Petition — Bache & Co. v. Seymour

In The AUG 10 1976

Supreme Court of the HH rri foe |

October Term, 1976

“ 76-187

BACHE & CO. INC.,

Petitioner,

vs.

CY SEYMOUR,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

SECOND CIRCUIT

MICHAEL M. PLATZMAN

Attorney for Petitioner

475 Fifth Avenue

New York, New York 10017

(212) MU 3-7079

(9747) LUTZ APPELLATE PRINTERS. INC.

Law and Financial Printing

South River, N.J. New York, N.Y. Philadelphia, Pa. Washington, D.C.

(201) 257-6850 (212) 563-2121 (215) 563-5587 (201) 783-7288

a

TABLE OF CONTENTS

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TABLE OF CITATIONS

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APPENDIX

Opinion of the United States Court of Appeals .......... la

Opinion of the United States District Court for the Southern

SY Gr OU WE ood pocsnnchebssennesdnéees sees 3a

a

In The

Supreme Court of the Hnited States

oe.

October Term, 1976

No.

BACHE & CO. INC.,

_ Petitioner,

VS.

CY SEYMOUR,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

SECOND CIRCUIT

To: The Honorable, the Chief Justice of the United States, and

the Associate Justices of the United States Supreme Court:

The petitioner, Bache & Co. Inc., respectfully prays that a

writ of certiorari issue to review an order of the United States

Circuit Court of Appeals for the Second Circuit entered in this

proceeding on May 12, 1976.

2

OPINION BELOW

The opinion of the Court of Appeals and of the United

States District Court fer the Southern District of New York

appear in the Appendix hereto.

JURISDICTION

The order of affirmance of the Court of Appeals for the

Second Circuit was entered on May 12, 1976.

This Court’s jurisdiction is invoked under 28 U.S.C.

§1254(1).

QUESTIONS PRESENTED

1. Is a customer’s contractual obligation to arbitrate

disputes with his broker, unenforceable by reason of the

Securities Exchange Act of 1934, even where the agreement to

arbitrate was executed after the occurrence of the events upon

which the customer’s claim is based?

The court answered in the affirmative.

2. Does Wilko v. Swan, 346 U.S. 427 (1953), which held

that parties cannot be required to arbitrate post-agreement

controversies, extend also to pre-agreement controversies?

The court answered in the affirmative.

3. Where the wrongs complained of constitute a common

law cause of action, and such a cause of action is pleaded, does

Wilko v. Swan bar arbitration because the acts complained of

are also alleged to constitute violations of the Securities

Exchange Act of 1934?

The court answered in the affirmative.

3

STATEMENT OF THE CASE

This petition presents a question of first impression which

arises in the following context.

The plaintiff-appellee (hereinafter plaintiff) has been

actively trading in the stock market for many years. The

defendant-appellant Alex Canaan (hereinafter Canaan) was the

plaintiff's “customer’s man” during all those years. The plaintiff

followed Canaan, as his customer, as Canaan moved from one

brokerage firm to another. In July of 1969 Canaan was in the

employ of the defendant-appellant Bache & Co. Inc. (hereinafter

Bache). The plaintiff was one of Canaan’s customers. Some time

later Canaan left Bache, went to work for another brokerage

house, and took the plaintiff and some of his other customers

with him.

In January of 1973 Canaan returned to the employ of

Bache, again bringing the plaintiff with him as a customer. At

that time the plaintiff entered into an agreement with Bache,

dated June 4, 1973, which contains a general arbitration clause.

All of the acts complained of by the piaintiff occurred prior

to June 4, 1973, when the agreement to arbitrate was executed.

The plaintiff complains that Canaan advised him to engage in an

excessive number of transactions, i.e., “churning.” The churning

is claimed to have occurred during the period “from July 22,

1969 to July 1, 1972.” The last “churning” transaction is claimed

to have been consummated on July |, 1972. The agreement to

arbitrate was executed one year after that last transaction.

The essence of the plaintiff's complaint is that Bache did not

adequately supervise Canaan, who, by reason of such inadequate

supervision, was able to recommend that the plaintiff authorize

Canaan to make the purchases and sales of securities, which the

plaintiff now claims amounts to “churning.”

4

The acts complained of, as against Canaan or as against

Bache, constitute a common law cause of action.

Plaintiff also alleges that the same acts constitute a

violation of the Securities Exchange Act of 1934. The plaintiff's

complaint is complete without this allegation, but the allegation

is added in an attempt to avoid the post-churning agreement to

arbitrate disputes, it being hoped (by plaintiff) that Wilko v.

Swan will be enlarged to bar arbitration, even when the

agreement to arbitrate is executed after the occurrence of the

acts complained of.

The affidavits in support of the Bache motion to stay the

action on the ground of an existing valid agreement to arbitrate

all disputes between the parties, are not controverted. The

plaintiff submitted no affidavit in opposition to the Bache

motion in the District Court, the purpose of which was to

compel the plaintiff to arbitrate his dispute with Bache, as his

agreement requires.

The question of first impression presented here is:

May a party avoid his written agreement to arbitrate,

where, unlike Wilko v. Swan, the alleged securities act

violations had already occurred, at the time of the making

of the agreement to arbitrate?

REASONS FOR GRANTING THE WRIT

Affirming Judge Terney’s decision is further to expand the

rule of Wilko v. Swan, supra, making another inroad and

restriction upon the freedom to contract, in this instance at the

expense of the otherwise desirable alternative of arbitration.

The issues in Wilko v. Swan were, as are the issues here,

simple. In Wilko v. Swan, the agreement to arbitrate was

entered into prior to the commission or occurrence of the acts

ee od

5

complained of. It was this agreement to arbitrate, in advance of

the occurrence of the dispute, that was held to be void.

However, since Wilko v. Swan, it has been held that a party may

agree to arbitrate issues stemming from violations of the

Securities Act, when the agreement to arbitrate is not executed

before the acts complained of occurred. In this case, the acts

complained of had already occurred when the plaintiff agreed to

arbitrate all disputes. Nevertheless, in Judge Tenney’s view, even

such an agreement to arbitrate will be enforced, only where the

plaintiff has been advised by his attorney, before the agreement

is signed, of the different factors that might be considered in

deciding in favor of litigation as against arbitration. It is only

then, according to Judge Tenney, that a party may waive his

right to litigate as distinguished from his right to arbitrate.

The plaintiff cannot fairly argue that by being compelled to

arbitrate, he is being deprived of anything that could even

remotely approach the importance of a constitutional right.

The petitioner urges that this case presents an excellent

opportunity to restore the forum of arbitration as the most

efficient method of resolving disputes between businessmen.

Judge Tenney presumed, without any supporting evidence,

that the plaintiff was ignorant of what had transpired in his

account during the period prior to his execution of the

agreement to arbitrate, and that he lacked the knowledge

necessary to agree to arbitrate rather than litigate. Since there

was no affidavit submitted by the plaintiff, the conclusion by

Judge Tenney that the plaintiff lacked sufficient knowledge must

be the result of a presumption, a presumption which we suggest

was unwarranted.

The petitioner urges that it does not endanger the spirit of

the Securities Acts to hold that a customer should not be

presumed to lack such capacity when he signs an agreement to

arbitrate, after the acts complained of occurred. The plaintiff

6

complains of each and every one of 620 separate transactions

consummated in his behalf by Bache. But he does not deny that

following each transaction, which occurred from time to time

over a period of four years, he received a written confirmation of

the transaction. Nor does he deny that after all of these

transactions had been consummated, he entered into the

agreement to arbitrate all disputes with Bache, an agreement

Bache now seeks to enforce.

In this action the plaintiff should have the burden of proof

' to demonstrate that although he signed this arbitration

agreement one year after the last of the wrongful acts occurred,

he nevertheless failed to possess the mecessary capacity

intelligently to choose arbitration as distinguished from

litigation.

To presume, as Judge Tenney did, that the plaintiff lacked

such capacity, or that the burden is upon the petitioner to prove

that he had that capacity, has the practical effect of eliminating

arbitration as a practical forum for the resolution of disputes in

the securities industry.

CONCLUSION

For these reasons, a writ of certiorari should be issued to

review the opinion and order of the Court of Appeals for the

Second Circuit.

Respectfully submitted,

s/ Michael M. Platzman

Attorney for Petitioner

. a ED CE

APPENDIX

OPINION OF THE UNITED STATES COURT OF

APPEALS

UNITED STATES COURT OF APPEALS

FOR THE

SECOND CIRCUIT

At a Stated Term of the United States Court of Appeals, in

and for the Second Circuit, held at the United States

Courthouse in the City of Bridgeport, Conn., on the 12th day of

May, one thousand nine hundred and seventy-six.

Present:

HON. WILLIAM H. TIMBERS

Circuit Judge

HON. LLOYD F. MacMAHON

HON. JON O. NEWMAN

District Judges

Sitting

by Designation

(Filed May 12, 1976)

CY SEYMOUR,

Plaintiff-Appellee,

-against-

BACHE AND COMPANY, INCORPORATED, and ALEX

CANAAN,

Defendants-Appellants.

2a

Opinion of the United States Court of Appeals

76-7058

Appeal from the United States District Court for the

Southern District of New York.

This cause came on to be heard on the transcript of record

from the United States District Court for the Southern District

of New York, and was argued by counsel.

ON CONSIDERATION WHEREOF, it is now hereby

ordered, adjudged, and decreed that the order of said District

Court be and it hereby is affirmed on the opinion of Judge

Tenney filed January 14, 1976 and on the authority of Wilko v.

Swan, 346 U.S. 427 (1953).

s/ Wm. H. Timbers

WILLIAM H. TIMBERS

Circuit Judge

s/ Lloyd F. MacMahon

LLOYD F. MacMAHON

District Judge Sitting

by Designation

s/ Jon O. Newman

JON O. NEWMAN

District Judge Sitting

by Designation

3a

OPINION OF THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF NEW YORK

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

CY SEYMOUR,

Plaintiff,

-against-

BACHE & CO. INC. and ALEX CANAAN,

Defendants.

75 Civ. 3722 (CHT)

(Filed January 14, 1976)

TENNEY, J.

Defendants Bache & Co. Inc. (“Bache”) and Alex Canaan

(“Canaan”), a Bache employee,' seek an order of this Court

staying the instant action pursuant to 9 U.S.C. § 3 on the

ground that a valid arbitration agreement exists between the

parties and that the arbitration should be allowed to go forward.

For the reasons set forth below, the motion is denied.

On December 5, 1970, plaintiff entered into a margin

agreement with Bache. Paragraph 14 of that agreement provides

for the resolution of any controversies arising thereunder in an

arbitral forum. Paragraph 14 states in pertinent part:

“This contract shall be governed by the laws

of the State of New York... . Any controversy

arising out of or relating to my account, to

4a

Opinion of the United States District Court for the Southern

District of New York

transaction with or for me, or to this agreement

or the breach thereof, shall be settled by

arbitration in accordance with the rules then

obtaining of either the American Arbitration

Association or the Board of Governors of the

New York Stock Exchange, as I may

elect....If I do not make such election by

regisiered mail addressed to you at your main

office within five days after demand by you that I

make such election, then you may make such

election.”

On June 4, 1973, plaintiff again signed a margin agreement

containing the same arbitration clause.

Plaintiff commenced the instant action on July 31, 1975,

charging defendants with violations of Section 10(b) of the

Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule

10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, as well as

several breaches of common law fiduciary duties. The gravamen

of the action is “churning”.

_ The issue before the Court is the enforceability of the

arbitration agreement in light of the holding of the United States

Supreme Court in Wilko v. Swan, 346 U.S. 427 (1953).

In Wilko, a stock purchaser brought suit charging a

brokerage house with a violation of Section 12(2) of the

Securities Act of 1933, 15 U.S.C. § 771(2), based on certain

misrepresentations and omissions. Plaintiff had signed a margin

agreement containing an arbitration clause similar to that signed

in the instant case. The Court found that the arbitration

agreement was a “condition” or “stipulation” within the meaning

of Section 14 of the Securities Act of 1933, 15 U.S.C. § 77n

which states: )

A a —

Sa

Opinion of the United States District Court for the Southern

District of New York

“Any condition, stipulation, or provision

binding any person acquiring any security to

waive compliance with any provision of this

subchapter or of the rules and regulations of the

- Commission shall be void.”

Hence, the agreement was held to be unenforceable. Noting “the

desirability of arbitration as an alternative to the complications

of litigation,” id. at 431, the Court nevertheless held that

Congress had taken great pains to protect the rights of the buyer

of securities and had clearly expressed its intention to forbid the

waiver of those specifically created rights. /d. at 438. The waiver,

of course, is implicit in the agreement to arbitrate.? The rule

enunciated in Wilko has been held to apply to the Securities

Exchange Act of 1934 as well.? Maheu v. Reynolds & Co., 282

F. Supp. 423 (S.D.N.Y. 1967); Stockwell v. Reynolds & Co., 252

F. Supp. 215 (S.D.N.Y. 1965); Reader v. Hirsch & Co., 197 F.

Supp. 111 (S.D.N.Y. 1961).

Defendants, in the instant case, attempt to distinguish the

facts herein from those in Wilko by pointing out that the parties

had been engaged in a course of conduct for some seventeen or

eighteen months prior to the signing of the agreement in

question and presumably some of the alleged violations had

already occurred. Thus, defendants conclude that there was no

waiver of rights as to future disputes since the violations had

presumably already occurred, at least in part, and any rights

attendant thereto had presumably accrued. To further buttress

this position, defendants cite a second margin agreement signed

by plaintiff on June 4, 1973. Defendant would have this Court

hold that only where a plaintiff signs an arbitration agreement

before any of the violations occurred would the agreement be

voided. The Court will not adopt so narrow a view of the

Supreme Court’s holding in Wilko.

6a

Opinion of the United States District Court for the Southern

District of New York

There have been cases which have upheld the integrity of an

agreement, such as an agreement to arbitrate (which involve

some waiver of rights). Moran v. Paine, Webber, Jackson &

Curtis, 389 F.2d 242 (3d Cir. 1968).

In Moran, plaintiff complained of certain misrepresentation

made in conjunction with purchases for her margin account as

well as general overactivity. After lengthy consultation with both

the New York Stock Exchange and with the Securities and

Exchange Commission (both advised that she seek her remedy at

law), plaintiff entered into an agreement to arbitrate the

controversy. Plaintiff prevailed in the arbitration, but took an

appeal as to the size of the damage award. The arbitral award

was upheld throughout the state court system of Pennsylvania

and plaintiff then turned to the federal courts. The federal

appellate court considered, inter alia, the enforceability of the

arbitration agreement in light of Wilko v. Swan, supra, 346 U.S.

427, and noted with regard to the parallel provisions of the 1933

and 1934 Acts:

“The non-waiver provision is almost identically

worded in each Act wherein provision is made

that any condition or stipulation binding any

person to waive compliance with any section of

the Act is void.” /d. at 245.

The Court went on to distinguish Wilko:

“The Court there [in Wilko] held that the non-

waiver provision of the statute was void as to

future arbitration controversies and held that

under such circumstances the right to select the

judicial forum was one that could not be waived.

However, the instant case is on a different

footing in that here the Arbitration Submission

Agreement was to submit an existing controversy

7a

Opinion of the United States District Court for the Southern

District of New York

between the parties to arbitration and that

differentiation expresses itself in Wilko v. Swan,

supra, at p. 438, 74 S.Ct. 182, as well as in the

concurring opinion of Justice Jackson, pointing

to the fact that present controversies are

arbitrable.” /d. at 246.

Judge Conner of this court, in Korn v. Franchard

Corporation, 388 F. Supp. 1326 (S.D.N.Y. 1975), explained the

rationale underlying the enforceability of the waiver provision:

“Section 29(a) and its counterparts, which

can be found in all six federal securities acts,

prevent professional broker-dealers from

circumventing the provisions of those acts by

invalidating any attempt to obtain anticipatory

waivers of compliance with the provisions of the

Securities Exchange Act of 1934, Wilko v. Swan,

346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953);

Junker v. Midterra Ass. Inc., 49 F.R.D. 310, 313

(D.C. 1970), and should not be construed to

apply to the release of matured claims. To rule

otherwise would foreclose the parties from

settling matured claims and force every claimant

to pursue the litigation to its costly conclusion.

Many small but otherwise settleable cases would

have to be dropped and many large but otherwise

settleable cases would clog the dockets of the

federal courts. This would not only constitute a

blow to judicial economy, but to justice and

common sense as well.” /d. at 1329.

Some additional guidance is given by Mr. Justice Jackson

in his concurrence in Wilko where he states:

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Opinion of the United States District Court for the Southern

District of New York

“I agree with the Court’s opinion insofar as

it construes the Securities Act to prohibit waiver

of a judicial remedy in favor of arbitration by

agreement made before any controversy arose. I

think thereafter the parties could agree upon

arbitration.” Wilko v. Swan, supra, 346 U.S. at

438.

The principle which emerges from these cases is that while

no waiver in futuro will be allowed, a waiver will be allowed

when made at a time when a “controversy” is in existence and

when a party has full knowledge of the facts therein. The key

seems to be that in the latter instance the party is in a Position to

examine the alternatives, to seek counsel, and to make an

informed judgment prior to the waiver of important rights

secured to the stock purchaser by Congress.

The waiver contained in the instant arbitration clause,

signed in December of 1970, even if after some of the alleged

violations had occurred, was sufficiently in advance of the

existence of a controversy to void the agreement. Plaintiff was

simply not in a position in December of 1970 to make a

voluntary and intelligent waiver of important rights. The

fraudulent scheme charged in the complaint was on-going and

extended well beyond December of 1970. Thus, even if acts prior

to that date could arguably be the subject of an arbitration

agreement, clearly those later acts would not properly be the

subject of a valid agreement.

The margin agreement signed by plaintiff on June 4, 1973,

when he returned his account to Bache is likewise of no avail.

When plaintiff returned to Bache in 1973 a new relationship was

instituted. The margin agreement signed in furtherance of this

new agreement cannot be construed as granting a waiver

retroactively to all past acts, particularly those the subject of the

previous business relationship. Even if it could be argued that

9a

Opinion of the United States District Court for the Southern

District of New York

the dates of the margin agreements might confer jurisdiction as

to some transactions and not as to others, judicial economy

dictates that this entire matter be tried in one forum. This

conclusion is further supported by the apparent presence of

defendant Canaan as the common thread that runs throughout

the scenario.

The Court must make two final observations. First, while

some courts have allowed the common law claims to proceed in

the arbitral forum and left the securities claims to the courts, this

has not been done where, as here, the issues are complex and

intertwined. Shapiro v. Jaslow, 320 F. Supp. 598 (S.D.N.Y.

1970). Second, there has been no authority proffered by

defendant Canaan which would permit him to enjoy the benefits

of the arbitration agreement signed by Bache. Even if it could be

argued that he somehow fell within its ambit while he was

employed at Bache, clearly his acts while employed at Weis,

Voisin & Co., Inc., were not covered.

Accordingly, defendants’ motion to stay the instant

proceeding is denied.

So ordered.

Dated:

New York, New York

January 14, 1975

CHARLES H. TENNEY

U.S.D.J.

10a

Opinion of the United States District Court for the Southern

District of New York

CY SEYMOUR,

Plaintiff,

75 Civ. 3722 (CHT)

-against-

BACHE & CO. INC. and ALEX CANAAN,

Defendants.

FOOTNOTES

1] Canaan was employed by Bache from July 1, 1969 until

2)

July 1, 1972, and from May 1, 1973 until May 1, 1974.

From July |, 1972 until May 1, 1973, Canaan was employed

as a security salesman at Weis, Voisin & Co., Inc. During

each of these time periods, Canaan was the representative in

charge of plaintiff's account.

Defendants’ counsel, in a recent letter to the Court, have

cited the case of Scherk v. Alberto-Culver Co., 417 U.S. 506

(1974), for the proposition that Scherk limited Wilko by

restricting its application to the 1933 Act. Therefore,

defendants conclude that Wilko would have no application

to the instant case since it alleges violations of the 1934 Act.

Suffice it to say that defendants have misread Scherk which

limits the application of Wilko when it comes into play with

international arbitration agreements. In Newman v.

Shearson, Hammill & Co., Inc., 383 F. Supp. 265 (W.D.

Tex 1974), the court held:

“Defendant’s argument that Wilko was

overruled by Scherk v. Alberto-Culver Co., 417

U.S. 506, 94 S.Ct. 2449, 41 L.Ed.2d 270 (1974),

is incorrect as that case simply carved out a

narrow exception to the Wilko holding, and is

applicable only to international transactions.”

Id. at 263.

= ~~ —-

lla

Opinion of the United States District Court for the Southern

District of New York

3] Section 29(a) of the Securities Exchange Act of sag

U.S.C. § 78cc, is the equivalent of Section 14 of the

Act and states:

“(a) Any condition, stipulation, or

provision binding any person to waive

compliance with any provision of this chapter

or of any rule or regulation thereunder, or of

any rule of an exchange required thereby shall

be void.”