Opposition — Bache & Co. v. Seymour

— -—— —

In THE

Supreme Court of the United States

Octoser Term, 1976

No. —— 6 - 1 8 @

<a

Bacue & Co., Inc.,

Petitioner,

—V.—

Cy Seymour,

Respondent.

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

BRIEF FOR RESPONDENT IN OPPOSITION

Avex L. Rosen, Esq.

Attorney for Respondent

225 Broadway

New York, New York 10007

(212) BA 7-1787

Of Counsel:

Leon B. Lipkin

JosEPH ARONAUER

TABLE OF CONTENTS

Questions Presented e*eenereeeececeeeneenereenseeeeeneee7oees

Statement of the Case eeeeeeeeeeeeeeeeeeoaneesd

Argument:

Point I. Seymour did not have

knowledge of his claim or of the

existence of a controversy when he

signed the margin agreement and

thus the lower courts properly

refused to stay this action.....c..e..

Point II. The doctrine of Wilko v.

Swan is applicable to violations

OF Che 1934 Acbecccccccccccccccccece

Point III. Bache offers no reason

why the Court should grant the writ

OF COTELOTATL.cccccccccccccccccccoes

, 4 n h kb 6400666666466 066006068008

TABLE OF CITATIONS

Cases Cited:

Brooklyn Savings Bank v. O'Neil, 324 US

697, 65 S.Ct. 895, 89 L.Ed. 1296

SRD 6 66% 66600000600600600086600006006080

Hecht v. Harris Upham & Co., 283 F.Sup.

417, 433 (N.D. Cal. 1968) modified on

other grounds, 430 F.2d 1202 (9th Cir.

BOUE Ds 66600066666 6606600666 660600 8606668

Korn v. Franchard Corporation, 388 F.Sup.

1326 (S.D.N.Y. 1975).. eeeree eoeeeeeeee eee e800

Maheu v. Reynolds & Co., 282 F.Sup. 423

(S.D.N.Y. Ee

Moran v. Paine, Webber, Jackson & Curtis,

389 F.2d 242 (3rd Cir. a

Newman v. Shearson, Hammill & Co., Incor-

porated, 383 F.Sup. 265 (W.D. Tex. 1974)..

Reader v. Hirsch & Co., 197 F.Sup. 111

(S.D.N.Y. D066 eh650006058008000600000006

Scherk v. Alberto-Culver Co., 417 US 506,

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

Stockwell v. Reynolds & Co., 252 F.Sup. 215

(S.D.N.Y. Din. nb 606566000 604604060600004

Wilko v. Swan, 346 US 427, 74 S.Ct. 182, 98

L.Ed. 168 tr rTTrTrTrrrTrT rT TrTrrr

Statutes Cited:

Securities and Exchange Act of 1934, 15

U.S.C. 78a et. 2! Eee ee ee

Securities Act of 1933, 15 U.S.C. 77a

et. SCZ co coececeeeereroccsorosescosoeesesons

Securities Act of 1933

ETRE ony or Oe ae ee ee ee

a ees ieee dale ties

Dien cbsneredadadteundiatebesenceonestees

ii

2,5,7

8

7,8

Securities and Exchange Act of 1934

10. eeeeeseeeeeeseeeenereeneeeereeeveeneeonoeeeeeeee eee

18. eeeeveeeveeeeeeoseeweeeeeeeeeeeeeeeeeocoeeeeeee

20. eeeeseeeneteseenseenseeneeeeneenrtee eeereeeseeenee#eec8¢se0

i << eke 66600 600600000644 066600 0464600080668

27) ee ee

Rules Cited:

Rule 10b-5, 17 Cod clbe §240.10D-5... ee eeeeees

Supreme Court Rule 23(1)(h).....ceeeeeeoeees

Supreme Court Rule 19(1)(b)...... sensecesude

Other Authorities Cited:

Note - Arbitration Clauses in International

Contracts and the Extra Territorial

Reach of the Securities Exchange Act of

1934 in Light of Scherk v. Alberto-Culver

Co., 26 Syracuse L.Rev. 995 (1975)........

Note - Arbitration and Securities

Regulation - Conflict between Federal

Arbitration Act and Securities Exchange

Act in an International Transaction,

) Se A Bey) eee

Note - Churning by Securities Dealers,

80 Harv. L. Rev. 869 TE 660066eeseoscces

iii

co CO CO ©

2

2. Did the United States District Court,

Southern District of New York, err when it

denied a motion to stay a securities action

when the complaint alleges violations of the

1934 Securities Exchange Act* but not the 1933

Securities Act”?

STATEMENT OF THE CASE

Plaintiff Cy Seymour ("Seymour") instituted

this action against Defendant Bache & Co. Inc.

("Bache") and defendant Alex Canaan (''Canaan"')

to recover damages caused by the churning of

Seymour's securities account.

The complaint alleges that Canaan was

Seymour's account executive from July 1, 1969

to May 31, 1974.3 During this time period,

Canaan was employed by Bache from July 1, 1969

through April 30, 1972. Canaan was then employed

by the brokerage firm of Weis Securities Inc.

from May 1, 1972 through April 30, 1973.

Canaan then returned to Bache and was employed

by them from May 1, 1973 through May 31, 1974.

. 15 U.S.C. 78a et. seq. (hereinafter ''the

1934 Act").

15 U.S.C. 77a et. seq. (hereinafter ''the

1933 Act").

2

3 The allegations of the complaint should be

taken as true when a Court determines whether

to grant a defendant's motion to stay an action

because of an agreement to submit disputes to

arbitration. See Maheu v. Reynolds & Co.

282 F.Sup. 423, 428. (S.D.N.Y. 1967).

On December 5, 1970, Seymour entered into

a margin agreement with Bache which contained

an arbitration provision. When Canaan returned

to Bache, Seymour signed another margin agreement

on June 4, 1973, which contained the same

arbitration provision as the December 5, 1970

agreement .

The complaint alleges that from July 1969

until May 1974, Canaan exercised control over

Seymour's account and caused an excessive number

of transactions in Seymour's securities account.

The complaint also alleges that Bache, among

other things, failed to properly supervise the

activities of Canaan. The acts of Canaan and

Bache are allege? to be violations of Rule 10b-5

of the 1934 Act.

Bache and Canaan then moved on or about

September 4, 1975 to stay the action on the

ground that there was an agreement to arbitrate

any disputes. Seymour submitted a memorandum of

law in opposition to the defendants' motion.

4 This provision states in pertinent part that:

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 transactions with or for me

or to this agreement or to the breach

thereof, shall be settled by arbitration

in accordance with the rules then obtaining

of the American Arbitration Association or

the Board of Governors of the New York

Stock Exchange, as I may elect....

; 17 CO oF ole Section 240.10b-5.

On January 14, 1976, the United States

District Court, Southern District of New York,

Charles H. Tenney, J., denied the defendants'

motion to stay the action on the ground that the

agreement to arbitrate was not enforceable in

light of the holding of the United States Supreme

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

On May 12, 1976, the United States Court of

Appeals for the Second Circuit summarily affirmed

the memorandum decision of Judge Tenney.

POINT I

SEYMOUR DID NOT HAVE KNOWLEDGE

OF HIS CLAIM OR OF THE EXISTENCE

OF A CONTROVERSY WHEN HE SIGNED

THE MARGIN AGREEMENT AND THUS THE

LOWER COURTS PROPERLY REFUSED TO

STAY THIS ACTION

In Wilko v. Swan, supra, a stuck purchaser

brought suit against a brokerage house, charging

violations of Section 12(2) of the 1933 Act.

The plaintiff in Wilko had signed a margin

agreement with a broadly worded arbitration

provision. The Court held that the arbitration

clause was a conditim and waiver within the

meaning of Section 14 of the 1933 Act, which

states that such conditions and waivers are void.

Accordingly, the Court held that the arbitration

clause was unenforceable.

Bache contends that because Seymour signed

the June 4, 1973 margin agreement after all the

disputed transactions took place, Wilko is not

applicable, Petition, page 4,

This contention overlooks the nature of a

churning scheme. While a victim of a churning

scheme may be aware of the number of trades in

his account, the victim may not be aware that

the trades are excessive under the circumstances.

See Hecht v. Harris, Upham & Co., 283 F.Sup. 417,

433 (N.D. Cal. 1968), modified on other grounds,

430 F.2d 1202 (9th Cir. 1970); See also Note,

Churning by Securities Dealers 80 Harv.L. Rev.

869 (1967). Further, the victim of a churning

scheme may not be aware that the high number of

trades is induced by a broker anxious to earn

even more commissions. See Hecht v. Harris,

Upham & Co., supra, at 433.

Thus, the present case is clearly distinguish-

able from cases which have upheld an agreement

to arbitrate when the plaintiff is aware of his

claim but knowingly chooses to assert that claim

in an arbitration forum. See, e.g., Moran v.

Payne, Weber, Jackson & Curtis, 389 F.2d 242

(3rd Cir. 1968); Korn v. Franchard Corporation,

388 F.Sup. 1326 (S.D.N.Y. 1975).

Bache does not assert that Seymour was aware

of the possible claim against it when he signed

the margin agreements. Any such assertion by

Bache would be untenable since the complaint

read as a whole denies that Seymour had such

knowledge, and the allegations of the complaint

must be deemed to be true. Indeed, Judge Tenney

found that:

The waiver contained in the instant

arbitration clause, signed in December

1970, even if after some of the alleged

violations had occurred, was sufficiently

in advance of the existence of a con-

troversy to void the agreement. Plaintiff

© See Maheu v. Reynolds & Co. 282 F.Sup. 423,

428 (S.D.N.Y. 1967)

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 like-

wise 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 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. App. of

Petition, pp. 8a, 9a.

In short, the margin agreements are waivers

in advance of a controversy and such waivers

should not be upheld by the Courts. Wilko v.

Swan, supra, at 438, n. 31 citing Brooklyn Savings

Bank v. O'Neil, 324 U.S. 697 (1945).

POINT II

THE DOCTRINE OF WILKO v SWAN

IS APPLICABLE TO VIOLATIONS —

OF THE 1934 ACT

Wilko deals with alleged violations of

Section 12 of the 1933 Act. Bache asserts in a

rather oblique fashion that since the complaint

alleges violations of the 1934 Act but not the

1933 Act, Wilko is not applicable to the present

action. Pt. Brief Page 2.’ Bache contends that

the recent United States Supreme Court decision

in Scherk v. Alberto-Culver Co., 417 U.S. 506

(1974) supports its position.

The cases decided before Scherk v. Alberto-

Culver Co., supra, clearly hold that Wilko is

applicable to violations of the 1934 Act. See

Maheu v. Reynolds & Co., supra; Stockwell v.

Reynolds & Co., 252 F.Sup. 215 (S.D.N.Y. 1965);

Reader v. Hirsch & Co., 197 F.Sup. 111 (S.D.N.Y.

1961). Scherk does not change the impact of these

cases.

Scherk is based on the ground that in an

international brsiness transaction between parties

of similar bargaining strength an arbitration

provision should be enforced. Scherk v. Alberto-

Culver Co., 417 U.S. at 515, 516; see also Note -

Arbitration Clauses in International Contracts

and the Extra Territorial Reach of the Securities

Exchange Act of 1934 in Light of Scherk v.

Alberto-Culver Co., 26 Syracuse L.Rev. 995 (1975);

Note - Arbitration and Securities Regulation -

Conflict Between Federal Arbitration Act and

Securities Exchange Act in an International

Transaction 40 Mo. L.Rev. 527, 534 (1975).

7 This issue is presented in the petitioner's

brief as the tes question presented to the

th

Court but Bach $c 20S, PEF gtherwise deal wi

8

There is one reported case which deals with

the impact of Scherk on Wilko. In Newman v.

Shearson, Hammill & Co., Incorporated, 383 F.Sup.

265 (W.D. Tex. 1974), the court noted that

Scherk did not overrule Wilko since Scherk is

only applicable to international business trans-

actions. Judge Tenney properly followed the

Newman decision. See Petitioner's App. p.10(a).

The 1934 Act contains a similar non-waiver

provision as the 1933 Act. Compare §29(a) of the

1934 Act, 15 U.S.C. 78cc with §14 of the 1933

Act, 15 U.S.C. 77n. The court's holding in

Wilko was grounded on the conclusion that the

intention of Congress concerning the sale of

securities is better carried out by holding

arbitration agreements invalid. Wilko v. Swan,

417 U.S. at 438. Certainly, Congress expressed

similar concern with respect to claims under

the 1934 Act. See, §29(a) of the 1934 Act,

15 U.S.C. 78cc (non-waiver provision); §10 of

the 1934 Act, 15 U.S.C. 78} (fraud provision);

gis of the 1934 Act, 15 U.S.C. 78r (liability

or misleading statements); §20 of the 1934 Act,

15 U.S.C. 78t (liabilities of controlling

persons); §27 of the 1934 Act, 15 U.S.C. 78aa

(exclusive jurisdiction provision).

POINT III

BACHE OFFERS NO REASON WHY

THE COURT SHOULD GRANT THE

WRIT OF CERTIORARI

Bache offers no argument why the Court

should grant a writ of certiorari. Such an

argument is required in all petitions for

certiorari. See Supreme Court Rule 23(1)(h).

Bache does not claim that the Second Circuit

decision is in conflict with the decision of

another Court of Appeals. Clearly, there is no

important state or territorial question of law

involved in this action. The Second Circuit

simply followed the Supreme Court decision in

Wilko. Under these circumstances, the Court

should not grant a writ of certiorari. See

Supreme Court Rule Section 19(1)(b).

CONCLUSION

| For the foregoing reasons, it is respect-

fully submitted that this petition for a writ

of certiorari should be denied.

Dated: New York, New York

August 10, 1976

Respectfully submitted,

ALEX L. ROSEN, ESQ.

Attorney for Respondent

225 Broadway

New York, New York 10007

(212) BA7-1787

Of Counsel:

Leon B. Lipkin

Joseph Aronauer