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09/11/87 John M. Pearce v. E.F. Hutton Group

September 11, 1987

JOHN M. PEARCE

v.

E.F. HUTTON GROUP, INC., APPELLANT 1987.CDC.384 DATE DECIDED: SEPTEMBER 11, 1987



UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT

Appeal from the District Court for the District of Columbia, Civil Action No. 86-00008.

APPELLATE PANEL:

Bork. and D. H. Ginsburg, Circuit Judges and Oberdorfer.. , United States District Judge for the District of Columbia. Opinion for the Court filed by Circuit Judge D. H. Ginsburg. Concurring opinion filed by United States District Judge Oberdorfer.

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE GINSBURG

The appellant in this diversity case, the E.F. Hutton Group, Inc. (Hutton Group) is a holding company of which E.F. Hutton and Company, Inc. (Hutton Company), a securities broker, is a wholly owned subsidiary. Appellee John M. Pearce has at all relevant times been a registered representative employed by the Hutton Company as a branch manager at its offices first in Bethesda, Maryland and then in St. Louis, Missouri. In those offices, Pearce was responsible for the branches' cash management practices, among other things.

In May 1985, Hutton Company pled guilty to 2,000 counts of mail and wire fraud in connection with its cash management practices. In the aftermath of the plea and the publicity surrounding it, Hutton Group engaged Griffin B. Bell to conduct an investigation of Hutton Company's cash management practices and to identify the individuals responsible for the acts leading up to Hutton Company's guilty plea. In September 1985, Bell publicly released his report at a press conference at which, in response to questions, he explained and elaborated upon the report.

In January 1986, Pearce sued Hutton Group and Bell, invoking the diversity jurisdiction of the District Court and alleging that various statements contained in the Bell report or that Bell made at the press conference defamed him and invaded his privacy by portraying him in a false light. We need not repeat here the particulars of the statements so charged; their gist, according to Pearce's complaint, was to portray him as one of a small number of Hutton Company employees who, by departing from established company policy, was responsible for Hutton Company's pleading guilty to the 2,000 counts of mail and wire fraud.

Hutton Group promptly moved to stay "all proceedings," including the action against Bell as well as itself, pending arbitration pursuant to the rules of the New York Stock Exchange. Hutton Group argued that it had a right to go to arbitration pursuant to the employment contract between Pearce and Hutton Company. It is undisputed that in order to obtain employment with Hutton Company, Pearce had submitted to the Exchange a so-called U-4 form, or "Uniform Application for Securities and Commodities Industry Representative and/or Agent." Pearce thereby agreed that:

Any controversy between me and any member or member organization or affiliate or subsidiary thereof arising out of my employment or the termination of my employment shall be settled by arbitration at the instance of any such party in accordance with the arbitration procedure prescribed in the Constitution and Rules then obtaining of the New York Stock Exchange, Inc.

(Emphasis added).

Article XI, ยง 1 of the Constitution of the Exchange provides that "any controversy between a member . . . and any other person arising out of the business of such member . . . shall at the instance of any such party be submitted for arbitration" according to the Constitution and rules of the Exchange. Rule 600(a) of the Exchange provides:

Any dispute, claim or controversy between a customer or non-member and a member, allied member, member organization and/or associated person arising in connection with the business of such member, allied member, member organization and/or associated person in connection with his activities as an associated person shall be arbitrated under the Constitution and Rules of the New York Stock Exchange, Inc. as provided by any duly executed and enforceable written agreement or upon the demand of the customer or non-member.

(Emphasis added).

On April 16, 1986, the District Court denied the Hutton Group's motion to stay the proceedings pending arbitration. Record Excerpts at 117. After a review of recent cases arising from the arbitration provisions of the U-4 form and of the Exchange rules, the District Court held that Rule 600 does not mandate arbitration in this case. Although it found that plaintiff is an "associated person" and Hutton Group is a "non-member" as those terms are used in the Exchange's rules, the Court held that because plaintiff's claim is "based on activities not involving customers and merely the ...


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