# Opposition — Bache & Co. v. Seymour

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition
- **Published:** January 1, 1976
- **Citation:** 429 U.S. 885

## Text

— -—— —

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

---

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