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BRENER v. BECKER PARIBAS INC.

January 2, 1986

ISRAEL BRENER and PABLO BRENER, Plaintiffs, against BECKER PARIBAS INC., A.G. BECKER PARIBAS INCORPORATED, WARBURG PARIBAS BECKER INC., A.G. BECKER HOLDINGS, INC., A.G. BECKER PARIBAS HOLDINGS, INC., A.G. BECKER PARIBAS GROUP, INC., PARIBAS CORP., COMPAGNIE FINANCIERE de PARIBAS, and ALVIN CORWIN, Defendants


The opinion of the court was delivered by: TENNEY

TENNEY, J.

In this securities fraud action, the plaintiffs, Israel Brener and Pablo Brener, are asserting claims under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j (the "Exchange Act") and Rule 10b-5 promulgated thereunder; Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77g (the "1933 Act"); and the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. 1962(c) (1982) ("RICO"). The plaintiffs are also asserting claims of common law fraud, breach of fiduciary duty, breach of contract, and negligence. *fn1"

The defendants, Becker Paribas Incorporated, Becker Holdings Inc., Becker Paribas Holdings Inc., and Paribas Corporation ("Becker"), and Alvin R. Corwin ("Corwin"), have filed a motion, pursuant to Sections 3 and 4 of the Federal Arbitration Act, 9 U.S.C. §§ 3, 4 (1970), to compel arbitration of all claims, and to stay this action pending arbitration. The plaintiffs have moved to amend their complaint to assert a claim under Section 12(2) of the 1933 Act, 15 U.S.C. § 771(2) ("§ 12(2)").

 For the reasons set forth below, the defendants' motion to compel arbitration is granted, and this action is stayed pending arbitration. The plaintiffs' motion to amend their complaint is granted.

 BACKGROUND

 The plaintiffs are former brokerage customers of Becker and from 1978 to 1983 they maintained a number of securities accounts with Becker. By June of 1982, the plaintiffs had placed approximately $13.5 million into their accounts with Becker. The plaintiffs had an equity position of approximately $4 million when they closed the account in September of 1983. Both sides agree that the plaintiffs suffered a substantial loss.

 The plaintiffs claim that their losses were a result of the defendants' misconduct. Specifically, the amended complaint alleges that the defendants: (1) offered and sold securities to the plaintiffs by means of misrepresentations and/or omissions of material facts; (2) engaged in unauthorized transactions; (3) recommended and purchased certain investments that were not suitable in light of the plaintiffs' stated investment goals; (4) charged the plaintiffs excessive commissions; and (5) forced the plaintiffs to incur interest expenses at unreasonably high rates. The plaintiffs are seeking compensatory damages of $17,500,000, and punitive damages of $10,500,000.

 The defendants seek to compel arbitration based on the provisions contained in two written agreements, signed by the plaintiffs, which were entitled "Customer Margin Agreement/Loan Consent" ("Customer Consents"). *fn2" The Customer Consents each contained a provision that states in relevant part:

 It is agreed that any controversy between us arising out of [Becker's] business or this agreement shall be submitted to arbitration conducted under the provisions of the Constitution and Rules of the Board of Governors of the New York Stock Exchange or pursuant to the Code of Arbitration of the National Association of Securities Dealers, as the undersigned may elect.

 Relying on this language, and the Supreme Court's recent decision in Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213 105 S. Ct. 1238, 84 L. Ed. 2d 158 (1985), the defendants filed a motion to compel arbitration pursuant to the federal Arbitration Act.

 DISCUSSION

 The Arbitration Act reversed centuries of judicial hostility to arbitration agreements. See Scherk v. Alberto -Culver Co., 417 U.S. 506, 510-11, 94 S. Ct. 2449, 41 L. Ed. 2d 270 (1974). The Act was designed to avoid the expense and delays involved in litigation, and to give arbitration agreements the same validity as other contracts. Id. (citing H.R. Rep. No. 96, 68th Cong., 1st Sess. 1, 2 (1924)); see also Mitsubishi Motors Corp. v. Sol er Chrysler-Plymouth Inc., 473 U.S. 614, 105 S. Ct. 3346, 3354, 87 L. Ed. 2d 444 (1985).

 In considering a motion to compel arbitration, the court must determine (1) whether there is an agreement to arbitrate; (2) whether the claims involved are arbitrable; and (3) whether the right to arbitrate has been waived. See Janmort Leasing, Inc. v. Econo-Car Int'l, Inc., 475 F. Supp. 1282, 1288 (E.D.N.Y. 1979). In the case at bar, the plaintiffs first argue that the arbitration agreements are invalid because the plaintiffs signed the Customer Consents without reading or understanding them. Second, the plaintiffs argue that the claims brought under § 10(b), § 17(a), and the RICO statute are non-arbitrable. Finally, the plaintiffs argue that the defendants waived their right to arbitrate by taking actions that were inconsistent with that right. For the reasons set forth below, the Court rejects each of these arguments, and concludes that arbitration is appropriate.

 I. Validity of the Arbitration Agreement

 The plaintiffs argue that they were fraudulently induced to sign the Customer Consents. The plaintiffs claim that they signed the Consents without understanding the significance of the arbitration agreements contained therein, and the Consents are therefore invalid.

 The law in this area was clearly established by Prima Paint Corp v. Flood and Conklin Mfg. Co., 388 U.S. 395, 402-04, 18 L. Ed. 2d 1270, 87 S. Ct. 1801 (1967). In that case, the Supreme Court held that when a contract contains an arbitration clause, a claim of fraudulent inducement concerning the contract as a whole should be decided by an arbitrator. The court will become involved only if there is a specific allegation that the arbitration clause itself, standing apart from the overall agreement, was induced by fraud. Id. at 402-04. See also McMahon v. Shearson/American Express, Inc., 618 F. Supp. 384, 387 (S.D.N.Y. 1985); Jarvis v. Dean Witter Reynolds, Inc., 614 F. Supp. 1146, 1149 (D. Vt. 1985). Claims concerning duress, unconscionability, coercion, or confusion in signing should be determined by an arbitrator because those issues go to the formation of the contract. See Merrill Lynch, Pierce, Fenner & Smith v. Haydu, 637 F.2d 391, 398 (5th Cir. 1981).

 In the case at bar, the plaintiffs are not claiming that the arbitration agreements were fraudulently induced, but rather that the Customer Consents were obtained by fraud because the plaintiffs did not understand or agree to the provisions contained therein. Since the claim of fraud is not directed at the arbitration clause itself, the issue of fraudulent inducement as to the Customer Consents is an issue for the arbitrator to decide. *fn3"

 II. Arbitrability of Plaintiffs' Claims

 The plaintiffs argue that their claims under § 10(b) of the Exchange Act, § 17(a) of the 1933 Act, and their civil RICO claims are non-arbitrable. For the reasons set forth below, the Court holds that all of these claims are suitable for arbitration.

 A. Section 10(b) of the Exchange Act

 In the landmark case of Wilko v. Swan, 346 U.S. 427 1953, 98 L. Ed. 168, 74 S. Ct. 182 ), the Supreme Court held that an agreement to arbitrate claims arising under § 12(2) of the 1933 Act is unenforceable. Although the decision in Wilko concerned the 1933 Act, numerous courts have extended the Wilko holding to claims brought under the Exchange Act. See e.g., Delancie v. Birr, Wilson & Co., 648 F.2d 1255, 1257-59 (9th Cir. 1981); Sibley v. Tandy Corp., 543 F.2d 540, 543 and n.3 (5th Cir. 1976), cert. denied, 434 U.S. 824, 54 L. Ed. 2d 82, 98 S. Ct. 71 (1977); Ayres v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 538 F.2d 532, 536-37 (3d Cir.), cert. denied, 429 U.S. 1010, 50 L. Ed. 2d 619, 97 S. Ct. 542 (1976); Greater Continental Corp. v. Schechter, 422 F.2d 1100, 1103 (2d Cir. 1970); Starkman v. Seroussi, 377 F. Supp. 518, 522 (S.D.N.Y. 1974). Clearly the plaintiffs' 10(b) claims are non-arbitrable if the rationale of the above cases is correct.

 In Scherk v. Alberto Culver Co., 417 U.S. 506, 94 S. Ct. 2449, 41 l. Ed. 2d 270 (1974), however, the Supreme Court questioned whether the Wilko doctrine is applicable to claims arising under § 10(b) of the Exchange Act. Id. at 513-14. The Court noted that there are important distinctions between the 1933 Act and the Exchange Act. The Court explained that § 12(2) of the 1933 Act provides the "special right" of a private judicial remedy for civil liability, whereas the Exchange Act does not provide such a right. The right that arises under § 12(2) is an express Congressionally-created right, while the right under § 10(b) is an implied one. Id. 513-14. In addition, the Exchange Act does not include the broad jurisdictional provisions that the 1933 Act does. Thus, the Court expressed reservations about extending the Wilko doctrine ...


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