Petition — Rosansky v. Ladenburg, Thalmann & Co.

i

X

Supreme Court, U. S,

FILED

OCT 3 1977

MICHAEL RODAK, JR., CLERK

’

IN THE

Supreme Court of the United States

OCTOBER TERM, 1977

No,

MARTIN G. ROSANSKY,

Petitioner,

Vv.

LADENBURG, THALMANN & CO., INC.,

Respondent,

PETITION FOR WRIT OF CERTIORARI

TO THE APPELLATE DIVISION, FIRST

DEPARTMENT OF THE SUPREME COURT

OF THE STATE OF NEW YORK

Richard deY. Manning, Esq.

Counsel for Petitioner

Martin S, Rosansky

122 East 42nd Street

‘ New York, New York 10017

“Kevin F. Cook

\\ Of Counsel

COUNSEL PRESS, INC., 55 West 42nd Street, New York, N.Y. 10036 @ (212) 391-6622

INDEX

PAGE

Opinion Below 2

Jurisdiction 2

Question Presented 3

Statement 4

Reasons for Granting the Writ

A. The decision below 7

squarely presents an

important Federal

question -- never

passed upon by this

Court -- as to whether

any claim under the

1934 Act is arbitrable,

with or without the con-

sent of the parties.

B. The State Court decided 12

an important question

of Federal law for the

first time, in a manner

not in accord with the

1934 Act and probably

not in accord with de-

cisions of this Court,

that if 1934 Act questions

may under proper circum-

stances, be submitted to

arbitration, must such

arbitration be conducted

under the Federal Arbitra-

tion Act under the aegis

of Federal Courts or may

such arbitration be con-

ducted under the State

Arbitration Act under the

aegis of the State Courts.

ii

PAGE

Cc. The State Court decided 17

an important question

of Federal law for the

first time in a manner

probably not in accord

with the decisions of

this Court, in that it

permitted the arbitration

of a 1934 Act claim

against petitioner, which

was not previously known

to petitioner, over the

specific and continual

objection of petitioner.

Conclusion 20

iii

TABLE OF AUTHORITIES

United States Cases Page

Axelrod & Co. v. Kordich 9 & 12

Victor & Newfeld, 451 F.2d

838 (2nd Cir. 1971).

Clark v. Watchie, 513 F.2d

~994 (9th Cir.) cert. den.

423 U.S. 841 (1975). 13

Metro Indust. Painting Corp.

Vv. Terminal Const. Co.,

287 F.2d 382 (2nd Cir. 1961) 15

Moran v. Paine, Webber

“Jackson & Curtis, F.2d

242 (3rd Cir. 1968). 9 & 19

Sobel v. Hertz Warner & Co., 9 & 10

F.Supp. 28

reversed and remanded,

469 F.2qg 1211 (2nd Cir. 1972)

Wilko v. Swan, 201 F.2d 439 8, 9

(2nd Cir.), reversed, 19

346 U.S. 427 (1953).

Wright v. Securities and

Exchange Commission,

112 er 89 (2nd Cir. 1940). 14

New York Cases

New York Stock Exchange v. 14

~“Goodbody & Co., vm WEL A.D. 556,

345 N.Y.S.2d 58 (lst Dept.

1973).

ta Ml ee ee

iv

STATUTES

Securities Act of 1933,

15 U.S.C. 77a et seg.

Securities Exchange

Act of 1934, 15 U.S.C.

78a et seq.

Civil Practice Law and

Rules:

§5602

§7511

Page

2-5;

7-14;

and 16-19

8-10;

18 &

19

IN THE

SUPREME COURT OF THE UNITED STATES

| OCTOBER TERM, 1977

i No.

MARTIN G. ROSANSKY,

Petitioner,

Vv.

LADENBURG, THALMANN & CO., INC.,

Respondent.

PETITION FOR WRIT OF CERTIORARI TO THE

APPELLATE DIVISION, FIRST DEPARTMENT OF

THE SUPREME COURT OF THE STATE OF NEW YORK

To The Honorable The Chief Justice And

Associate Justices Of The Supreme Court Of

The United States:

Petitioner prays that a writ of cer-

tiorari be issued to review the judgment

of the Appellate Division, First Department,

of the Supreme Court of the State of New

York in the above entitled action.

OPINION BELOW

Neither the Court of Appeals nor the

Appellate Division, First Department, of

the Supreme Court of the State of New

York rendered an opinion. The opinion of

the Supreme Court of the State of New York

is unreported. A copy of this opinion

is annexed hereto as Appendix A.

JURISDICTION

The jurisdiction of this Court is

invoked under 28 United States Code, Sec-

tion 1257 by reason of the fact that the

Court of Appeals of the State of New York,

as the Court of last resort, refused to

grant leave to appeal and thus left stand-

ing a decision of the Appellate Division,

Supreme Court, affirming an arbitration

award based on a proceeding in which there

was introduced, over the objections of

petitioners, a counterclaim arising under

the Securities Exchange Act of 1934,

ee

15 U.S.C. 78aa ("1934 Act"), that act

provides, in pertinent part, that:

"The district court of the

United States, and the United

States courts of any terri-_

tory or other place subject

to the jurisdiction of the

United States shall have ex-

clusive jurisdiction of viola-

tions of this chapter or the

rules and regulations there-

under, and of all suits in

equity and actions at law

brought to enforce any lia-

bility or duty created by

this chapter or the rules

and regulations thereunder.

(Emphasis added)

QUESTION PRESENTED FOR REVIEW

Did the New York Court err in con-

firming an award of an arbitration panel

acting pursuant to the New York Arbitra-

tion Act in a proceeding instituted by

petitioner, a customer of respondent (a

member of the National Association of

Securities Dealers) for non-payment for

securities sold for petitioner's account,

which panel, over petitioner's objection

(a) held that it had jurisdiction

to hear and decide a counterclaim of

| respondent based upon alleged violations

| by petitioner of the 1934 Act; and

| (b) heard extensive evidence of such

: alleged violations of the 1934 Act; and

| (c) thereafter dismissed petitioner's

claim and respondent's counterclaim.

STATEMENT

The proceedings below were commenced

by the filing by petitioner of an arbitra-

tion "Submission Agreement", dated May 13,

1974, under the Code of Arbitration Pro-

cedure ("CAP") of the National Association

of Securities Dealers ("NASD").

Petitioner, an officer of Power Con-

version, Inc. ("PCI") initiated the arbi-

tration with respect to a $20,000 claim for

breach of contract for the sale of 500

shares of PCI common stock for which re-

| spondent, the purchaser, refused to pay.

After the arbitration proceedings had

been commenced, respondent interposed a

counterclaim against petitioner for

RE ee eee

ee ee ——

ee ee ee ee ee

$200,000 asserting a violation of Rule

10b-5 promulgated pursuant to the Se-

curities Exchange Act of 1934 (i5 U.S.C.

78a et seg.).

Petitioner challenged the jurisdiction

of the arbitration panel to entertain the

said "counterclaim" under NASD-CAP. The

panel did not initially decide the juris-

dictional objection. After hearing the

evidence on the claim which consisted

simply of the respondent's "confirmation"

of the sale, the arbitrators heard exten-

sive evidence of the alleged violation of

petitioner of the 1934 Act, and then

rendered a decision

(a) holding that the panel had juris-

diction over the 1934 Act counterclaim; and

(b) dismissing both the claim and

counterclaim.

Petitioner thereafter moved in

Supreme Court, New York County under New

York CPLR 7511 to vacate the award on the

ground that, inter alia the arbitrators,

ad

ee ee ne eee ee

war

in entertaining the respondent's counter-

claim and hearing evidence with respect

thereto exceeded their power. That Court

denied the motion and confirmed the award.

Thereafter petitioner appealed to the

Appellate Division, First Department,

of the Supreme Court seeking a reversal

of the Supreme Court's order confirming

the award. That Court affirmed the

Supreme Court's judgment without an

opinion. Petitioner then moved the Supreme

Court, Appellate Division for an order

granting a rehearing or leave for appeal

to the Court of Appeals of the State of

New York. CPLR 5602. The Court denied

both motions. Thereafter petitioner

moved the Court of Appeals for an order

granting leave to appeal to the Court of

Appeals. CPLR 5602. On July 7, 1977,

the Court of Appeals denied the motion

thus exhausting the remedies available to

petitioner under New York law and pro-

cedure.

SOLO EP PS ER Tre a eee RT oe he ee

Dar Re FECA FO AGT *

REASONS FOR GRANTING THE WRIT

A.

The decision below squarely presents

an_ important Federal question -- never

passed upon by this Court -- as to whether

any claim under the 1934 Act is arbitrable,

with or without the consent of the parties.

After forty years, there still exists

an important and unanswered question as to

whether any claim arising under the 1934

Act is arbitrable. In spite of the tre-

mendous impact that that Act has had on

the securities industry and its customers,

neither can be sure whether it has a

judicial or arbitral remedy under the Act.

This court has never passed on the question

of whether a 1934 Act claim is arbitrable.

This unsettled state of affairs should not

continue and this Court is respectfully

requested to issue the writ sought and

allow this question to be fully briefed and

squarely presented for adjudication.

In the preamble of the Act, section

2 states:

"([SJecurities exchanges and

over-the-counter markets are

affected with a national

pubiic interest...."

Inasmuch as the Act is an expression of

statutory public policy, the comment of

Judge Charles E. Clark in his dissenting

Opinion in Wilko v. Swan, 201 F.2d 439

(2nd Cir.) whose position was ultimately

sustained by this Court, 346 U.S. 427

| (1953) is particularly germane. Judge

Clark pointed out the dangers of permitting

commercial arbitration to extend its reach

into areas involving public policy:

"Commercial arbitration has

been highly successful in

bringing a businessman's ad-

judication to business

questions. But it would be

vastly unfortunate if it be-

came usable as a device to

blunt or break social legis-

lation.” (201 F.2d at 445)

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

the petitioner sued to recover damage

| pursuant to the Securities Act of 1933.

|

CS ee

Fs Pe FRET Te ete

ORS 6 OT RRL OT ae

FO, Pe ET Wes 2Te re, concen “1

The Court held that an agreement to arbi-

trate a future controversy was void under

the 1933 Act. This Court did not there hold,

nor has it ever held since, that a different

rule prevails with respect to existing con-

troversies. The Court of Appeals of the

Third Circuit has held that, under certain

extreme circumstances, a party might waive

right to have 1934 Acts decided by a Court

(Moran v. Paine, Webber, Jackson & Curtis,

389 F.2d 242 (3rd Cir. 1968); however, the

decisions of the District Court of the

Southern District of New York (Pollock, J.)

in Sobel v. Hertz Warner & Co., 338 F.Supp.

287 (1971) and the Second Circuit, in re-

versing and remanding (469 F.2d 1211 (1972))

clearly point up the inherent problems in

permitting a 1934 Act claim to be sub-

mitted to arbitration, discussed infra.

This Court, in Wilko v. Swan, took

specific note of the many problems in ar-

bitrating 1933 Act claims which apply with

equal force to 1934 Act claims (Axelrod &

RE Sn att ore tee

10

Co. v. Kordich, Victor & Newfeld, 451 F.2d

838, 843 (2nd Cir. 1971)). Such claims re-

quire subjective findings on the purpose

and knowledge of the alleged violator.

Such findings by an arbitration panel would

necessarily be determined and applied with-

out judicial instruction. In addition they

are almost always decided without explana-

tion or complete records. This makes ef-

fective judicial review well nigh impos-

sible (the problem “wrestled with" but not

determined in Sobel, supra). These con-

siderations which were held to be fatal

to the arbitrability of a 1933 Act claim

are equally important under the 1934 Act.

In Sobel, supra, a customer who agreed

to arbitrate an existing dispute under the

1934 Act and lost his claim before the ar-

bitrators, moved the district court to

vacate the award. The district court faced

with no record of how the panel arrived at

its decision ordered the case remanded to

the panel for explanation. The Court of

11

Appeals reversed and remanded holding that

the efficiency and informality of arbitra-

tion would be destroyed under such pro-

cedure; after discussing the conflicting

public policy questions (desirability of

arbitration vs desirability of correct

decisions in the 1934 Act cases) the Court,

as noted above, reversed and remanded,

holding:

"In short, we believe that

the district court erred in

remanding the arbitration pro-

ceeding to the arbitrators.

We do not agree with its con-

clusion that ‘the present

state of the record is not

sufficient to justify final

determination of the issues

petitioner has raised.' 338

F.Supp. at 289. Those issues

are whether the arbitration

award was procured by ‘undue

means,' 9 U.S.C. §10(a), or

is void as against public

policy. Both parties have

urged us to decide those ques-

tions. While we are tempted

to do so in order to bring

this litigation to an end,

orderly administration sug-

gests that the district court

should rule upon them first."

(469 F.2d at 1216)

ee ee

12

Petitioner herein is faced with a

similar problem and understands that if

arbitrators simply ignore applicable law

or exceed their power then such action

would compel vacation of the award. Pe-

titioner submits that arbitration should

not be used to decide 1934 Act claims be-

cause judicial review is effectively

thwarted. *

The State Court decided an important

guestion of Federal law for the first time,

in a manner not in accord with the 1934 Act

and probably not in accord with decisions

of this Court, that if 1934 Act questions

*Petitioner, of course, is aware of the

numerous decisions of Courts of Appeals

upholding arbitration of disputes between

brokers and members of brokerage firms.

Those cases are founded upon a spec-

ific statutory recognition of agreements to

settle disputes between securities exchange

members (1934 Act §28(b)). See e.g. Axelrod

& Co. v. Kordich, Victo & Newfeld, 451

F.2d 638 (2nd Cir. i371) and cases and

authorities there discussed.

13

may under proper circumstances, be sub-

mitted to arbitration, must such arbitra-

tion be conducted under the Federal Arbi-

tration Act under the aegis of Federal

Courts or may such arbitration be conducted

under the State Arbitration Act under the

aegis of the State Courts.

The Securities Exchange Act of 1934

confers exclusive jurisdiction on the

federal judiciary to hear all cases arising

under that statute:

"The district courts of the

United States...shall have

exclusive jurisdiction of

violations of this chapter

or the rules and regulations

thereunder, and all suits in

equity and actions at law

brought to enforce any lia-

bility or duty created by

this chapter or the rules

and regulations there inder."

(15 U.S.C. 78 aa) (Emphasis

added)

The federal courts have repeatedly

sustained their right to exclusivity.

Clark v. Watchie, 513 F.2d 994 (9th Cir.)

cert. den. 423 U.S. 841 (1975);

OY eee <0 row

ee ee fo oe

PERIL RE Te ee

a ee a ee ——

14

Wright v. Securities and Exchange Com-

mission, 112 F.2d 89 (2nd Cir. 1940).

Even the courts of the State of New York

have historically recognized that the

federal courts have pre-empted this area

of regulation. New York Stock Exchange

v. Goodbody & Co., 42 A.D.2d 556, 345

N.Y.S.2d 58 (lst Dept. 1973) (defenses and

counterclaims involving Securities and

Exchange Act of 1934 were not cognizable

in the state court).

In spite of the clear wording of the

statute and rulings by both federal and

state courts, the New York Court below

clearly did not ebnstbes stecit so

limited in the case of arbitration of 1934

Act claims as it confirmed the arbitrator

award rather than refusing to accept juris-

diction.

It is respectfully submitted that even

if such claims are arbitrable under proper

circumstances, any such arbitration must

be conducted under federal and not state

ee

ee -

15

arbitration procedures. The reason why pe-

titioner moved in the State Court to vacate

the award is that no Federal question was

presented by petitioner's claim; since pe-

titioner was challenging the right of the ar-

bitrators to hear the counterclaims arising

under Federal law it would have been totally

inconsistent for petitioner to invoke the

jurisdiction of the Federal Court to deny

jurisdiction of Federal question.* Cf. Metro

Indust. Painting Corp. v. Terminal Const. Co.,

287 F.2d 382 (2nd Cir. 1961). Petitioner's

dilemma was that he was challenging the

jurisdiction of the arbitrators to hear the

counterclaims based on exclusively Federal

questions; had petitioner invoked the juris-

diction of the Federal Court he would have

expressly (or tacitly) been asserting that

that Court had jurisdiction which, in turn,

would necessarily have been founded on

*Quaere: Where arbitration is invoked under

a question of state law and a counterclaim

is interposed of an exclusive Federal ques-

tion; under which arbitration act are the

parties proceeding; the State or the Federal?

16

the proper existence of a Federal question

before the arbitrators -- the very point

which petitioner was challenging.

In any event, it is respectfully

submitted that the State Court, in con-

firming the award of the arbitration panel,

necessarily held that

(1) the State Court had jurisdiction

Over an arbitration of 1934 Act claims; and

(2) the State arbitration act con-

trolled such arbitration.

In the light of the express provisions

of the 1934 Act that the Federal Courts have

exclusive jurisdiction over claims in law

or in equity under the 1934 Act, it is re-

spectfully submitted that the New York

Courts have, in this case of first impres-

sion, incorrectly decided this important

question of Federal law.

| 1

Cc.

The State Court decided an important

question of Federal law for the first time

in a manner probably not in accord with

the decisions of this Court, in that it

| permitted the arbitration of a 1934 Act

claim against petitioner, which was not

previously known to petitioner, over the

specific and continual objection of pe-

titioner.

Here, petitioner sold stock through

his broker, E.F. Hutton, to respondent.

Respondent refused to pay the $20,000

due as the purchase price and petitioner

commenced what he contemplated was to be

a simple arbitration under the CAP of the

NASD.

After invoking the jurisdiction of the

arbitrators, petitioner was confronted

for the first time with a $200,000 counter-

claim based upon claimed violations of the

1933 and 1934 Acts (there is involved here

a

18

only the question of the 1934 Act claims,

but the point is exactly the same with re-

spect to the 1933 Act claims asserted).

Petitioner objected to the counter-

claims and the arbitrators reserved de-

cision.

After presentation of petitioner's

case, which consisted of a very short pre-

sentation of the facts and the introduc-

tion of the respondent's “confirmation"

of the purchase, respondent was permitted

to go on for days alleging all types of

alleged violations of the 1933 and 1934 Acts.

Thereafter, the arbitrators held that

they had jurisdiction of the 1933 and 1934

Act counterclaims, and dismissed both the

petitioner's claim and respondent's counter-

claim.

Of course, no one can say with assur-

ance the extent to which the allegations

of the 1934 Act violations affected the

decision of the arbitrators on the pe-

titioner's claim, but the point is that

EEE EEE EEE SS'S&=—~““~“~~

Ae EE ree —

19

they never should have been permitted to

hear such allegations.

It is respectfully submitted that the

Clear holding of this Court in Wilko v.

Swan, supra, has been violated under the

procedural ploy that once petitioner in-

voked the jurisdiction of the arbitrators

on his simple claim for money damages he

consented to any and all counterclaims,

including unknown claims under the 1933

and 1934 Acts.

Certainly, the facts of this case do

not meet the standards of Moran v. Paine,

Webber, Jackson & Curtis, supra, which is

a Circuit Court exception to the rule of

Wilko v. Swan.

It is respectfully submitted that even

if such be the law of New York with respect

to normal arbitration procedures, State

procedural rules under State arbitration

acts cannot be permitted to deprive a party

of a substantive Federal right to a hearing

of 1934 Act claims by a Federal Court.

2

WHEREFORE, petitioner prays that a

writ of certiorari be issued out of and

under the seal of this Honorable Court

directed to the Appellate Division, First

Department of the Supreme Court of the State

ef New York commanding that Court to cer-

tify and send to this Court for its review

and determination on a date certain to be

therein named, a full and complete tran-

script of all proceedings of the case en-

titled on its docket No. 08566/76, Martin

G. Rosansky, Petitioner - Appeliant,

against, Ladenburg, Thalmann & Co., Inc.,

2 IE STE OE, Sa he, te ee ee tow

Respondent-Respondent; and that said decree

of the Appellate Division, First Department,

of the Supreme Court of the State of New

York be reversed by this Honorable Court,

and that your petitioner may have such other

| and further relief on the premises as to

this Court may seem just and proper.

| Dated: New York, New York

| Respectfully submitted,

| Martin G. Rosansky, Petitioner

| By Richard deY. Manning

APPENDIX A

SUPREME COURT OF THE STATE OF NEW YORK,

SPECIAL TERM, PART I, NEW YORK COUNTY

at the Courthouse thereof, 60 Centre

St., New York, New York, 10007

Present:

HON. HAROLD BAER

“Justice

*

MARTIN G. ROSANSKY

-~against-

LADENBURG, THALMANN & CO., INC.

x

The following papers numbered 1 to 21 read

on this motion SUBMITTED

No 283 on Calendar PAPERS NUMBERED

of May 20, 1976

Notice of Motion-Order

to Show Cause-and Affi-

Aavits C—O ee

Answering Affidavit-

CEES BGREBc coccccccccceesesccecosan ae

Replying Affidavit.............++ 20

RE. 6.86. 66660660660660666666066 21

Upon the foregoing papers this motion

for an order vacating arbitrator's award is

denied and the cross motion for an order

confirming same together with judgment in

accordance therewith is granted.

Whether respondent's counterclaim was

related to petitioner's claim was properly

reserved for the arbitrators’ determina-

tion. In the absence of a clear exclusion

from arbitration, which is not the case

here, questions concerning arbitrability

are properly resolved at the arbitration,

not in a court. Settle order.

Dated: June 25, 1976

County Clerk's No. 8566, 1976

Spec I Liber R6l, Line 9, 1976