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SANDERS v. GARDNER

May 15, 1998

STEVEN P. SANDERS, DANIEL M. PORUSH, JORDAN SHAMAH, and ANDREW T. GREENE, Petitioners,
v.
F. CLARK GARDNER, Respondent.



The opinion of the court was delivered by: SEYBERT

MEMORANDUM AND ORDER

 SEYBERT, District Judge:

 Presently before the Court are numerous motions from the cases originally docketed as 97-CV-1928, 97-CV-1972, 97-CV-2124 and consolidated under lead case number 97-CV-1928. These cases arise from a securities arbitration proceeding entitled "In the Matter of the Arbitration Between F. Clark Gardner, Claimant [against] Stratton Oakmont, Inc., Samuel R. Weber, Daniel M. Porush, Jordan Shamah, Andrew T. Greene, Paul F. Byrne, Mathias V. Tiffert, Leonard Dunn and Steven Sanders, Respondents" and the resultant Award dated April 15, 1997, Arbitration No. 96-02076.

 PROCEDURAL HISTORY

 In March 1996, Claimant F. Clark Gardner ("Gardner" or "Respondent"), commenced an arbitration proceeding pursuant to a customer agreement (the "Agreement"), against Stratton Oakmont, Inc. ("Stratton"), a registered broker/dealer of securities, and its principal officers, directors and supervisors, Daniel M. Porush ("Porush"), Steven P. Sanders ("Sanders"), Jordon Shamah ("Shamah"), and Andrew T. Greene ("Greene"), (collectively the "Petitioners"), and others, before the National Association of Securities Dealers ("NASD"). After nine conferences and hearings were held, a panel of three arbitrators, Sandra L. Malek, Esq., Mary E. Cobb, and Louise D. Lillard, Esq., (collectively the "Arbitrators"), rendered a unanimous Award (the "Award"), in favor of F. Clark Gardner (Claimant below, Respondent herein), as against Daniel M. Porush, Jordan Shamah, Andrew T. Greene, and Steven P. Sanders (Respondents below, Petitioners herein).

 Immediately thereafter, Petitioners Porush, Shamah, Sanders and Greene initiated suit in this Court and moved individually and collectively to vacate the arbitration award. Respondent Gardner moved to confirm the arbitration award. Respondent then moved for an Order of Attachment, pursuant to Fed. R. Civ. P. 64, as against all property and assets owned or controlled by Porush and for an Order, pursuant to Fed. R. Civ. P. 37, compelling the deposition of Porush. Petitioner Greene's motions to intervene and to amend the caption were stipulated to by the parties on April 29, 1997, and were subsequently granted by the Court. The other aforementioned motions are all decided herein.

 BACKGROUND

 I. ACCOUNT ESTABLISHMENT AND TRADING

 Respondent F. Clark Gardner, a physician residing in California, was contacted via telephone in or about November 1994, by Samuel R. Weber ("Weber"), an employee of Stratton, to solicit new business. Gardner had previously invested in stocks, bonds, and mutual funds and listened to Weber's sales pitch. Weber highlighted Stratton's success in new offerings and its daily oversight of customer accounts, stressing it protects against downward stock price movements of more than two points. (Arb. Amended Claim P 6). Gardner indicated his investment objective was to purchase securities that offered growth potential, but would not present any significant risk of loss to the principal invested. (Arb. Amended Claim P 6).

 Weber continued contacting Gardner during the month and inquired into his net worth and annual income. Weber sent Gardner a completed Retail New Account Application which became the Agreement, and it erroneously over estimated Gardner's net worth at $ 2,000,000 plus, *fn1" and his investment objective as speculative activity in growth companies. (Arb. Amended Claim P 10). Gardner purportedly questioned these entries and was informed by Weber that they were computer generated and unimportant. (Arb. Amended Claim P 10).

 Accordingly, Gardner agreed to open an account with Stratton, account number 492990, and initially agreed to a purchase of 200 shares of Dr. Pepper. It is noteworthy, though legally incidental, that a copy of the Agreement signed by F. Clark Gardner was never produced. Directly above the customer signature line the Agreement states:

 
Your Signature must appear below. By signing this Agreement, I acknowledge that I have read, understand and agree to the terms of the following Customer Agreement, which is incorporated as if fully set forth hereat. I am also fully aware of, and completely understand and agree to the pre-dispute arbitration clause at paragraph 9 of this agreement. . . . I have read the text, including the terms and conditions set forth on the reverse side of this Retail New Account Application, and agree to be bound thereby. [italicized emphasis in original].

 The other pertinent sections of the Agreement include paragraph nine, the Arbitration Clause, *fn2" paragraph ten, the Applicable Rules and Regulations, *fn3" and paragraph eleven, the Governing Law. *fn4"

 The following transactions as provided in Gardner's Arbitration Amended Claim were the basis of the arbitration dispute in issue, and were executed by and based upon representations of Samuel Weber.

 
a) Purchased 200 shares of Dr. Pepper at $ 25 3/4 on 11/17/94; total $ 5,210;
 
b) Purchased 2,000 shares of Select Media at $ 8 on 11/23/94; total $ 16,010;
 
c) Purchased 3,000 shares of Select Media at $ 6 3/8 on 12/21/94; total $ 19,135;

 Gardner was apparently not familiar with Select Media nor was he informed that Stratton made a market in the security. *fn5" Gardner allegedly directed Weber to sell the Select Media stock in January and February 1995, however Weber did not carry out the instructions.

 
d) Sold 5,000 shares of Select Media at 5[cents] per share on 11/16/95; sale proceeds $ 240, total loss of $ 34,950;
 
e) Purchased 4,000 shares of United Leisure at $ 5 on 1/23/95; total $ 20,010;
 
f) Purchased 3,000 shares of United Leisure at $ 5 3/8 on 2/6/95; total $ 16,125;
 
g) Purchased 11,000 shares of United Leisure at $ 5 on 2/24/95; total $ 55,000;
 
h) Purchased 1,000 units (combination of stocks and warrants) of Dual Star at $ 7 on 2/22/95; total $ 7,000;
 
i) Purchased 7,000 shares of Dual Star at $ 6 1/4 on 2/22/95; total $ 43,750;

 Stratton not only made a market for the Dual Star stock but also underwrote the issue two days prior. Two days later, Weber purportedly recommended selling Dual Star because of a trend he didn't like, yet one month later, he recommended purchasing it again.

 
j) Sold 1,000 units and 7,000 shares of Dual Star on 2/24/95; sales proceeds of $ 54,730, total profit $ 4,845;
 
k) Purchased 5,000 shares of Dual Star at $ 6 1/4 on 3/30/95; total $ 31,257;
 
l) Purchased 5,000 shares of Dual Star at $ 10 1/4 on 4/13/95; total $ 51,227;

 Gardner allegedly directed Weber to sell the Dual Star shares, and once again Weber failed to execute trades at the customer's direction.

 
m) Sold 10,000 shares of Dual Star at $ 1 3/16 on 12/12/95; sales proceeds of $ 11,865, total loss $ 70,619;
 
n) Purchased 500 units of Czech Industries at $ 7 on 6/16/95; total $ 3,500;
 
o) Sold 500 units of Czech Industries at $ 3.586 on 11/16/95; sales proceeds of $ 1,793, total loss $ 1,707;
 
p) Sold 18,000 shares of United Leisure at $ 2 9/16 on 7/28/95; sales proceeds of $ 46,678; total loss of $ 44,477;

 Gardner maintains the United Leisure stock was sold without his authorization and that Weber used the proceeds on that day to purchase Solomon Page Group, Ltd. ("Solomon") stock.

 
q) Purchased 29,500 shares of Solomon at $ 1 9/16 on 7/28/95; total $ 46,104;
 
r) Sold 29,500 shares of Solomon at $ 22/33 on 12/12/95; sales proceeds of $ 21,203; total loss of $ 24,901;
 
s) Purchased 500 units of MVSI at $ 7 on 8/22/95; total $ 3,500;
 
t) Sold 500 units of MVSI at $ 20 5/8 on 10/12/95; sales proceeds of $ 10,303; total profit of $ 6,803;
 
u) Purchased 1,000 units of Hemispherx at $ 3 1/2 on 11/7/95; total $ 3,500;
 
v) Purchased 1,000 units of Hemispherx at $ 8 1/2 on 11/7/95; total $ 8,500;
 
w) Sold 2,000 units of Hemispherx at $ 6 3/4 on 11/16/95; sales proceeds of $ 13,490; total profit $ 1,480.

 Thus, over the thirteen month period, the Respondent, F. Clark Gardner, invested a total of approximately $ 328,993 and suffered a loss of $ 184,583. The Respondent further alleged that during the thirteen month period the account was turned over approximately four times by the Petitioner, Stratton, and that this "churning" was done for the sole purpose of generating commissions. (Arb. Amended Claim P 28).

 II. GARDNER'S ARBITRATION CLAIMS

 On or about May 7, 1996 Respondent filed his Statement of Claim for arbitration, which was subsequently amended on October 1, 1996. On or about July 12, 1996, the parties filed a signed Submission Agreement ("SA"), agreeing to submit the matter in controversy to arbitration and to abide by and perform any award rendered pursuant to the SA.

 In arbitration, Gardner claimed that the Petitioners committed fraud by excessively trading his account and by trading in securities unsuitable for Gardner's investment objectives. These actions, Respondent maintained, constituted violations of state and federal securities laws and breached Petitioners' fiduciary duty as owed to the client/customer. In addition, Gardner asserts that Petitioners Stratton and its control persons failed to supervise the activities of their broker.

 Accordingly, Gardner sought compensatory damages in the amount of $ 238,332, representing his trading losses, interest on the loss, the Petitioners' commissions and the NASD filing fee, and unspecified punitive damages.

 The Petitioners generally denied the allegations asserting that the transactions in Respondent's account were carried out in accordance with Gardner's instructions and in conformity with all applicable rules, regulations, industry standards and practices.

 III. THE ARBITRATION HEARINGS AND AWARD

 Five pre-hearing conferences were held between November 18, 1996, and March 27, 1997, and four hearing sessions were held on April 8 and 9, 1997. Prior to the hearing sessions, the Arbitrators were informed that Weber, Byrne, and Stratton Oakmont had filed for bankruptcy protection, thus, as to those parties, the proceeding was stayed. Also prior to the arbitration, the Arbitrators dismissed the action as against Mathias Tiffert and Leonard Dunn. In addition, although Jordan Shamah did not attend the arbitration, the Arbitrators found that he had been properly served and was therefore subject to the terms of the Award.

 The Arbitrators rendered their award after considering the parties' submissions, pleadings, testimony, and evidence presented at the hearing. In finding against Greene and Sanders (Petitioners herein, Respondents below), the Arbitrators acknowledged that Greene and Sanders had no direct contact with Gardner, nonetheless, their culpability was premised upon their participation in the overall business of Stratton.

 The Arbitrators unanimous Award decided in full and final resolution the issues submitted for determination, and provided:

 
1. Respondents [Petitioners in the case at bar] Daniel M. Porush, Jordan Shamah, Andrew T. Greene and Steven P. Sanders, jointly and severally, are liable to and shall pay Claimant [Gardner, Respondent in the case at bar] compensatory damages in the amount of $ 184,583.
 
2. Respondents Daniel M. Porush, Jordan Shamah, Andrew T. Greene and Steven P. Sanders, jointly and severally, are liable to and shall pay Claimant interest at 10% commencing from December 12, 1995 through April 10, 1997, in the amount of $ 23,375.
 
3. Respondent Daniel M. Porush is liable to and shall pay Claimant punitive damages in the amount of $ 4,000,000.
 
4. Respondent Jordan Shamah is liable to and shall pay Claimant punitive damages in the amount of $ 2,000,000.
 
5. Respondent Andrew T. Greene is liable to and shall pay Claimant punitive damages in the amount of $ 2,000,000.
 
6. Respondent Steven P. Sanders is liable to and shall pay Claimant punitive damages in the amount of $ 2,000,000.
 
7. All punitive damages were made pursuant to the authority presented in Claimant's Arbitration Brief at pages 9-10.
 
8. Respondent Daniel M. Porush, Jordan Shamah, Andrew T. Greene and Steven P. Sanders, jointly and severally, are liable to and shall pay ...

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