Washington Square Securities, Inc. v. Sowers, 02-CV-976(JMR/RLE).

• Decision Date: 09 August 2002
• Docket Number: No. 02-CV-976(JMR/RLE).,02-CV-976(JMR/RLE).
• Citation: 218 F.Supp.2d 1108
• Parties: WASHINGTON SQUARE SECURITIES, INC. v. Donald O. SOWERS, Thelma J. Sowers, Glenn B. Crabtree, and Goldie Alkire.
• Court: U.S. District Court — District of Minnesota

218 F.Supp.2d 1108

WASHINGTON SQUARE SECURITIES, INC. v. Donald O. SOWERS, Thelma J. Sowers, Glenn B. Crabtree, and Goldie Alkire.

No. 02-CV-976(JMR/RLE).

United States District Court, D. Minnesota.

August 9, 2002.

COPYRIGHT MATERIAL OMITTED

Frank Alan Taylor, Briggs & Morgan, Minneapolis, MN, Patrick S. Williams, Michelle Kurtz Peterson, Briggs & Morgan, St Paul, MN, for plaintiff.

Ralph V. Mitchell, Jr., Lapp Libra Thomson Stoebner & Pusch, Minneapolis, MN, Joel A Goodman, Goodman & Nekvasil, Clearwater, FL, for defendants.

ORDER

ROSENBAUM, Chief Judge.

Plaintiff, Washington Square Securities, Inc. ("Washington Square"), asks the Court to issue a temporary restraining order¹ enjoining an arbitration proceeding. The arbitration proceeding has commenced, and is proceeding under the auspices of the National Association of Securities Dealers ("NASD"). Plaintiff's amended complaint seeks a declaratory judgment stating it is not liable to defendants for alleged securities violations. The declaratory judgment action is not presently before the Court; as a result, this opinion addresses only the need for emergency relief.

I. Facts²

This matter comes before the Court by a circuitous route. Washington Square is a licensed brokerage firm, with its primary place of business in Minnesota. The defendants are individual investors residing in West Virginia. Defendants dealt with stockbroker, David H. Henderson, one of Washington Square's representatives. Henderson acts as a Washington Square investment advisor at least most of the time. Defendants claim they invested money with Mr. Henderson, knowing and understanding him to be acting as a Washington Square representative at all times.

In 1998, Mr. Henderson sold each defendant unregistered securities as follows: (1) Donald O. Sowers and Thelma J. Sowers purchased a U.S. Capital Funding Inc. corporate funding note for $125,000, and invested $15,000 in 21st Century Pay Communications, Inc., wherein they purchased payphones; (2) Glenn B. Crabtree purchased $94,409.07 in U.S. Capital Funding Inc. promissory notes; $68,250 in ETS Payphones, Inc.; $10,000 in Alpha Telecom, Inc., a similar payphone venture; and $12,000 in an Arcade Equipment Lease venture; and (3) Goldie Alkie purchased a U.S. Capital Funding Inc. promissory note for $25,000.

Washington Square emphatically denies receiving any money for these securities. None of the defendants signed a customer agreement or independently contracted for arbitration with Washington Square.

II. Procedural History

In 2000, a number of Mr. Henderson's investment clients filed an arbitration claim against Washington Square arising from Henderson's securities sales. The arbitration complaint alleges violations of state and federal securities laws, as well as various tort and contract claims. On May 10, 2001, the arbitration complaint was amended to include these defendants. For reasons unknown to the Court, defendants' claim was assigned to an arbitration panel located in Pittsburgh, Pennsylvania. On March 7, 2002, following defendants' belated document production,³ Washington Square raised an objection to the arbitration panel's jurisdiction over defendants' claims. The arbitral panel, after hearing plaintiff's jurisdictional challenge,⁴ found jurisdiction proper and continued the arbitration.⁵

On May 9, 2002, plaintiff filed this lawsuit. At the initial May 10, 2002, hearing, the Court asked the parties to consider whether it had personal jurisdiction over defendants, and whether Minnesota was a proper venue. By agreement of the parties, the Court continued the matter generally, without issuing an order, until May 23, 2002, allowing the parties to brief the issues, and giving defendants an opportunity to respond.

On May 20, 2002, plaintiff filed its amended complaint adding a claim for declaratory judgment. At the May 23, 2002, hearing, the Court heard argument on the later-filed complaint, rather than the documents previously considered. The Court declined to issue the requested injunction, and reserved the right to issue this opinion.

The parties returned to arbitration on May 29. On July 15, 2002, the panel issued its award.

III. Personal Jurisdiction

A federal court must always first determine whether it has personal jurisdiction over the parties. See Wessels, Arnold & Henderson v. Nat. Med. Waste, 65 F.3d 1427, 1431 (8th Cir.1995) (personal jurisdiction is a "threshold issue for the Court"). Under the amended pleadings, the Court has personal jurisdiction. Washington Square's amended complaint seeks a declaratory judgment of non-liability under Section 10 and Rule 10(b)(5) of the Exchange Act. This securities count allows personal jurisdiction over defendants.

When enacting 15 U.S.C. § 78aa, Congress expanded personal jurisdiction for certain securities disputes. This statute gives a federal district court jurisdiction over any defendant who establishes minimum contacts with the United States, as opposed to contacts with a particular state. See 15 U.S.C. § 78aa; see also United Liberty Life Ins. Co. v. Ryan, 985 F.2d 1320, 1330 (6th Cir.1993); Kansas City Power & Light Co. v. Kansas Gas & Elec. Co., 747 F.Supp. 567 (W.D.Mo.1990) (applying securities statute to plaintiff's action for declaratory judgment). Although defendants reside in West Virginia, their securities related matters occurred within the United States; as such, this Court has personal jurisdiction.

Defendants argue that, at most, § 78aa's extended jurisdiction applies to plaintiff's declaratory judgment action, but not over the motion to enjoin arbitration. Defendants claim the Court must apply the regular personal jurisdiction analytic — using the traditional minimum contacts framework — to plaintiff's individual claims. Defendants are incorrect.

Defendants offer the case of Paulucci v. William Morris Agency, Inc., 952 F.Supp. 1335, 1341 (D.Minn.1997) to support this position, but the case is inapposite. Paulucci considers a distinctly different personal jurisdiction question. It analyzes a limiting exception to Minnesota's long-arm statute. Under this special exception, a Court must consider the nexus between each cause of action and the state. See id. As the Court noted in Paulucci, the "case presents one of the statute's anomalies, and falls outside `most' ... jurisdictional questions." See id. at 1342.

The case before the Court is different. This federal statute broadens — as opposed to narrows — jurisdiction. The Court need not, therefore, consider the appropriateness of jurisdiction under the traditional minimum contacts test.

IV. Venue

A. Venue: 15 U.S.C. § 78aa

Defendants next claim this case is improperly venued. Plaintiff replies that venue is appropriate under an expansive exception to § 1391(a), Section 27 of the Exchange Act of 1934. The section reads, in relevant part:

Any suit or action to enforce any liability or duty created by this chapter or rules or regulations thereunder, or to enjoin any violation of such chapter or rules or regulations, may be brought in any such district [wherein any act or transaction constituting the violation occurred] or in the district wherein the defendant is found or is an inhabitant or transacts business.

15 U.S.C. § 78aa.

Plaintiff has not shown, however, how its action is covered by the text of this statute. A declaratory action to prevent an arbitration is a different beast from that which the statute facially covers: a suit or action to enforce liabilities or enjoin violations. See Oxford First Corp. v. PNC Liquidating Corp., 372 F.Supp. 191, 197 (E.D.Pa.1974) (interpreting venue provision expansively in case of organizational wrongdoing); cf. Emerson Elec. Co. v. Black and Decker Mfg., Co., 606 F.2d 234 (8th Cir.1979) (finding special patent infringement venue provisions do not apply to declaratory judgment actions).

While a broad venue provision serves the salutary goal of providing investors and small market participants with greater access to multiple fora, plaintiff's interpretation would give large investment firms the power to shanghai individual investors from their local communities and force them into distant states. This does not square with the statute's purpose, as recognized by the United States Supreme Court. That Court found the provision "applicable to the broad universe of potential defendants subject to the prohibitions of the Act," and that it facilitates "fair and honest mechanisms for the pricing of securities and to assure that dealing in securities is fair and without undue preferences or advantages among investors ... by enabling suits to enforce rights created by the Act to be brought wherever a defendant could be found." See Radzanower v. Touche Ross & Co., 426 U.S. 148, 154-56, 96 S.Ct. 1989, 48 L.Ed.2d 540 (1976) (emphasis added).

The Court, therefore, rejects plaintiff's venue choice, insofar as it is premised on 15 U.S.C. § 78aa, because plaintiff's action falls within neither the text nor the purpose of the securities statute. The Court, however, must also consider whether venue is appropriate under 28 U.S.C. § 1391(a).

B. Venue: 28 U.S.C. § 1391

Plaintiff, alternatively, claims venue is proper under sections 1391(a) and (b)(2) which state, "A civil action ... may ... be brought in ... a judicial district in which a substantial part of the events or omissions giving rise to this claim occurred." See 28 U.S.C. § 1391. Washington Square notes defendants claim the company's Minnesota-based compliance office improperly supervised and trained Henderson, rendering venue appropriate in this district. Plaintiff points to no fewer than five witnesses who worked in its Minneapolis office who have been identified on the arbitration witness list as further evidence of events or omissions occurring here.

This district's suitability as a forum is a close question. But plaintiff has shown that its failure to supervise, fraudulent concealment, breaches of...