Swab Financial v. E*Trade Securities

• Decision Date: 17 May 2007
• Docket Number: No. B191166.,B191166.
• Citation: 58 Cal.Rptr.3d 904,150 Cal.App.4th 1181
• Court: California Court of Appeals Court of Appeals
• Parties: SWAB FINANCIAL, Plaintiff and Respondent, v. E*TRADE SECURITIES, Defendant and Appellant.

58 Cal.Rptr.3d 904

150 Cal.App.4th 1181

SWAB FINANCIAL, Plaintiff and Respondent, v. E*TRADE SECURITIES, Defendant and Appellant.

No. B191166.

Court of Appeal, Second District, Division 5.

May 17, 2007.

Morgan, Lewis & Bokius, Michael J. Lawson, Thomas M. Peterson, Joseph E. Floren, Jonathan M. Degooyer and Umung D. Varma, San Francisco, for Defendant and Appellant.

Siciliano & Weeks, Nicholas A. Siciliano and David E. Weeks, Westlake Village, for Plaintiff and Respondent.

TURNER, P.J.

I. INTRODUCTION

Defendant, E Trade Securities, LLC, appeals from an order vacating an arbitration award against plaintiff, SWAB Financial, LLC. The trial court found plaintiff's rights were substantially prejudiced by the National Association of Securities Dealers arbitrators' failure to postpone the arbitration hearing upon sufficient cause being shown. We conclude the arbitrators did not abuse their discretion in refusing to continue the arbitration hearing. Accordingly, we reverse the order vacating the arbitration award.

II. BACKGROUND

A. Arbitration Agreement

Defendant is a registered securities broker-dealer and a member of the National Association of Securities Dealers. Plaintiff opened a securities brokerage account with defendant on March 21, 2001. Plaintiffs brokerage account was governed by a customer agreement. The March 21, 2001 customer agreement provided for arbitration of disputes: "31. a. Arbitration Disclosures. The following is a required disclosure for all brokerage agreements containing a pre-dispute arbitration provision: [¶] (1) Arbitration is final and binding on the parties. [¶] (2) The parties are waiving their right to seek remedies in court, including the right to jury trial. [¶] (3) Pre-arbitration discovery is generally more limited than and different from court proceedings. [¶] (4) The arbitrator's award is not required to include factual findings or legal reasoning and any party's right to appeal or to seek modification of rulings by the arbitrators is strictly limited. [¶] (5) The panel of arbitrators will typically include a minority of arbitrators who were or are affiliated with the securities industry, [¶] b. Arbitration Agreement. You agree to arbitrate any controversy between you and E TRADE or any of its officers, directors, employees, agents or affiliates arising out of or relating in any way to your Account, including but not limited to: (i) transactions of any kind made on your behalf by, through or with E TRADE....; (ii) the performance, construction or breach of this Agreement or any other written agreement between you and E*TRADE. Such arbitration shall be conducted in accordance with the rules then in effect of the National Association of Securities Dealers, Inc. You understand that judgment upon any award rendered by the arbitrators may be entered in any court having jurisdiction thereof."

Several National Association of Securities Dealers rules in effect at the time of the arbitration have bearing on the determination of this appeal. National Association of Securities Dealers Code of Arbitration Procedure Rule¹ 10106 states, "No party shall, during the arbitration of any matter, prosecute or commence any suit, action, or proceeding against any other party touching upon any of the matters referred to arbitration pursuant to this Code." Under Rule 10328(c), "After a panel [of arbitrators] has been appointed, no new or different pleading may be filed except ... with the panel's consent." Pursuant to rule 10319(a), the National Association of Securities Dealers arbitrators exercise discretion in deciding whether to postpone a hearing, "The arbitrator(s) may, in their discretion, adjourn any hearing) either upon their own initiative or upon the request of any party to the arbitration." Rule 10318 governs failures to appear: "If any of the parties, after due notice, fails to appear at a hearing or at any continuation of a hearing session, the arbitrators may, in their discretion, proceed with the arbitration of the controversy. In such cases, all awards shall be rendered as if each party had entered an appearance in the matter submitted."

B. Plaintiff Initiates Arbitration

On May 6, 2002, plaintiff, then known as TSI Technologies, LLC, initiated the underlying arbitration proceeding against defendant. Plaintiff relied on the arbitration provision of the March 21, 2001 customer agreement. Plaintiffs claims arose out of its business dealings with Wendy Feldman Purner and her company, San Diego Asset Management, Inc. The May 6, 2002 statement of claims alleged that in dealing with Ms. Purner's company false representations were made by defendant. The May 6, 2002 statement of claims alleged defendant: made fraudulent statements in connection with a stock transaction between plaintiff and Ms. Purner's company; made negligent misrepresentations in connection with that stock transaction; fraudulently represented Ms. Purner's company owned stock promised to plaintiff in a settlement agreement with her firm; made negligent misrepresentations as to Ms. Purner's company's ownership of the stock promised to plaintiff; breached its fiduciary duty to plaintiff; and violated Uniform Commercial Code section 4-214. Central to the dispute between plaintiff and defendant is an August 24, 2001 letter addressed to Ms. Purner. The August 24, 2001 letter was signed by two of defendant's employees, Jackie Bixby and Bobby Duerre. The August 24, 2001 letter states, "San Diego Asset Management Inc.] holds EMedsoft shares in excess of 21 million shares...." Pursuant to its National Association of Securities Dealers Dispute Resolution Arbitration Uniform Submission Agreement, plaintiff agreed, in part, "The undersigned parties hereby submit the present matter in controversy, as set forth in the attached statement of claims, answers, and all related counterclaims and/or third-party claims which may be asserted, to arbitration in accordance with the Constitution, By-Laws, Rules, Regulations, and/or Code of Arbitration Procedure of the sponsoring organization." Defendant executed its own uniform submission agreement on July 12, 2002. Defendant also tendered a third party claim against Steven M. Goldberg, who had controlled plaintiffs account. A panel of three arbitrators was appointed. The first hearing in the arbitration was held on August 7, 2003.

Plaintiff also separately arbitrated claims against Ms. Purner and her company for: contract breach; fraud; unfair, unlawful, and fraudulent business practices; conversion; unjust enrichment; intentional interference with current economic relations; and intentional interference with prospective economic relations. An American Arbitration Association Commercial Arbitration Tribunal award was entered in plaintiffs favor and against Ms. Purner and her company on July 14, 2003. The arbitrator set forth 95 statements of fact and conclusions of law including: "During the year 2001, PURNER engaged in a scheme to fraudulently induce SWAB to transfer shares of ... stock to [San Diego Asset Management, Inc.] without paying for the ... stock and for purposes of stealing the consideration from SWAB without SWAB's knowledge ..."; "PURNER assisted in the forgery of the August 24, 2001 letter from e*Trade ... which states that [San Diego Asset Management, Inc.] had in excess of 21 million shares of [EMedsoft] stock in e*Trade accounts"; and "PURNER fraudulently induced or conspired with an e*Trade employee to prepare the August 24, 2001 letter...."; and, "At the time PUNER transmitted the August 24, 2001 letter to SWAB PURNER knew that the contents of the letter were false."

Defendant brought a motion to compel plaintiff to produce documents. The matter was set for hearing on October 24, 2003, but continued after plaintiffs counsel failed to appear. Plaintiff did not appear at arbitration hearings on December 15, 2003, and January 6, 2004. On January 8, 2004, defendant moved to dismiss plaintiffs claims with prejudice as a sanction for failing to produce documents. On February 13, 2004, the arbitrators conditionally denied defendant's motion to dismiss. The arbitration was set for September 13 through 17, 2004.

In June 2004, plaintiff filed a summary adjudication motion, which defendant opposed. In addition, on July 2, 2004, defendant filed a renewed motion to dismiss for failure to produce documents and for allegedly tampering with third party witnesses. These matters were heard on August 17, 2004. The arbitrators denied plaintiffs, summary adjudication motion. They also denied defendant's motion to dismiss. The arbitrators ordered the arbitration to proceed as scheduled on September 13, 2004.

On August 20, 2004, plaintiff dismissed with prejudice the first, second, fifth, and sixth causes of action in it statement of claims—for fraud and negligent misrepresentation in stock transactions, fiduciary duty breach, and violation of Uniform Commercial Code section 4-214. The remaining claims were for fraud and negligent misrepresentation in connection with the business relationship between plaintiff and Ms. Purner's company. Plaintiff alleged defendant misrepresented that Ms. Purner's company owned certain shares of stock. This stock was promised to plaintiff under a settlement agreement with Ms. Purner's company.

On September 9, 2004, plaintiff filed an ex parte application to dismiss the arbitration proceeding without prejudice. Plaintiff desired to sue defendant in a court of law. Plaintiff advised it would not appear before the arbitration panel due to an un-waivable conflict of interest on the part of the arbitration panel's chair; moreover, plaintiff gave notice it would immediately file suit in the Los Angeles Superior Court to pursue a judicial remedy. At the same time, plaintiff cancelled scheduled depositions of defendant's witnesses. In addition, two of plaintiffs principals indicated they would not appear for scheduled depositions. Plaintiff also purported to...