of National Association of Securities Dealers, Inc. (hereinafter "NASD"), and two of its employees, Gerald Wischmeyer and Joseph Gallino, filed this action in New York Supreme Court seeking the permanent injunction of a NASD Arbitration Proceeding brought by respondents. The arbitration pertains to petitioners' alleged failure to supervise one Robert Michael Simpson, who was registered as a Royal dealer and who served as a branch manager of Royal's office in Cocoa Beach, Florida. Respondents were all clients of Simpson, and they contend that he either borrowed or misappropriated hundreds of thousands of dollars from them.
The case was removed to this Court in August 1994, on the basis of diversity jurisdiction. Petitioners move for a permanent injunction staying the NASD arbitration. Respondents move for an order compelling arbitration under the Federal Arbitration Act, 9 U.S.C.A. §§ 1-16, and to dismiss the petition. For reasons which follow we grant respondents' motion.
Simpson entered the securities business in 1977 as a registered representative for Merril Lynch. In 1980, he left that firm to work for E.F. Hutton as a registered representative, and later, as the manager of its office in Cocoa Beach, Florida. Between April 1987 and August 1988, twenty-three complaints against Simpson were filed by E.F. Hutton clients. The complaints claimed such misconduct as the "misplacement" of client funds; the execution of unauthorized transactions; and the making of material misrepresentations to clients in an effort to persuade them to purchase certain securities. In March 1988, a former client filed a complaint against Simpson with the Florida Securities Division accusing him of making numerous misrepresentations. Three of his E.F. Hutton clients filed suit against him in 1988; two others did so in 1989.
Simpson left E.F. Hutton in May, 1987 and, with his wife, opened up a branch office for Integrated Resources Equity Corporation ("IREC") in Cocoa Beach under the name of Simpson & Simpson, Inc. During his tenure with IREC, Simpson was the subject of a lawsuit brought in 1988 by one of his clients, asserting that he had borrowed $ 100,000 from the client. See Frank M. Wolfe v. R. Michael Simpson, Sharon Simpson, and Simpson & Simpson, Inc., No. 88-521-CA (Fla. Cir. Ct., Brevard Co. 1988). That client was ultimately awarded a judgment of over $ 146,000. According to respondents, petitioner Wischmeyer was serving as a compliance officer for IREC during the pendency of the Wolfe action.
On or about November 20, 1989, IREC transferred all of its client accounts to Royal. Subsequently, Simpson's registration with IREC was transferred to Royal. On December 11, 1989, the Florida Division of Securities approved Royal's application for registration of Simpson's branch office.
On March 5, 1993, Simpson was censured and barred from the securities industry for 10 years by the New York Stock Exchange for the following misconduct: (1) effecting unauthorized and unsuitable transactions; (2) making material misstatements to clients; (3) misrepresenting to clients the nature of their investments; and (4) guaranteeing one client against losses and reimbursing a client for a tax liability without authorization of his employer. See NYSE Docket/Case No. 92-176.
Respondents allege that Simpson -- while acting as broker for their Royal accounts -- engaged in a scheme to defraud them by convincing them to sell various securities and banking instruments and to lend him the funds so obtained at interest rates higher than the rates of return on their typical investments. The securities and banking instruments in question were generally maintained in respondents' IREC or Royal accounts. Simpson offered respondents as much as 18% interest on the loans, and frequently promised them that they would be short-term.
Respondents Nan, Julian and Richard Foster
Respondents Nan C. Foster, Julian S. Foster and Richard C. Foster became Simpson's clients in 1981, while he was still in the employ of E.F. Hutton. They had two accounts with him, one in the name of the Foster Family trust and the other in the name of the Nan C. Foster trust. The Fosters allege that Simpson borrowed approximately $ 150,000 from them. In March 1990, Simpson remitted to the Fosters approximately $ 6,000. He has failed to repay the Fosters the remaining funds.
An affidavit submitted by Nan Foster claims the following facts. In December 1988, Simpson acted as a witness to a real estate sale for which she and her husband received a down payment of $ 140,000. In April 1989, Simpson asked her for a $ 10,000 loan stating that "if [she] placed moneys with him, [she] would received 15% interest, a rate of return that far exceeded the rate of return [she] was receiving on [her] money markets and CDs." Nan Foster Affid. at P 13. On April 14, 1989, she "redeemed $ 2,000 worth of Integrated Money Market securities and issued a check to Simpson in the amount of $ 8,000." Id.
Her affidavit further contends that in June 1989 Simpson convinced the Fosters to liquidate a portion of an account they held in the Lord, Abbett & Co., L.A. Tax Free Income Fund, Inc. ("Lord, Abbett Fund"), in order to raise substantial funds to lend him. It states that at that time the Fosters' investments in the Lord, Abbett Fund were generating a 7% tax-free return. Simpson wrote a Lord, Abbett Fund representative requesting that the funds at issue be transferred to him. On June 19, 1989, he executed a promissory note which he had drafted in which he agreed to pay the Foster Family Trust principal in the amount of $ 59,616.38, and the greater (as of October 19, 1989) of a minimum of 15% interest or "what the L.A. Tax Free Income Fund, Inc.- National would be at maturity." Id. at P 14. The affidavit continues:
The promissory note also stated that Simpson would pay 18% interest on the note and deferred interest from the date of maturity until the note was paid. Simpson orally emphasized to us the attractiveness of the interest rates that he offered to pay on the note.
According to the affidavit, in October 1990, the Fosters redeemed $ 58,000 worth of SunAmerican Money Market securities from the Foster Family Trust Royal account to pay taxes relating to the real estate transaction discussed above. Aware of this redemption, Simpson "requested that as consideration for a promissory note paying 18%, interest, we lend him the sum of $ 50,000." On November 20, 1990, the Fosters transferred the sum of $ 30,000 to Simpson. In November and December 1990, the Fosters transferred to Simpson $ 22,000 from the Foster Family Trust Royal account and $ 2,435 from the Nan C. Foster Family Trust Royal account "based on the expressed assurance that [they] would be receiving a rate of return that was higher than the Royal Alliance investments in which [they] had [their] money." Id. at P 16. Nan Foster's affidavit also lists numerous smaller loans made to Simpson under similar circumstances.
Nan Foster further claims that Simpson misappropriated $ 15,000 which she had given him for deposit one of the Fosters' Royal trust accounts for the purchase of securities which he had recommended. She claims that he then deposited those funds in a different Royal account over which he had control.
The Fosters entered into two agreements with Royal relating to the two Royal trust accounts. Each contained an arbitration clause which provided:
To the extent permitted by law, all controversies which may arise between the [customer] and [Royal Alliance] or any of their affiliated companies concerning any transaction arising out of or relating to any account maintained by the undersigned, or the construction, performance, or breach of this or any other agreement between us whether entered into prior to, on, or subsequent to the date hereof, shall be submitted to arbitration under the Code of Arbitration Procedure of the National Association of Securities Dealers, Inc., or the arbitration panel of any other national securities exchange in which a transaction giving rise to the claim took place, as I may elect.