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Merrill Lynch, Pierce, Fenner v. Cantone Research

June 27, 2012

MERRILL LYNCH, PIERCE, FENNER & SMITH, INC. AND ANDREW KATCHEN, PLAINTIFFS-RESPONDENTS,
v.
CANTONE RESEARCH, INC., ANTHONY J. CANTONE, CHRISTINE L. CANTONE, VICTOR POLAKOFF, PNC INVESTMENTS, LLC, AND J.J.B. HILLIARD, W.L. LYONS, LLC, DEFENDANTS-APPELLANTS



On appeal from Superior Court of New Jersey, Law Division, Morris County, Docket Nos. L-2646-10 and L-3131-10.

The opinion of the court was delivered by: St. John, J.S.C.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

APPROVED FOR PUBLICATION

Submitted December 21, 2011

Before Judges Cuff, Waugh and St. John.

The opinion of the court was delivered by ST. JOHN, J.S.C. (temporarily assigned)

Defendants appeal four orders dated December 20, 2010, enjoining them from pursuing their third-party arbitration claims for contribution and indemnification against plaintiffs Merrill Lynch, Pierce, Fenner & Smith, Inc. (Merrill Lynch) and Andrew Katchen, and denying defendants' cross-motions to compel plaintiffs to FINRA*fn2 arbitration. At the outset, we note it is now settled that "orders compelling or denying arbitration are deemed final and appealable as of right as of the date entered." GMAC v. Pittella, 205 N.J. 572, 587 (2011). After a careful review of the record as well as defendants' contentions, we affirm.

I.

A.

Merrill Lynch is a securities broker-dealer registered with FINRA as a member firm, and Katchen is registered with FINRA as an associated person of Merrill Lynch. Defendants Cantone Research, Inc., PNC Investments, Inc. (PNCI) and J.J.B. Hilliard, W.L. Lyons, LLC (Hilliard Lyons) are securities broker-dealers also registered with FINRA as member firms. Individual defendants, Anthony J. and Christine L. Cantone, and Victor Polakoff, are registered with FINRA as associated persons of defendant Cantone Research, Inc. (collectively Cantone).

Between April and June 2009, four groups of investors filed four separate complaints in the Law Division and one federal court action against Maxwell Baldwin Smith as well as Merrill Lynch and defendants.*fn3 By way of background, the investors were victims of a Ponzi scheme perpetrated by Smith, a former registered representative at each of the broker-dealer defendants. Smith induced the investors to invest, in the aggregate, approximately $8 million in a non-existent investment product known as Healthcare Financial Partnership. Instead of investing their money, Smith deposited the funds into a Merrill Lynch account held in his and his wife's name. The account was opened, maintained, and utilized by Smith for the sole purpose of facilitating the fraudulent scheme. The investors sought to recoup their losses from the present defendants and Merrill Lynch. The investors' claims against Merrill Lynch alleged negligent supervision of and failure to police Smith's account for fraudulent activity.

The four state court actions were consolidated and Merrill Lynch moved for dismissal pursuant to Rule 4:6-2(e). The investor-plaintiffs in those matters opposed the motion and cross-moved for an order compelling FINRA arbitration. The court granted Merrill Lynch's motion and denied the plaintiffs' cross-motion, holding that because the investors were not customers of Merrill Lynch, it owed no duty to them.

An appeal ensued, and we affirmed the decision of the motion judge. Frederick v. Smith, 416 N.J. Super. 594, 596 (App. Div. 2010), certif. denied, 205 N.J. 317 (2011). In affirming the judge's decision, we determined the investors possessed no viable negligence claim against Merrill Lynch. Id. at 601. Additionally, we noted that in light of our disposition of the negligence claim, [the investors] have no viable cause of action to be arbitrated even if we were to ignore the other insurmountable burden that [the investors] and Merrill Lynch never entered into an agreement to arbitrate any disputes that might later arise between them. [Ibid.]

B.

On July 22, 2010, Cantone filed third-party FINRA arbitration claims against plaintiffs, seeking contribution and indemnification in the event Cantone is found liable to the investors in arbitration actions (the Frederick and Tedeschi arbitrations)*fn4 they filed prior to the appeal from the order granting Merrill Lynch's motion to dismiss.

On August 16 and September 29, 2010, plaintiffs filed two complaints*fn5 against Cantone, seeking to enjoin them from pursuing third-party contribution claims related to the investors' arbitration actions.*fn6

On August 26 and October 6, Judge W. Hunt Dumont entered orders to show cause requiring Cantone to demonstrate why they should not be enjoined from proceeding with their third-party claims against plaintiffs. Also on October 6, the judge entered an order allowing PNCI and Hilliard Lyons to intervene as defendants in the injunction action between plaintiffs and Cantone. PNCI and Hilliard Lyons subsequently cross-moved to compel plaintiffs to arbitrate their third-party claims via FINRA arbitration.

On October 8, 2010, the judge entered an order consolidating the complaints under the Cantone I docket number, and preliminarily enjoined all defendants from pursuing their third-party claims against plaintiffs in the Frederick and Tedeschi ...


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