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May 28, 1968

Barbara Brown, Plaintiff
Gilligan, Will & Co., et al., Defendants

Cooper, District Judge.

The opinion of the court was delivered by: COOPER

COOPER, District Judge:

Fourth-party defendant, Eastman Dillon, Union Securities & Co. (hereinafter Eastman), moves, pursuant to § 3 of the United States Arbitration Act, 9 U.S.C., for an order staying the action brought by the fourth-party complainant, Cohn, Delaire & Kaufman (hereinafter Cohn), until arbitration has been had between them, in accordance with the constitution and rules of the American Stock Exchange (AMEX).


 This action was commenced by plaintiff, Barbara Brown, against the unknown seller of 100 shares of Westec Corporation common stock and Gilligan, Will & Co. (hereinafter Gilligan). The complaint alleges that Gilligan, acting as broker on behalf of defendant seller, sold to plaintiff, through the facilities of AMEX, 100 shares of Westec Corporation common stock; that defendant seller was a controlling stockholder of Westec at the time of such sale; that no registration statement was in effect, in violation of § 5 of the Securities Act of 1933 (hereinafter the 1933 Act), 15 U.S.C. § 77e; that the defendants omitted to inform plaintiff that the stock was being sold by a controlling person without such registration statement, in violation of § 12 (2) and § 17(a) of the 1933 Act, 15 U.S.C. §§ 771(2), 77q(a), and § 10(b) of the Securities Exchange Act of 1934 (hereinafter the 1934 Act), 15 U.S.C. § 78j(b); and that at the time Gilligan effected the transaction on AMEX, no registration was effective as to such security for such exchange in violation of § 12(a) of the 1934 Act, 15 U.S.C. § 781(a). Plaintiff, predicating jurisdiction upon § 22 of the 1933 Act, 15 U.S.C. § 77v, and § 27 of the 1934 Act, 15 U.S.C. § 78aa, demands rescission of the sale or, in the alternative, damages.

 Defendant Gilligan impleaded Cohn alleging that it acted as Cohn's "clearing agent" in the sale of stock to plaintiff, and consequently, if plaintiff is entitled to any relief, responsibility therefor arises solely by virtue of the acts and omissions of Cohn. The causes of action set forth in the third-party complaint parallel those in the original complaint.

 Cohn in turn impleaded Eastman Dillon and Delafield and Delafield (hereinafter Delafield), alleging that it purchased from them 1500 shares of Westec stock for its own account, through the facilities of AMEX; such shares are alleged to have been sold through Gilligan, as clearing broker, to divers purchasers through divers brokers, including Burnham & Co., plaintiff's broker. Cohn seeks judgment over against Eastman Dillon and/or Delafield for any damages or other relief awarded Gilligan against it. The causes of action in the fourth-party complaint parallel those in the original and third-party complaints.

 The Arbitration Act

 The United States Arbitration Act applies to a written provision in a "contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract." 9 U.S.C. § 2. The Act provides that arbitration agreements within its scope "shall be valid, irrevocable, and enforceable," 9 U.S.C. § 2; and that upon application of a party who is not in default in proceeding with arbitration, the court shall stay the trial of the action until arbitration is had in accordance with the terms of the parties' agreement. 9 U.S.C. § 3. Under this section, the court cannot grant a stay unless it is "satisfied that the issue involved in such suit . . . is referable to arbitration" under "an agreement in writing for such arbitration."

 At the outset, we are confronted with Cohn's assertion that it never agreed to arbitrate. Eastman, on the other hand, contends that the constitution and rules of AMEX, which embody provisions requiring arbitration, constitute a binding contract between the parties. Since the arbitration provision is an integral part of the alleged contract, the issue as to whether the parties agreed to that provision requires us to first determine if a contract exists. See Kulukundis Shipping Co. v. Amtorg Trading Corp., 126 F.2d 978 (2d Cir. 1942).

 Cohn and Eastman are broker-dealer firms registered with the Securities and Exchange Commission under the 1934 Act and are member firms of AMEX. AMEX's constitution requires that each individual member ("regular" and "allied") of the Exchange pledge himself in writing to abide by the constitution and all rules adopted pursuant thereto. *fn1" Accordingly, all general partners of Cohn and Eastman who are admitted to membership on the Exchange have executed this pledge.

 The constitution and rules of a stock exchange constitute a contract between all members of the exchange with each other and with the exchange itself. See Franklin v. Dick, 262 App. Div. 299, 28 N.Y.S. 2d 426, aff'd, 287 N.Y. 656, 39 N.E. 2d 282 (1941); Cohen v. Thomas, 209 N.Y. 407, 103 N.E. 708 (1913). National League of Commission Merchants of the United States v. Hornung, 148 App. Div. 355, 132 N.Y.S. 871 (1911), aff'd, 153 App. Div. 937, 138 N.Y.S. 1131 (1912), aff'd, 211 N.Y. 575, 105 N.E. 1091 (1914); In re Haebler v. New York Produce Exchange, 149 N.Y. 414, 44 N.E. 87 (1896); Belton v. Hatch, 109 N.Y. 593, 17 N.E. 225 (1888); White v. Brownell, 4 Abb. Pr. (N.S.) 162 (N.Y.C.P. 1868).

Most exchanges require applicants for membership, as a prerequisite to admission, to sign the constitution of the exchange or an agreement to be bound by its provisions. But whether or not express written assent is demanded, every member, by virtue of his admission, contracts to be governed by the conditions of membership which the exchange has imposed. These conditions are, therefore, binding on the members, and constitute virtually a body of law by which the members are governed in their dealings with the exchange and with each other. 1 C. H. Meyer, The Law of Stock Brokers and Stock Exchanges § 7 (1931). *fn2"

 The provisions of the constitution and rules define the rights of the members as well as their obligations. Exchange members, however, have not only subjected themselves to the organic law of the exchange, as embodied in its constitution and rules, but have bound their firms as well, 1 C. H. Meyer, supra § 19; in turn member firms enjoy the privileges conferred by these rules of the Exchange. *fn3" See Avery v. Moffatt, 187 Misc. 576, 55 N.Y.S. 2d 215 (N.Y. Sup. Ct. 1945).

 Article VIII, § 1 of the AMEX constitution provides:

Member, member firms, partners of member firms, member corporations and officers and holders of stock in member corporations shall arbitrate all controversies arising in connection with their business between or among themselves. . . .

 The Board of Governors of the Exchange, in compliance with the constitution, has prescribed detailed rules regarding arbitration and the conduct of arbitration proceedings. *fn4"

 Since the rules of the Exchange "constitute a contract between the members, the arbitration provisions which they embody have contractual validity." 1 C. H. Meyer, supra, § 149. See Russell-Coleman Cotton Oil Co. v. C.R. Garner & Co., 242 S.W. 1067 (Tex. Civ. App. 1922); National League of Commission Merchants of the United States v. Hornung, supra; Heath v. President of Gold Exchange, 7 Abb. Pr. (N.S.) 251 (N.Y.C.P. 1969). The Exchange provisions requiring arbitration constitute an agreement to arbitrate which is binding upon both Cohn and Eastman. See Osborne & Thurlow v. Hirsch & Co., 10 Misc. 2d 225, 172 N.Y.S.2d 522, 523 (N.Y. Sup. Ct. 1958).

 In addition, the contract involving the stock transaction here in question embodies the arbitration provisions of the Exchange's constitution and rules. Subsections (j) and (k) of § 3 of article I of the AMEX constitution provide that the term "Exchange Contracts" includes all contracts of a member firm with another member firm made on the Exchange for ...

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