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READER v. HIRSCH & CO.

August 1, 1961

Charles D. READER and Patricia Reader, Plaintiffs,
v.
HIRSCH & CO., Defendant



The opinion of the court was delivered by: DAWSON

Hirsch & Co. has brought on a motion pursuant to section 3 of the United States Arbitration Act, 9 U.S.C. § 3, to stay this action and all proceedings herein until arbitration may be had of the dispute between the parties. The claim for arbitration is founded on two agreements which provide that 'any controversy (between the parties) * * * shall be settled by arbitration * * *.' Customer's Agreement, paragraph 16. A similar provision is found in the Guaranty of Account ('Any controversy arising between us shall be determined by arbitration * * *'). Both these agreements were signed by Charles Reader. The plaintiffs contend, however, that despite these provisions, arbitration may not be had.

Plaintiffs seek to recover damages for losses suffered in securities transactions allegedly arranged by Hirsch & Co. in violation of the margin requirements of section 7 of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78g. Hirsch & Co. is a stock brokerage firm with membership in the New York Stock Exchange, the American Stock Exchange, and other exchanges.

 The motion to stay the action until the controversy has been arbitrated is contested by the plaintiffs on the grounds that the remedy designated by the statute, i.e., a suit in a federal court, is exclusive. This argument is founded on two sections. Section 27 of the 1934 Act, 15 U.S.C.A. § 78aa, provides:

 'The district courts of the United States * * * shall have exclusive jurisdiction of violations of this chapter or the rules and regulations thereunder * * *.'

 The non-waiver provision, section 29(a), 15 U.S.C.A. § 78cc(a), states:

 '(a) Any condition, stipulation, or provision binding any person to waive compliance with any provision of this chapter or of any rule or regulation thereunder, or of any rule of an exchange required thereby shall be void.'

 The Issue.

 A ruling on this motion requires that the Court determine whether arbitration is available under the Securities Exchange Act of 1934, where the parties have previously, i.e., prior to the time of actual controversy, agreed that any disputes arising thereafter shall be submitted to arbitration.

 Wilko v. Swan.

 Wilko v. Swan, 1953, 346 U.S. 427, 74 S. Ct. 182, 98 L. Ed. 168, was an action brought under section 12(2) of the Securities Act of 1933, 15 U.S.C.A. § 77l(2) to recover damages for alleged misrepresentation in the sale of securities. Prior to answering the complaint the defendant moved to stay the trial of the action, pursuant to section 3 of the United States Arbitration Act, until arbitration could be had in accordance with the terms of certain margin agreements between the parties.

 The Court was forced to choose between two desirable but conflicting courses: (1) the arbitration of a dispute and (2) a plaintiff's choice of forum, as provided by the statute. Arbitration had already established a history of being judicially favored as an expeditious means of settling disputes. By passage of the federal act, Congress had signified its approval of arbitration. The Securities Act of 1933 was designed to protect investors. It provides a security buyer-plaintiff with a wide choice of courts and venue, and the privilege of nationwide service of process.

 The Court turned to section 14 of the Securities Act of 1933, 15 U.S.C.A. § 77n,

 'Any condition, stipulation, or which provides: provision binding any person acquiring any security to waive compliance with any provision of this subchapter or of the rules and ...


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