Reed v. Bear, Stearns & Co., Inc., Civ. A. No. 88-2040-O.

• Decision Date: 19 August 1988
• Docket Number: Civ. A. No. 88-2040-O.
• Court: U.S. District Court — District of Kansas
• Parties: Martha F. REED, Plaintiff, v. BEAR, STEARNS & CO., INC., Defendant.

698 F. Supp. 835

Martha F. REED, Plaintiff, v. BEAR, STEARNS & CO., INC., Defendant.

Civ. A. No. 88-2040-O.

United States District Court, D. Kansas.

August 19, 1988.

Bruce Keplinger, Payne & Jones, Chartered, Overland Park, Kan., for plaintiff.

W. Woody Schlosser, Smith, Gill, Fisher & Butts, Kansas City, Mo., David A. Jacobson, Richard C. Anderl, Kutak, Rock & Campbell, Omaha, Neb., Frank A. Taylor, New York City, Frank W. Lipsman, Smith, Gill, Fisher & Butts, Overland Park, Kan., for defendant.

MEMORANDUM AND ORDER

EARL E. O'CONNOR, Chief Judge.

This matter is before the court on two motions to compel arbitration brought by the defendant Bear, Stearns and Company, Inc. (Bear Stearns). The plaintiff Martha F. Reed (Reed) brought this action against Bear Sterns in connection with a margin securities account she held with the firm. Bear Stearns initially seeks an order compelling arbitration of the state law claims included in Reed's complaint: breach of contract (count 1), breach of a fiduciary duty (count 2), common law fraud, negligence, and conversion (count 3), and violations of Kansas securities laws (count 7). Bear Stearns additionally seeks an order compelling arbitration of the federal securities laws claims included in the complaint: violations of section 12(2) of the Securities Act of 1933 (count 4), violations of section 17(a) of the 1933 Act (count 5), and violations of section 10(b) of the Securities Exchange Act of 1934 and rule 10b-5 of the Securities Exchange Commission (SEC) (count 6).

The facts giving rise to Reed's claims and Bear Stearns' motions are as follows: Reed signed several written documents in opening her accounts with Bear Stearns. Among these documents was a Customer Agreement, which provided that Reed would buy and sell securities on margin through Bear Stearns. The Customer Agreement also included an arbitration clause:

Any controversy arising out of or relating to your account in connection with transactions between us or pursuant to this Agreement or the breach thereof shall be settled by arbitration in accordance with the rules, then in effect, of the National Association of Securities Dealers, Inc., the Board of Governors of the New York Stock Exchange, Inc. or the Board of Governors of the American Stock Exchange, Inc. as you may elect. If you do not make such election by registered mail addressed to Bear Stearns at 55 Water Street, New York, New York 10041, Attention: Director Legal and Compliance Department, within five days after demand by Bear Stearns that you make such election, then Bear Stearns may make such election. Judgment upon any award rendered by the arbitrators may be entered in any court having jurisdiction thereof. You understand that this Agreement to arbitrate does not constitute a waiver of your right to a judicial forum where such waiver would be void under the securities laws and specifically does not prohibit you from pursuing any claim or claims arising under the federal securities laws in any court of competent jurisdiction.

Pursuant to the documents, Bear Stearns transacted business by way of the mail and wire communication systems. On January 26, 1988, Reed filed her complaint against Bear Stearns, seeking damages in connection with Bear Stearns' alleged mismanagement of the account during the period surrounding the October 1987 stock market crash. Bear Stearns' answer specifically states that Bear Stearns does not waive its right to demand arbitration of the matter.

I. The State Law Claims.

Reed's complaint alleges claims under state common law and the Kansas securities laws. Her claims for breach of contract, breach of a fiduciary duty, fraud, negligence, and conversion may, for purposes of the motion to compel arbitration, be considered as a unit.

A contract dealing with margin securities accounts involves commerce, see Wilko v. Swan, 346 U.S. 427, 430, 74 S.Ct. 182, 184, 98 L.Ed. 168 (1953), and the Federal Arbitration Act provides that arbitration clauses in contracts involving commerce are valid and enforceable. 9 U.S.C. § 2. Reed's response to the motion to compel asserts that the arbitration clause is unenforceable because it is unconscionable. However, no evidence supports this assertion, and the assertion itself is insufficient in light of the strong favor paid to arbitration in recent Supreme Court decisions. See, e.g., Moses H. Cone Memorial Hosp. v. Mercury Construction Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 941-942, 74 L.Ed.2d 765 (1983) ("Any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration."); see also, Cohen v. Wedbush, Noble, Cooke, Inc., 841 F.2d 282, 286 (9th Cir.1988) ("The strong federal policy favoring arbitration, coupled with the extensive regulatory oversight performed by the SEC in this area, compel the conclusion that agreements to arbitrate ... are not unconscionable as a matter of law."); Surman v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 733 F.2d 59, 61 n. 2 (8th Cir.1984) ("There is certainly nothing inherently unfair about the arbitration clauses, and they are therefore valid and enforceable."); Brener v. Becker Paribas, Inc., 628 F.Supp. 442, 446 n. 3 (S.D.N.Y. 1985) ("There is nothing inherently unfair or oppressive about arbitration clauses."). Thus, the agreement is enforceable.

Further, section 4 of the Arbitration Act compels arbitration in disputes arising under a contract including a valid arbitration clause:

A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court which, save for such agreement, would have jurisdiction under Title 28 28 USC §§ 1 et seq., in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties, for an order directing that such arbitration proceed in the manner provided for in such agreement.... The court shall hear the parties, and upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement.

9 U.S.C. § 4 (emphasis added). Here, the making of the agreement is not disputed: Reed does not contest that she signed the Customer Agreement, which includes the arbitration clause. See Villa Garcia v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 833 F.2d 545, 546 (5th Cir.1987) (a court considering whether to compel arbitration initially should determine whether the parties agreed to arbitrate the dispute in question). Thus, section 4 directs the court to compel arbitration.

In addition to the mandate of section 4 of the Arbitration Act, the court is guided by the Supreme Court's decision in Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985). The Court stated: "The Arbitration Act requires district courts to compel arbitration of pendant arbitrable claims when one of the parties files a motion to compel, even where the result would be possibly inefficient maintenance of separate proceedings in different forums." Id. at 217, 105 S.Ct. at 1240. Thus, under Byrd, this court must compel arbitration of Reed's claims in counts 1, 2, and 3.

In her response to the motion to compel, Reed raises an additional argument against compelling arbitration: the claims in counts 1, 2, and 3 are implied under the federal securities laws because they allege violations of New York Stock Exchange (NYSE) and National Association of Securities Dealers (NASD) rules.¹ Neither Reed's response nor her complaint mention any specific rules which were violated, and we are persuaded that the claims, as pleaded, are properly characterized as state common law claims. Reed requests that if we reach this conclusion, she be allowed to amend her complaint. Under Federal Rule of Civil Procedure 15, leave to amend "shall be freely given." Fed.R.Civ.P. 15(a). Although "this mandate is to be heeded," the court need not allow amendment of a complaint where the amendment would be futile. Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962). Here, an amendment to allege claims arising under NYSE and NASD rules would be futile. No private right of action exists for violations of unspecified NYSE and NASD rules. See Jablon v. Dean Witter & Co., 614 F.2d 677, 679 (9th Cir.1980) (stating generally that no private cause exists for rules violations, and focusing specifically on the NYSE "know your customer" rule and the NASD "suitability rule"); Newman v. Rothschild, 651 F.Supp. 160, 162 (S.D.N.Y.1986) (no private cause of action exists under the "suitability rules" of the NYSE and NASD); Finne v. Dain Bosworth, Inc., 648 F.Supp. 337, 342 (D.Minn. 1986) ("NYSE and NASD rules do not confer a private cause of action."); Shahmirzadi v. Smith Barney, Harris, Upham & Co., 636 F.Supp. 49, 51 (D.D.C.1985) (no private cause exists for violations of unspecified NYSE and NASD rules). Thus, the court will not grant Reed leave to amend her complaint.

In summary, the state law claims in counts 1, 2, and 3, which are properly characterized as common law claims, must be submitted to arbitration because of the mandate of section 4 of the Arbitration Act and the Supreme Court's ruling in Byrd.

Reed's complaint also includes a claim for violations of the Kansas securities laws, and Bear Stearns moves the court to compel arbitration of this claim. Reed relies on the language of the arbitration clause and a Kansas statute in opposing arbitration. The clause states:

You understand that this Agreement to arbitrate does not constitute a waiver of your right to a judicial forum where such waiver would be void under the securities laws and specifically does not prohibit you from pursuing any claim or claims arising under the federal securities laws in any court of competent jurisdiction.

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