Weinraub v. Glen Rauch Securities, Inc., 05 Civ. 4072(SAS).

• Decision Date: 11 October 2005
• Docket Number: No. 05 Civ. 4072(SAS).,05 Civ. 4072(SAS).
• Citation: 399 F.Supp.2d 454
• Parties: Mark B. WEINRAUB, Plaintiff, v. GLEN RAUCH SECURITIES, INC., Bear Stearns & Co., NASD Dispute Resolution, Inc., Valley National Bank, Mark Mendley, David C. Carter, and David R. Bolnick, Defendants.
• Court: U.S. District Court — Southern District of New York

399 F.Supp.2d 454

Mark B. WEINRAUB, Plaintiff, v. GLEN RAUCH SECURITIES, INC., Bear Stearns & Co., NASD Dispute Resolution, Inc., Valley National Bank, Mark Mendley, David C. Carter, and David R. Bolnick, Defendants.

No. 05 Civ. 4072(SAS).

United States District Court, S.D. New York.

October 11, 2005.

Alan Paul Weinraub, Rouses Point, NY, for Plaintiff.

David S. Smith, Smith Campbell, LLP, New York, NY, for Defendants Glen Rauch Securities, Bear, Stearns & Co., and Valley National Bank.

Terri L. Reicher, Associate General Counsel, National Association of Securities Dealers, Inc., Washington, DC, for Defendants NASD Dispute Resolution, Inc. Mark Mendley, David C. Carter and David R. Bolnick.

OPINION AND ORDER

SCHEINDLIN, District Judge.

I. INTRODUCTION

Mark B. Weinraub brings this action, asserting a plethora of federal and state-law claims, to recover from his former broker over half a million dollars in trading losses resulting from the demise of Weinraub's margin trading account in 2000. Many of these claims have already been rejected by a panel of arbitrators, the New York trial court, and the New York appellate court. Plaintiff now invokes this Court's jurisdiction to press essentially the same allegations yet again, as well as new allegations of malfeasance committed by the arbitrators who ruled against him, and the bank that collected a judgment against him based on the arbitration award. For the following reasons, the motions to dismiss brought by all defendants are granted. Furthermore, the Court must consider sanctions against plaintiff and plaintiff's counsel pursuant to the Private Securities Litigation Reform Act of 1995 ("PSLRA"), and Rule 11 of the Federal Rules of Civil Procedure.

II. BACKGROUND

A. The Parties

Weinraub, a New Jersey resident, is a dissatisfied customer of broker Glen Rauch Securities ("Glen Rauch"), which along with Bear Stearns & Company ("Bear Stearns"), will be referred to collectively as the "Broker Defendants.¹ Weinraub is also suing the National Association of Securities Dealers ("NASD") Dispute Resolution, Inc., and individual defendants Mark Mendley, David Carter and David Bolnick (collectively, the "Arbitrator Defendants"), who conducted an arbitration proceeding from June 2000 to April 2002 initiated by Weinraub against, inter alia, Glen Rauch and Bear Stearns.² Finally, Weinraub alleges that defendant Valley National Bank ("Valley") "improperly collected" a judgment of $143,827 obtained by Glen Rauch in the arbitration proceeding and subsequent proceedings in the New York state courts.³

Weinraub invokes this Court's jurisdiction on numerous grounds: diversity;⁴ federal question based on violations of the securities laws;⁵ the Federal Arbitration Act;⁶ federal question jurisdiction based on violations of federal civil rights law;⁷ original jurisdiction based on violations of Weinraub's Equal Protection and Due Process rights; and pendent and ancillary jurisdiction.⁸

B. Weinraub's Margin Account

In October 1992, Weinraub opened a brokerage account with a firm called Jonathan Foster.⁹ Weinraub's broker at this firm was his cousin Michael Weinraub.¹⁰ When Michael Weinraub joined Glen Rauch in 1995, he took plaintiffs account with him.¹¹ Although plaintiff faults Glen Rauch for failing to execute a written "customer agreement" with him,¹² he continued to trade there.¹³

Plaintiff contends that Glen Rauch (and Michael Weinraub) ignored his desire to stop trading speculative securities on margin and transition into more conservative investments, and instead continued to recommend risky "tech stocks."¹⁴ Indeed, Weinraub's account "consisted essentially entirely of speculative stocks purchased on margin."¹⁵ This left him vulnerable to a decline in the high tech sector, which wiped out his margin account in 2000, costing him over $500,000.¹⁶ Weinraub alleges that his losses would have been prevented if the Broker Defendants had fulfilled their obligations to advise him of the virtues of a diversified portfolio, and reducing Weinraub's reliance on margin trading.¹⁷

C. The Arbitration Proceeding

In June 2000, plaintiff commenced an arbitration proceeding against the Broker Defendants, and Michael Weinraub, before the NASD.¹⁸ The gravamen of Weinraub's allegations in the arbitration was that, by allowing Weinraub to maintain "a highly leveraged" and "unreasonably risky" margin position, the Broker Defendants were negligent and breached their fiduciary duty, and also "failed to provide Plaintiff with material information [and] misstated [] material information."¹⁹ Glen Rauch asserted a counterclaim against Weinraub for the outstanding debit balance in his margin account.²⁰ The case was heard by defendants Mendley, Carter and Bolnick.²¹

Weinraub hurt his cause during the arbitration by failing to comply with deadlines for document production-failures he blamed on his former lawyer, who became ill soon after the filing of the claim.²² As a result of this deficiency, the arbitration panel ruled on July 3, 2001 that Weinraub was "enjoined from presenting further evidence to the panel for consideration. Any such documents will be precluded."²³ Accordingly, aside from the testimony of Weinraub himself, the arbitrators considered only evidence submitted by the Broker Defendants.²⁴ The arbitrators denied Weinraub's claims and granted judgment for Glen Rauch on its counterclaim.²⁵ In the aftermath of this ruling, Weinraub asserts that defendant Valley damaged his credit and caused him embarrassment in its attempts to collect the judgment on behalf of Glen Rauch.²⁶

D. Proceedings in New York Courts

Glen Rauch and Michael Weinraub commenced a special proceeding in the New York Supreme Court to confirm the arbitration award, and plaintiff filed a cross-motion to vacate the award.²⁷ The Supreme Court confirmed the award and denied. Weinraub's cross-motion.²⁸ The court held that the arbitrators' preclusion of Weinraub's evidence was appropriate in light of Weinraub's continued refusal to provide discovery.²⁹ The court also held that Weinraub failed to meet his burden under New York law to show that misconduct in the arbitration resulted in prejudice to the party seeking to vacate,³⁰ as he never explained how the precluded evidence was "pertinent and material."³¹ In a brief opinion, the Appellate Division affirmed the Supreme Court in all respects.³²

E. Weinraub's Claims

In this proceeding, Weinraub asserts six distinct causes of action arising out of these facts. First, Weinraub accuses the Broker Defendants of "violation[s] of securities laws" based on the management of his margin account.³³ Second, he asserts that the Broker Defendants breached their fiduciary duty to Weinraub.³⁴ Third, Weinraub asserts that the Arbitrator Defendants violated his civil rights, acting under color of state law.³⁵ Fourth, Weinraub asserts that the Arbitrator Defendants breached their contract with him "to provide a fair and adequate Dispute Resolutions forum."³⁶ Fifth, Weinraub asserts that Glen Rauch and Valley committed "defamation of credit" in their efforts to collect Glen Rauch's judgment, including reporting his delinquency to credit agencies and harassment at his place of employment.³⁷ Sixth, Weinraub alleges a conspiracy among all defendants to deprive him of his property.³⁸

III. LEGAL STANDARD

A. Standard of Review

Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, a motion to dismiss should be granted only if "`it appears beyond doubt that the plaintiff[s] can prove no set of facts in support of [their] claim[s] which would entitle [them] to relief.'"³⁹ The court's task in ruling on a Rule 12(b)(6) motion is "merely to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof."⁴⁰ When deciding a motion to dismiss, courts must accept all factual allegations in the complaint as true, and draw all reasonable inferences in plaintiffs' favor.⁴¹ Courts generally do not consider matters outside the pleadings but may consider documents attached to the pleadings, documents referenced in the pleadings, or documents that are integral to the pleadings.⁴²

B. Res Judicata

Res judicata is a long-accepted principle that "a final judgment on the merits of an action precludes the parties or their privies from relitigating issues that were or could have been raised in that action."⁴³ Res judicata applies "if the earlier decision was (1) a final judgment on the merits, (2) by a court of competent jurisdiction, (3) in a case involving the same parties or their privies, and (4) involving the same [claim or] cause of action."⁴⁴ A party may raise a res judicata defense in a motion to dismiss pursuant to Rule 12(b)(6).⁴⁵ A federal court must accord the same preclusive effect to a state court decision that a state court would give it.⁴⁶ In particular, final judgments in arbitration,⁴⁷ and state court judgments confirming arbitration awards,⁴⁸ are entitled to res judicata.

In New York, "`once a claim is brought to a final conclusion, all other claims arising out of the same transaction or series of transactions are barred, even if based upon different theories or if seeking a different remedy.'"⁴⁹ In determining what "factual grouping" constitutes a "transaction" or "series of transactions," courts examine whether "the facts are related in time, space, origin, or motivation, whether they form a convenient trial unit, and whether their treatment as a unit conforms to the parties' expectations or business understanding or usage."⁵⁰

C. Rule 11

Upon final adjudication of a securities fraud action, the PSLRA requires the court to make findings regarding each attorney's compliance with Rule 11(b).⁵¹ Rule 11(b) provides in relevant part:

By presenting to the court . . . a pleading, written motion, or other paper, an attorney or unrepresented party is certifying that to the best of the person's knowledge, information,...