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AMERICAN EXP. FINANCIAL ADVISORS, INC. v. ZITO

April 26, 1999

AMERICAN EXPRESS FINANCIAL ADVISORS, INC., PLAINTIFF
v.
RICHARD ZITO, DEFENDANT.



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

MEMORANDUM AND ORDER

This is an action for injunctive relief and damages brought by plaintiff American Express Financial Advisors, Inc. ("AEFA") against Defendant Richard Zito ("Zito"), a former financial planner for AEFA. In support of several different causes of action, AEFA alleges, essentially, that Zito has misappropriated confidential information concerning AEFA clients and used that information to the detriment of AEFA. Zito's alleged misappropriation of information stems from the alleged breach of a "Personal Financial Planner's Agreement" executed by Zito while employed as a financial planner for AEFA. In this action, AEFA seeks to enjoin Zito from the use of the AEFA's information and an order directing that Zito return to AEFA any and all such information. AEFA also seeks compensatory and punitive damages.

AEFA also has pending before this court, under docket number 98-4408, what the parties have referred to as a "companion" case. In that case, AEFA named as the defendant, Douglas Flynn (the "Flynn Action"). Like Zito, Flynn is alleged to have breached the "Financial Planner's Agreement" and misappropriated confidential information belonging to AEFA. Both Flynn and Zito are referred to in the two complaints before this court as AEFA "Financial Planners." It appears, from the allegations of the complaints, that Flynn had seniority over Zito. See generally Complaint ¶ 7 (referring to both Flynn and Zito as former financial planners working for AEFA). Nonetheless, it is clear that the two worked together at AEFA and are alleged to be currently working together at a company known as Linsco/Private Ledger. They are alleged to have misappropriated the same confidential information and to have been using that information to the detriment of AEFA.

Both the Flynn Action and this action were commenced by way of Order To Show Cause, within one week of each other, in late June and early July 1998. The Flynn case seeks only injunctive relief while the Zito case, as noted above, seeks injunctive relief and damages. Apparently, AEFA has elected to press its damages case against Flynn in an arbitration now pending before the National Association of Securities Dealers ("NASD").*fn1 AEFA has neither commenced a separate arbitration case against Zito before the NASD nor joined any claim for money damages against Zito in the NASD arbitration commenced against Flynn.

Presently before the court are the motions of Zito seeking a stay of this action and an order that the damages portion of this case are properly arbitrated before the NASD. If the claims are held not to be arbitrable, Zito seeks a stay of this action pending the outcome of the arbitration against Flynn. Zito also seeks summary judgment on the merits of any claim remaining in this court. In the alternative, Zito seeks a stay of discovery in this action pending the outcome of the Flynn arbitration.

I. The Motion For Referral To Arbitration Or Stay Pending The Flynn
   Arbitration

Zito argues that the damages claims brought by AEFA are arbitrable before the NASD.*fn2 Accordingly, Zito seeks a stay of this action and a referral to arbitration pursuant to the Federal Arbitration Act, 9 U.S.C. § 3. In the alternative, Zito seeks a stay of this action pending the outcome of the NASD arbitration brought by AEFA against Flynn.

Although AEFA has readily conceded that any claim for money damages in the Flynn Action must be sought in an NASD arbitration, it argues that its claim for money damages against Zito should be allowed to proceed. Specifically, AEFA argues that its damages case against Zito is not arbitrable. Even if the claims are arbitrable, AEFA states that Zito has waived his right to arbitrate.

A. The Claim of Arbitrability

  [a]ny dispute, claim or controversy eligible for
  submission under Rule 10100 Series between or among
  members and/or associated persons, and/or certain
  others, arising in connection with the business of
  such member(s), or arising out of the employment or
  termination of employment of such associated person(s)
  with such member, shall be arbitrated.

Claims are eligible for submission under "Rule 10100 Series" if they are: (1) between or among members and associated persons or others, and; (2) arise out of the business of any member.

The Second Circuit has interpreted the precise NASD rules upon which the parties rely and has clearly described the two conditions that must be met when determining whether a securities industry dispute is arbitrable. See McMahan Securities Co. L.P. v. Forum Capital Markets, L.P., 35 F.3d 82 (2d Cir. 1994). The first condition to be met is whether the parties are "members and/or associated persons, and/or certain others" within the meaning of the NASD rules. Id. at 86. Second, the court must determine whether the ...


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