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June 14, 1990


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 claims.


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
  securities laws.

Exhibit B to Affidavit of Florence M. Peterson, filed November 16, 1989, at ¶ 13. Defendant is nowhere named or mentioned in the Agreement.

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 defendant's office.

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 York.

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.

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 ...

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