Wilson v. DH Blair & Co., Inc.

• Decision Date: 23 January 1990
• Docket Number: No. S88-537.,S88-537.
• Citation: 731 F. Supp. 1359
• Parties: Cornelius WILSON, Plaintiff, v. D.H. BLAIR & COMPANY, INC., et al., Defendants.
• Court: U.S. District Court — Northern District of Indiana

731 F. Supp. 1359

Cornelius WILSON, Plaintiff, v. D.H. BLAIR & COMPANY, INC., et al., Defendants.

No. S88-537.

United States District Court, N.D. Indiana, South Bend Division.

January 23, 1990.

James B. Koch, Chicago, Ill., E. Spencer Walton, Jr., South Bend, Ind., and Richard J. Morvillo, Washington, D.C., for plaintiff.

James H. Ham, III and Douglas D. Powers, Fort Wayne, Ind., for defendants.

MEMORANDUM AND ORDER

MILLER, District Judge.

This cause comes before the court on plaintiff Cornelius Wilson's motion to vacate this court's order of December 9, 1988 staying further proceedings pending arbitration of the claims raised in the plaintiff's complaint. Mr. Wilson first asked the court to reconsider the December 9 order because the factual record on that date was incomplete. At the time of the court's ruling, Mr. Wilson had not filed a response to the defendants' motion to stay. The court granted Mr. Wilson's motion to reconsider its December 9 ruling on July 5, 1989. Defendants D.H. Blair & Company ("Blair") and Mr. Howard Rubin object to Mr. Wilson's motion to vacate arguing that the order staying the proceedings was proper and that further reconsideration of the issue is now untimely. Both parties have filed several memoranda and supplemental authorities in support of their position. This matter is now ripe for ruling.

Mr. Wilson's complaint lists seven counts against the defendants for violation of federal racketeering statutes, the Securities Exchange Act of 1934, rules of the New York Stock Exchange and the National Association of Securities Dealers, and for acts of fraudulent inducement and misrepresentation, conversion, and breach of a fiduciary duty. Mr. Wilson sues Blair and Mr. Rubin; Prudential-Bache Securities, Inc. ("Prudential-Bache,"), the clearing broker for Blair, is not a party to this action. Mr. Wilson claims losses exceeding $400,000.00 in actual damages on each of the counts and further asks for an assessment of $10,000.00 in punitive damages. The defendants deny the allegations.

The facts giving rise to the action involve Mr. Wilson's dealings with the securities brokerage firm (Blair) and one of Blair's sales representatives (Mr. Rubin). From October, 1986 to November, 1987, Mr. Wilson had a cash account at Blair, with Mr. Rubin acting as his account executive. Mr. Wilson characterizes himself as an "inexperienced investor", who had "previously engaged in a few isolated securities transactions", wishing to invest only in "low-risk stocks on a cash basis". The pleadings indicate that Blair secured this account through Mr. Rubin's telephone and mail solicitation of Mr. Wilson. (Declaration of Cornelius Wilson, ¶¶ 3-6, 13, and 14).

On April 7, 1987, Mr. Wilson signed a client's agreement presented to him by Mr. Rubin. This document represents the central point of the parties' controversy on the issue of arbitration. The agreement does not list Blair's name, but rather Prudential-Bache, the clearing firm associated with Blair. Cornelius Wilson's name and an account number¹, however, appear on the client's agreement, as do the following provisions:

14. It is understood that the following agreement to arbitrate does not constitute a waiver of the right to seek a judicial forum where such a waiver would be void under federal securities laws.

The undersigned agrees, and by carrying an account for the undersigned you agree, that except as inconsistent with the foregoing sentence, all controversies which may arise between us concerning any transaction or the construction, performance or breach of this or any other agreement between us, whether entered into prior, on or subsequent to the date hereof, shall be determined by arbitration.

15. This contract shall be governed by the laws of the State of New York, and shall inure to the benefit of your successors and assigns, and shall be binding on the undersigned, my heirs, executors, administrators and assigns. Any controversy arising out of or relating to my account, to transactions with or for me or to this Agreement or the breach thereof, and whether executed or to be executed within outside of the United States, and any controversy arising out of or relating to transactions in commodities or contracts related thereto executed on or subject to the rules of a contract market designated as such under the Commodity Exchange Act, as amended, shall be settled by arbitration in accordance with the rules then obtaining of either the NASD, AMEX or the Board of Governors of the New York Stock Exchange as I may elect. If I do not make such election by registered mail addressed to you at your main office within five (5) days after demand by you that I make such election, then you may make such election. Notice preliminary to, in conjunction with, or incident to such arbitration proceeding, may be sent to me by mail and personal service is hereby waived. Judgment upon any award rendered by the arbitrators may be entered in any court having jurisdiction thereof, without notice to me.

(Howard Rubin Aff., Exh. 2).

The existence and nature of the relationship between Blair and Prudential-Bache is customarily revealed to a client (such as Mr. Wilson) through an introductory letter provided to the client upon opening an account with Blair. (Rubin Aff., Exh. 1). Mr. Wilson says he never received such a letter and was unaware of any association between the two firms prior to Mr. Rubin's efforts to acquire a signature on the client's agreement. (Wilson Declaration, ¶¶ 8 and 9). While Mr. Rubin's affidavit recites the customary procedure, he is uncertain whether a delivery of that letter was made to Mr. Wilson upon opening of an account with Blair. (Rubin Aff., ¶ 4). Mr. Wilson indicates that Mr. Rubin told him that the client's agreement did not affect his relationship with Blair or his account and that it was only a formality necessary for Prudential-Bache to perform certain administrative functions.

The defendants assert that the provisions quoted above mandate arbitration over Mr. Wilson's claims. The defendants give two alternative arguments² in support of this position: (1) Blair was a party to the client's agreement signed by Mr. Wilson and is, therefore, entitled to enforce that contract and those provisions for arbitration contained within; and/or (2) Blair was a third-party beneficiary of the contract between Mr. Wilson and Prudential-Bache and as such is entitled to any rights or privileges that stem from that contract. Mr. Wilson finds fallacy in each of these analyses. Mr. Wilson admits that the client's agreement constitutes a contract between Mr. Wilson and Prudential-Bache, but argues that Blair is neither a party to nor a beneficiary of that agreement. The court finds Mr. Wilson's legal interpretation of the agreement and the parties' (and non-party's) relationship the more plausible.

The few courts that have addressed the issue in question have permitted introducing brokers to enforce arbitration agreements between clients and clearing brokers in one of two instances. In the first instance, the introducing agent is a disclosed agent of the clearing broker. In Okcuoglu v. Hess, Grant & Co., 580 F.Supp. 749 (E.D.Pa.1984), the introducing broker worked as a go-between for the...