There is a strong policy favoring arbitration, particularly the arbitration of customer claims against securities broker-dealers. Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 226 (1987) (The Supreme Court has consistently stated that the Federal Arbitration Act “establishes a federal policy favoring arbitration.”)(quoting, Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24 (1983). Arbitration is quick, it is relatively inexpensive, and perhaps most importantly, it provides a forum for the resolution of claims that may otherwise consume scarce judicial resources, (if these matters, particularly arising under the federal securities laws, were heard in federal court).
In federal court, and indeed, in substantially all courts, a defendant may seek to dismiss a lawsuit, for a variety of reasons, including for legal insufficiency, or the failure to state a claim, or at the common law, demurrer, which means that if if we assume the facts and all reasonable inferences therefrom are assumed to be true, there is no legally viable claim. However, fraud is required to be plead with particularity, and for example, securities fraud must be pled with sufficient facts that provide a strong inference of scienter or the state of mind embracing the intent to deceive or defraud.
In other cases, particularly where a securities broker-dealer is sought to be held responsible for the conduct of its registered representative selling away or engaging in the sale of unapproved investments, promissory notes, a Ponzi scheme, or other extracurricular activities, the securities broker-dealer may wish to be in court where it seek to the case dismissed based upon the lack apparent authority, or that the investor who or should have known that they were not dealing with the broker-dealer.
As one Court has recently observed, “herculean efforts” by securities broker-dealers “to avoid resolution of disputes through arbitration” is not new. Smoothline Ltd. v. N. Am. Foreign Trading Corp., 249 F.3d 147,148 (2d Cir. 2001)(“Arbitration is intended to provide the parties to a dispute with a speedy and relatively inexpensive trial before specialists. Despite this well-recognized fact, courts continue to be confronted with herculean efforts to avoid resolution of disputes through arbitration.”).
However, once the “threshold” question of arbitrability has been raised, it is incumbent on the
party seeking arbitration to seek “judicial determination” by a Court as to whether or not the dispute is arbitrable. See, e.g. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 942-45 (1995)(the “question of arbitrability,” is “an issue for judicial determination”); See also, AT&T Technologies, Inc. v. Communications Workers, 475 U.S. 643, 649 (1986)(same); Painewebber Inc. v. Hartmann, 921 F.2d 507, 510 (3d Cir.1990)(The Federal Arbitration Act, 9 U.S.C. § 1, et seq. “enables a litigant to invoke the authority of a federal district court in order to force a reluctant party to arbitrate a dispute.”).
Brokerage Firms Are Required To Arbitrate As A Condition of Membership
FINRA Rules, as a condition of membership, require all stockbrokers and securities broker-dealers to arbitrate disputes with customers. These Rules are “contractual in nature” and are binding on its members. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Georgiadis, 903 F.2d 109, 113 (2d Cir. 1990)(“The rules of a securities exchange are contractual in nature”); Scobee Combs Funeral Home, Inc. v. E.F. Hutton & Co., Inc., 711 F. Supp. 605, 606 (S.D. Fla. 1989); See also Paine, Webber, Jackson & Curtis, Inc. v. Chase Manhattan Bank, N.A., 728 F.2d 577, 580 (2d Cir. 1984) (the arbitration rules of the New York Stock Exchange can be binding on NYSE members); Kidder, Peabody & Co., Inc., v. Zinsmeyer Trusts Partnership, 41 F.3d 861 (2d Cir. 1994)(As a member of the NASD, Kidder is bound to adhere to the organization’s rules and regulations); Drexel Burnham Lambert, Inc. v. Pyles, 701 F. Supp. 217, 220 (N.D. Ga. 1988).
FINRA Rule 12200 provides that:
Parties must arbitrate a dispute under the Code if:
• Arbitration under the Code is either:
(1) Required by a written agreement, or
(2) Requested by the customer; and
The dispute is between a customer and a member or associated person of a member; and The dispute arises in connection with the business activities of the member or the associated person, except disputes involving the insurance business activities of a member that is also an insurance company.
Non-Signatories Can Be Bound By Arbitration Agreements
It is well established that only parties or signatories to an agreement can be bound by an agreement to arbitrate. However, what about partnerships, the beneficiary of a trust, or even an Estate.
Courts have held that a party may be bound by arbitration even absent a signature on an agreement. Letizia v. Prudential Bache Securities, Inc., 802 F.2d 1185 (9th Cir. 1988)(non-signatory under the broad construction of the agreement, was bound to arbitrate See, e.g., Blashka v. Greenway Capital Corp., 1995 U.S. Dist. LEXIS 15191 at *7 (S.D.N.Y. Oct. 16, 1995); Genesco v. T. Kakiuchi & Co., 815 F.2d 840 (2d Cir. 1987); Republic of Nicaragua v. Standard Fruit Co., 937 F.2d 469 (9th Cir. 1991); Stedor Enterprises, Ltd. v. Armtex, Inc., 947 F.2d 727 (4th Cir. 1991); Ziegler v. Whale Securities Co., 786 F.Supp. 739 (N.D. Ill. 1992); Creative Securities v. Bear Stearns & Co., Inc., 671 F. Supp. 961, 963 n.2 (S.D.N.Y. 1987), aff’d, 847 F.2d 834 (2d Cir. 1988); Ocean Industries, Inc. v. Soros Associates Int’l, Inc., 328 F. Supp. 944, 947 (S.D.N.Y 1971); Reed v. Fisher Controls, Inc., 814 F. Supp. 545, 547 (E.D. Tex. 1993).
Because of liberal policy of promoting arbitration, if the issue of arbitrability is a doubtful one, all doubts are to be resolved in favor of arbitration. Stateside Machinery Co. v Alperin, 591 F2d 234 (3rd Cir. 1979) (superseded by statute on other grounds as stated in Gold Kist, Inc. v Laurinburg Oil Co., 756 F2d 14 (3rd Cir. 1985); Hartford Financial Systems, Inc. v. Florida Software Services, Inc. 550 F. Supp. 1079 (D. Me. 1982)(general partners bound to arbitration agreement in which only the partnership entity was the named party and signatory): Letizia v. Prudential Bache Securities, Inc., 802 F.2d 1185 (9th Cir. 1988)(third party held to arbitration agreement); Garfinkel v. Morristown Obstetrics & Gynecology Assoc., 333 N.J. Super. 291 (App. Div. 2000)(individual doctor of medical group had standing to compel arbitration pursuant to contract with professional corporation); See also, Matthew Farley, Arbitrating with the Non-Signatory, Securities Arbitration 2002, Taking Control of the Process at 565 (PLI 2002)(the commitment to arbitrate with a party includes, within the scope of that obligation, concurrent obligations to arbitrate that dispute with the legal entity’s agents and employees).
Guiliano Law Group
Our practice is limited to the representation of investors. We accept representation on a contingent fee basis, meaning there is no cost to you unless we make a recovery for you. There is never any charge for a consultation or an evaluation of your claim. For more information, contact us at (877) SEC-ATTY.
For more information concerning common claims against stockbrokers and investment professionals, please visit us at securitiesarbitrations.com.
OUR PRACTICE AREAS
FINRA Arbitration
The litigation of individual and group investor claims against securities broker-dealers and investment professionals adjuducated in arbitration before the Financial Industry Regulatory Authority.
Defective Financial Products
Alternative Investments, Promissory Notes, Structured Products, High Yield Bond Funds, Non-Marketable Real Estate Investment Trusts, Inverse and Leveraged ETFs, the Failure to Conduct Due Diligence.
Unsuitable Investments
Speculative or High Risk Investment Recommendations, Unsuitable Investment Strategies, Low Priced Securities, Customer Specific Unsuitability, Inappropriate Investment Recommendations.
Stockbroker Misconduct
Breach of Fiduciary Duty, Churing, Unauthorized Trading, Fraud, Stockbroker Theft, Ponzi Schemes, the Sale of Unapprovied investments.
