The opinion of the court was delivered by: SWEET
Upon remand, plaintiff R. Stockton Rush III ("Rush") now seeks a jury trial on the issue of fraudulent inducement of the arbitration agreement, a request opposed by defendants Oppenheimer & Co., Inc. ("Oppenheimer") and Scott Seskis ("Seskis") on the ground that there is no material factual basis for asserting such a defense to the arbitration agreement. Upon the memoranda and affidavits submitted and for the following reasons, Rush's request for a jury trial on this issue will be granted.
On January 18, 1985, defendants brought a motion to compel arbitration of the state law claims alleged by Rush pursuant to section 4 of the United States Arbitration Act, 9 U.S.C. § 4. By its opinion of March 22, 1985, this court held that the defendants' conduct of litigation had resulted in a waiver of its right to compel arbitration as provided by the arbitration agreement signed by Rush. This determination, however, was reversed by the Court of Appeals.
Facts as Set Forth Upon the Motion
On papers submitted it appears that Rush, a nineteen-year old student at Princeton University, obtained control over an inherited block of stock in 1981 and opened an investment account with Seskis at the firm of Drexel Burnham Lambert in May of that year and executed a Client's Security Option Agreement and a Customer's Agreement, both of which contained clauses requiring arbitration of any disputes arising in connection with the account. Rush does not contend that any of these agreements or the arbitration clauses contained therein were fraudulently induced.
Later that year, Seskis joined Oppenheimer and invited Rush to visit Oppenheimer's offices to consider opening an account with them. Construing the facts most favorably to Rush, on November 30, 1985, Rush arrived at Oppenheimer's offices in New York City, met with Seskis and was introduced to other personnel at Oppenheimer. The parties discussed a cover options writing program on 20,000 shares of Natonas common stock held in a trust account for Rush back in California. Rush agreed to such a program and decided to transfer his account at Drexel, consisting of 100 shares of Transcontinental Energy, to Oppenheimer. According to Rush, he refused to transfer money into the account and prohibited any purchases of stock on margin.
A sharp discrepancy in the parties' contentions arises from their accounts of Rush's signing of the Oppenheimer documents on November 30, 1982 which included a margin agreement containing the arbitration clause. Rush states that he was taken into a large office or conference room where he was presented with the documents and told by the defendants that there was no need to read them because they were merely a routine formality to open the account and that he should simply sign them. According to Seskis' deposition testimony, however, Rush was instructed to read the agreements thoroughly and understand it before signing. Seskis did not recall whether Rush signed the document in his presence at the offices of Oppenheimer or at home. Seskis has testified that he emphasized the nature of the agreement to Rush, but Rush contends that he was opposed to trading on margin and would not have signed the document had he been informed that such was its purpose.
The following week, Seskis called Rush to indicate that not all of the necessary forms were signed at the first meeting. Rush was requested to return to Oppenheimer's offices and on December 9, 1981, he signed a second document which was an option account form that did not contain an arbitration clause. According to Rush, the November 30 document signed by him was entirely unnecessary for the account which he agreed to open with Oppenheimer and that he was fraudulently induced to sign that agreement.
Section 4 of the Arbitration Act of 1947, 9 U.S.C. § 4, provides that "if the making of the arbitration agreement or the failure, neglect, or refusal to perform the same be in issue, the court shall proceed summarily to the trial thereof." Rush has not raised any issue regarding the scope of the arbitration agreement or its applicability to the present dispute. Instead, the only issue to be determined is whether the arbitration agreement was properly executed by Rush or instead was procured through the fraudulent misrepresentations or omissions of the defendants.
Rush first contends that the defendants were under a duty to disclose the import and effect of the arbitration clause to their prospective client when presenting him with the brokerage agreement. Rush's contention that the defendants' failure to disclose constitutes fraud is based on a release and later ruling of the Securities Exchange Commission (the "Commission"). In 1979, two years before Rush opened his account, the Commission stated that it was:
especially concerned that arbitration clauses continue to be part of form agreements widely used by broker-dealers despite the number of cases in which these clauses have been held to be unenforceable in whole or in part. Requiring the singing of an arbitration agreement without adequate disclosure as to its meaning and effect violates standards of fair dealing with customers and constitutes conduct that is inconsistent with just and equitable principles of trade. In addition, it may raise serious questions of compliance with the anti-fraud provisions of the securities laws.
Securities Exchange Act Release No. 34-15984 (July 2, 1979), 44 Fed. Reg. 40,462, 40,464 (1979)(footnotes omitted). Given its perception that this release had failed to alter the use of broad, unenforceable arbitration clauses, the Commission initiated proceedings in 1983 which culminated in the adoption of the rule under the ...