United States District Court, Southern District of New York
June 14, 1990
THOMAS CONWAY, PLAINTIFF,
ICAHN & CO., INC., DEFENDANT.
The opinion of the court was delivered by: Robert J. Ward, Senior District Judge.
Defendant Icahn & Co., Inc. ("Icahn") has moved, pursuant to
Rule 56, Fed.R.Civ. P., for partial summary judgment
dismissing count III of the complaint, which alleges a
violation of the federal securities laws. In addition, Icahn
seeks an order compelling arbitration of the remaining claims,
all of which are based upon state law, and of the federal
claim in the event it is not dismissed. In a conference call
on March 9, 1990, chambers notified the parties that the Court
had determined to adjourn that portion of the motion seeking
summary judgment on the federal claim, pending completion of
discovery. However, at defendant's request, that part of the
motion seeking to compel arbitration was severed for immediate
decision. For the reasons that follow, the Court denies
defendant's motion to compel arbitration of plaintiff's
In this action, which stems in large part from the
precipitous fall in the stock market that occurred on October
19, 1987 — "Black Monday" — plaintiff Thomas Conway
("Conway") seeks damages for losses in his margin account that
occurred when defendant, his broker (the "introducing broker"),
executed certain open buy orders and then sold off stock in
plaintiff's account to meet the margin call of Cowen & Co.
("Cowen"), the "clearing broker,"*fn1 which is not a party to
this action. Plaintiff claims that as a result of his inability
to reach defendant's offices by telephone during the crucial
period, and defendant's failure promptly to notify him of the
transactions executed on behalf of his account and of the
resulting under-margining of his account, he sustained severe
losses and incurred substantial tax liabilities.
The relevant facts are largely undisputed. The complaint
reveals that plaintiff opened his securities account with
Icahn in 1981. According to plaintiff, as an inducement to him
to open and maintain this account, defendant made certain
representations to him. In particular, plaintiff claims that
he was told that: (1) Icahn would confirm, by same-day
telephone communication, all transactions executed in
plaintiff's account; (2) Icahn would confirm,
by same-day or next-day written communication, all
transactions executed in plaintiff's account; (3) Icahn would
permit plaintiff to maintain less than a thirty percent
margin, and would notify him in the event that deposits were
necessary to comply with any margin requirements; and (5)
Icahn's offices would be open during securities trading hours,
and plaintiff would be able to communicate his transaction
requests to his account representative by telephone.
In connection with opening his account with Icahn, plaintiff
signed a Customer Agreement (the "Agreement") on a Cowen
form.*fn2 This agreement contains the following clause:
. . Any controversy arising out of or relating
to my accounts, to transactions with you for me
or to this agreement or the breach thereof, shall
be settled by arbitration in accordance with the
rules, then in effect, of the National
Association of Securities Dealers, Inc. or the
Boards of Directors of the New York Stock
Exchange, Inc. as I may elect. If I do not make
such election by registered mail addressed to you
at your mail office within 5 days after demand by
you that I make such election, then you may make
such election. . . . The execution of this
agreement does not waive my rights to bring suit
on claims rising [sic] under the federal
Exhibit B to Affidavit of Florence M. Peterson, filed November
16, 1989, at ¶ 13. Defendant is nowhere named or mentioned in
On October 19, 1987, at approximately 10:30 in the morning,
plaintiff telephoned Barry M. Ferrari ("Ferrari") at Icahn's
midtown Manhattan branch office where plaintiff's account was
located, and placed open buy orders for twelve different
securities. Also outstanding at that time were several other
open buy orders which had previously been communicated to
defendant by Conway. As of the time of plaintiff's call, all
of these buy orders were priced below the current market
prices for the various stocks.
A few hours later, at approximately 12:45 in the afternoon,
Conway had a change of heart with respect to the
aforementioned buy orders and attempted to reach Ferrari by
telephone in order to cancel them. The lines, however, were
continuously busy and plaintiff was unable to get through to
According to the complaint and plaintiff's papers, over the
ensuing two weeks Conway was ill and did not leave his home.
Conway claims that, during that time period, he attempted to
telephone defendant's office three or four times per day but
was never able to get through due to a constant busy signal on
Icahn's line, nor was he contacted by defendant with respect
to any transactions occurring in his account or any margin
requirements. On Friday, October 30, 1987, plaintiff was
admitted as a patient at St. Luke's/Roosevelt Hospital in New
Early in the morning on Monday, November 2, plaintiff
finally succeeded in reaching Ferrari at defendant's midtown
branch office. Telephoning from his hospital room, plaintiff
questioned Ferrari concerning the status of his account and of
the outstanding buy orders previously transmitted by plaintiff
to defendant. He claims that Ferrari stated that he did not
know the status of the account or the buy orders, and that any
transactions would be reported in plaintiff's forthcoming
October 1987 monthly statement. Plaintiff gave Ferrari the
telephone number of his hospital room, and asked that he
contact him should he obtain any of the requested information.
According to plaintiff, neither Ferrari nor any other employee
or representative of Icahn telephoned him in this regard.
Plaintiff was discharged from the hospital on November 4.
Plaintiff continued to telephone Ferrari regularly during
the week of November 2
through November 6, but was told only that Icahn's downtown
office was not providing any information to Ferrari and that
plaintiff should await his October statement. When plaintiff
telephoned Icahn's downtown office on November 3 and 4,
however, he was told that all inquiries regarding his account
were required to be made through his account representative
and that he should not telephone the downtown office.
On Saturday, November 7, plaintiff "collected his
mail,"*fn3 which included several items of correspondence
from defendant. In particular, plaintiff received his October
1987 monthly statement, written confirmations of various
purchases*fn4 and sales*fn5 that occurred in his account
between October 19 and October 28, 1987, and a "margin call"
requesting immediate deposit into plaintiff's account of
$100,000. Plaintiff claims that these items represented the
first communications he had received from defendant regarding
the status of his account and the need for additional margin.
According to plaintiff, had defendant timely confirmed to
him the occurrence of the purchase transactions he could have
prevented the sell-off in his account, since he had sufficient
cash or liquid assets to meet any margin demand. In addition,
plaintiff claims he had previously informed Ferrari of this
fact precisely for the purpose of preventing a sell-off in the
case of a market break.
On the following Monday, November 9, plaintiff personally
visited Ferrari at defendant's uptown office and complained to
him about his inability to reach defendant on October 19 and
thereafter, defendant's failure to confirm the transactions
earlier, and the sell-outs that occurred in plaintiff's
account on October 27 and 28. Plaintiff gave Ferrari a check
for $100,000 — the amount of the margin demand received by
plaintiff on November 7. According to plaintiff, Ferrari:
stated to [him] that he could not understand why
any margin call had ever been made and that
whatever had happened had been done by
defendant's "downtown office" without any notice
Affidavit of Thomas Conway, filed December 4, 1989, at 10.
Plaintiff states that Ferrari urged him not to withdraw his
account until he received his November monthly statement,
since the sell-out transactions did not appear on the October
statement. When the November statement arrived showing these
transactions, however, plaintiff claims that Ferrari again
blamed defendant's "downtown office" and insisted that
"defendant was good for the damage." Id.
The complaint contains nine separate claims against Icahn.
No claim is made against the clearing broker, Cowen.
Defendant, in the portion of its motion under consideration
here, seeks to invoke the arbitration clause in the Agreement
to compel arbitration of all of plaintiff's claims against it.
A court faced with a motion to compel arbitration under the
Federal Arbitration Act, codified at 9 U.S.C. § 1-14, must
first "determine whether the parties agreed to arbitrate."
Genesco, Inc. v. T. Kakiuchi & Co., 815 F.2d 840, 844 (2d Cir.
1987) (citing Mitsubishi Motors Corp. v. Soler
Chrysler-Plymouth, Inc., 473 U.S. 614, 105 S.Ct.
3346, 87 L.Ed.2d 444 (1985)). "Because arbitration is a matter
of contract, a party cannot be required to submit to
arbitration any dispute with a party with whom he has not
agreed to arbitrate." Kelly v. Robert Ainbinder & Co.,
Fed.Sec.L.Rep. (CCH) ¶ 94,963, 1990 WL 26809 (S.D.N.Y. March 8,
1990); Continental Group, Inc. v. NPS Communications, Inc.,
873 F.2d 613, 617 (2d Cir. 1989).
Although not referred to by name in the Agreement containing
the arbitration clause, defendant argues that the Agreement
should be interpreted to apply to Icahn. Ordinary contract
principles apply to the determination whether plaintiff and
defendant have or have not agreed to arbitrate their disputes.
See Ahn v. Rooney, Pace Inc., 624 F. Supp. 368, 369 (S.D.N Y
1985). Defendant's argument that it is included within the term
"you" in the Agreement apparently is based upon the fact that
it was Icahn which provided the form to plaintiff, that the
Clearing Agreement between Icahn and Cowen required Icahn to
obtain clients' signatures on Cowen forms, and that other
documents upon which plaintiff's claims against Icahn are based
were also on Cowen forms.*fn6
These circumstances are insufficient to support Icahn's
argument that it was a party to the Agreement. "While the
parties need not be named formally, there can be no
enforceable agreement unless the parties can be identified
with reasonable certainty." Antinoph v. Laverell Reynolds
Securities, Inc., Fed.Sec.L.Rep. ¶ 94,765 (CCH), 1989 WL 67332
(E.D.Pa. 1989) (citing 4 Williston on Contracts (3d ed.) § 569,
at 39). Here, Icahn was not mentioned by name or otherwise
referred to in the Agreement, and it appears from a contextual
reading of the Agreement that the term "you" refers to Cowen.
Therefore, defendant may not enforce the arbitration clause
against plaintiff based upon its being a party to the
There remains the possibility, however, that defendant could
enforce the Agreement between Cowen and plaintiff if it could
demonstrate either that it was an agent of Cowen, see Nesslage
v. York Securities, Inc., 823 F.2d 231, 233-34 (8th Cir. 1987);
Okcuoglu v. Hess, Grant & Co. 580 F. Supp. 749, 750-52 (E.D.Pa.
1984), or that it was a third party beneficiary of the
Agreement. See Cauble v. Mabon Nugent & Co., 594 F. Supp. 985,
990-92 (S.D.N.Y. 1984); Nesslage v. York Securities, Inc.,
supra, 823 F.2d at 233-34. Although defendant does not
expressly argue that it was either an agent of Cowen, or a
third party beneficiary of the Agreement, it cites the above
cases in support of its assertion that it is entitled to invoke
the arbitration provision of the Agreement against plaintiff.
The overwhelming weight of authority in this district and in
other jurisdictions rejects attempts by introducing brokers to
enforce arbitration clauses contained in customer agreements
between their clients and clearing brokers. See Kelly v. Robert
Ainbinder & Co., Fed.Sec.L.Rep. (CCH) ¶ 94,963 (S.D.N.Y. 1990);
Church v. Gruntal & Co., 698 F. Supp. 465 (S.D.N.Y. 1988);
Lester v. Basner, 676 F. Supp. 481 (S.D.N.Y. 1987); Ahn v.
Rooney, Pace Inc., 624 F. Supp. 368 (S.D.N.Y. 1985); Mowbray v.
Moseley, Hallgarten, Estabrook & Weeden, Inc., 795 F.2d 1111
(1st Cir. 1986); Wilson v. D.H. Blair & Co., 731 F. Supp. 1359
(N.D.Ind. 1990); Antinoph v. Laverell Reynolds Securities,
Inc., Fed.Sec.L.Rep. (CCH) ¶ 94,765, 1989 WL 67332 (E.D.Pa.
1989); Morgan v. Kobrin Securities, Inc.,
649 F. Supp. 1023 (N.D.Ill. 1986); Finlay v. Moseley,
Hallgarten, Estabrook & Weeden, Inc., No. 85 C 7205, slip op.,
1987 WL 5237 (N.D.Ill. January 5, 1987) (avail. on Lexis at
1987 U.S.Dist. LEXIS 68). See also Asset Allocation &
Management Co. v. Western Employers Ins. Co., No. 88 C 4287,
slip op., 1988 WL 139247 (N.D.Ill. December 22, 1988) (avail.
on Lexis at 1988 U.S.Dist. LEXIS 14531).
As noted by some of these courts, the usual relationship
between introducing broker and clearing broker does not fit
easily within an agency framework. Indeed, one court has noted
that "[e]ven without an express denial of a principal and
agent relationship, courts have held that one does not exist
between the introducing and clearing brokers." Lester v.
Basner, supra, 676 F. Supp. at 484 (citing Ahn v. Rooney, Pace
Inc., supra, 624 F. Supp. 368); Morgan v. Kobrin Securities,
Inc., supra, 649 F. Supp. at 1032-33. Because "there can be no
agency relationship where the alleged principal holds no right
of control over the alleged agent," id. at 370, there must be
some evidence to support a finding of subservience on the part
of the alleged agent.
The facts at this stage of the instant proceedings do not
reveal any such agency relationship between Cowen and Icahn.
The Clearing Agreement expressly provides that Cowen is not
liable for any dispute arising out of the acts or omissions of
Icahn, thus underscoring the separateness of the two firms.
See Ahn v. Rooney, Pace Inc., supra, 624 F. Supp. at 371. Thus,
defendant may not enforce the arbitration agreement contained
in the Agreement under an agency theory.
Similarly, the facts thus far presented fail to reveal any
evidence that the parties to the Agreement intended to confer
a benefit upon Icahn so as to give it third party beneficiary
status. See Mowbray v. Moseley, Hallgarten, Estabrook & Weeden,
supra, 795 F.2d at 1117 (crux of third party beneficiary
analysis is the intent of the parties); Kelly v. Ainbinder &
Co., supra, slip op. (no extrinsic evidence suggested to show
intent to benefit introducing broker as third party
beneficiary); Lester v. Basner, supra, 676 F. Supp. at 484-85
(since no intent to make defendants third party beneficiaries
shown, they were merely incidental beneficiaries). Defendant
therefore cannot enforce the Agreement based upon its alleged
status as a third party beneficiary of the Agreement.
For the foregoing reasons, that portion of defendant's
motion seeking to compel arbitration of any or all of
plaintiff's claims is denied. The parties are directed to
complete discovery on or before July 6, 1990, and to serve and
file any final submissions concerning defendant's motion for
summary judgment on or before July 20, 1990. In connection
with these final submissions, the parties are directed to
focus particularly upon the issue of scienter on the part of
It is so ordered.