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April 30, 1992



The opinion of the court was delivered by: THOMAS P. GRIESA

This is a securities fraud action brought by five securities investors against a clearing brokerage firm. Plaintiffs assert two claims under Section 10(b) of the Securities Exchange Act of 1934, 12 U.S.C. § 78j, and SEC Rule 10b-5 promulgated thereunder. In their first claim, plaintiffs allege that Financial Clearing & Services Corporation fraudulently induced plaintiffs to enter into customer account agreements through an introducing broker that was not duly registered. This will be referred to as the registration issue. The second claim alleges that the liquidation of the Katzes' accounts by Financial Clearing was unauthorized. This will be referred to as the liquidation issue. The issues were the subject of arbitrations before the New York Stock Exchange and confirmation proceedings in New York state court.

 Defendant moves to dismiss the complaint under the statute of limitations, under Fed. R. Civ. P. 12(b)(6), and on the grounds of res judicata and collateral estoppel. Defendant also moves to sanction Simon Katz and plaintiffs' former counsel, Richard Claman, under Fed. R. Civ. P. 11 and 28 U.S.C. § 1927.

 Defendant's motion to dismiss is granted. The first claim is dismissed under Rule 12(b)(6). In addition, both claims are dismissed as barred by the doctrine of res judicata. Defendant's motion for sanctions is denied.


 Undisputed Facts

 Defendant is a clearing broker. A clearing broker handles the mechanics of order entry, confirmation, clearance of trades, calculation of margin, and similar activities. It typically does so for an introducing broker which is too small to maintain such operations itself. An introducing broker is a firm that has the initial contact with the public customer. The customer typically places his or her order with the introducing broker.

 In early 1985 Financial Clearing entered into a clearing agreement with Brown Knapp & Co., an introducing broker. Pursuant to this agreement, Financial Clearing acted as the clearing broker for public customers that Brown Knapp attracted.

 In June 1985 plaintiffs approached Brown Knapp, seeking to open accounts through Brown Knapp in which to trade securities, especially stocks and stock options. Brown Knapp gave plaintiffs account agreements and related documents that Financial Clearing had authorized Brown Knapp to distribute on its behalf.

 In June 1985 Simon, Rose and Volvi Katz executed Financial Clearing's customer, margin and option agreements and guarantees and returned them to Brown Knapp. The customer agreements included a provision whereby the customer would make payments for deficiencies in his account to Financial Clearing upon demand. In addition, the customer agreements contained the following arbitration clauses:

To the extent permitted by law, any controversy arising out of or relating to any of my account(s) with FiCS or this agreement except controversies arising under the federal securities laws, shall be submitted to arbitration. . . . Arbitration must be commenced by service upon the other party of a written demand for arbitration or a written notice of intention to arbitrate, therein selecting the arbitration tribunal. If I do not make such election by registered mail addressed to FiCS at its main office within ten (10) days after FiCS mails a notice requesting such election, then FiCS may make such election on my behalf. Judgment upon any award rendered by the arbitrator(s) shall be final, and may be entered in any court having jurisdiction. This agreement does not constitute a waiver of my right to a judicial forum in instances in which such a waiver would be void under the federal securities laws, nor does it prohibit me from pursuing any claim arising under the federal securities laws in any court of competent jurisdiction.

 In November 1985 Abraham Katz and Abraham Tusk signed, among other things, three guarantee agreements each with Financial Clearing, guaranteeing the accounts of Simon, Rose and Volvi Katz, respectively. These guarantee agreements contained the following arbitration clauses:

Any controversy between you [Financial Clearing] and the Guarantor [i.e. Katz or Tusk] arising out of or relating to this contract or the breach thereof shall be settled by arbitration.

 The Katz Arbitration

 In its Statement of Claim against Simon, Rose and Volvi Katz dated February 25, 1988, Financial Clearing sought to recover the alleged deficits in plaintiffs' accounts. On May 18, 1988 the Katzes served an Answer and Counterclaims. The Katzes admitted "that arbitration hereunder is appropriate as a result of entering into customer agreements with claimant" and did not, in any way, attempt to reserve a right to bring claims under the federal securities laws.

 In the first counterclaim, the Katzes asserted that during the period they maintained their accounts with Brown Knapp, "trades were made in the Accounts without authorization, in error, for incorrect prices and in direct contravention of orders." The Katzes asserted that while their accounts were often out of margin, no margin calls were made and the accounts were not liquidated:

Had claimant dealt with the Accounts in a proper and lawful manner, they would not have been liquidated in a panic, would not have been in a deficit position and would have had an equity position in excess of $ 500,000.

 Par. 9.

 In their second counterclaim, the Katzes claimed that Financial Clearing earned $ 1,000,000 in commissions from them and that this money should be returned. Pars. 10-11. In their third counterclaim, the Katzes averred that on

and after October 19, 1987, claimant, acting in panic, confusion, unprofessionally and without any justification therefor, effected transactions in the Accounts which wiped out the equity contained in the Accounts as well as creating a debit balance.

 Par. 12.

 The fourth counterclaim addressed a claim by Financial Clearing that the Katzes had guaranteed the accounts of two other investors. The arbitration panel ultimately found in favor of the Katzes on this issue. As it is not raised in the federal action, no further mention of it need be made.

 The Katzes demanded an award of $ 500,000 on their first, third and fourth counterclaim, and requested the return of $ 1,000,000 in commissions on their second counterclaim.

 After twelve sessions of presentation of testimony and evidence, the NYSE arbitration panel rendered its decision on December 18, 1989. The panel awarded Financial Clearing $ 212,000 against the Katzes with respect to the claims relating to debit balances in their accounts, and it awarded ...

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