Olde Discount Corp. v. Tupman

• Decision Date: 16 September 1992
• Docket Number: Civ. A. No. 92-498-SLR.
• Citation: 805 F. Supp. 1130
• Parties: OLDE DISCOUNT CORPORATION, Plaintiff, v. W. Michael TUPMAN, individually and as Deputy Attorney General of the State of Delaware; Richard W. Hubbard, Securities Commissioner of the State of Delaware, Eugene H. Engelhardt, and Carol D. Engelhardt, Defendants.
• Court: U.S. District Court — District of Delaware

805 F. Supp. 1130

OLDE DISCOUNT CORPORATION, Plaintiff, v. W. Michael TUPMAN, individually and as Deputy Attorney General of the State of Delaware; Richard W. Hubbard, Securities Commissioner of the State of Delaware, Eugene H. Engelhardt, and Carol D. Engelhardt, Defendants.

Civ. A. No. 92-498-SLR.

United States District Court, D. Delaware.

September 16, 1992.

COPYRIGHT MATERIAL OMITTED

James S. Green of Duane, Morris & Heckscher, Wilmington, Del., for plaintiff. Of Counsel: Robert P. Bramnik, Thomas P. Fitzgerald, and Michael I. Behn, of Altheimer & Gray, Chicago, Ill.

W. Michael Tupman, Delaware Dept. of Justice, Wilmington, Del., for defendants W. Michael Tupman and Richard W. Hubbard.

MEMORANDUM OPINION

SUE L. ROBINSON, District Judge.

I. INTRODUCTION

Before the Court is a motion for temporary restraining order, preliminary injunction and other relief filed by plaintiff OLDE Discount Corporation ("OLDE") in order to enjoin defendants from: "(1) pursuing a penal and registration revocation action against the plaintiff which will have the effect of violating plaintiff's federal right to arbitrate....; (2) pursuing an investigation of OLDE; and (3) instigating other actions against the plaintiff in Delaware or any other state, pending a hearing and determination on the issuance of a preliminary injunction." (Docket item, "D.I.", 4) Defendants Richard W. Hubbard and W. Michael Tupman (hereinafter "the State defendants")¹, the Securities Commissioner of the State of Delaware and the Deputy Attorney General representing such, respectively, have responded and oral argument was heard on August 27, 1992. Supplemental responses have been received. (D.I. 19, 28)

II. JURISDICTION

Jurisdiction is grounded on plaintiff's claim regarding the Federal Arbitration Act ("FAA"), 9 U.S.C. §§ 1-10, and 28 U.S.C. § 1331.

Venue is proper in this District under 28 U.S.C. § 1391(b) because all defendants reside in this District and because the claims asserted by plaintiff arose in this District.

III. FINDINGS OF FACT

For purposes of this proceeding, the material facts are undisputed:

1. Plaintiff OLDE is a securities firm with its principal place of business located at 751 Griswold Street, Detroit, Michigan 48226. OLDE also has a branch office located at 208 West Tenth Street, Wilmington, Delaware 19801. (D.I. 12, Ex. 1, ¶ 12)

2. OLDE is and has been registered as a broker-dealer in Delaware since October 6, 1981. Although OLDE is primarily engaged in the discount brokerage business, it does make a market in certain securities, which its agents recommend to customers. In the spring of 1990, one of the stocks was Second National Federal Savings Bank ("SNFS"), a savings and loan association with branches in Pennsylvania, Maryland, Delaware, Virginia, and the District of Columbia. (D.I. 14, Ex. 1, ¶ 15)

3. The Division of Securities of the State of Delaware is a unit within the Department of Justice directed by the Securities Commissioner under the auspices of the Attorney General pursuant to the Delaware Securities Act, 6 Del.C. § 7301 et seq.

4. In 1983, defendants Eugene H. and Carol D. Engelhardt opened a joint account with OLDE in Michigan, where they were then residing. When they moved to Delaware in 1986, they transferred their account to OLDE's Wilmington office. In the spring of 1990, their account was assigned to Michael R. Donohoe, the only securities agent employed in OLDE's Wilmington branch. (D.I. 12, Ex. 1, ¶ 22)

5. The Engelhardt's account with OLDE was governed by the terms of an Investors Account Agreement between OLDE and the defendants Engelhardt. The Investors Account Agreement in effect during the period relevant to this proceeding was signed by the defendants Engelhardt on May 25, 1990. According to their Customer Preference Profile, the defendants Engelhardt had substantial investment experience, having invested in stocks for approximately fifteen years, making an average of three to five trades per year, and trading an average of five to ten thousand shares per transaction. In describing their investment objects, the defendants Engelhardt chose the following adjectives: "aggressive", "growth", "speculation". (D.I. 6, Ex. A)

6. The Investors Account Agreement entered between OLDE and the defendants Engelhardt included a "Predispute Arbitration Clause". The inclusion of the Predispute Arbitration Clause was disclosed in bold face and in large type directly above the defendants' signatures. (D.I. 6, Ex. A)

7. The Predispute Arbitration Clause itself was more specifically spelled out in the terms and conditions portion of the agreement, clauses 17 and 18, in bold type. In relevant part, the Predispute Arbitration Clause provides that the Engelhardts "agree to submit any and all controversies or claims arising out of this agreement to arbitration" according to the procedures of the New York Stock Exchange, Inc. or the National Association of Security Dealers, Inc. (D.I. 6, Ex. A)

8. In May and June 1990, the defendants Engelhardt purchased a total of ten thousand shares of the common stock of SNFS. The total purchase price of the ten thousand shares of SNFS stock was $52,875.00. During the course of the next several months, the market price of SNFS stock declined, causing a parallel decline in the market value of the defendants Engelhardts' SNFS account. (D.I. 1, ¶ 13)

9. In July or August 1990, the defendants Engelhardt telephoned OLDE in Michigan to express their dissatisfaction with their SNFS stock purchase, given the drop in price. The defendants Engelhardt were informed that there was no basis for their complaint, that their SNFS stock purchases were not inappropriate. (D.I. 1, ¶ 15)

10. According to the record, the defendants Engelhardt were advised at that time that they should submit a written complaint to OLDE regarding the circumstances of their claim if they wished to initiate a complaint and/or a fuller review. (D.I. 1, ¶ 15) No written complaint was ever submitted, although the Investors Account Agreement, clause 12, expressly requires investors to object, in writing, within ten days regarding any transactions in their account which are in dispute. (D.I. 1, ¶ 18; D.I. 6, Ex. A)

11. On September 6, 1990, the defendants Engelhardt transferred their SNFS stock out of OLDE. The market value of their SNFS stock at the time of the transfer was approximately $32,500.00, a decline of approximately $20,375.00 from their initial investment. (D.I. 1, ¶ 17)

12. In July 1991, the Division of Securities of the State of Delaware received a complaint from the defendants Engelhardt against OLDE and its agent (by now a former agent), Michael Donohoe, with regard to the purchase of the SNFS stock in May and June of 1990. (D.I. 6, Ex. C; D.I. 12, ¶ 2)

13. By letter dated July 31, 1991, a securities investigator for the Delaware Department of Justice advised OLDE of the Engelhardts' complaint. The securities investigator related that "the Engelhardts allege that the solicitation to purchase the SNFS stock involved omission of material facts (including the risk factor) and high pressure selling techniques. They further allege that Mr. Donohoe marked at least one purchase `unsolicited'. Finally, they allege that this security was unsuitable for persons in their circumstances." The securities investigator requested that OLDE respond to these allegations by August 26, 1991. (D.I. 6, Ex. C; D.I. 12, ¶ 2) OLDE responded to this and subsequent requests for documents and information. (D.I. 6, Ex. E; D.I. 12, ¶ 2-4)

14. By late May 1992, the Division of Securities had completed its investigation of the Engelhardts' complaint and on June 5, 1992, defendant Tupman sent to OLDE a draft "Notice of Intent to Suspend or Revoke Broker-Dealer Registration", alleging various violations of the Delaware Securities Act, 6 Del.C. §§ 7301 et seq. (D.I. 12, ¶ 5) In said Notice, defendant Tupman stated that it was in the public interest that: 1) the broker-dealer registration of OLDE be suspended or revoked; 2) Donohoe be permanently barred from engaging in the securities business in Delaware; 3) OLDE rescind the three sales of SNFS stock to the defendants Engelhardt, and pay the Engelhardts back their purchase price of $52,875.00; and 4) OLDE be fined $10,000.00 for each and every violation of the Act, and that OLDE pay all of the costs incurred by the Division of Securities in connection with the investigation and prosecution of the case. (D.I. 6, Ex. F)

15. By letter dated June 25, 1992, OLDE asserted that the proposed administrative proceeding against OLDE for Donohoe's alleged sales practice abuses was not warranted. OLDE also offered to settle the Engelhardts' claim concerning their SNFS stock purchases by offering $20,000.00 as compensation for all of the losses which were allegedly caused by Donohoe's conduct. In the alternative, OLDE offered to "pay all filing and form fees for the Engelhardts' claim to be heard and decided by an arbitration panel before the National Association of Securities Dealers, Inc., the New York Stock Exchange, Inc. or the American Arbitration Association." (D.I. 6, Ex. G)

16. By letter dated July 6, 1992, defendant Tupman responded:

In considering your offer of settlement, I assume that the $20,000.00 figure represents the difference between the price paid by the Engelhardts for their SNFS stock, and the current market value. Given the allegations of unsuitability, I think it much more appropriate for there to be a rescission of the trades, with your firm receiving the stock back, and the Engelhardts their purchase price ($52,875.00).

In addition, because of the seriousness of the allegations, and the State's preparedness to prosecute, the public interest would require a substantial contribution to the Investor Protection Fund, as well as written undertakings regarding compliance procedures in your Wilmington branch office.

I do not intend to continue any further written

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