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FARINO v. ADVEST

May 1, 1986

DOMENICK FARINO and FRANCES FARINO, Plaintiffs,
v.
ADVEST, INC., and CHARLES LESSER, Defendants



The opinion of the court was delivered by: BARTELS

MEMORANDUM-DECISION and ORDER

BARTELS, District Judge

 In what is essentially a 'stock-churning' action, plaintiffs Domenick and Frances Farino charge defendants Advest, Inc., and Charles Lesser with (1) violations of §§ 10(b) and 20 of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. §§ 78j(b) and 78(t), and Rule 10b-5 promulgated thereunder; (2) state common law fraud and breach of fiduciary duty; and (3) violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1692(c) and 1964(c).

 Plaintiffs, who have a joint margin trading account with defendant brokerage firm Advest, allege that for a period of 19 months between June 1983 and December 1984, defendant Lesser, the account executive, engaged in aggressive, frequent, unauthorized trading in plaintiffs' account, contrary to plaintiffs' express instructions to limit trading to conservative, dividend-producing stocks. As a result, plaintiffs allege, defendants generated excessive commissions and margin charges, and reduced plaintiffs' equity from approximatley $500,000 to less than $90,000 in December 1984, and less than $30,000 in December 1985.

 In lieu of answer, defendants have moved, under the Federal Arbitration Act, 9 U.S.C. §§ 3 and 4, to stay this action and compel plaintiffs to arbitrate the federal and state law claims in their complaint. The motion is based on a broad arbitration clause contained in a Customer's Agreement dated December 21, 1977. Plaintiffs, however, deny signing this agreement containing he arbitration clause, and question whether it applies to the particular account being sued upon here since the Agreement contains a different account number. In the alternative, should the Court determine the arbitration agreement is enforceable, plaintiffs oppose arbitration of their federal law claims on the ground that such claims are not subject to mandatory arbitration under the Arbitration Act.

 Defendants' motion thus raises two issues; first, whether there is an enforceable agreement to arbitrate, and second, whether any or all of the claims alleged are arbitrable.

 Arbitration Agreement

 Plaintiffs deny signing the 1977 Customer's Agreement containing the arbitration clause. They also note that the account number which is hand written at the top of the disputed Customer's Agreement, 38-076121, is not the number of the particular account being sued upon in this action, 36-403806. Therefore, plaintiffs question whether the Agreement applies at all in this case, even if the signatures are deemed valid.

 In view of these factual disputes over the validity of the 1977 Agreement, the Court permitted discovery relevant to this issue and held an evidentiary hearing on April 11 and 18, 1986, pursuant to § 4 of the Federal Arbitration Act, 9 U.S.C. § 4. Based on all the evidence submitted by the parties, the Court makes the following findings.

 For some time before 1973, plaintiff Domenick Farino and his wife Frances had individual securities accounts with Purcell Graham, a brokerage firm, for which defendant Charles Lesser was the account executive. In 1973, the Purcell Graham branch office in which plaintiffs had their accounts was taken over by defendant Advest, Inc. At that time, plaintiffs executed new Customer's Agreements, similar to the 1977 Agreement in dispute here, with Advest, and Lesser, now an Advest employee, continued as the account executive.

 In December 1977, plaintiffs requested Advest to open for them the joint margin account which is the subject of this lawsuit. Lesser told plaintiffs, in December 1977, that they must sign a customer's authorization in order to open the account, as required by relevant regulations, and he thereafter drew up an authorization which plaintiffs signed and returned to Advest. According to Lesser, had the plaintiffs not returned such an authorization to Advest, Advest's Compliance Department, which oversees the company's compliance with relevant securities laws and regulations, would have notified him that the authorization was missing. Miles Levites, Advest's Director of Compliance, confirmed that Stock Exchange rules, and Advest's standard practice, require that Advest obtain a customer's authorization in order to engage in margin trading on the customer's account.

 Defendants produced a copy of a document entitled "Customer's Agreement", reproduced from microfilm, since it is Advest's practice to reduce all such documents to microfilm and then to destroy the originals. The Customer's Agreement, dated December 21, 1977, contains the authorization to engage in margin trading, the disputed arbitration clause, and plaintiffs' purported signatures. Plaintiffs claim they did not sign this document, and plaintiffs' attorney suggested, in the course of the hearing, that plaintiffs' signatures may have been fraudulently transferred onto the Customer's Agreement from some other document.

 However, in addition to evidence showing that this document was produced in the normal course of Advest's business, defendants presented the testimony of Lyndal L. Shaneyfelt, a handwriting expert and also an expert in examining questioned documents, whose experience includes 35 years of training and work with the FBI as well as 10 years of work as a private consultant in this field. In the course of his work, Shaneyfelt has frequently been called upon to determine the validity of signatures, often in cases where the only copy of the questioned document is on microfilm.

 Using a chart entered into evidence, Shaneyfelt made a detailed comparison on the record of the contested signatures with exemplars of plaintiffs' signatures made at various times from 1977 to the present. Based on his experience and analysis of the signatures, it was his opinion that the "Domenick Farino" signature on the 1977 Agreement was indeed that of the plaintiff Domenick Farino, and that Domenick had probably also signed his wife's name to the Agreement. Both plaintiffs ...


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