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WILLIS v. RUBIERA-ZIM

December 29, 1988

YVONNE WILLIS, Plaintiff,
v.
NILDA RUBIERA-ZIM, et al., Defendants



The opinion of the court was delivered by: WOLIN

 G. DONALD HANEKE, UNITED STATES MAGISTRATE

 This matter has been referred to me by the Honorable Maryanne Trump Barry. I have read and considered all papers submitted. Additionally, I have provided both parties with a copy of an unpublished opinion upon which I have relied in reaching my decision. See, Frankel v. Shearson Lehman Brothers, Inc., et al., No. 86-2520 (D.N.J. Nov. 2, 1987) I hereby report the following facts and recommend that defendants' motion to compel arbitration be granted

 The present motion arises from a complaint filed March 30, 1987. Willis alleges that Zim, an account executive of Paine Webber, conducted excessive and unauthorized trading activity in plaintiff's account for the sole purpose of obtaining substantial commissions for Zim and Paine Webber without regard to the financial impact upon plaintiff This is a practice commonly known as "churning." in addition to this "churning" scheme, plaintiff alleges that Zim made material misstatements of fact to plaintiff regarding the status and type (i.e. margin) of account, statements upon which plaintiff relied in maintaining her account with Paine Webber.

 The First Count of the Complaint alleges violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78, and Rule 10b-5, 17 C.F.R. 240.10b-5 and Section 20(a) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78t. The remaining three counts allege pendent common law claims of fraud and breach of fiduciary duty (Second Count), negligence (Third Count) and negligent misrepresentation (Fourth Count). In this motion, defendants move (1) to compel arbitration of all state law claims and to strike the claim for punitive damages; (2) to compel arbitration of the federal securities law claims or to stay this case pending arbitration of the state law claims; (3) in the alternative, to dismiss the federal law claims for failure to plead fraud with specificity, as required by Fed.R.Civ.P. 9(b), or to otherwise state a cause of action under the theories alleged, in violation of Fed.R. Civ.P. 12(b)(6). In recognition of the recent decisions of the United States Supreme Court in Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 84 L. Ed. 2d 158, 105 S. Ct. 1238 (1985); and Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 107 S. Ct. 2332, 96 L. Ed. 2d 185 (1987), plaintiff does not oppose that part of the motion which seeks to compel arbitration of the state law claims. Accordingly, I recommend that defendant's motion to compel arbitration of the Second, Third and Fourth Counts be granted.

 Violations of Section 10 and Rule 10b-5

 The United States Supreme Court in Shearson/American Express v. McMahon, 482 U.S. 220, 107 S. Ct. 2332, 96 L. Ed. 2d 185 (1987) held that claims under Section 10b of the Securities Act of 1934 are arbitrable where there is in existence a valid predispute arbitration agreement. The essence of the present dispute is whether there is in existence a valid predispute agreement to arbitrate claims arising under federal securities laws. Plaintiff's opposition to the motion is based on the assertion that the predispute agreement specifically excludes arbitration of those federal claims. Therefore, I must first determine the boundaries of the predispute agreement. Before I proceed further, I must acknowledge my reliance on the unpublished decisions in Frankel v. Shearson Lehman Brothers, et al., No. 86-2520 (D.N.J. Nov. 2, 1987); and Campagna v. Shearson Lehman Brothers, Inc., et al., No. 86-4840 (Report and Recommendation Nov. 17, 1987) adopted (D.N.J. Dec. 2, 1987). The analysis and decision in those cases guides my decision in the instant case.

 The arbitration clause at issue provides in pertinent part:

 Any controversy between us arising out of or relating to this contract, or breach thereof, or any account(s) maintained by you, (except any claim for relief by a public customer for which a remedy may exist pursuant to an expressed or implied right of action, under the federal securities laws), shall be settled by arbitration . . . .*

 Plaintiff asserts that the arbitration clause is "clear on its face" and thus must be enforced as written without reference to extrinsic facts. See, Buono Sales, Inc. v. Chrysler Motors Corp., 239 F. Supp. 839 (D.N.J. 1965), rev'd on other grounds, 363 F.2d 43 (3d Cir. 1966), cert. denied, 385 U.S. 971, 17 L. Ed. 2d 435, 87 S. Ct. 510 (1966). I disagree. The ambiguity is created by the "may exist" language in the instant arbitration clause. I could have found the contract to be clear and unambiguous if it had read: Any controversy between us . . . (except any claim for relief by a public customer for which a remedy exists pursuant to an expressed or implied right of action under the federal securities laws), shall be settled by arbitration. . . . While the clause clearly means to limit arbitration, it is unclear from the language itself whether "may exists" specifically excludes the arbitration of Section 10 and Rule 10-b5 claims in light of the McMahon decision.

 Defendant persuasively argues that the words "may exist" were intended and understood to mean "except such right of action in federal court as may be determined to exist by the federal courts." the United States Supreme Court has now settled the issue whether arbitration was mandated for 1934 Act claims by holding in McMahon that a public customer does not have an existing express or implied right of action to proceed in federal court in the presence of an otherwise enforceable arbitration agreement. I agree with defendant that the term "may exists" can be viewed as "paralleling the evolving case law as it determined which securities disputes are arbitrable." Frankel v. Shearson Lehman Brothers, et al., No. 86-2520 (D.N.J.) Accordingly, those federal securities law claims would then be removed from the exclusion from arbitration. Id.

 Plaintiff asserts that even if the clause is ambiguous, under standard contract analysis, that ambiguity would be construed against the drafter, in this case, defendant, Paine Webber. However, in Frankel, supra, Judge Bissell, when faced with this same issue, concluded that this clause must be interpreted within the context of arbitration. Id. at 7. "[W]hen contract language is ambiguous or unclear, a healthy regard for the federal policy favoring arbitration requires that any doubts concerning the scope of arbitrable issues be resolved in favor of arbitration." Id. at 7, quoting Barrowclough v. Kidder Peabody and Company, Inc., 752 F.2d 923, 938 (3d Cir. 1985) citing Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. at 24-25. In the Frankel case, Judge Bissell held that the language in the arbitration clause did not exclude arbitration of Section 10 and Rule 10b-5 claims.

 Plaintiff argues that arbitration of a federal securities law claim is only mandated when there is in existence a signed customer agreement containing an arbitration clause requiring the customer to arbitrate federal securities claims. However, a customer agreement to that effect was barred by SEC Rule 15c 2-2, 17 C.F.R. § 240.15c 2-2. That rule provided:

 It shall be a fraudulent, manipulative or deceptive act or practice for a broker or dealer to enter into an agreement with any public customer which purports to bind the customer to the arbitration of future disputes between them arising out of the federal securities laws, or to have in effect such an agreement, pursuant to which it effects transactions with or for a customer.

 This rule has now been rescinded in light of the evolving case law. SEC Rescinds Fraud Arbitration Rule, Fed. Sec. Law Rep. (CCH) No. 1255, at 1 (October 21, 1987). In Frankel, Judge Bissell concluded that "the legislative history and the fact that the rule has been rescinded clearly indicates that the rationale for the rule was the Commission's assumption [based on Wilke v. Swan, 346 U.S. 427, 98 L. Ed. 168, 74 S. Ct. 182 (1953)] that Federal Securities claims were non-arbitrable." Frankel v. Shearson/Lehman Brothers, Inc., supra, at 6. Judge Bissell found that Shearson/Lehman had attempted to construct an arbitration clause that would place a public customer on notice that the requirement of arbitration would exclude only those certain federal securities claims which the Supreme Court held to preclude arbitration. Once the Supreme

 Court in McMahon removed Section 10 and Rule 10b-5 claims from the exclusion from arbitration, if there was a valid predispute arbitration agreement, then those claims must be arbitrated.

 I agree with Judge Bissell's analysis. In the instant case it seems clear that the arbitration close only meant to exclude from arbitration those federal securities claims which the Supreme Court held to be non-arbitrable. With McMahon now in effect, Section 10 and Rule 10b-5 claims are subject to arbitration.

 Based on the foregoing, I find that the language in the arbitration clause does not exclude arbitration of plaintiff's Section 10 and Rule 10b-5 claims. In light of McMahon, I hereby recommend that plaintiff's Section 10 and Rule 10b-5 claims (First Count) be submitted to arbitration.

 Violation of Section 20, 15 U.S.C. § 78t

 The First Count also sets forth a claim for violation of Section 20(a) of the Securities and Exchange Act of 1934. Section 20(a) deals with the liability of controlling persons and provides:

 (a) Joint and several liability; good faith defense. Every person who, directly or indirectly, controls any person liable under any provision of this title or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and ...


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