O.N. Equity Sales Co. v. Gibson
| Decision Date | 15 May 2008 |
| Docket Number | Civil Action No. 3:07-0362. |
| Citation | 553 F.Supp.2d 652 |
| Court | U.S. District Court — Southern District of West Virginia |
| Parties | The O.N. EQUITY SALES COMPANY, Plaintiff, v. Lonnie L. GIBSON, Defendant. |
Charles M. Love, III, Fazal A. Shere, Bowles Rice McDavid Graff & Love, Charleston, WV, Marion H. Little, JR., Michael R. Reed, Zeiger Tigges & Little, Columbus, OH, for Plaintiff.
Joel A. Goodman, Goodman & Nekvasil, Clearwater, FL, Stephen P. Meyer, Meyer & Ford, Charleston, WV, for Defendant.
Pending before the Court is Plaintiffs Motion for Relief from Judgment Under Civil Rule 60(b)(2) & (3). (Doc. 46). For the reasons explained below, that motion is DENIED.
This action ultimately arises from an unfortunate investment and the resulting failure of Lancorp Financial Business Trust ("Lancorp"). Plaintiff, O.N. Equity Sales Co. ("ONESCO"), is a full service securities broker dealer, registered in all 50 states and a member of the National Association of Securities Dealers ("NASD"). From March 23, 2004 until January 2, 2005, ONESCO employed nonparty Gary Lancaster as an independent contractor and registered representative. Lancaster also served as the Chairman, President, and CEO of Lancorp before, during, and after his employment with ONESCO. Lancorp failed after one of its first major investments (in the Texas based MegaFund) turned out to be a Ponzi scheme.
After the failure of Lancorp, numerous investors filed arbitration actions with the NASD asserting state and federal claims against ONESCO based on its employment and supervision of Lancaster. ONESCO filed actions in district courts across the country in an attempt to avoid arbitration. On October 1, 2007, this Court denied the Plaintiffs motion for a preliminary injunction and granted the Defendant's motion to compel arbitration. O.N. Equity Sales Co. v. Gibson, 514 F.Supp.2d 857, 865 (S.D.W.Va.2007). As a result, the parties proceeded to arbitration before the NASD.
The Court's decision to send the parties to arbitration was based on findings pertaining to the existence and scope of an arbitration agreement. See generally, id. The Court determined that the NASD Code of Arbitration Procedure served as an existing arbitration agreement between the parties and that the relationship between ONESCO and Gibson fit within the scope of that agreement.1 Id. To reach this decision, the Court found Gibson was a customer of ONESCO, within the meaning of the NASD Code, and the dispute arose within a business relationship. Id. at 864-65. Plaintiff argues that the factual basis for these decisions has been contradicted by testimony of Lancaster during the NASD arbitration.
The Court found that Gibson could be considered a customer of ONESCO because events that occurred during Lancaster's association with ONESCO would support Gibson's claim. Facts in the record supported this finding. First, although Lancaster began soliciting investors prior to his association with ONESCO, all investments in the company were held in escrow and subject to modification, cancellation, or termination by Lancorp in its sole discretion until a later start-up date. Lancaster swore that this date was May 14, 2004, a time when he was associated with ONESCO. Second, in April of 2004, also a time when Lancaster was associated with ONESCO, Lancorp changed the terms of the investments. Lancaster informed buyers that insurance was no longer available and investments would be guaranteed by a new bank or by broker/dealer obligations; investors were asked to confirm their investments or request withdrawal. In affidavit, Lancaster described this change as material. Third, this Court found it significant that although Gibson made an initial investment in Lancorp before Lancaster was associated with ONESCO, Gibson made a second investment ($30,000) in September of 2004—during the time at which Lancaster was associated with ONESCO. Fourth, the Court found that ONESCO was at least on notice that Lancaster was associated with Lancorp. Finally, this Court noted that the complaint contained sufficient allegations to support claims against ONESCO based on its supervision of Lancaster.
ONESCO now argues that new evidence indicates that the factual basis upon which the Court based its prior analysis is incorrect. It first contends that the May 14, 2004 "effective" startup date was but one of three possible start-up dates and irrelevant to the analysis. The first of the three dates is March 17, 2003—a date listed in a private placement memorandum' and circulated by Lancorp with its offerings. This was the date Lancorp was organized and began soliciting investors. The second date, May 14, 2004, was the day on which Lancorp lost discretion to modify or cancel investment agreements and also the day when Lancorp made a deposit with Tricom Securities (an Australian brokerage firm). ONESCO describes a third date it considers effective, February 1, 2005, which was the date when Lancorp invested in MegaFund. Lancorp had recovered its Tricom investment in December 2004—a time at which Lancaster did work for ONESCO. At that time, and continuing until February 2005, Lancaster offered investors an opportunity to obtain a full refund on their investment. In February 2005—after Lancaster was terminated from ONESCO —Lancorp reinvested its funds in MegaFund, the investment which directly resulted in investors' losses. Lancaster's balance and deposit sheets list February 1, 2005 as the investment date and as a startup date for Lancorp.
ONESCO also contends that the April 2004 "material modification" was not material at all. During cross-examination Lancaster testified that he was not able to obtain insurance for investors in Lancorp, but also that only about one-third of investors had chosen insurance. The following exchange then took place;
Q. And what you communicated in April 2004 is, in fact, there would be no coverage?
A. Correct.
Q. As a practical matter, what you told the investors in this letter is that even though there would be no insurance coverage, you alternatively would have security through the bank, the bank holding the monies?
A. Correct.
Q. And so, functionally, in terms of what the representations were to the investors as to the preservation of the principal, it was—it was the same at all points during the relationship?
A. Correct.
Plaintiff argues that this exchange proves that the April change was not material.2
Federal Rule of Civil Procedure 60(b) provides grounds for relief from a final judgment under limited circumstances. Here, Plaintiff has filed a motion for relief under Rule 60(b) on two grounds. First, Plaintiff argues that the Court should reconsider its prior opinion based on Fed. R.Civ.P. 60(b)(2), which allows relief when there is "newly discovered evidence that, with reasonable diligence, could not have been discovered in time to move for a new trial under Rule 59(b)." Second, Plaintiff argues that it is entitled to relief under Fed.R.Civ.P. 60(b)(3) which allows relief for "fraud ... misrepresentation, or misconduct by an opposing party."
The remedy provided by Rule 60(b) "is extraordinary and is only to be invoked upon a showing of exceptional circumstances." McLawhorn v. John Daniel & Co., Inc. 924 F.2d 535 (4th Cir.1991) (internal quotations omitted). In seeking relief from judgment, "the movant assumes the burden of showing a meritorious defense against the claim on which judgment was entered as a threshold condition to any relief whatsoever under the Rule." Id. (internal quotations omitted).
Relief based on newly discovered evidence, under Rule 60(b)(2) requires a party to show,
(1) the evidence is newly discovered since the judgment was entered; (2) due diligence on the part of the movant to discover the new evidence has been exercised; (3) the evidence is not merely cumulative or impeaching; (4) the evidence is material; and (5) the evidence is such that is likely to produce a new outcome if the case were retried, or is such that would require the judgment to be amended.
Boryan v. U.S., 884 F.2d 767, 771 (4th Cir.1989).
To prevail on a Rule 60(b)(3) motion the movant must satisfy the following test:
(1) the moving party must have a meritorious defense; (2) the moving party must prove misconduct by clear and convincing evidence; and (3) the misconduct prevented the moving party from fully presenting its case. After proof of these elements, the court must balance the competing policies favoring the finality of judgments and justice being done in view of all the facts, to determine within its discretion, whether relief is appropriate in each case.
Schultz v. Butcher, 24 F.3d 626, 630 (4th Cir.1994) (internal quotations omitted).
ONESCO fails the test for relief from judgment under Rule 60(b)(2) because new evidence that it has uncovered during arbitration is not material and thus is unlikely to produce a new outcome if the case were retried. The relevant provision of the NASD Code—which serves as an arbitration agreement between the parties— states,
Any dispute, claim, or controversy eligible for submission under Rule 10100 Series between a customer and a member and/or associated person arising in connection with the business of such member or in connection with the activities of such associated persons shall be arbitrated under this Code, as provided by any duly executed and enforceable written agreement or upon the demand of the customer.
NASD Code of Arbitration Procedure, Rule 10301(a).
Rule 10301 thus establishes two conditions for arbitration: (1) the dispute must be between a customer and a member or a person associated with a member; (2) the dispute must have arisen in connection with the business of such member or in...
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...with the business of the member or in connection with the activities of the associated person. Id.; O.N. Equity Sales Co. v. Gibson, 553 F.Supp.2d 652, 656 (S.D.W.Va.2008); see Multi-Fin. Sec. Corp. v. King, 386 F.3d 1364, 1370 (11th Cir.2004) (concluding that because a customer dealt with ......