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SANDS BROTHERS & CO., LTD. v. NASSER

United States District Court, S.D. New York


December 31, 2003.

SANDS BROTHERS & CO., LTD., SANDS BROTHERS ASSET MANAGEMENT, LLC, SANDS BROTHERS ASSET MANAGEMENT LTD., SB VENTURE CAPITAL III, LLC, MARTIN SCOTT SANDS, STEVEN BRETT SANDS, GEORGE GLEUSNER, MOSHE SILVER, and GLEN McKELVEY, Plaintiff's,
v.
MOHAMMAD AL NASSER Defendant

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

Opinion and Order

On October 9, 2003, Plaintiff's sought to temporarily restrain Defendant Mohammad Al Nasser from prosecuting a pending arbitration against them. In an Order dated October 17, 2003, this Court denied Plaintiff's' motion with respect to Plaintiff Sands Brothers & Co., Ltd. and ordered Sands Brothers & Co., Ltd. to proceed with the pending arbitration. The arbitration was temporarily enjoined with respect to the other Plaintiff's. The Court set an expedited briefing schedule in order to give both parties an opportunity to brief the issue whether Defendant's pending arbitration against the remaining Plaintiff's should be allowed to proceed, and the parties consented to a stay pending the Court's decision. Having carefully reviewed and considered the submissions of both parties, the Court vacates the stay with respect to Martin Scott Sands, Steven Brett Sands, George Gleusner, Moshe Silver, and Glen McKelvey (collectively "the Individual Plaintiff's") and orders the Individual Plaintiff's to arbitration. The Court grants the Plaintiff's' request to enjoin the NASD arbitration with respect to Sands Brothers Asset Management, LLC, Sands Brothers Asset Management Ltd., and SB Venture Capital III, LLC (collectively "the Entity Plaintiff's").*fn1

The Court also grants, in part, Defendant's motion for an award of attorneys fees.

  BACKGROUND

  Defendant Al Nasser commenced an arbitration against the Plaintiff's before the NASD. Under the NASD Code of Arbitration:

Any dispute, claim, or controversy between a customer and a member and/or associated person arising in connection with the business of such member or in connection with the activities of such associated persons shall be arbitrated under this Code, as provided by any duly executed and enforceable written agreement or upon the demand of the customer. NASD Code of Arbitration, Section 10301(a).
  The NASD Bylaws define "person associated with a member" or "associated person of a member," in relevant part, as:

 

(1) a natural person who is registered or has applied for registration under the Rules of the Association; [and]
(2) a sole proprietor, partner, officer, director, or branch manager of a member, or other natural person occupying a similar status or performing similar functions, or a natural person engaged in the investment banking or securities business who is directly or indirectly controlling or controlled by a member, whether or not any such person is registered or exempt from registration with the NASD under these By-Laws or the Rules of the Association
  Al Nasser's arbitration is predicated on claims against the Plaintiff's arising out of losses he sustained while he was a customer of Sands Brothers & Co., Ltd (hereinafter, "Sands Brothers"), a brokerage firm. The Individual Plaintiff's are employees of Sands Brothers; the Entity Plaintiff's are affiliated with Sands Brothers and/or its directors. The two registered representatives who were primarily responsible for Al Nasser's brokerage account during the relevant time period are also parties to the NASD arbitration, but are not parties to this suit.

  Sands Brothers is a member of NASD, and signed an agreement with Al Nasser in which it agreed to arbitrate all claims in front of the NASD. A. The Individual Plaintiff's

  Under Section 10301 of the NASD Code of Arbitration, a customer may demand that any NASD member or an "associated person" submit "[a]ny dispute, claim, or controversy" to arbitration if the claim "aris [es] in connection with the business of such member or in connection with the activities of such associated persons." The Individual Plaintiff's in this action are members of the NASD, thus they are subject to arbitration under the NASD Code of Arbitration.

  Plaintiff's neither assert nor argue that the Individual Plaintiff's are not members of the NASD.*fn2 However, even if the Individual Plaintiff's are in fact not members of the NASD, the NASD Code of Arbitration requires members and "associated persons" of members to arbitrate disputes with customers. The NASD Bylaws define an "associated person" as an "officer, director, or branch manager of a member." The Individual Plaintiff's are all directors (except for Martin Sands and Steven Sands, who are Co-Chairmen and CEOs) of Sands Brothers. Sands Brothers is a member of the NASD, and the Individual Plaintiff's are clearly subject to arbitration as "associated persons." (Def. Ex. LL at 16-17). Plaintiff's have argued, both in their papers and during a conference with the Court, that the Individual Plaintiff's may not be compelled to arbitrate the Defendant's claims against them because no express arbitration agreement exists between the Defendant and the Individual Plaintiff's.*fn3 In arguing that the Individual Plaintiff's are not subject to arbitration, Plaintiff's rely upon the Second Circuit's decision in John Hancock Life Ins. Co. v. Wilson, 254 F.3d 48 (2d Cir. 2001). Specifically, Plaintiff's argue:

In Hancock, the Second Circuit firmly demanded that for a matter to be considered by the arbitrator there must exist an express arbitration agreement exist [sic] between parties. See John Hancock, at 53. Indeed, the Second Circuit demanded that there exist an express arbitration agreement between parties even if one is a member in the NASD. Id., at 55.
(Pl. Mem. at 6).

  Plaintiff's grossly mischaracterize the Second Circuit's holding in John Hancock. The Second Circuit held that "John Hancock's membership in the NASD, without more, is not sufficient to show that the parties agreed to submit the question of arbitrability to the arbitrators, but that it is sufficient, without more, to bind John Hancock to arbitrate the Investors' claims." John Hancock, 254 F.3d at 53 (emphasis added). John Hancock, a member of the NASD, conceded that "it agreed by virtue of its membership in the NASD to arbitrate all disputes contemplated under" Section 10301 of the NASD Code of Arbitration. John Hancock, 254 F.3d at 58. The John Hancock Court then held that a customer may demand arbitration under Section 10301 if he or she is a customer of the member or a customer of the "associated person." Id. at 59-60.

  Here, there is no dispute that Al Nasser was a customer of Sands Brothers, a member of NASD. All of the Individual Plaintiff's are "associated persons" of Sands Brothers. Therefore, Plaintiffs argument that Defendant must be enjoined from prosecuting his arbitration against the Individual Plaintiff's is frivolous.

  Defendant has moved for an award of attorneys fees "for having to defend against this unreasonable and untimely action." (Def. Mem. at 21). Although there is no statutory authority for the award of attorneys fees in these circumstances, the Court has the legal authority to award such fees where "the party refusing arbitration acted without justification or did not have a reasonable chance to prevail." Newspaper Guild of New York v. New York Times Co., 95 Lab. Cas. (CCH) P13, 1981 U.S. Dist. LEXIS 15366, at *4-5 (S.D.N.Y. Oct. 29, 1981); see also Chauffeurs, Teamsters and Helpers, Local 765 v. Stroehmann Brothers Co., 625 F.2d 1092, 1094 (3d, Cir. 1980). Here, Plaintiff's have failed to make even a colorable argument explaining why Al Nasser could not require the Individual Plaintiff's to arbitrate, but instead decided to mischaracterize or ignore the law of the Circuit — a tactic that they could not have expected to "have a reasonable chance to prevail." Thus, Defendant is entitled to an award of attorneys fees, and he is directed to submit an affidavit itemizing costs and attorneys fees within ten days of the date of this Opinion and Order.*fn4

 B. The Entity Plaintiff's

  After bringing their motion to temporarily enjoin Defendant, Plaintiff's filed a motion for leave to amend their Complaint and omit the Entity Plaintiff's on the basis that the NASD has already determined that these entities are not members of the NASD and are not bound to arbitrate in the underlying arbitration. (Reply Decl. Ex. A). Plaintiffs motion for leave to amend is denied. The Defendant has filed a cross-claim to compel arbitration, and he is entitled to have issues of arbitrability determined by the Court rather than by an arbitrator. See John Hancock, 254 F.3d at 53 ("Issues of. `arbitrability' are presumptively for the court to decide.") (citations omitted).

  Having considered Defendant's cross-claim to compel arbitration, this Court denies the cross-claim and enjoins the Defendant from arbitrating his claims against the Entity Plaintiff's in the NASD arbitration.*fn5

  Plaintiff's argue that the Entity Plaintiff's cannot be compelled to arbitrate as "associated persons" "because `as that term is now defined by the rules, it is limited to natural persons,' not entities." (Reply at 8) (quoting World Financial Group, Inc. v. Steele, 2002 WL 31045354, at *3 (S.D. Ind., Aug. 15, 2002)). In response, Defendant relies upon McMahan Sec. Co. L.P. v. Forum Capital Mkts. L.P., 35 F.3d 82 (2d Cir. 1994), which held that:

[T]he "associated person" definition begins by stating that the term refers to "every sole proprietor, partner, officer, director, or branch manager of any member, or any natural person occupying a similar status or performing similar functions, or any natural person engaged in the investment banking or securities business who is directly or indirectly controlling or controlled by such member." If the term "partner" was confined to natural persons, the subsequent phrase "or any natural person occupying a similar status" would be redundant.
Id. at 87 (citations omitted).

  However, although the McMahan Court found that the NASD definition of "associated person" included corporate entities, the Second Circuit appears to have overruled the McMahan decision in Burns v. New York Life Ins. Co., 202 F.3d 616, 620 (2d Cir. 2000), finding that "Article I of the NASD By-Laws defines persons associated with a member' to exclude corporate entities." Therefore, Defendant cannot compel the Entity Plaintiff's to arbitrate as associated persons.*fn6

  Defendant also argues that the Entity Plaintiff's can be compelled to arbitrate as "certain others" under NASD Code §§ 1, 8, again relying upon McMahan Sec. Co. L.P. v. Forum Capital Mkts. L.P., 35 F.3d 82, 86 (2d Cir. 1994). However, the McMahan Court was applying an earlier version of the NASD's arbitration rules, which included claims involving "certain others" among the claims subject to mandatory arbitration. The current version does not include "certain others" as those who may insist on or must submit to mandatory arbitration. World Fin. Group Inc., v. Steele, 2002 U.S. Dist. LEXIS 17376, at *11-12 (S.D. Ind. Aug. 15, 2002). Therefore, the Entity Plaintiff's cannot be compelled to arbitrate as "certain others."

  CONCLUSION

  Having found that the Individual Plaintiff's are subject to arbitration, the stay with respect to those Plaintiff's is lifted, and Plaintiff's are ordered to pay 50% of the costs that Defendant incurred while litigating this matter. The Entity Plaintiff's are not subject to arbitration before the NASD, and Defendant is enjoined from prosecuting his NASD arbitration against those parties.

 SO ORDERED.


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