Shotto v. Laub

• Decision Date: 07 April 1986
• Docket Number: Civ. A. No. M-85-4181.
• Citation: 632 F. Supp. 516
• Court: U.S. District Court — District of Maryland
• Parties: Mr. & Mrs. John R. SHOTTO, et al. v. R. Michael LAUB, Jr., et al.

632 F. Supp. 516

Mr. & Mrs. John R. SHOTTO, et al. v. R. Michael LAUB, Jr., et al.

Civ. A. No. M-85-4181.

United States District Court, D. Maryland.

April 7, 1986.

Phillips P. O'Shaughnessy, Robert W. Hesselbacher, Jr., and Sandbower, Gabler & O'Shaughnessy, P.A., Baltimore, Md., for plaintiffs.

David F. Albright, Harry M. Rifkin, and Semmes, Bowen & Semmes, Baltimore, Md., for defendants.

MEMORANDUM AND ORDER

JAMES R. MILLER, Jr., District Judge.

Plaintiffs, Mr. and Mrs. John R. Shotto and Timothy C. Spigelmire, filed this action against defendants, R. Michael Laub, Jr. and Drexel Burnham Lambert Incorporated (Drexel), alleging various claims arising out of defendants' handling of plaintiffs' securities accounts (Paper No. 1). Plaintiffs appear to allege in the 13-count Complaint violations of §§ 5 and 12 of the Securities Act of 1933 (the 1933 Act), as amended, 15 U.S.C. §§ 77e and 771;¹ Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated under § 10(b) of the Securities Exchange Act of 1934 (the 1934 Act), as amended, 15 U.S.C. § 78j(b); Rule 15c2-5, 17 C.F.R. § 240.15c2-5, promulgated under § 15(c)(1) of the 1934 Act;² and the Maryland Securities Act, Md. Corp. and Assn. Code Ann., § 11-703; and common law claims of fraud, breach of fiduciary duty, negligent misrepresentation, and breach of contract.³

Plaintiffs have filed an Amendment to Complaint by Interlineation (Paper No. 16). In this amendment, it appears that plaintiffs have added claims under §§ 12(2) and 17(a) of the 1933 Act, 15 U.S.C. §§ 771(2) and 77q(a).⁴

Defendants have filed a Motion for an Order Compelling Arbitration of Plaintiffs' Claims and for a stay of this action pending arbitration (Paper No. 7).⁵ Plaintiffs have filed an Opposition to the Motion (Paper No. 12); defendants have filed a Reply (Paper No. 13); plaintiffs have filed a Supplemental Memorandum (Paper No. 14); defendants have filed a Response to Plaintiffs' Supplemental Memorandum (Paper No. 18); and plaintiffs have filed Memorandum in Further Opposition (Paper No. 19). After reviewing the memoranda submitted by the parties, the court concludes that no hearing is necessary. Local Rule 6(G).

I. Factual Background

The facts as alleged by plaintiffs in the Complaint are as follows. Mr. Shotto alleges that in early 1983, he spoke with Laub, a Senior Vice President of Drexel, concerning investment opportunities. Laub indicated that he would require a discretionary account under his management with Drexel. Shotto stated that he wanted his funds deployed with an overall investment objective of a retirement fund, and Laub represented that if he could not obtain a 30% per year pre-tax return for Shotto then he was not doing his job. On April 13, 1983, Shotto opened a discretionary account with defendants, and transferred $75,000.00 to defendants.⁶ According to Shotto, neither defendant made any disclosure of the risk of a discretionary account, neither sought to obtain an accurate financial picture of the Shottos, neither made material and/or mandatory disclosures respecting options trading, and neither explained the effect of active trading on defendants' commissions. On June 6, 1983, Mr. and Mrs. Shotto transferred another $50,880.88 to defendants.

The Shottos further allege that defendants did not adhere to Rule 15c2-5, 17 C.F.R. § 240.15c2-5, Rule 405 of the New York Stock Exchange (NYSE), and certain other rules of the NYSE and the National Association of Securities Dealers (NASD), because they did not make a reasonable or mandatory disclosure of the risks of option trading and did not obtain the essential minimum financial information with respect to the Shottos. The Shottos allege that defendants placed the Shottos' retirement capital into options and margin accounts without prior disclosure of the risks involved, and that they invested in arbitrage transactions involving intentionally undisclosed risks. The Shottos allege that their account with defendants is now worth approximately $30,000.00.

Plaintiff Spigelmire alleges that he contacted Laub in Pennsylvania in the early fall of 1982 and that Laub made certain representations concerning his track record as a stockbroker. Spigelmire claims that he indicated that his investment objectives were for high income and growth, but claims that defendants never inquired as to the nature of his assets and income, and ignored and returned to Spigelmire a financial plan provided by Spigelmire. Spigelmire alleges that although Laub stated that he would use the discretionary account for options, margins and other transactions, and explained that credit risks existed in margin transactions, he did not make the mandatory risk disclosures respecting these transactions. Spigelmire further alleges that Laub did not explain to him the effect of active trading on defendants' commissions and did not acknowledge that he was not registered as a broker/agent in Maryland.

On October 13, 1982, Spigelmire opened a discretionary account and transferred $27,500.00 to defendants. According to Spigelmire, neither defendant made any substantive disclosure of the risks of a discretionary account, nor did they seek to obtain an accurate financial picture of Spigelmire. Thereafter, Spigelmire transferred an additional $17,000.00 to defendants as a security deposit. He alleges that defendants have informed him his account is worth only about $3,000.00 at the time of filing suit.

Spigelmire also alleges that neither defendant complied with Rule 15c2-5, Rule 405 of the NYSE, or other NYSE and NASD rules, in that neither made the mandatory credit disclosures to him and neither obtained essential minimum financial information with respect to him.

II. Agreements to Arbitrate

In connection with their accounts with defendants, each of the plaintiffs signed Customer Agreements, which provided in paragraph 16 as follows:

"SIXTEENTH: Any controversy between you and the undersigned arising out of said account or relating to this contract or the breach thereof, shall be settled by arbitration, in accordance with the rules, then obtaining, of the American Arbitration Association, the New York Stock Exchange, Inc., the American Stock Exchange, Inc. or the National Association of Securities Dealers, Inc., as the undersigned may elect. If the undersigned does not make such election, by registered or certified mail addressed to you at 60 Broad Street, New York, N.Y. 10004, Attn: Legal Dept., within five (5) days after demand by you that the undersigned make such election, then you may make such election. Judgment upon any award rendered by the arbitrators may be entered in any court having jurisdiction thereof. Certain decisions by the federal courts have held that if a dispute involves a claim arising under the Securities Act of 1933 or the Securities Exchange Act of 1934, such arbitration clauses are void and unenforceable as applied to such claims and accordingly customers cannot be compelled to arbitrate such a claim. In other contexts, the courts generally enforce arbitration clauses of customers agreements. Therefore, nothing in this paragraph shall in any way constitute a waiver or limitation of any rights which the undersigned may have under any Federal Securities laws. Commodity accounts are governed by the arbitration provisions of the Commodity Customer's Agreement."

(Paper No. 7, Exs. A & B; Paper No. 13, Ex. A).⁷

First, plaintiffs assert that their agreements with Drexel were not in existence at the time that plaintiffs opened their accounts and their claims arose, and that, therefore, those agreements cannot constitute a basis for compulsory arbitration of plaintiffs' claims. Second, Spigelmire asserts that the contract he signed with Drexel is unenforceable, because Laub was not registered with the Maryland Securities Commission until subsequent to the date of the contract. Third, plaintiffs assert that the contracts involved are contracts of adhesion and, therefore, are unenforceable because there was no "meeting of the minds."

A. The Federal Arbitration Act

The Federal Arbitration Act, 9 U.S.C. § 1 et seq., provides that an agreement in writing in a contract to settle by arbitration a controversy arising out of that contract "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. The strong federal policy favoring arbitration has been reaffirmed in several recent opinions of the Supreme Court.

"The Arbitration Act establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability."

Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983). See also Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., ___ U.S. ___, 105 S.Ct. 3346, 3354, 87 L.Ed.2d 444 (1985). In addition, as the Supreme Court noted in Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985), in 9 U.S.C. §§ 3-4, "by its terms, the Act leaves no place for the exercise of discretion by a district court, but instead mandates that the district court shall direct the parties to proceed to arbitration on issues as to which an arbitration agreement has been signed." 105 S.Ct. at 1241 (emphasis in original). Accordingly, under §§ 3 and 4 of the Act, this court must determine whether there exists an agreement to arbitrate any of the claims raised in this action and, if so, those claims must be compelled to arbitration.⁸

Furthermore, in determining whether an agreement to arbitrate exists, while this court is empowered to decide questions relating to the validity of the arbitration clause per se, the decision on issues going to the enforceability of the entire...