
Wallace Boyack, Boyack & Hansen, Salt Lake City, Utah, for appellee, Main Street Securities.
Before SETH and DOYLE, Circuit Judges, and BOHANON, Senior District Judge. *
The litigants who brought this suit in the United States District Court for the District of Colorado, 585 F.Supp. 533, seek to obtain reversal of a ruling by the district court judge staying all further judicial proceedings in these actions against all defendants, pending the outcome of arbitration proceedings between plaintiffs and several of the defendants. The request is that the court reverse the order of the district court and remand the case to the district court with instructions to proceed with the federal judicial action against all defendants. A further request is that this court instruct the district court to deny arbitration, or in the alternative, to stay arbitration pending the outcome of this court action below on remand. These cases were consolidated for appeal.
The two plaintiffs are broker-dealers in securities and are both members of the National Association of Securities Dealers (NASD), a national association of securities broker-dealers. The allegation is that defendants were engaged in a fraudulent plan or scheme to illegally distribute stock of American United Energy Corporation (American United).
The defendants consist of several groups of persons and entities, including: American United, the corporation whose stock was allegedly fraudulently publicly traded; three broker-dealer companies, Edward Brown Securities, Inc., Western Capital & Securities, Inc., and Rooney, Pace Corporation, which were also members of NASD and sold shares of American United for that corporation; and several officers, directors and auditors of American United.
The complaints which have been filed by the plaintiffs against defendants in the district court alleged that defendants were engaged in a scheme to illegally sell stock in the public market at a fraudulently inflated price. Specifically, plaintiffs alleged that defendants' conduct constituted: (1) violations of federal securities laws, specifically, Sec. 10(b) of the Securities Exchange Act of 1934 and 10b-5 of the Regulations, and Secs. 12(1) and 12(2) of the Securities Act of 1933; (2) common law fraud and statutory fraud in violation of the Colorado Securities Act Sec. 11-51-123; and (3) violation of the Colorado Organized Crime Control Act and the federal Racketeer Influenced and Corrupt Organizations Act (RICO).
Following the filing of the complaints in the district court, defendants Western Capital & Securities, Inc. (Western Capital) and Rooney, Pace Corporation (Rooney, Pace) requested the court to stay further judicial proceedings and, instead, compel arbitration between themselves and plaintiffs pursuant to the rules and regulations of NASD, of which plaintiffs, Western Capital, and Rooney, Pace were members. On July 6, 1983, the district court granted defendants' request and issued minute orders stating: "This action will be abated pending the outcome of arbitration proceedings."
The district court refused plaintiffs' requests to reconsider and stay the compelled arbitration proceedings. On May 10, 1984, the court issued a memorandum opinion and order in support of its July 6, 1983 minute order and refusal to stay arbitration proceedings. On August 5, 1983, plaintiffs appealed the court's July 6, 1983 orders compelling arbitration.
Inasmuch as there has not been a trial we do not have the basic facts. We do have the allegations of the Plaintiffs with respect to the alleged fraudulent conduct on the part of the defendants. The allegation is that American United devised a scheme to sell its stock in the public market at a fraudulently inflated price. In addition, plaintiffs allege that the three defendant broker-dealer companies aided and abetted these fraudulent sales by acting as "market makers" for American United's stock without adequately investigating American United's true financial worth or discovering the fraudulent representations and financial data.
The scheme to defraud public investors is alleged by plaintiffs to have occurred as follows:
First, American United was organized as a corporation in the spring of 1981 and issued 2,500,000 shares of stock to several of the individual defendants in an intrastate private offering pursuant to federal Securities and Exchange Rule 147. The rule did not require stringent reporting to the federal Securities and Exchange Commission. The issued price per share was one cent.
Second, American United used the $25,000 in proceeds to buy a mining claim in Utah. It never conducted business nor did it ever have any significant assets.
Third, after the expiration of the technical nine-month holding period required by Rule 147, the original purchasers of the 2,500,000 shares of American United began to sell their stock in the public securities market.
Fourth, in an attempt to inflate the value of the stock in the open market, American United issued several fraudulent financial reports and made numerous false and misleading statements.
Fifth, the three named broker-dealer companies attempted to act as "market makers" for the stock and sell it for the original investors. These defendant broker-dealers failed to independently research the accuracy of the financial data provided by American United.
Sixth, as a result of defendants' conduct, the price of American United stock was inflated to $9.50 from one cent per share.
Seventh, in reliance on defendants' statements, plaintiffs committed themselves to purchase for their customers 24,800 shares of American stock for a cost of $213,470. However, before consummating the entire transaction, plaintiffs discovered the fraudulent scheme to manipulate and inflate the stock price and cancelled the purchases. Plaintiffs were forced to sell the stock they had purchased at a loss of $80,187.50, as the price of the stock fell dramatically in the public market after disclosure of the fraudulent scheme. It is this loss that plaintiffs brought suit to recover. Conversely, in requesting the district court to compel plaintiffs to arbitrate, defendants Edward Brown Securities, Western Capital, and Rooney, Pace assert the current dispute actually arises out of plaintiffs' refusal to honor their commitments to purchase American United stock from defendant broker-dealers and that plaintiffs should be forced to honor those commitments.
There is only one issue on appeal and that is:
WHETHER IT WAS REVERSIBLE ERROR FOR THE DISTRICT COURT TO
OF ARBITRATION PROCEEDINGS BETWEEN
PLAINTIFFS AND DEFENDANT
BROKER-DEALER COMPANIES.
Plaintiffs maintain that judicial proceedings ought not to have been stayed pending arbitration, because such arbitration defeats the federal court's exclusive jurisdiction over cases involving federal securities law violations.
The contention is that the district court erred in staying its action against all defendants in federal district court and requiring them to complete arbitration proceedings with the three defendant broker-dealer companies to settle their dispute. Plaintiffs argue in support of their contention that the suit in federal court ought not to have been stayed.
They concede that as members of NASD they agreed to arbitrate all disputes with fellow member broker-dealers; however, they contend that such an agreement is invalid and unenforceable in this instance since it would operate to deprive the federal district court of its exclusive jurisdiction over federal securities law claims. They cite Wilko...
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