Prudential Securities Inc. v. Arain

• Decision Date: 12 July 1996
• Docket Number: No. 96 Civ. 2418 (LAK).,96 Civ. 2418 (LAK).
• Citation: 930 F. Supp. 151
• Parties: PRUDENTIAL SECURITIES INCORPORATED, Petitioner, v. Mohammad Afzal ARAIN, et al., Respondents.
• Court: U.S. District Court — Southern District of New York

930 F. Supp. 151

PRUDENTIAL SECURITIES INCORPORATED, Petitioner, v. Mohammad Afzal ARAIN, et al., Respondents.

No. 96 Civ. 2418 (LAK).

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

July 9, 1996.

As Corrected July 12, 1996.

Anthony Paduano, Jordan D. Becker, Smith Campbell & Paduano, New York City, for Petitioner.

Seth E. Lipner, Deutsch & Lipner, Garden City, NY, for Respondents.

MEMORANDUM OPINION

KAPLAN, District Judge.

This case, which arises out of the widely publicized difficulties of Prudential Securities Incorporated ("Prudential"), involves the so-called "AMEX window." This provision of the constitution of the American Stock Exchange ("ASE") gives a customer the right to arbitrate claims against an ASE member firm before the American Arbitration Association ("AAA") in the City of New York unless the customer has signed an agreement requiring submission of the controversy to arbitration before the ASE.

Prudential's difficulties have grown out of its sales of interests in limited partnerships. Its troubles seem to have spawned an industry of which this controversy is a part. On November 29, 1995, Ron Miller, a non-attorney, filed a Statement of Claim against Prudential and a Demand for Arbitration with the American Arbitration Association ("AAA") on behalf of 147 claimants from 24 different states. He seeks to proceed with a consolidated arbitration in California. Prudential's petition in this Court contends that 64 of the arbitration claimants have no written arbitration agreements with Prudential, that their only basis for arbitration is the AMEX window, and that the AMEX window requires that any AAA arbitration be in the City of New York. It seeks a determination that those 64 claimants may pursue the AAA arbitration against Prudential only in New York. It contends also that the respondents' claims are untimely.

Facts

The California Proceedings

The 147 claimants in the AAA sought a single, consolidated arbitration in San Francisco. The express policies of the AAA do not permit it to accept consolidated cases involving parties who are not signatories to the same arbitration agreement unless there is (1) an agreement of all the parties, (2) a court order directing consolidation, or (3) clear case law authorizing arbitrators to rule on consolidation issues. None of these exceptions was satisfied in this case. In consequence, the AAA ultimately ruled that it would not accept the arbitration on a consolidated basis. (Zagon Aff. ¶ 3) But the claimants did not even await the AAA's ruling before resorting to the courts.

On January 4, 1996, about half of the 147 claimants filed an action in the California Superior Court, City and County of San Francisco, to compel Prudential to arbitrate and to consolidate the arbitration of all of the claims. On February 16, 1996, Prudential moved to dismiss the action, insofar as it was brought on behalf of persons who neither resided nor maintained accounts at Prudential branches in California, on the ground of forum non conveniens. (Id. ¶ 6) On March 18, 1996, the California court granted the motion and stayed the action insofar as it was brought by non-California plaintiffs.¹ (Ferentz Aff.Ex. C)

Nor has the matter progressed with regard to the California plaintiffs. Under California law, a party seeking to compel arbitration may bring the matter to issue only by filing a noticed motion with the court. CAL. CODE CIV.PROC. § 1290.2 (West 1996). The claimants have not made such a motion in the six months during which the action has been pending.

Accordingly, the current state of play in California is that the AAA has refused to accept the consolidated claim. The court has declined to entertain the effort of the non-California claimants to compel a consolidated arbitration. The California claimants have filed an action to compel such an arbitration, but have not brought that matter to resolution.

The AMEX Window

Prudential's effort to stay respondents from pursuing the California arbitration pursuant to the so-called "AMEX window" has spawned a dispute concerning which of the respondents in this action are proceeding pursuant to the AMEX window and which have other rights to arbitrate. Article VIII, § 2, of the Constitution of the ASE, the AMEX window, provides that:

"Arbitration shall be conducted under the arbitration procedures of the Exchange, except as follows:

* * * * * *

"(c) if any of the parties to a controversy is a customer, the customer may elect to arbitrate before the American Arbitration Association in the City of New York, unless the customer has expressly agreed, in writing, to submit only to the arbitration procedure of the Exchange." (Emphasis added)

Prudential alleged in its petition that 62 of the 64 respondents do not have written arbitration agreements with it and therefore may arbitrate their claims against Prudential only before the AAA and only in New York. (Pet. ¶ 54) It there acknowledged that two of the respondents executed a customer agreement with Prudential authorizing arbitration in accordance with the rules of the ASE. (Id. ¶ 55) As will appear, subsequent investigation has resulted in some change in these figures.

The Second Circuit has held that arbitrations brought pursuant to the AMEX window must take place in New York.² Respondents therefore argue that certain of the respondents had written arbitration agreements with Prudential that permit arbitration before the AAA without restriction as to venue. In doing so, however, they have not produced a single such agreement. Nor have they come forward with a single affidavit of a single respondent asserting that the respondent executed such an agreement. Instead, they rely on an affidavit of Michael Hume, a former stock broker now employed by Mr. Miller's firm. On the basis of a review of some account documents and an outdated schedule of forms allegedly required by Prudential for the opening of certain types of accounts, Miller — who never worked for Prudential and professes no personal knowledge of Prudential's practices — opines that certain of the respondents, in the normal course of Prudential's business, would have been required to execute arbitration agreements of the sort alleged.

Prudential has responded with an affidavit of Regina Tait, a senior legal assistant whose duties include retrieving customer account documentation for use in litigation. Ms. Tait states that Prudential has no customer agreements for 46 of the respondents (and no evidence that seven of them even had accounts at Prudential or that six others had any interest in accounts owned by relatives who are claimants), that customer agreements of two others contain no arbitration clauses, that agreements with seven limit arbitration to the New York Stock Exchange and the NASD (thus excluding the AAA altogether), and that one of the respondents appears to have made his disputed investment via an account for which there was no arbitration clause, but had another account that provided for arbitration, albeit not before the AAA. (Tait Aff. ¶¶ 4-8) Prudential acknowledges that it recently has found agreements with eight other respondents that permit arbitration before the AAA without limitation as to venue (id. ¶ 9) and has dismissed as against them by stipulation.

Prudential has submitted also evidence inconsistent with the assumptions on which Mr. Hume's comments rest. Mr. Hume based his remarks on the premise that the account forms he reviewed exemplified all of the forms used by Prudential during the relevant period, a premise essential to his conclusion that the forms he supposed that the respondents signed would have permitted AAA arbitration without limitation on venue. That premise is incorrect, as Prudential also used other forms, that would preclude use of the AMEX window, during the relevant period. (Id. ¶ 11) Moreover, Prudential has shown that it simply did not obtain signed arbitration agreements from many of its customers. (Id. ¶ 10)

Discussion

Arbitration between customers and securities firms is governed by the Federal Arbitration Act (the "Act"), 9 U.S.C. §§ 1 et seq. See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Georgiadis, 903 F.2d 109, 112 (2d Cir.1990).

Timeliness

Prudential's effort to stay all of the respondents from proceeding with their claims on the ground that their claims are untimely antedated the Second Circuit's decision in PaineWebber Inc. v. Bybyk, 81 F.3d 1193 (2d Cir.1996). That case makes it clear that the issue of timeliness here is for the arbitrators. Compare Insurance Co. of North America v. ABB Power Generation, 925 F.Supp. 1053 (S.D.N.Y.1996) (timeliness for court where contract so provides). Accordingly, Prudential's motion to stay the arbitration on this ground is denied.

The Existence of Arbitration Agreements

Respondents' effort to avoid the venue provision of the AMEX window begins with their contention that many of the respondents must have signed arbitration agreements with Prudential that permit AAA arbitration free of venue constraints. As indicated, the sole basis for this contention is the Hume affidavit.

Under Section 4 of the Act, 9 U.S.C. § 4, the determination of whether there is an agreement to arbitrate is for the Court. E.g., Bybyk, 81 F.3d at 1198. Where there is a genuine issue as to a fact material to this determination, a hearing is required.³ Here, however, there is no genuine issue.

In essence, the respondents — although not one of them has said so under oath — assert through counsel that (1) they signed arbitration agreements with Prudential, and (2) the terms of those agreements permitted AAA arbitration outside New York. Mr. Hume's affidavit seeks to establish both propositions by contending that it was the routine practice of Prudential to require that customers sign such agreements and that the agreements in use during the relevant period all contained such terms.

The conduct of an organization on a particular occasion...