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United States District Court, S.D. New York

October 11, 2005.

MARK B. WEINRAUB, Plaintiff,

The opinion of the court was delivered by: SHIRA SCHEINDLIN, District Judge



Mark B. Weinraub brings this action, asserting a plethora of federal and state-law claims, to recover from his former broker over half a million dollars in trading losses resulting from the demise of Weinraub's margin trading account in 2000. Many of these claims have already been rejected by a panel of arbitrators, the New York trial court, and the New York appellate court. Plaintiff now invokes this Court's jurisdiction to press essentially the same allegations yet again, as well as new allegations of malfeasance committed by the arbitrators who ruled against him, and the bank that collected a judgment against him based on the arbitration award. For the following reasons, the motions to dismiss brought by all defendants are granted. Furthermore, the Court must consider sanctions against plaintiff and plaintiff's counsel pursuant to the Private Securities Litigation Reform Act of 1995 ("PSLRA"), and Rule 11 of the Federal Rules of Civil Procedure.


  A. The Parties

  Weinraub, a New Jersey resident, is a dissatisfied customer of broker Glen Rauch Securities ("Glen Rauch"), which along with Bear Stearns & Company ("Bear Stearns"), will be referred to collectively as the "Broker Defendants."*fn1 Weinraub is also suing the National Association of Securities Dealers ("NASD") Dispute Resolution, Inc., and individual defendants Mark Mendley, David Carter and David Bolnick (collectively, the "Arbitrator Defendants"), who conducted an arbitration proceeding from June 2000 to April 2002 initiated by Weinraub against, inter alia, Glen Rauch and Bear Stearns.*fn2 Finally, Weinraub alleges that defendant Valley National Bank ("Valley") "improperly collected" a judgment of $143,827 obtained by Glen Rauch in the arbitration proceeding and subsequent proceedings in the New York state courts.*fn3

  Weinraub invokes this Court's jurisdiction on numerous grounds: diversity;*fn4 federal question based on violations of the securities laws;*fn5 the Federal Arbitration Act;*fn6 federal question jurisdiction based on violations of federal civil rights law;*fn7 original jurisdiction based on violations of Weinraub's Equal Protection and Due Process rights; and pendent and ancillary jurisdiction.*fn8

  B. Weinraub's Margin Account In October 1992, Weinraub opened a brokerage account with a firm called Jonathan Foster.*fn9 Weinraub's broker at this firm was his cousin Michael Weinraub.*fn10 When Michael Weinraub joined Glen Rauch in 1995, he took plaintiff's account with him.*fn11 Although plaintiff faults Glen Rauch for failing to execute a written "customer agreement" with him,*fn12 he continued to trade there.*fn13

  Plaintiff contends that Glen Rauch (and Michael Weinraub) ignored his desire to stop trading speculative securities on margin and transition into more conservative investments, and instead continued to recommend risky "tech stocks."*fn14 Indeed, Weinraub's account "consisted essentially entirely of speculative stocks purchased on margin."*fn15 This left him vulnerable to a decline in the high tech sector, which wiped out his margin account in 2000, costing him over $500,000.*fn16 Weinraub alleges that his losses would have been prevented if the Broker Defendants had fulfilled their obligations to advise him of the virtues of a diversified portfolio, and reducing Weinraub's reliance on margin trading.*fn17

  C. The Arbitration Proceeding

  In June 2000, plaintiff commenced an arbitration proceeding against the Broker Defendants, and Michael Weinraub, before the NASD.*fn18 The gravamen of Weinraub's allegations in the arbitration was that, by allowing Weinraub to maintain "a highly leveraged" and "unreasonably risky" margin position, the Broker Defendants were negligent and breached their fiduciary duty, and also "failed to provide Plaintiff with material information [and] misstated [] material information."*fn19 Glen Rauch asserted a counterclaim against Weinraub for the outstanding debit balance in his margin account.*fn20 The case was heard by defendants Mendley, Carter and Bolnick.*fn21

  Weinraub hurt his cause during the arbitration by failing to comply with deadlines for document production — failures he blamed on his former lawyer, who became ill soon after the filing of the claim.*fn22 As a result of this deficiency, the arbitration panel ruled on July 3, 2001 that Weinraub was "enjoined from presenting further evidence to the panel for consideration. Any such documents will be precluded."*fn23 Accordingly, aside from the testimony of Weinraub himself, the arbitrators considered only evidence submitted by the Broker Defendants.*fn24 The arbitrators denied Weinraub's claims and granted judgment for Glen Rauch on its counterclaim.*fn25 In the aftermath of this ruling, Weinraub asserts that defendant Valley damaged his credit and caused him embarrassment in its attempts to collect the judgment on behalf of Glen Rauch.*fn26

  D. Proceedings in New York Courts

  Glen Rauch and Michael Weinraub commenced a special proceeding in the New York Supreme Court to confirm the arbitration award, and plaintiff filed a cross-motion to vacate the award.*fn27 The Supreme Court confirmed the award and denied Weinraub's cross-motion.*fn28 The court held that the arbitrators' preclusion of Weinraub's evidence was appropriate in light of Weinraub's continued refusal to provide discovery.*fn29 The court also held that Weinraub failed to meet his burden under New York law to show that misconduct in the arbitration resulted in prejudice to the party seeking to vacate,*fn30 as he never explained how the precluded evidence was "pertinent and material."*fn31 In a brief opinion, the Appellate Division affirmed the Supreme Court in all respects.*fn32

  E. Weinraub's Claims

  In this proceeding, Weinraub asserts six distinct causes of action arising out of these facts. First, Weinraub accuses the Broker Defendants of "violation[s] of securities laws" based on the management of his margin account.*fn33 Second, he asserts that the Broker Defendants breached their fiduciary duty to Weinraub.*fn34 Third, Weinraub asserts that the Arbitrator Defendants violated his civil rights, acting under color of state law.*fn35 Fourth, Weinraub asserts that the Arbitrator Defendants breached their contract with him "to provide a fair and adequate Dispute Resolutions forum."*fn36 Fifth, Weinraub asserts that Glen Rauch and Valley committed "defamation of credit" in their efforts to collect Glen Rauch's judgment, including reporting his delinquency to credit agencies and harassment at his place of employment.*fn37 Sixth, Weinraub alleges a conspiracy among all defendants to deprive him of his property.*fn38


  A. Standard of Review

  Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, a motion to dismiss should be granted only if "`it appears beyond doubt that the plaintiff[s] can prove no set of facts in support of [their] claim[s] which would entitle [them] to relief.'"*fn39 The court's task in ruling on a Rule 12(b)(6) motion is "merely to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof."*fn40 When deciding a motion to dismiss, courts must accept all factual allegations in the complaint as true, and draw all reasonable inferences in plaintiffs' favor.*fn41 Courts generally do not consider matters outside the pleadings but may consider documents attached to the pleadings, documents referenced in the pleadings, or documents that are integral to the pleadings.*fn42

  B. Res Judicata

  Res judicata is a long-accepted principle that "a final judgment on the merits of an action precludes the parties or their privies from relitigating issues that were or could have been raised in that action."*fn43 Res judicata applies "if the earlier decision was (1) a final judgment on the merits, (2) by a court of competent jurisdiction, (3) in a case involving the same parties or their privies, and (4) involving the same [claim or] cause of action."*fn44 A party may raise a res judicata defense in a motion to dismiss pursuant to Rule 12(b)(6).*fn45 A federal court must accord the same preclusive effect to a state court decision that a state court would give it.*fn46 In particular, final judgments in arbitration,*fn47 and state court judgments confirming arbitration awards,*fn48 are entitled to res judicata.

  In New York, "`once a claim is brought to a final conclusion, all other claims arising out of the same transaction or series of transactions are barred, even if based upon different theories or if seeking a different remedy.'"*fn49 In determining what "factual grouping" constitutes a "transaction" or "series of transactions," courts examine whether "the facts are related in time, space, origin, or motivation, whether they form a convenient trial unit, and whether their treatment as a unit conforms to the parties' expectations or business understanding or usage."*fn50 C. Rule 11

  Upon final adjudication of a securities fraud action, the PSLRA requires the court to make findings regarding each attorney's compliance with Rule 11(b).*fn51 Rule 11(b) provides in relevant part:

By presenting to the court . . . a pleading, written motion, or other paper, an attorney or unrepresented party is certifying that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances . . . it is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation [and] the claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law; [and that] the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery.*fn52
  In determining whether a Rule 11 violation has occurred, the court should use an objective standard of reasonableness.*fn53 The Supreme Court has cautioned that Rule 11 "must be read in light of concerns that it will . . . chill vigorous advocacy."*fn54 Thus, "[w]hen divining the point at which an argument turns from merely losing to losing and sanctionable" courts must "resolve all doubts in favor of the signer of the pleading."*fn55 Sanctions should only be imposed "`where it is patently clear that a claim has absolutely no chance of success.'"*fn56 Moreover, "[a] sanction imposed for violation of this rule shall be limited to what is sufficient to deter repetition of such conduct or comparable conduct by others similarly situated."*fn57 "[T]he principal objective of the imposition of Rule 11 sanctions is not compensation of the victimized party but rather the deterrence of baseless filings and the curbing of abuses."*fn58


  There are two pending motions to dismiss this action. One was filed jointly by the Broker Defendants and Valley, asserting that Weinraub's claims should be dismissed as to them on numerous grounds, including res judicata, the statute of limitations, and lack of diversity or supplemental jurisdiction over Weinraub's state-law claims.*fn59 The Arbitrator Defendants submitted a separate motion to dismiss, asserting that the claims against them are barred by the statute of limitations, collateral estoppel, the doctrine of arbitral immunity, and the fact that NASD arbitrators are not state actors.*fn60 For the following reasons, Weinraub's Complaint is dismissed in its entirety, as it is woefully deficient on both jurisdictional and substantive grounds.

  A. Plaintiff Has Not Stated Any Viable Federal Claim 1. Weinraub's Complaint Fails to State a Claim for Violations of Federal Securities Laws

  Weinraub alleges that the Broker Defendants violated federal securities laws, based on the management of his margin account and the faulty advice he received.*fn61 Weinraub's allegations in this regard are most characteristic of a securities fraud claim brought under section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission.*fn62 However, a comparison between the claims Weinraub asserted in the arbitration and the allegations of his Complaint reveals that the securities fraud claim he now asserts is based on the same transactions that have already been the subject of litigation in three different forums.*fn63 Moreover, the New York Supreme Court already rejected the Complaint's related allegations that Glen Rauch violated his rights by failing to execute a signed written agreement with him.*fn64 Accordingly, claims arising out of the Glen Rauch margin account are barred by the doctrine of res judicata and must be dismissed.*fn65

  Weinraub's securities fraud allegations are deficient in several other respects. First, any federal securities fraud claim brought by Weinraub is now time-barred by the applicable statute of limitations, as he did not bring the claim within one year of discovery of the facts constituting the violation.*fn66 The latest that Weinraub could have discovered the pertinent facts was June 2000, when he commenced arbitration proceedings. Second, the Complaint falls far short of the rigorous pleading standard for securities claims required by the PSLRA, which mandates that a plaintiff "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind."*fn67 The Complaint is devoid of allegations raising such an inference. Third, Weinraub fails to state any valid claim against Bear Stearns. Weinraub fails to allege that Bear Stearns had any control over his margin account, and the provision of clearing services does not by itself give rise to liability for violations committed by the primary broker (here, Glen Rauch).*fn68 Finally, Weinraub cannot state a valid cause of action based on violations of New York Stock Exchange and NASD rules and guidelines,*fn69 as these rules confer no private right of action.*fn70

  2. The Section 1983 Claims Against the Arbitrator Defendants Must Be Dismissed

  Weinraub alleges that, by precluding evidence he sought to present at his arbitration hearing, the Arbitrator Defendants "refused to grant the Plaintiff Due Process and violated his civil rights under [section 1983 of Title 42 of the United States Code]," and similarly "violated the civil rights and the Constitutional rights of Due Process of Law and Equal protection of Plaintiff."*fn71 However, as Weinraub was explicitly informed before filing his Amended Complaint,*fn72 a viable claim under section 1983 requires that the defendant be a state actor, and it is well-settled that neither the NASD, nor its dispute resolution subsidiary, qualifies as a state actor.*fn73 Accordingly, all claims based on constitutional violations by the Arbitrator Defendants must be dismissed.*fn74

  B. The Court Lacks Jurisdiction Over Weinraub's Non-Federal Claims

  As Weinraub fails to state any valid federal claims, the next question is whether there is any basis for jurisdiction over Weinraub's remaining claims of breach of fiduciary duty (against the Broker Defendants), breach of contract (against the Arbitrator Defendants), defamation (against Glen Rauch and Valley), and conspiracy (against all defendants). I find no such basis. First, there is no diversity jurisdiction because Weinraub, a New Jersey resident, named a New Jersey corporation (Valley) as a defendant,*fn75 and diversity jurisdiction requires complete diversity between plaintiff and defendants.*fn76 Second, when all federal claims have been dismissed, courts usually decline to exercise supplemental jurisdiction over remaining state law claims.*fn77 There is no reason to depart from that general rule here.*fn78 Even if I were to exercise supplemental jurisdiction, I would dismiss all of Weinraub's remaining claims pursuant to Rule 12(b)(6). His claims relating to breach of fiduciary duty and the request to vacate the arbitration award are barred by res judicata for the reasons already discussed.*fn79 Weinraub's claim against the Arbitrator Defendants for breach of contract is barred by the doctrine of arbitral immunity, which provides that "arbitrators in contractually agreed upon arbitration proceedings are absolutely immune from liability in damages for all acts within the scope of the arbitral process."*fn80 Weinraub fails to state a claim for defamation because he does not allege that any defendant made a false statement about him.*fn81 Finally, Weinraub's conspiracy claim against defendants fails because there is no "conspiracy" tort as such under New York law.*fn82

  C. Rule 11 Sanctions

  All defendants have urged the Court to impose sanctions. The Broker Defendants assert, and I agree, that Weinraub's attempt to plead a federal securities law claim triggers the provision of the PSLRA requiring a court, upon final adjudication of an action, to "include in the record specific findings regarding compliance by each party and each attorney representing any party with each requirement of Rule 11(b) of the Federal Rules of Civil Procedure as to any complaint, responsive pleading, or dispositive motion."*fn83 The Broker Defendants argue that sanctions are appropriate because, inter alia, Weinraub's allegations against them were clearly barred by res judicata and the statute of limitations.*fn84

  The Arbitrator Defendants have already filed a separate motion for sanctions pursuant to Rule 11.*fn85 They advise the Court that Weinraub was served with this motion on August 30, 2005, complying with the twenty-one day safe harbor provided by Rule 11.*fn86 The Arbitrator Defendants argue that sanctions are justified because plaintiff insisted on maintaining this action even after the Arbitrator Defendants brought to his attention controlling caselaw establishing that a) the Arbitrator Defendants are not state actors; and b) that arbitrators enjoy immunity from liability arising from decisions made during arbitration.*fn87 The present Opinion and Order constitutes a "final adjudication" within the meaning of the PSLRA. Accordingly, this Court must make the Rule 11 findings mandated by that statute.*fn88 Based on a preliminary review of the record, it seems probable that Rule 11 was violated in this case. Weinraub's claims appear to be frivolous, clearly precluded by existing (and well-settled) law, and unsupported by any cognizable argument for the modification of existing law. Moreover, given the strangeness of many of Weinraub's arguments, and the general disorganization of his papers, this case is similar to a recent Rule 11 case where I noted that "[s]ome of plaintiffs' claims and arguments . . . seem so ill-defined and incoherent that they are, in the words of the physicist Wolfgang Pauli, `not even wrong.'"*fn89

  Pursuant to the PSLRA's command that "[p]rior to making a finding that any party or attorney has violated [Rule 11], the court shall give such party or attorney notice and an opportunity to respond,"*fn90 plaintiff and his counsel shall show cause within fourteen days from the date of this Opinion and Order why sanctions should not be imposed under Rule 11.*fn91 All defendants shall file responses (either jointly or separately) within fourteen days of receipt of plaintiff's submission. Defendants shall specify the nature of the sanctions that they believe are appropriate.*fn92


  For the foregoing reasons, plaintiff's Complaint is dismissed in its entirety, with prejudice.*fn93 In addition, plaintiff's "Motion for Oral Argument" is denied as moot. The Clerk is directed to close the pending motions [numbers 43, 48, and 55 on the docket sheet]. The parties shall brief the issue of sanctions in accordance with the schedule set forth above.



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