Vestax Securities Corp. v. McWood
| Decision Date | 14 February 2002 |
| Docket Number | No. 00-1936.,00-1936. |
| Citation | 280 F.3d 1078 |
| Parties | VESTAX SECURITIES CORPORATION, Plaintiff-Appellant, v. Arthur B. MCWOOD, et al., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Marion H. Little, Jr. (argued and briefed), Zeiger & Carpenter, Columbus, OH, for Appellant.
Anthony V. Trogan, Jr. (briefed), Anthony V. Trogan, P.L.L.C., West Bloomfield, MI, for Appellees.
Before JONES, NELSON, and DAUGHTREY, Circuit Judges.
JONES, J., delivered the opinion of the court, in which DAUGHTREY, J., joined. NELSON, J. (pp. 1083-84), delivered a separate concurring opinion.
Vestax Securities Corporation ("Vestax") appeals the district court's order granting a motion to compel the arbitration of its dispute with several investors regarding the purchase and sale of securities. The company also challenges on appeal the order of the district court dismissing the declaratory judgment actions Vestax filed against the investors. The district court held that the investors were "customers" of Vestax within the meaning of National Association of Securities Dealers ("NASD") Rule 10301(a), and were therefore entitled to demand arbitration. For the following reasons, we affirm.
Vestax is an Ohio-based securities brokerage firm and a registered member of the NASD. Vestax employs approximately 625 registered agents who offer investments advice and place trades in various ventures on behalf of Vestax customers. The current dispute centers on the allegedly negligent and fraudulent conduct of two Vestax dealers, Jon Davis and Brian Dunn, in certain securities transactions. Davis was a registered representative of Vestax from 1990 to 1998, whereas Dunn was a representative from 1991 to 1999. Over the course of that period, Davis and Dunn recommended securities and made purchases on behalf of Arthur McWood ("McWood"), and a second group of investors including Archibald Montgomery, Barbara Montgomery, the Archibald Montgomery Living Trust, the Barbara Montgomery Living Trust, and Chrom Services, Inc., the Montgomery's personal service corporation. We will refer to this second group, for convenience, as "the Montgomery defendants."
The investors purchased the following securities on the basis of the advice provided by Davis and Dunn:
A. Montgomery Trust -Capella Computer $100,000
Chrom Services -Opus Minerals $16,954
-Opus Minerals $6,303
B. Montgomery -Opus Minerals $5,115
B. Montgomery Trust -Opus Minerals $142,359
-Rangestar $29,284
-Rangestar $50,329
McWood -Castle Capital Corp. $60,347
The securities, however, did not turn out well for the investors. McWood and the Montgomery defendants claim that they lost all of the money they invested in the securities as a result of the Vestax agents' allegedly poor investments advice. To recover on the failed investments, the defendants filed an arbitration claim against Vestax with the NASD. The defendants allege that Davis and Dunn committed a number of unprofessional and fraudulent acts in their capacity as Vestax agents, including: (i) failing to make suitable investment recommendations, (ii) accepting undisclosed commissions, (iii) issuing press releases prior to selling the securities, (iv) encouraging the purchase of securities based on insider information, (v) engaging in private securities transactions, and (vi) front-running trades.
Vestax responded with two declaratory judgment actions, one against McWood, and another against the Montgomery defendants seeking a judicial determination that it was not liable to the investors for the alleged misconduct of its registered agents. The defendants, in turn, filed a motion to compel the arbitration of their claims and to dismiss Vestax's declaratory judgment actions. Vestax resisted the effort to submit the dispute to arbitration on the ground that most of the securities transactions in question, although recommended by its agents, were placed through brokerage firms other than Vestax. The investors do not dispute this, but argue instead that they purchased the securities in this manner because Davis and Dunn advised them to do so to avoid certain costly and inefficient transaction costs. Nonetheless, Vestax pointed out that several of the investors at no time ever held an account with the firm and therefore argued that the brokerage firm could not be compelled to arbitrate claims with persons who could not fairly be considered its customers.
After a hearing on July 18, 2000, the district court dismissed Vestax's declaratory judgment actions and granted the motion to compel arbitration on the basis of the definition of "customer" supplied by NASD Rule 10301(a). The court reasoned that in light of their dealings with Davis and Dunn, the investors were customers of persons associated with Vestax, and as such were entitled to demand arbitration. Vestax now challenges the district court's analysis and conclusions of law on appeal.
The sole issue on appeal is whether the district court properly determined that the claims against Vestax were subject to arbitration. The district court's determination that the present dispute is arbitrable is reviewable de novo. See E.E.O.C. v. Frank's Nursery & Crafts, Inc., 177 F.3d 448, 454 (6th Cir.1999) ().
We begin our analysis with the observation that "[a]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." AT & T Techs. v. Communications Workers of Am., 475 U.S. 643, 648, 106 S.Ct. 1415, 89 L.Ed.2d 648 (1986). Indeed, this basic principle is at the heart of Vestax's argument that the current dispute is not subject to arbitration. Vestax notes that none of the investors had a written contract with Vestax requiring that disputes be arbitrated with the NASD. Vestax further contends that while the investors received advice and recommendations from its registered agents, Vestax received no commissions and was not even aware of the transactions that were ultimately placed through other broker-dealers. On the basis of this reasoning, Vestax argues that the motion to compel arbitration was granted in error as there simply was no agreement to arbitrate disputes with the investors.
The NASD Code of Arbitration Procedure, however, creates the right of parties to compel an NASD-member firm to arbitrate even in the absence of a direct transactional relationship with the firm. NASD Rule 10301(a) directs that a member firm must submit to arbitration "[a]ny dispute, claim, or controversy ... between a customer and a member and/or associated person arising in connection with the business of such member or in connection with the activities of such associated persons.. . ." In other words, there are two conditions that must be satisfied to trigger the NASD arbitration requirement. First, the claim must involve a dispute between either an NASD-member and a customer, or an associated person and a customer. Second, the dispute must arise in connection with the activities of the member or in connection with the business activities of the associated person. We believe that both conditions have been satisfied in the case before us.
There is no question that the investors had little in the way of a contractual or transactional relationship with Vestax. Only McWood and the two Montgomery trusts opened accounts with Vestax during the period in question. Among these three investors, only $20,000 in securities were purchased directly through Vestax. Neither Archibald and Barbara Montgomery nor their personal services corporation, Chrom Services, Inc., ever established an account with Vestax or purchased securities through the brokerage firm. Each one of the investors, however, did establish trading accounts with Davis and Dunn in which the investors purchased the securities the agents recommended to them.
A number of courts have held that an agent or representative of a financial services firm is an "associated person" under NASD Rule 10301(a) such that a relationship with the agent entitles the investor to the arbitration process. The Second Circuit Court of Appeals has twice held that an NASD-member firm must arbitrate disputes with investors on the basis of a relationship between the investor and such a representative. In John Hancock Life Insurance Co. v. Wilson, 254 F.3d 48 (2d Cir.2001), the only connection between the investors and John Hancock was their relationship with Frank P. Fucilo, a John Hancock sales representative. Id. at 51. In fact, it was undisputed that the investors were not even aware of the affiliation between Fucilo and the life insurance company. Id. In determining that the dispute was subject to arbitration, the Second Circuit "look[ed] no further...
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