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STEINBERG & LYMAN v. TAKACS

October 16, 1991

STEINBERG & LYMAN, PLAINTIFF,
v.
FRANK TAKACS, ANTHONY PALMA, SAL PALMA, GARY PALMA, ANTHONY DAVI, CHARLES BEREN, PETER COGNIGLIO, GEOFFREY OGBURN, TERRY LIN SOLOMON, JOSEPH BIERMAN, DELAPLAINE MCDANILE, FIRST AFFILIATED SECURITIES, INC., WILLIAM MORGAN AND AKIVA BAR, DEFENDANTS.



The opinion of the court was delivered by: Edelstein, District Judge:

OPINION AND ORDER

Steinberg & Lyman ("S & L") is a Delaware partnership with its principal place of business in New York that is engaged in the business of buying and selling securities for itself and customers. The defendants Takacs, Anthony, Sal and Gary Palma, Davi, Beren, Cogniglio, Ogburn, McDanile, Morgan and Bar are residents of California; defendants Solomon and Bierman appear to be residents of Utah.*fn1 Defendant First Affiliated Securities, Inc. ("FAS")*fn2 is a California corporation with its principal place of business in California. Bar was employed in FAS' Carmel office and Morgan was the principal of the Carmel office as well as Bar's manager and supervisor.

S & L has brought suit under sections 9 and 10(b) of the Securities Exchange Act and Securities Exchange Commission Rule 10b-5,*fn3 sections 1962(a) and (c) of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), New York General Business Law section 352(c), and has also asserted claims for common law breach of contract, common law fraud*fn4, punitive damages and indemnity.

S & L's action involves stock trades executed through S & L involving the common stock of Corporate Capital Resources ("CCR"). The complaint alleges that in June 1987, the purchasing defendants placed telephone orders with S & L for large blocks of CCR stock and then refused to pay for the stock after the stock price declined. S & L further alleges that these defendants placed orders for CCR on the advice of Bar, who told the purchasing defendants that he controlled the market in CCR stock and suggested buying the stock because its price would soon rise dramatically. S & L contends that Bar's activities constitute an illegal attempt to manipulate the market in CCR stock. S & L also asserts that Morgan and FAS, who employed Bar, are vicariously liable for Bar's conduct.

S & L originally filed this action on July 1, 1987 against only the purchasing defendants. These defendants then brought two separate actions in California state courts based on the same facts: the first against FAS, Morgan and Bar and the second against S & L and its employee Vinnie Aquino, who allegedly executed the CCR transactions. The defendants in the first California action removed the case to the United States District Court for the Northern District of California. The California plaintiffs then filed a first amended complaint in federal court against FAS, Morgan, Bar, S & L and Aquino, which effectively consolidated the California suits in federal court.

On December 1, 1987, the purchasing defendants moved to dismiss the New York action or to transfer it to California. This Court denied the motion. See Steinberg & Lyman v. Takacs, 690 F. Supp. 263 (S.D.N.Y. 1988). The purchasing defendants then asserted counterclaims against S & L and filed a third-party complaint against FAS, Morgan and Bar, which they later discontinued. S & L subsequently filed a second amended complaint that added FAS, Morgan and Bar as defendants.

FAS and Morgan have moved this Court for an order staying proceedings pending arbitration or, in the alternative, dismissing the second amended complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), for lack of particularity pursuant to Rule 9(b) and for lack of personal jurisdiction over Morgan under Rule 12(b)(2). S & L has cross moved for summary judgment against FAS and Morgan pursuant to Rule 56 on the eighth and ninth claims of the second amended complaint, which are damages claims based on respondeat superior and controlling person liability. In addition, S & L has filed a separate motion for summary judgment against the purchasing defendants on their first and third through sixth counterclaims and against Sal Palma on the second claim of the second amended complaint.*fn5

FAS' and Morgan's motion to stay these proceedings to the extent of their involvement pending arbitration is granted. As a result, this Court need not reach its motion to dismiss. This Court also stays any action on S & L's cross motion for summary judgment because it is also subject to arbitration. S & L's motion for summary judgment on the purchasing defendants' counterclaims and against Sal Palma on the second claim of the second amended complaint is denied.

DISCUSSION

      I. FAS' and Morgan's Motion to Stay These Proceedings
                       Pending Arbitration

The Federal Arbitration Act provides that:

  If any suit or proceeding be brought in any of the
  courts of the United States upon any issue
  referable to arbitration under an agreement in
  writing for such arbitration, the court in which
  such suit is pending, upon being satisfied that
  the issue involved in such suit or proceeding is
  referable to arbitration under such an agreement,
  shall on application of one of the parties stay
  the trial of the action until such arbitration has
  been had in accordance with the terms of the
  agreement. . . .

9 U.S.C. § 3 (1990). FAS and Morgan assert, and S & L does not contest, that as members of the National Association of Securities Dealers ("NASD"), the parties agreed to submit to arbitration any disputes among members "arising out of or in connection with the business of any member of the Association. . . ." NASD Manual, para. 3701. It is well settled that arbitration agreements between self-regulating professional associations, such as NASD or the New York Stock Exchange, and their members are enforceable. See Formica v. Malone & Assoc., Inc., 907 F.2d 397, 400 (2d Cir. 1990). In addition, it is uncontested that the dispute between S & L, on the one hand, and Morgan and FAS on the other falls within the scope of the NASD arbitration agreement because it involves the members' business affairs. See Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983) ("The Arbitration Act establishes that, as a matter of federal law, any doubts concerning the scope of arbitration should be resolved in favor of arbitration. . . .").

S & L opposes FAS' and Morgan's motion for a stay pending arbitration solely on the grounds that FAS and Morgan waived their right to arbitration by conducting discovery in the California and New York actions. For instance, S & L alleges that FAS and Morgan participated in a dozen depositions. It is true "that the litigation of substantial issues going to the merits may constitute a waiver of arbitration." Sweater Bee By Banff, Ltd. v. ...


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