Opposition Brief — Rodriguez De Quijas v. Shearson/American Express, Inc.

Supreme Court brief1989

Ask Donna

What actually matters in this document.

Text

No. 88-385

IN THE

Supreme Court of the United States

Octroser Term, 1988

Orevia Ropricuez pe Quiyas, et al.,

Petitioners,

Vv.

SHEARSON/AMERICAN Express, INC.,

Respondent.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT O! APPEALS

FOR THE FIFTH CIRCUIT

RESPONDENT'S BRIEF IN OPPOSITION TO

PETITION FOR A WRIT OF CERTIORARI

THeopore A. KREBSBACH

Counsel of Record for Respondent

Office of the General Counsel

Shearson Lehman Hutton Inc.

Two World Trade Center

New York, New York 10048

(212) 528-0565

Jerrrey L. FRIEDMAN

Office of the General Counsel

Shearson Lehman Hutton Inc.

(212) 528-0650

Of Counsel

TABLE OF CONTENTS

Question Presented _.

Table of Authorities.

Statutory and Regulatory Provisions Involved

Reasons for Granting the Writ.....__.

I. The Fully Developed Conflict Among the Fifth,

Tenth, Second and Third Circuits as to Whether

Shearson v. McMahon Mandates Enforcement of

Agreements to Arbitrate Claims Under § 12(2) of

The Securities Act of 1933 Can Only Be Resolved

By This Court Which Should Grant Certiorari in

Ne. cece ec ceeee

A. The Fifth and Tenth Circuits Have Held

That Shearson v. McMahon Presently

Renders Agreements to Arbitrate § 12/2)

Claims Enforceable ................

B. The Second and Third Circuits Have Held

That Wilko v. Swan Continues to Prohibit

Pre-Dispute Agreements to Arbitrate § 12(2)

Claims Notwithstanding Shearson v.

McMahon Until This Court States Otherwise

Page

Il. The Refusal of Courts to Enforce Agreements

To Arbitrate § 12(2) Claims Continues to

Infringe Upon Congressional Policies

Underlying the Arbitration Act and Recent

Precedent of This Court. | 16

Ill. The Conflict and Confusion Among the Lower

Courts Requires Early Resolution to Avoid

Increased Congestion in the Lower Courts 18

Conclusion ... ee | 20

Appendices

A. Statutory and Regulatory Provisions Involved

B. Opinion of the United States Court of

Appeals for the Fifth Circuit, Dated May 31.

RSE a TEE oe NPE Sea

C. Opinion of the United States Court of

Appeals for the Fifth Circuit, Dated June 22.

SE vasa decktadawaseershersanssseebess

D. Opinion of the United States District Court

for the Southern District of Texas, Dated

SS TE FI bo coin cncanadepecdcnes

E. Opinion of the United States District Court

for the Southern District of Texas, Dated

ie 2, DRL us nandewesseastveree.

F. Judgment of the United States Court of

Appeals for the Fifth Circuit, Entered on

es Ec ecaticeceueaaesaeccn snes

G. District Court and State Court Cases

Addressing the Enforceability of Agreements

to Arbitrate 1933 Act Claims Post-McMahon.

Page

A-13

A-23

A-25

A-27

TABLE OF AUTHORITIES

Cases

Abadian v. Drexel Burnham Lambert. Inc..

No. 88-0186 (E.D. Pa. Aug. 5. 1985) (LENIS.

Fedsec library, Courts file)

Allegaert v. Perot, 548 F.2d 432 (2d Cir.).

cert. denied, 432 U.S. 910 (1977)

Ayres v. Merrill Lynch, Pierce, Fenner & Smith,

Inc., 338 F.2d 532 (3d Cir.), cert. denied, 429

U.S. 1010 (1976) |

Belke v. Merrill Lynch, Pierce, Fenner & Smith,

Inc., 693 F.2d 1023 (11th Cir. 1982)

Chang v. Lin, 824 F.2d 219 (2d Cir. 1987)

Dain Bosworth Inc. v. Johnson, No. C9-87-1754,

petition for cert. filed, 57 U.S.L.W. 3161

(U.S. Aug. 12, 1988) (No. 88-284) .

Dean Witter comcast Inc. v. bites 470 U.S. 213

(1985) .

Delancie v. Birr. Wilson & Co., 648 F.2d 1255

(9th Cir. 1981) i

Jeppsen v. Piper, Jaffray & Hopwood, Inc.,

|Current] Fed. Sec. L. - (CCH) € 93,996

(D. Utah Aug. 16, 1988) - | |

Mansbach v. Prescott. Ball & Turben, 598 F.2d

1017 (6th Cir. 1979).

McCowan v. Dean Witter Reynolds, Inc. , 682

F. Supp. 741 (S.D.N.Y. 1987)

Page

9. 15

passim

Merrill Lynch, Pierce, Fenner & Smith Inc. v.

Moore, 590 F.2d 823 (10th Cir. 1975)

Mitsubishi Motors Corp. v. Soler Chrysler-

Plymouth, Inc., 473 U.S. 614 (1985). .

Moses H. Cone Memorial Hosp. v. Mercury

Constr. Corp., 460 U.S. 1 (1983).

Noble v. Drexel Burnham Lambert. Inc.. 823

F.2d 849 (5th Cir. 1987)...

Osterneck v. Merrill Lynch, Pierce, Fenner

& Smith, Inc., 841 F.2d 508 (3d Cir. 1988)

Peterson v. Shearson/American Express, Inc., 849

F.2d 464 (10th Cir. 1988) .................

Reed v. Bear, Stearns & Co., No. 88-2040-0

(D. Kan. Aug. 19, 1988) (LEXIS, Fedsec

RR, CRUD cc ccccdataowecuceeiess

Rodriguez De Quijas v. Shearson/American

Express, Inc., 845 F.2d 1296 (5th Cir.), rehg

en banc denied, 850 F.2d 1582 (1988) (per

ES odsc us cb recs euSeusbthenenescedicees

Shearson/American Express, Inc. v. McMahon,

482 U.S. _._., 107 S. Ct. 2332 (1967) ........

Sibley v. Tandy Corp., 543 F.2d 540 (5th Cir.

1976), cert. denied, 434 U.S. 824 (1977) .....

Surman v. Merrill Lynch, Pierce, Fenner

& Smith, Inc., 733 F.2d 59 (8th Cir. 1984)...

Weissbuch v. Merrill Lynch, Pierce, Fenner

& Smith Inc., 558 F.2d 831 (7th Cir. 1977)

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

ll. 14

Racketeer Influenced and Corrupt Organizations

Act. IS U.S.C. § 1961 et seq. (1982)

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

(1982) . |

Sec. 12(2). 15 U.S.C. § 772)

Sec. 14. 15 U.S.C. § 77n

Sec. 22(a). 15 U.S.C. § 7T7via)

Senestiies Rashengy Act af UO, 15 U.S.C. § 78a

J f ieee |

Sec. 10(b), 15 U.S.C. § 78j(b)

Sec. 19, 15 U.S.C. § 78s

Sec. 19(b)(2). 15 U.S.C. 78s(b)2

Sec. 19(c), 15 U.S.C. 78sic) _

Sec. 29a), 15 U.S.C. § 78ce(a)

United States Arbitration Act. 9 U.S.C. § 1

et seq. (1982) ..

Sec. 2,9 U.S.C. § 2..

Sec. 3.9 U.S.C. § 3

Sec. 4.9 U.S.C. § 4

28 U.S.C. § 1254(1) (1982)

Other Materials

Annual Report of the Director of the

Administrative Office of the United States

Courts (1987)—==---—-

H.R. Rep. No. 96, 68th Cong., Ist Sess. (1924)

SEC Securities Exchange Act Release No. 16930

(Nov. 30, 1979). 18 S.E.C. Docket 1197 (1979)

Page

3. 11

STATUTORY AND REGULATORY PROVISIONS [INVOLV ED*

United States Arbitration Act

Section 2.9 U.S.C. § 2

Section 3.9 U.S.C. § 3

Securities Act of 1933

Section 12(2), 15 U.S.C. § 772)

Section 14, i5 U.S.C. § 77n

Section 22(a). 15 U.S.C. § T7via)

Securities Exchange Act of 1934

Section 10(b), 15 U.S.C. § 78j(b)

Section 19, 15 U.S.C. § 78s

Section 27, 15 U.S.C. § 7S8aa

Section 29(a), 15 U.S.C. § 78ec(a)

* The text of these provisions is reproduced in full at Appendix A hereto.

IN THE

Supreme Court of the United Siates

Octoser Term, 1988

No. 88-385

Oreia Ropricuez pe Quiyas, et al..

Petitioners.

Vv.

SHEARSON/AMERICAN Express, INc..

Respondent.

RESPONDENT'S BRIEF IN OPPOSITION TO

PETITION FOR A WRIT OF CERTIORARI

OPINIONS BELOW

The opinion of the United States Court of Appeals for the

Fifth Circuit is reported at 845 F.2d 1296, and is reproduced

at Appendix B hereto. The order of the court of appeals deny-

ing petitioners’ motion for rehearing en banc is reported at 850

F.2d 1582 and is reproduced at Appendix C hereto. The opinions

of the United States District Court for the Southern District of

Texas are unreported but are reproduced at Appendix D and

Appendix E hereto.

JURISDICTION

The judgment of the court of appeals was entered on May

31, 1988 and is reproduced at Appendix F hereto. This Court

has jurisdiction pursuant to 28 U.S.C. § 1254(1) (1982).

STATEMENT OF THE CASE

Petitioners opened securities accounts with a financial con-

sultant formerly employed by respondent Shearson Lehman Hut-

ton Inc., named herein as Shearson/American Express, Inc.

(“Shearson”) in a Shearson branch office located in Brownsville.

Texas at various times in 1982 and 1983: At or around the time

petitioners opened their accounts, they entered into Customer's

Agreements with Shearson. Each of these agreements provides

that any controversy relating to the various accounts petitioners

maintained with Shearson is to be resolved through arbitration

at one of three designated self-regulatory organization (“SRO”)

arbitration forums:

Unless unenforceable due to federal or state law, any

controversy arising out of or relating to my accounts,

to transactions with you for me or to this agreement

or the breach thereof, shall be settled by arbitration

in accordance with the rules then in effect, of the Na-

tional Association of Securities Dealers, Inc. or the

Boards of Directors of the New York Stock Exchange.

Inc. and/or the American Stock Exchange, Inc. as |

[the customer] may elect.

Petitioners filed complaints against Shearson and their finan-

cial consultant in the United States District Court for the

Southern District of Texas on August 23, 1985 and November

27, 1985.’ Petitioners alleged that there had been excessive and

unauthorized trading in their accounts, that false statements

were made and material facts omitted from the advice given

Petitioners are those individuals listed in the Petition for a Writ of Certiorari

Petition”). See Petition at | n.1. The parent company of Shearson is Shear-

son Lehman Hutton Holdings Inc. which is a non-wholly owned subsidiary

of the American Express Company. E.F. Hutton & Company, Inc. is a » holly

owned subsidiary of Shearson. Petitioners’ financial consultant, Jon Grady

Deaton, a defendant below, was not a party to the appeal before the Fifth

Circuit and is not a party to this proceeding.

’ The four complaints filed by petitioners in the district court were consolidated

for purposes of appeal. The arbitration orders of the district court and court

of appeals were identical for all four complaints.

to them, and that certain securities purchased in their accounts

were not appropriate in light of their investment objectives. Peci-

tioners alleged that this conduct constituted violations of: (a)

$§ 12(2) and 17(a) of the Securities Act of 1933, 15 U.S.C. § 77a

et seq. (1982) (the “1933 Act”); (b) § 10(b) of the Securities Ex-

change Act of 1934, 15 U.S.C. § 78a et seq. (1982) (the “1934

Act”) and Securities and Exchange Commission (“SEC”) Rule

10b-5 promulgated thereunder, 17 C.F.R. § 240-10b-5: (c)

$§ 15(c)(1) and 15(c)(2) of the 1934 Act and SEC Rules I5cl-2.

15el-4 and 15cl-6 promulgated thereunder: (d) §§ 206 and 215

of the Investment Advisors Act of 1940: (e) the Racketeer In-

fluenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et

seq. (1982) (“RICO”); (f) various state and common laws: and

(g) various rules and regulations of the New York Stock Ex-

change, Inc. (“N.YS.E.”) and the National Association of

Securities Dealers, Inc. (“N.A.S.D.”).

Shearson filed a motion in the district court for. among other

things, an order to enforce the arbitration agreements entered

into by the parties pursuant to § 3 of the United States Arbitra-

tion Act, 9 U.S.C. § 1 et seq. (1982). In an opinion dated

November 18, 1986, the district court granted Shearson’s mo-

tion to dismiss petitioners’ clain.s asserted under § 17(a) of the

1933 Act and its motion to stay proceedings pending arbitra-

tion of all petitioners’ remaining claims except those asserted

under § 12(2) of the 1932 Act, 15 U.S.C. § 771(2), and those

asserted under the 1934 Act. The district court based its refusal

to order the parties to arbitrate petitioners’ § 12(2) claims on

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

that an agreement to arbitrate a § 12/2) claim violates § 14 of

the 1933 Act, an anti-waiver provision, 15 U.S.C. § 77n. as an

agreement waiving the jurisdictional provision of the 1933 Act.

See Appendix D at A-i8 (citing Wilko, 346 U.S. at 434-35). The

jurisdictional provision of the 1933 Act, § 22(a), provides that

a plaintiff may bring an action to enforce rights under the 1933

Act in either a federal or a state court. 15 U.S.C. § T7v(a). The

district court's refusal to order arbitration of petitioners’ claims

asserted under the 1934 Act was based on prior circuit prece-

dent extending the rationale underlying Wilko to the 1934 Act.

See Appendix D at A-19.

Shearson filed a motion with the district court to reconsider

its refusal to order the parties to arbitrate petitioners’ claims

under § 12(2) of the 1933 Act, based on the rationale underly-

ing this Court's opinion in Shearson/American Express. Inc. v.

McMahon, 482 U.S. ___, 107 S. Ct. 2332 (1987), wherein the

Court ruled that agreements to arbitrate claims under § 10(b)

of the 1934 Act and RICO are enforceable. The district court

subsequently ruled that petitioners’ § 10(b) claims were ar-

bitrable but ruled that their § 12(2) claims were nonarbitrable

in an opinion dated July 14, 1987. See Appendix E.

Shearson filed an appeal with the United States Court of Ap-

peals for the Fifth Circuit to review the district court's refusal

to order the parties to arbitrate petitioners’ claims asserted under

§ 12(2) of the 1933 Act. On May 31, 1985, the Fifth Circuit re-

versed the district court, ruling that the rationale underlving

McMahon mandates enforcement of the parties’ agreement to

arbitrate petitioners’ § 12(2) claims. Rodriguez De Quijas v.

Shearson/American Express, Inc., 845 F.2d 1296, 1299 (5th Cir).

rehg en banc denied, 850 F.2d 1582 (1988) (per curiam). Peti-

tioners filed a petition for a writ of certiorari to review the order

of the Fifth Circuit dated August 31, 1988. Petitioners contend

that such a writ should be granted and the Fifth Circuit reversed

based on their arguments that:

(a) the Fifth Circuit improperly failed to follow this

Court's holding in Wilko that § 12(2) claims are

nonarbitrable:

(b) the Fifth Circuit's opinion is in conflict with the

opinion of the Second Circuit Court of Appeals

in Chang v. Lin, 824 F.2d 219 (2d Cir. 1987). as

well as federal district court and state court opi-

nions; and

passed, woulc amend the 1934 Act regarding the

enforceability of agreements to arbitrate federal

securities law claims.

See Petition at 4-5.

To the extent that petitioners seek a writ of certiorari to resolve

the conflict that exists between the Fifth Circuit and Second

Circuit Courts of Appeals, as well as various federal district

courts and state courts, Shearson agrees that the issuance of a

writ of certiorari is needed to provide uniformity throughout

the nation on the issue of whether agreements to arbitrate clair

asserted under § 12(2) of the 1933 Act are presently enforceable

in light of McMahon.

REASONS FOR GRANTING THE WRIT

The Fifth Circuit's decision enforcing an agreement to ar-

bitrate claims asserted under § 12(2) of the 1933 Act was based

on the rationale underlying this Court's opinion in McMahon.

w herein the Court held that agreements to arbitrate claims aris-

ing under § 10(b) of the 1934 Act, 15 U.S.C. § 78j(b), and RICO

are enforceable. The Fifth Circuit chose to rely on McMahon

as presently governing the issue rather than Wilko which held

that agreements to arbitrate § 12(2) claims are unenforceable.

Rodriguez, 845 F.2d at 1298-99. The Tenth Circuit reached the

same conclusion in Peterson v. Shearson American Express. inc .

849 F.2d 464, 466 (10th Cir. 1988).

The Second Circuit has stated that Wilko continues to govern

the enforceability of agreements to arbitrate § 12(2) claims un-

til this Court expressly states otherwise. See Chang v. Lin, 824

F.2d 219, 222 (2d Cir. 1987). The Third Circuit has chosen to

tollow the Second Circuit and also continues to rely on Wilko

rather than McMahon on the issue. See Osterneck v. Merrill

Lynch, Pierce, Fenner & Smith. Inc., 84] F_2d 508, 512 (3d Cir.

1988).

The direct conflict among the circuits as to whether McMahon

or Wilko presently governs the enforceability of agreements to

arbitrate § 12(2) claims is fully developed. The circuit courts

as well as numerous district courts and state courts hold either

that the rationale underlying McMahon presently governs the

issue or that Wilko controls until this Court specifically states

otherwise. Courts that adhere to Wilko, notwithstanding

McMahon. are fostering the type of judicial hostility against ar-

bitration agreements that this Court and Congress has sought

to eliminate. Moreover, the lower courts continue to be burdened

with motions to compel arbitration and lawsuits which should

be resolved by arbitration. Only this Court can resolve the con-

flict that exists among the circuits and Shearson respectfully sub-

mits that it should do so in the present case.

I. The Fully Developed Conflict Among the Fifth, Tenth.

Second and Third Circuits as to Whether Shearson v.

Mc Mahon Mandates Enforcement of Agreements to Ar-

bitrate Claims Under § 12(2) of the Securities Act of 1933

Can Only Be Resolved by This Court Which Should

Grant Certiorari in This Case

The enforceability of agreements to arbitrate claims asserted

under § 12(2) of the 1933 Act is an issue which seemed to have

been resolved approximately thirty-five years ago in Wilko v.

Swan, 346 U.S. 427 (1953), wherein the Court ruled that such

agreements were unenforceable. The continued viability of

Wilko has been called into question due to the rationale underly-

ing this Court's opinion in Shearson/American Express, Inc. v.

McMahon, 482 U.S. ___., 107 S. Ct. 2332 (1987). The Court

in McMahon ruled that agreements to arbitrate claims asserted

under § 10(b) of the 1934 Act (as well as RICO) are enforceable.

An application of the rationale underlying the Court's opinion

in McMahon to § 12(2) of the 1933 Act indicates that claims

asserted under this statute are also presently arbitrable.

The Fifth Circuit Court of Appeals in the present case has

interpreted McMahon to mandate enforcement of valid

agreements to arbitrate § 12(2) claims:

McMahon undercuts every aspect of Wilko v.

Swan... .; a formal overruling of Wilko, appears in-

evitable — or, perhaps, superfluous.

Rodriguez, 845 F.2d at 1298 (citing Noble v. Drexel Burnham

Lambert. Inc., 823 F.2d 849, 850 n.3 (5th Cir. 1987)).

The Tenth Circuit Court of Appeals has also recognized that

an application of the rationale underlying McMahen to § 12(2)

of the 1933 Act renders agreements to arbitrate these claims

presently enforceable notwithstanding Wilko:

In Wilko, the Court determined that an agreement

to arbitrate was void under § 14 of the 1933 Securities

Act .... In McMahon, the Supreme Court essential-

ly overruled Wilko. See Rodriguez De Quijas v. Shear-

son/American Express, Inc., 845 F.2d 1296 (5th Cir.

1988). In doing so, the Court recognized arbitration

as an acceptable method of dispute resolution under

the 1934 Exchange Act.

Peterson v. Shearson/American Express, Inc., 849 F.2d 464, 466

(10th Cir. 1988).

In contrast, the Second Circuit Court of Appeals in Chang

v. Lin, 824 F.2d 219 (2d Cir. 1987) has stated that Wilko con-

tinues to govern the issue of the enforceability of agreements

to arbitrate § 12(2) claims until this Court states otherwise:

Although the Supreme Court in McMahon questioned

the rationale underlying Wilko, the Court neverthe-

less did not overrule that decision, and it continues

to govern us.

Chang, 824 F.2d at 222. The Third Circuit has reached the same

conclusion as did the Second Circuit in Chang. In Osterneck

v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 841 F.2d 508

(3d Cir. 1988), the Third Circuit stated:

As long as Wilko stands in the Supreme Court,

agreements to arbitrate claims under the Securities

Act of 1933 will remain unenforceable __.

Osterneck, 841 F.2d at 512.

The conflict among the Fifth, Tenth, Second and Third Cir-

cuit Courts of Appeals as to whether McMahon or Wilko present-

ly governs the issue of the enforceability of agreements to

arbitrate § 12(2) claims is mirrored by a similar conflict that

exists among the federal district courts and the state courts

nationwide.’ These courts have recognized the clear conflict that

exists on the issue and have chosen to follow either the Fifth

and Tenth Circuits’ approach or the Second and Third Circuits’

approach. For example, the United States District Court for the

Eastern District of Pennsylvania recently ruled that agreements

to arbitrate § 12(2) claims are unenforceable, relying on

Osterneck and Chang rather than Rodriguez:

The Court of Appeals for the Third Circuit explicitly

held in Osterneck --- that until Wilko is expressly

overturned, “agreements to arbitrate claims under the

Securities Act of 1933 will remain unenforceable.”

Therefore, I find that the Supreme Court has not ex-

pressly overruled its decision in Wilko. See Chang ._ .

But See Rodriguez ....

Abadian v. Drexel Burnham Lambert, Inc., No. 88-0186 (E.D.

Pa. Aug. 5, 1985) (LEXIS, Fedsec library, Courts file) (citations

omitted). See also Jeppsen v. Piper, Jaffray & Hopwood, Inc..

[Current] Fed. Sec. L. Rep. (CCH) ¢ 93, 996 at p. 90,651 (D.

Utah Aug. 16, 1988) (“The Tenth Circuit has taken the position

that ‘[i]Jn McMahon, the Supreme Court essentially overruled

Wilko. ”).

Although Shearson contends that the Fifth Circuit properly

ruled that the rationale underlying the Court's opinion in

McMahon mandates enforcement of agreements to arbitrate

§ 12(2) claims, it believes that it is essential for the Court to grant

certiorari to review and affirm the Fifth Circuit's opinion and

resolve the conflict that exists on this issue. Without the Court's

definitive resolution of the issue, parties to valid arbitration

agreements will be denied the right to have § 12(2) disputes

' Shearson is aware of twenty-nine cases nationwide that have decided the

enforceability of agreements to arbitrate claims asserted under § 12/2) and

other sections of the 1933 Act since this Court decided Mc Mahon. Sixteen deci-

sions have held that such agreements are enforceable based on McMahon. while

thirteen decisions have held that such agreements are unenforceable based

on Wilko. A complete list of the district and state court decisions on this issue

appears at Appendix CG.

resolved in an arbitration forum capable of enforcing rights

under the federal securities laws pursuant to the United States

Arbitration Act. As a result, courts will continue to be burdened

with unnecessary motions to compel arbitration and lawsuits

asserting claims that should be resolved through arbitration. The

Court should end this waste of judicial resources. This is especial-

ly so due to the fact that the SEC, the governmental agency

responsible for administering the federal securities laws, has

already advised the Court in the amicus curiae brief it filed in

McMahon in support of Shearson, that it believes that

agreements to arbitrate § 12(2) claims are presently enforceable:

[A] present-day customer-broker agreement to ar-

bitrate pursuant to SRO arbitration procedures would

be enforceable, even with respect to claims arising

under Section 12(2) of the 1933 Act, the section under

which the claim in Wilko arose. .

See Brief of the SEC as Amicus Curiae in McMahor “SEC

amicus brief”) at 20.*

Shearson respectfully suggests that the Court end the un-

necessary waste of judicial resources that are being expended

by courts which continue to force parties to litigate § 12(2) claims

in a judicial forum notwithstanding the existence of valid con-

tractual arbitration agreements covering these claims. The Court

should grant certiorari to review and affirm the Fifth Circuit's

opinion in this case and protect the Congressional policies

underlying the Arbitration Act.© ~

* The arbitration agreements governing the parties’ disputes in the present case

provide that the arbitration forum to hear their disputes will be one of three

designated SRO forums just as the arbitration agreement governing the par-

ties disputes in McMahon provided.

* A petition for a writ of certiorari was filed with the Court in Dain Bosworth

Inc. v. Johnson, No. C9-87-1784, petition for cert. filed, 57 US.L.W. 3161 (US

Aug. 12, 1988) (No. 88-284), seeking review of the same issue presented in this

case. The petitioner in Johnson is seeking a writ of certiorari for the Court

to review an order of the Minnesota Supreme Court which denied review of

a decision of the Minnesota Court of Appeals affirming a refusal to order ar.

bitration of a claim asserted under § 12(2) of the 1933 Act.

A. The Fifth and Tenth Circuits Have Held That Shear-

son vt. McMahon Presently Renders Agreements to Ar-

bitrate § 12(2) Claims Enforceable

The Fifth Circuit in the present case expressly chose to follow

the rationale underlying this Court's opinion in McMahon to

support its ruling that agreements to arbitrate claims asserted

under § 12(2) of the 1933 Act are enforceable notwithstanding

the contrary holding in Wilko. Rodriguez, 845 F.2d at 1298-99.

The Tenth Circuit in Peterson also stated that McMahon present-

ly governs the enforceability of agreements to arbitrate § 12(2)

claims. Peterson, 849 F.2d at 466. The Court in McMahon was

faced with, among other things, the issue of whether an agree-

ment to arbitrate a claim arising under § 10(b) of the 1934 Act

is enforceable. The Court had to reconcile the Wilko opinion

and determine if Wilko applied to § 10(b) of the 1934 Act.

The Wilko Court had held that an agreement to arbitrate a

claim under § 12(2) of the 1933 Act was unenforceable as an

agreement waiving the jurisdictional provision of the 1933 Act

which provides for concurrent jurisdiction in both the federal

district courts and state courts to resolve disputes under the 1933

Act. See Wilko, 346 U.S. at 434-35. The Court based its deci-

sion on its interpretation of the anti-waiver provision of the 1933

Act which precludes enforcement of any agreement which waives

“compliance with any provision” of the 1933 Act. § 14, 15 U.S.C.

§ 77n. Since the Wilko Court believed that an arbitration forum

was not capable of enforcing rights under the 1933 Act, the Court

concluded that an agreement waiving the right to have a judicial

forum resolve a § 12(2) claim was prohibited as an agreement

“waiving compliance” with the 1933 Act:

As the protective provisions of the Securities Act re-

quire the exercise of judicial direction to fairly assure

their effectiveness, it seems to us that Congress must

have intended § 14 __. to apply to waiver of judicial

trial and review [of § 12(2) claims}.

Wilko, 346 U.S. at 437 (citation and footnote omitted).

Due to the fact that the 1934 Act contains an anti-waiver pro-

vision, § 29(a), 15 U.S.C. § 78cc(a), which is in all substantive

respects the same as the anti-waiver provision contained in the

1933 Act, the courts of appeals had assumed that Wilko applied

equally to the 1934 Act rendering agreements to arbitrate claims

under § 10(b) of the 1934 Act unenforceable. The Court in

McMahon rejected the application of Wilko to § 10(b) of the

1934 Act. The Court recognized that the Wilko Court's inter-

pretation of an anti-waiver provision as prohibiting an agree-

ment to arbitrate a § 12(2) claim was based solely on its view

that arbitration was inadequate to protect rights under the

statute:

The conclusion in Wilko was expressly based on the

Court's belief that a judicial forum was needed to pro-

tect the substantive rights created by the Securities

Act: “As the protective provisions of the Securities Act

require the exercise of judicial direction to fairly assure

their effectiveness, it seems to us that Congress must

have intended § 14 . . . to apply to waiver of judicial

trial and review.” Wilko must be understood. therefore.

as holding that the plaintiff's waiver of the “right to

select the judicial forum,” . . . was unenforceable on-

ly because arbitration was judged inadequate to en-

force the statutory rights created by § 12/2).

McMahon, 107 S. Ct. at 2338.

* See Surman v. Merrill Lynch. Pierce. Fenner & Smith. Inc.. 733 F.2d 39.

61-62 (SthCir. 1984); Belke v. Merrill Lynch. Pierce. Fenner & Smith. Inc.

693 F.2d 1023, 1025-26 (Lith Cir. 1982); Delancie v. Birr. Wilson & Co.. 648

F.2d 1255, 1258-59 (9th Cir. 1981); Mansbach v. Prescott. Ball &- Turben. 598

F.2d 1017, 1030 (6th Cir. 1979); Merrill Lynch. Pierce. Fenner & Smith Inc

t. Moore. 590 F.2d 823, 827-29 (10th Cir 1978), Weissbuch « Merrill Lynch.

Pierce, Fenner & Smith Inc. 558 F.2d 831, 833-35 (7th Cir. 1977); Allegaert

v. Perot, 548 F.2d 432, 436-38 (2d Cir), cert. denied. 432 US. 910 (ISTT): Ayres

t. Merrill Lynch, Pierce, Fenner & Smith. Inc., 538 F 2d 532. 536 (3d Cir).

cert. denied, 429 US. 1010 (1976); Sibley © Tandy Corp. 543 F.2d 540 (5th

Cir 1976), cert. denied. 434 US. 824 (1977).

After analyzing the arbitration forums maintained by the

various SROs, the Court ruled that these forums are adequate

to protect and enforce rights under the federal securities laws

even if they were not when Wilko was decided:

[T]he mistrust of arbitration that formed the basis for

the Wilko opinion in 1953 is difficult to square with the

assessment of arbitration that has prevailed since that

time. This is especially so in light of intervening changes

in the regulatory structure of the securities laws.

McMahon, 107 S. Ct. at 2341. The Court relied on the fact that.

unlike during the time when Wilko was decided, the SEC

presently has broad power to ensure the adequacy of SRO ar-

bitration This power was granted to the SEC by Congress in

its 1975 amendments to § 19 of the 1934 Act, 15 U.S.C. § 75s.

Examples of the SEC’s broad oversight power are its power to

“abrogate, add to, and delete from” any SRO rule if it is incon-

sistent with the federal securities laws and the fact that no pro-

posed rule change may take effect unless first approved by the

SEC. See § 19(b)(2), 15 U.S.C. § 78s(b)(2): § 19(c), 15 USC

78s(c). Moreover, the SEC has specifically approved of the ar-

bitration procedures of the N.Y.S.E.. the N.AS.D. and the

American Stock Exchange. Inc.. the SRO arbitration forums that

were listed in the arbitration agreement that governed the par-

in the present case.” It was for these reasons that the Court in

McMahon found that an arbitration forum is capable of entor-

cing rights under the 1934 Act rendering the Wilko interpreta-

tion of an anti-waiver provision inapplicable to § 10(b) of the

1934 Act. McMahon, 107 S. Ct. at 2341-42.

The Court's refusal to rely on the Wilko Court's interpreta-

tion of an anti-waiver provision as prohibiting an agreement

to arbitrate claims under the federal securities laws, was not

based on any distinction between the 1933 Act and the 1934 Act.

and was due solely to the significant changes in securities ar-

bitration that have been made since Wilko was decided:

’ See SEC Securities Exchange Act Release No. 16390 (Now 30. 197%. ISS.ELC

Docket 11ST (1979): see also SEC amicus brief at 1S

Even if Wilko’s assumptions regarding arbitration

were valid at the time Wilko was decided. most cer-

tainly they do not hold true today for arbitration. pro-

cedures subject to the SEC's oversight authority.

McMahon, 107 S. Ct. at 2341.

The rationale underlying McMahon applies equally to both

the 1933 Act and the 1934 Act rendering the Wilko interpreta-

tion of an anti-waiver provision presently incapable of pro-

hibiting an agreement to arbitrate a § 12(2) claim at an SRO

arbitral forum. The Fifth and Tenth Circuit Courts of Appeals

recognition of this fact led these courts to state that agreements

to arbitrate § 12(2) claims are presently enforceable. Thus. courts

within the Fifth and Tenth Circuits will no longer refuse to en-

force parties’ agreements to resolve their § 12(2) disputes at

forums which this Court has ruled are perfectly capable of pro-

tecting rights under the federal securities laws."

Unlike the Fifth and Tenth Circuit Courts of Appeals, the

Second and Third Circuit Courts of Appeals have refused to

acknowledge the fact that Wilko no longer renders agreements

to arbitrate § 12(2) claims unenforceable in light of the rationale

underiving McMahon.

B. The Second and Third Circuits Have Held That Wilko

t. Swan Continues To Prohibit Pre-Dispute Agreements

To Arbitrate § 12(2) Claims Notwithstanding Shear-

son c. McMahon Until This Court States Otherwise

Tne Second Circuit has made it clear in Chang that it will

adhere to Wilko and refuse to enforce valid agreements to ar-

bitrate § 12/2) claims until this Court specifically states that such

agreements are presently enforceable Chang, 824 F.2d at 222

Although the issue of the enforceability of agreements to ar-

bitrate § 12/2) claims was not squarely before the Second

* See. ¢.@ . Reed c. Bear. Stearns & Co.. No. %&- 2040-0 (D Kan. Aug 19. 1988

(LEXIS, Fedsec library, Courts file) (§ 12/2) claims arbitrable based on the

Kodriguez and Peterson interpretation of McMahon). see also Jeppson

Circuit in Chang, the court's statement that “a plaintiff has the

right to litigate a ‘33 Act claim in a federal court notwithstan-

ding any arbitration agreement with the defendant,” /d.. has

caused and will continue to cause courts within the Second Cir-

cuit to refuse to enforce valid agreements to arbitrate § 12/2)

claims. See, e.g.. McCowan v. Dean Witter Reynolds, Inc., 682

F. Supp. 741, 744 (S.D.N.Y. 1987) (Wilko still governs arbitrability

of § 12(2) claims citing Chang). The same is true for courts

within the Third Circuit due to Osterneck. See, e.g.. Abadian.

The fact that the § 12(2) issue was not specifically decided

by the Court in McMahon, since the issue was not before it.

is the reason numerous federul district courts and state courts

in addition to the Second and Third Circuits continue to fail

to recognize that valid agreements to arbitrate claims under §

12(2) of the 1933 Act are presently entorceable in light of the

Court's rationale underlying McMahon. See Appendix CG. It is

thus essential that the Court resolve the conflict that exists among

the lower federal courts and specifically rule on the present en-

forceability of agreements to arbitrate § 12(2) claims. There are

no further arguments to be developed by the lower federal courts.

These courts either decide to accept the McMahon rationale to

enforce agreements to arbitrate § 12(2) claims or decide to re-

main bound by Wilko until told otherwise by the Court. Until

the Court resolves the issue definitively, its recent precedents

which have developed significant substantive law under the Arbi-

tration Act and the Congressional policies underlying the Act

will continue to be thwarted.

Il. The Refusal of Courts to Enforce Agreements to Arbitrate

§ 12(2) Claims Continues to Infringe Upon Congres.

sional Policies Underlying the Arbitration Act and Re-

cent Precedent of This Court

Congress enacted the Arbitration Act to reverse judicial hostili-

ty against arbitration agreements which had existed in the

English common law and was adopted by the American Courts.

H.R. Rep. No. 96, 68th Cong., Ist Sess. 1-2 (1924). Congress’

intent underlying the enactment of the Act was to ensure that

courts would defer to arbitration agreements as they would to

any contractual agreement:

Arbitration agreements are purely matters of contract.

and the effect of the bill is simply to make the con-

tracting party live up to his agreement. He can no

longer refuse to perform his contract when it becomes

disadvantageous to him. An arbitration agreement is

placed upon the same footing as other contracts,

where it belongs.

Id. The Arbitration Act provides that arbitration agreements

“shall be valid, irrevocable, and enforceable, save upon such

grounds as exist at law or in equity for the revocation of any

contract.” 9 U.S.C. § 2. The Act mandates that a court stay its

proceedings and direct the parties to an arbitration agreement

to resolve their disputes in an arbitration forum. 9 U.S.C. § 3-4

The Court has decided several cases involving arbitration

issues in recent years to protect Congress’ desire to ensure the

enforcement of valid arbitration agreements and has created

significant substantive law in furtherance of the Arbitration Act

In ruling that agreements to arbitrate § 10(b) and RICO claims

are enforceable in McMahon, the Court reiterated the strength

of the Arbitration Act:

The Arbitration Act thus establishes a “federal policy

favoring arbitration,” Moses H. Cone Memorial Hosp.

v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983), 103

S. Ct. 927, 941, 74 L. Ed.2d 765 (1983), requiring that

“we rigorously enforce agreements to arbitrate.” Dean

Witter Reynolds Inc. v. Byrd, 470 U.S. 213 (1985).

McMahon, 107 S. Ct. at 2337.

The Court in Mitsubishi Motors Corp. v. Soler Chrysler-

Plymouth, Inc., 473 U.S. 614 (1985), rejected the argument that

public policy concerns require that claims under the antitrust

laws be resolved solely in a judicial and not an arbitral forum.

The Court held that antitrust claims can be resolved by arbitra-

tion even though “[t Jhe treble-damages provision wielded by the

private litigant is a chief tool in the antitrust enforcement

scheme, posing a crucial deterrent to potential violators.” Mit-

subishi, 473 U.S. at 614. More importantly, the Court conclusive-

ly established that claims founded upon statutes can be

arbitrated:

The [Arbitration Act} provides no basis for disfavor-

ing agreements to arbitrate statutory claims by skew-

ing the otherwise hospitable inquiry into arbitrability.

Id. The Court in Dean Witter Reynolds Inc. v. Byrd, 470 US.

213 (1985), after scrutinizing the legislative history of the Ar-

bitration Act, held that its primary purpose was to ensure judicial

enforcement of privately made agreements to arbitrate, rather

than to promote the speedy and expeditious resolution of

disputes. Byrd, 470 U.S at 219.

All of these precedents taken together with McMahon should

indicate to the lower federal! courts that valid agreements to ar-

bitrate § 12(2) claims should be enforced pursuant to the Ar-

bitration Act. The continued refusal by many courts to enforce

valid agreements to arbitrate § 12(2) claims conflicts with the

rationale underlying Mc Mahon, as well as Congressional intent

underlying the Aribtration Act and continues to foster the type

of judicial hostility against arbitration agreements that this Court

and Congress has sought to eliminate

|W Je are well past the time when judicial suspicion

of the desirability of arbitration and the competence

of arbitral tribunals should inhibit enforcement of the

Act

MeMahon, 107 S. Ct. at 2337 (citing Mitsubishi, 473 U.S. at 627

The Court should grant certiorari to review and affirm the Fifth

Circuit's opinion and thereby ensure that the substantive law

it has created under the Arbitration Act in furtherance of Con.

gressional intent is no longer thwarted by courts relying on out-

dated precedent.

itl. The Conflict and Confusion Among the Lower Courts

Requires Early Resolution to word Increased Con-

gestion un the Lower Courts

As long as the enforceability of agreements to arbitrate § 12/2)

claims is not definitively resolved, the issue will continue to be

the subject of motion and appellate practice consuming inor-

dinate and unnecessary amounts of judicial resources. Each week

brings new filings of securities-related cases in addition to those

currently pending in the courts. Statistics compiled by the Ad-

ministrative Office of the United States Courts reveal that dur-

ing the twelve months ended June 30, 1987, a total of 2.544

“Securities, Commodities, and Exchanges” private civil actions

were filed in the federal district courts. See Annual Report of

the Director of the Administrative Office of the United States

Courts, Table C2 (1987). This flood of private securities lawsuits,

many raising claims subject to valid arbitration agreements will

continue to force the district courts to decide the enforceability

of such agreements and, perhaps, to decide claims that parties

had agreed to resolve by arbitration. The burden on the district

courts of leaving the issue of the enforceability of agreements

to arbitrate § 12(2) claims unresolved is not limited to deciding

numerous motions to compel arbitration. When the courts

within the Second and Third Circuits are added to the sub-

stantial number of courts that may choose to follow their

opinions in Chang and Osterneck as well as all of the federal

district and state courts that have already refused to enforce

agreements to arbitrate § 12(2) claims, see Appendix G, it is clear

that. unless this Court acts to resolve the issue quickly, a signifi-

cant number of otherwise arbitrable disputes will be litigated

in already overcrowded courts.

The Arbitration Act reflects a strong Congressional policy in

favor of reducing congestion in courts. When parties agree that

a claim should be resolved out of court and in a forum that this

Court has already ruled to be fair, impartial and adequate to

resolve statutory disputes, only explicit Congressional intent

should prohibit that agreement and require the expenditure of

the time and resources required by litigation in a judicial forum.

An express declaration by the Court that the rationale under!\-

ing its opinion in McMahon mandates enforcement ot

agreements to arbitrate § 12(2) claims will also eliminate another

source of waste — the maintenance of duplicative proceedings

in separate forums. As a result of this Court's decisions in Byrd

and McMahon, courts are required to compel arbitration of

claims asserted under § 10(b) of the 1934 Act, RICO and state

and common law. Those courts that refuse to compel a § 12(2)

claim asserted in the same lawsuit to arbitration require, and

will continue to require the parties to litigate the § 12(2) claim

in court while at the same time arbitrate the other claims. Con-

sidering that all of these claims are based on the same underly -

ing factual allegations, these types of parallel and duplicative

proceedings are extremely wasteful

Shearson respectfully submits that the Court should grant cer-

tiorari and resolve the conflict among the lower federal courts

by affirming the Fifth Circuit's decision rendering agreements

to arbitrate § 12(2) claims enforceable.

CONCLUSION

For all of the foregoing reasons. respondent Shearson respect-

fully suggests that the Court issue a writ of certiorari in this

case to review and affirm the decision of the United States Court

of Appeals for the Fifth Circuit.

DATED: New York, New York

October 20. 1988

Jerrrey L. Freep iN

Office of the General Counsel

Shearson Lehman Hutton Inc.

(212) 528-0650

Of Counsel

APPENDIX

APPENDIX A

STATUTORY AND REGULATORY

PROVISIONS INVOLVED

United States Arbitration Act

9 USC. § 2:

A written provision in any maritime transaction or

a contract evidencing a transaction involving com-

merce to settle by arbitration a controversy thereafter

arising out of such contract or transaction, or the

refusal to perform the whole or any part thereof, or

an agreement in writing to submit to arbitration an

existing controversy arising out of such a contract.

transaction. or refusal, shall be valid, irrevocable, and

enforceable, save upon such grounds as exist at law

or in equity for the revocation of any contract.

9 USC. § 3:

If any suit or proceeding be brought in any of the

courts of the United States upon any issue referable

to arbitration under an agreement in writing for such

arbitration, the court in which such suit is pending.

upon being satisfied that the issue involved in such

suit or proceeding is referable to arbitration under

such an agreement, shall or application of one of the

parties stay the trial of the action until such arbitra-

tion has been had in accordance with the terms of the

agreement, providing the applicant for the stay is not

in default in proceeding with such arbitration

Securities Act of 1933

Section 12(2), 15 U.S.C. § 7712):

Any person who

(2) offers or sells a security (whether or not

exempted by the provisions of section 77c of this

title. other than paragraph (2) of subsection (a)

of said section). by the use of anv means or in-

struments of transpartation or communication

in interstate commerce or of the mails, by means

ot a prospectus or oral communication. which

includes an untrue statement of a material fact

or omits to state a material fact necessary in order

to make the statements, in the light of the cir-

cumstances under which they were made. not

misleading (the purchaser not knowing of such

untruth or omission), and who shall not sustain

the burden of proof that he did not know, and

in the exeréise of reasonable care could not have

known, of such untruth or omission.

shall be liable to the person purchasing such security

trom him. who may sue either at law or in equity in

any court of competent jurisdiction, to recover the

consideration paid for such security with interest

thereon. less the amount of anv income received

thereon. upon the tender of such security, or for

damages if he no longer owns the security.

Section HM. 15 U.S.C. § T7n:

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

Section 22/a). 15 US.C. § Twa

The district courts of the United States and United

States courts of any Territory. shal! have jurisdiction

of offenses and violations under this subchapter and

under the rules and regulations promulgated by the

Commission in respect thereto. and. concurrent with

State and Territorial courts. of all suits in equity and

actions at law brought to enforce any liability or duty

created by this subchapter. Any such suit or action may

be brought in the district wherein the defendart is

found or is an inhabitant or transacts business. or in

the district where the offer or sale took place. if the

defendant participated therein, and process in such

cases may be served in any other district of which the

defendant is an inhabitant or wherever the defendant

may be found. Judgments and decrees so rendered shall

be subject to review as provided in sections 1234. 1291.

1292. and 1294 of Title 28. No case arising under this

subchapter and brought in any State court of compe-

tent jurisdiction shall be removed to any court of the

United States. No costs shall be assessed for or against

the Commission in anv proceeding under this sub-

chapter brought by or against it in the Supreme Court

or such other courts.

Securities Exchange Act of 1994

Section 10, 15 US.C. § T8jib):

It shall be unlawful for any person, directly or in-

directly. by the use of anv means or instrumentality

of interstate commerce or of the mails. or of amy facility

of anv national securities exchange —

(b) To use or employ, in connection with the pur-

chase or sale of anv security registered on a national

securities ewchange or env security not so registered.

am manipulative or deceptive device or contrivance

in contravention of such rules and regulations as the

Commission may presonbe as necessar or appropriate

in the public interest or for the protection of investors

)

Section 27, 15 U.S.C. § 7S8aa:

The district courts of the United States and the United

States courts of any Territory or other place subject to

the jurisdiction of the United States shall have exclusive

jurisdiction of violations of this chapter or the rules

and regulations thereunder, and of all suits in equity

and actions at law brought to enforce anv liability or

duty created by this chapter or the rules and regula-

tions thereunder. Any criminal proceeding ma\ be

brought in the district wherein any act or transaction

constituting the violation occurred. Any suit or action

to enforce any liability or duty created by this chapter

or rules and regulations thereunder. or to enjoin anv

violation of such chapter or rules and regulations. ma\

be brought in any such district or in the district wherein

the detendant is found or is an inhabitant or transacts

business, and process in such cases may be served in

any other district of which the defendant is an inhabi-

tant or wherever the defendant may be found.

Judgments and decrees so rendered shall be subject to

review as provided in sections 1254, 1291, 1292. and

1294 of Title 28. No costs shall be assessed for or against

the Commission in any proceeding under this chapter

brought by or against it in the Supreme Court or such

other courts.

Section 29(a), 15 U.S.C. § 78 cea):

Any condition, stipulation. or provision binding anv

person to waive compliance with any provision of this

chapter or of any rule or regulation thereunder. or of

any rule or an exchange required thereby shall be void

APPENDIX B

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

Nos. 87-2888, 87-2889,

87-2890, 87-2891

OPELIA RODRIGUEZ DE QUIJAS, ET AL..,

Plaintiffs-Appellees.

— Versus —

SHEARSON/LEHMAN BROTHERS, INC..,

{kia SHEARSON/AMERICAN EXPRESS, INC..,

and JON GRADY DEATON,

Defendants-Appellants.

i) ie fF =. Be oa Oe Oe

MARY GRACE NORMAN,

Plaintiff-Appellee.

— versus —

SHEARSON/LEHMAN BROTHERS, INC., f/kia

SHEARSON/AMERICAN EXPRESS, INC., ETC., ET AL..

Defendants-Appellants.

2. = ee ee eS Se €

ADELINA TRAPERO,.

Plaintiff-Appellee,

— versus —

SHEARSON/LEHMAN BROTHERS, INC..

f' kia SHEARSON/AMERICAN EXPRESS, INC..,

It's Successors and Assigns, and

JON GRADY DEATON, Jointly and Severally,

Defendants-Appellants.

GENE GRIFFIN and GERTRUD GRIFFIN,

Plaintiffs-Appellees,

— versus —

SHEARSON/LEHMAN BROTHERS, INC.,

f kia SHEARSON/AMERICAN EXPRESS, INC., ETC., ET

AL.,

. Defendants-Appellants.

APPEALS FROM THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF TEXAS

Betore THORNBERRY, WILLIAMS and DAVIS, Circuit

Judges.

JERRE S. WILLIAMS, Circuit Judge:

In these consolidated cases we confront the issue of whether

claims brought under § 12(2) of the Securities Act of 1933. 15

U.S.C. § 771(2) (1982), are subject to predispute arbitration

agreements. This issue arises in the wake of Shearson/American

Express, Inc. v. McMahon, ___ U.S. ___., 107 S.Ct. 2332,

L.Ed.2d ___. (1987), which enforced a predispute agreement

to arbitrate § 10(b) claims under the Securities Exchange Act

of 1934, 15 U.S.C. § 78j(b) (1982). We find § 12(2) claims to be

arbitrable, notwithstanding the earlier precedent of Wilco v.

Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1958).

Appellees are individual investors in Brownsville, Texas, who

suffered financial losses as the alleged result of unauthorized,

fraudulent transactions in securities. Approximately $190,000

was invested by the Rodriguez De Quijas family; $38,000 by

Mary Grace Norman; $100,000 by Adelina Trapero; and $80,000

by Gene and Gertrud Griffin. They sued appellants Jon Grady

Deaton, the agent in charge of the accounts, and Shearson’

American Express, Inc. (“Shearson”), pleading violations of

A-6

various state and federal laws! Appellant Shearson moved to

compel arbitration pursuant to an arbitration clause contain-

ed in the customer agreements signed by each appellee,’ and

in accordance with the Federal Arbitration Act.’

' Their common claims include violations of §§ 12(2) and 17(a) of the 1933

Securities Act, and §§ 10(b), 15(c)(1), 15(c)(2) of the Securities Exchange Act

of 1934; civil RICO violations consisting of mail and wire fraud under 18 U.S.C.

§§ 1341, 1343, and 1961 (1982); securities fraud in violation of TEX. REV.

CIV. STAT. ANN. § 581-33(A)(2) (Vernon 1964); violations of the Texas Decep-

tive Trade Practices Act, TEX. BUS. and COMM. CODE ANN. § 1746 et seq.

(Vernon 1986); and common law breach of contract, fraud, and misrepresen-

tation. The cistrict court properly dismissed appellees’ Securities Act § 17(a)

claims under Fed.R.Civ.P. 12(b)(6), because this Court has held that there is

no such private cause of action. Landry v. All American Assurance Co., 685

F.2d 381 (5th Cir. 1982).

* Paragraph 13 of the Customer's Agreement provides:

Unless unenforceable due to federal or state law, any controversy

arising out of or relating to my accounts, the transactions with

vou for me, or to this agreement or the breach thereof, shall be

settled by arbitration in accordance with the rules then in effect

of the National Association of Securities Dealers, Inc., or the

Boards of Directors of the New York Stock Exchange, Inc. and or

the American Stock Exchange, Inc. as I may elect. If | do not make

such election by registered mail addressed to you at your main

office within five (5) days after demand by you that I make such

election then you may make such election. Judgment upon any

awerd ordered by the arbitrators may be entered in any court hav-

ing jurisdiction thereof.

' The Federal Arbitration Act, 9 U.S.C. § 1 et. seq. (1982) (“FAA”), mandates

enforcement of agreements to arbitrate. E.g.. Moses H. Cone Memorial Hosp.

v. Mercury Constr. Corp., 460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983).

The FAA states in pertinent part:

§ 2. Validity, irrevocability, and enforcement of agreements to

arbitrate

A written provision in any maritime transaction or a contract

evidencing a transaction involving commerce to settle by arbitra-

tion on a controversy thereafter arising out of such contract or

transaction, or the refusal to perform the whole or any part,

thereof, or an agreement in writing to submit to arbitration an

(footnote continued )

The district court ordered arbitration of all claims except for the

federal securities claims.

The district court correctly followed the Supreme Court's deci-

sion in Wilco v. Swan, supra, which clearly set out the invalidi-

ty of agreements to arbitrate § 12(2) claims under the Securities

Act. And until recently, Wilco was interpreted in this Circuit as

barring arbitration of Securities Exchange Act claims as well. E.g.

Mayaja, Inc. v. Bodkin, 803 F.2d 157 (5th Cir. 1986), cert. denied

in part____ U.S. ____, 1075 S.Ct. 3210, 96 L.Ed.2d __, vacated

in part, ____ U.S. ___, 107 S.Ct. 3205, 96 L.Ed.2d 692 (1987):

Bustamonte v. Rotan Mosle, Inc., 802 F.2d 815 (5th Cir. 1986):

King v. Drexel Burnham Lambert, Inc., 796 F.2d 59 (5th Cir.

1986) vacated, ___ U.S. ___., 107 S.Ct. 3203, 96 L.Ed.2d 690

(1987). But the Supreme Court with Shearson/American Express,

Inc. v. McMahon, supra, established the arbitrability of Securities

Exchange Act claims. Appellant Shearson asserts this decision ef-

a overrules Wilco and allows arbitration of Securities Act

claims.

Appellees do not contest the arbitrability of their Exchange

Act claims following McMahon. They argue only that Wilco re-

mains good law and prohibits arbitration of claims brought under

§ 12(2) of the Securities Act. Appellees argue further that even

if § 12(2) claims are arbitrable, the parties lacked the requisite

intent to agree to arbitration. We address these claims.

II.

The Supreme Court in McMahon, enforced a predispute agree-

ment to arbitrate claims brought under § 10(b) of the 1934 Ex-

change Act. Supra at ____, 107 S.Ct. at 2343. In doing so, it refus-

ed under the 1934 Act to follow the reasoning of Wilco v. Swan.

which invalidated predispute agreements to arbitrate 1933 Act

(footnote continued)

existing controversy arising out of such a contract, transaction, or

refusal, shall be valid, irrevocable, and enforceable, save upon such

grounds as exist at law or in equity for the revocation of any

contract.

A-S

———

—_—_—_—_—_——————————— ee

claims. McMahon, supra, at 538, 74 S.Ct. at 188-89. The

McMahon majority opinion does not expressly overrule Wilco;

the precise issue of the arbitrability of § 12(2) claims was not

before the court.* Nevertheless, the reasoning in McMahon com-

pletely undermined Wilco, as this Court noted in Noble v. Drexel

Burnham Lambert, Inc., 823 F.2d 849, 850 n.3. (5th Cir.

1987)(“McMahon undercuts every aspect of Wilco v. Swan. .

_: a formal overruling of Wilco, appears inevitable — or, perhaps,

superfluous.”).

The basic premise of Wilco is that a predispute agreement to

arbitrate § 12(2) claims is invalid by virtue of § 14 of the Securities

Act, 15 U.S.C. § 77n. (1982). Secton 14 voids any stipulation “to

waive compliance with any provision” of the Securities Act. The

Wilco court held the jurisdictional provision of the Securities Act

to be the type of non-waivable provision contemplated in § 14.

Wilco, supra, 346 U.S. at 434, 74 S.Ct. at 186. The Supreme Court

states in McMahon, however, that § 29(a) of the Exchange Act,

15 U.S.C. § 78ce(a)(1982), which is a non-waiver provision vir-

tually identical to § 14 of the Securities Act, does not bar

predispute arbitration agreements. McMahon, supra, ___ U.S.

at , 107 S.Ct. at 2338-39.°

* The opinion states: “While stare decisis concerns may counsel against upset-

ting Wilco's contrary conclusion under the Security Act, we refuse to extend

Wilco’s reasoning to the Exchange Act. . . ” McMahon, supra ____ U.S. at _.

107 S.Ct. at 2341.

‘ The McMahon court reasons that § 29(a) voids only those agreements which

waive “compliance” with provisions of the Exchange Act, and that because the

jurisdictional provision of the Exchange Act does not impose substantive obliga-

tions with which to comply, nothing prevents its waiver. Supra, at ___, 107

S.Ct. at 2338. Section 27, the jurisdictional provision of the Exchange Act, 15

U.S.C. § 78aa (1982), is similar to the jurisdictional provision of the Securities

Act. Section 27 of the Exchange Act states in part:

The district courts of the United States . . . shall have exclusive

jurisdiction of violations of this title or the rules and regulations

thereunder, and of all suits in equity and actions at law brought

to enfore any liability or duty created by this title or the rules and

regulations thereunder.

(footnote continued )

The Supreme Court reconciles McMahon with Wilco by

characterizing the 1953 opinion as outdated in its bias against

arbitration. The McMahon majority opinion reinterprets Wilco

as follows: “Wilco must be read as barring waiver of a judicial

forum only where arbitration is inadequate to protect the substan-

tive rights at issue.” McMahon, supra, at 107 S.Ct. at 2339

As McMahon makes clear, the Supreme Court no longer con-

siders arbitration inadequate to protect substantive rights. Id

at ___., 107 S.Ct. at 2340-41. For this proposition, the court relied

upon Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth Inc

473 US. 614, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985); Dean Wit.

ter Reynolds, Inc. v. Byrd, 470 U.S. 213, 105 S.Ct. 1238. 84

L.Ed.2d 158 (1985); Southland Corp. v. Keating, 465 US. 1. 104

S.Ct. 852, 79 L.Ed.2d 1 (1984); Moses H. Cone Memorial Hospital

v. Mercury Construction Corp., 460 US. 1, 103 S.Ct. 927, 74

L.Ed.2d 765 (1983); and Scherk v. Alberto-Culver Co.. 417 US.

506, 94 S.Ct. 2449, 41 L.Ed.2d 270 (1974). Advances in arbitra-

tion noted by the Supreme Court, particularly the broad over-

sight authority of the Securities Exchange Commission

McMahon, supra, at ___, 107 S.Ct. at 2341, apply equally to

the protection of substantive rights under both the iti

and the Exchange Act. . ee

Appellees argue, however, that con i i

ppellees ar q gressional intent is th

crucial distinction between the two Acts. They claim that ey

gress, by preserving Wilco in the 1975 revisions of the Exchange

Act, manifested its intent that at least § 12(2) claims should

(footnote continued)

Compare § 22(a), the jurisdictional si

a , provision of the Sec =

(7 (a)(1982), which reads as follows: es Ant, © §

| The district courts of the United States . . . shall have jurisdic-

tion .. . Concurrent with State and Territorial courts, of all suits

in equity and actions at law brought to enforce any liability or duty

created by this subchapter. Any such suit or action may be brought

in the district wherein the defendant is found or is an inhabitant

or transacts business, or in the district where the sale took place,

if the defendant participated therein, and process in such cases may

be served in any other district of which the defendant is an inhabi-

tant or wherever the defendant may be found.

A-10

remain non-arbitrable.* We find it implausible that Congress in-

tended to prohibit arbitration of Securities Act claims but intend-

ed to allow courts to determine the arbitrability of Exchange Act

claims.’ Similarly fine distinctions between the two Acts have been

presented throughout the course of the debate over securities ar-

bitration. See, e.g., McMahon, supra, at ___, 107 S.Ct. at 2347

n.n.1-2 (Blackmun J., dissenting). We do not, however, find these

asserted distinctions controlling on the issue of arbitration. The

Supreme Court opinion in McMahon, which binds us here, turns

solely on the adequacy of arbitration to resolve securities disputes.

It does not distinguish between the Exchange Act and the

Securities Act. Furthermore, it has been the position of this Court

that, for the purposes of arbitration, similarities between the

Securities Act and the Exchange Act outweigh any differences

between them. Sibley v. Tandy Corp., 543 F.2d 540, 543 n.3

(1976). We thus follow the reasoning of the Supreme Court in

McMahon and our own decision in Noble which lead lirectly

to the obsolescence of Wilco and the arbitrability of Securities

Act § 12(2) claims.

ITI.

Appellees claim that even if § 12(2) claims are arbitrable, the

intent to agree to arbitration was lacking in their cases. At the

time the agreements were signed, claim appellees, Securities Act

claims were controlled by Wilco and clearly were not subject to

* The Conference Report accompanying the amendments to § 28(b) of the Ex-

change Act, 15 U.S.C. § 78bb(b), reads as follows:

It was the clear understanding of the conferees that this amend-

ment did not change existing law, as articulated in Wilco v. Swan,

346 U.S. 427 (1953), concerning the effect of arbitration proceedings

provisions in agreements entered into by persons dealing with

members and participants of self-regulatory organizations.

H. R. Conf. Rep. No. 229, 94th Cong., Ist Sess., 111 (1975).

’ The Supreme Court states in McMahon, supra, at —__, 107 §.Ci. at 2343:

“Hence, the Wilco issue was left to the courts: it was unaffected by the amend-

ment to § 28(b).”

A-ll

arbitration. We cannot conclude that appellees lacked the intent

to agree to arbitration because, at the time the customer

agreements were signed, courts refused to honor clauses compel-

ling arbitration of securities claims. At the time the contracts were

signed, the same circumstances existed barring arbitration of Ex-

change Act claims. E.g. Sibley, supra, at 543. Appellees cannot

now contend that they lacked the intent to arbitrate their Ex-

change Act claims in view of the Court’s holding in McMahon.

Neither the Supreme Court nor this Circuit considered that the

earlier lack of authorization to arbitrate was an obstacle in

McMahon, supra or Noble, supra. Both cases ordered arbitra-

tion of Exchange Act claims under analogous circumstances.

Authority no longer exists to deny arbitration of the § 12(2)

claims as the parties agreed in their contracts. Arbitration must

be directed both as to the Securities Act claims and Exchange

Act claims. That portion of the judgment of the district court

which denied directing arbitration of the Securities Act § 12(2)

claims is

REVERSED.

Clerk, U.S. Court of Appeals, Fifth Circuit

By /s/ Sarah L. Holmes

Deputy

New Orleans, Louisiana

OCT 7 1988

A-12

APPENDIX C

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

Nos. 87-2888, 87-2889,

87-2890 & 87-2891

OPELIA RODRIGUEZ De QUIJAS, et al.,

Plaintiffs-Appellees,

SHEARSON/LEHMAN BROTHERS, INC.,

f/kia SHEARSON/AMERICAN EXPRESS, INC.,

and JON GRADY DEATON,

Defendants-Appellants.

MARY GRACE NORMAN,

Plaintiff-Appellee.

SHEARSON/LEHMAN BROTHERS, INC., f/k/a

SHEARSON/AMERICAN EXPRESS, INC., ete., et al.,

Defendants-Appellants.

ADELINA TRAPERO,

Plaintiff-Appellee,

SHEARSON/LEHMAN BROTHERS, INC.,

f/kia SHEARSON/AMERICAN EXPRESS, INC.,

Its Successors and Assigns, and

JON GRADY DEATON, Jointly and Severally,

Defendants-Appellants.

A-13

GENE GRIFFIN and GERTRUD GRIFFIN,

Plaintiffs-Appellees,

SHEARSON/LEHMAN BROTHERS, INC.,

t/k/a SHEARSON/AMERICAN EXPRESS, INC.. etc.. et al..

Defendants-Appellants.

APPEALS FROM THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF TEXAS

ON PETITION FOR REHEARING

(June 22, 1988)

Before THORNBERRY, WILLIAMS and DAVIS.

Circuit Judges.

PER CURIAM:

IT IS ORDERED that the petition for rehearing filed in the

— entitled ana numbered cause be and the same is hereby

enied.

ENTERED FOR THE COURT:

United States Circuit Judge

A-14

APPENDIX D

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF TEXAS

BROWNSVILLE DIVISION

OFELIA RODRIGUEZ DE QUIJAS,

ET AL.

VS. C. A. NO.

B-85-360

SHEARSON/AMERICAN EXPRESS, INC.

Its Successors and Assigns, and

JON GRADY DEATON, Jointly and

Severally

MEMORANDUM AND ORDER

FACTS

In August of 1985, Plaintiffs Ofelia Rodriguez de Quijas, et

al. brought suit against Defendants Shearson/American Express

and Jon Grady Deaton based upon a series of transactions in-

volving the financial management of separate accounts total-

ling approximately $190,000. Plaintiffs allege that Defendant

Deaton, the manager of the discretionary account with Shear-

son, fraudulently induced the Plaintiffs to enter into the invest-

ment contract. Additionally, it is alleged that Defendants con-

ducted a number of unauthorized and/or fraudulent transac-

tions and misrepresented to Plaintiffs the nature of these trans-

actions. These transactions, it is asserted, were designed to

generate commissions and profits for Defendants and resulted

in staggering losses for the Plaintiffs. Plaintiffs bring this ac-

tion under sections 12(2) and 17(a) of the 1933 Federal Securities

Act and sections 10(b) (and rule 106-5 thereunder), 15(c)(1).

15(c)(2) of the Securities Exchar ze Act of 1934 (and rules 15cl-2.,

15cl-4, 15cl-6, thereunder). Plaintiffs also assert civil RICO

claims based upon predicate acts of mail and wire fraud, in

violation of 18 U.S.C. § 1341, § 1343, and § 1961, as well as acts

of securities fraud in violation of TEX. CIV. ART. 581-33(A)(2),

claims under the Texas Deceptive Trade Practices Act, TEX. BUS.

A-15

& COM. CODE ANN. § 17.46 et seg. (Vernon 1986), and com-

mon law breach of contract, fraud, and misrepresentation.

Defendants have filed a Motion to Compel Arbitration of all

the claims arising out of transactions in question pursuant to

an arbitration clause in the investment contracts signed by the

Plaintiffs. The Court must now decide which of the claims must

be arbitrated.

A) The Arbitration Clause

The question whether arbitration is contréiling is determin-

ed on the basis of the existence of an arbitration clause that on

its face appears broad enough to encompass the parties’ claims.

Mar-Len of LA., Inc. ». Parsons-Gilbane, 773 F.2d 633, 635 (5th

Cir. 1985); Commerce Park at DFW Freeport v. Mardian Con-

struction Co., 729 F.2d 334, 338 (5th Cir. 1984). The Fifth Cir-

cuit in Commerce Park reasoned that when confronted with an

arbitration clause, a presumption arises that arbitration should

not be denied “unless it can be said with positive assurance that

an arbitration clause is not susceptible of an interpretation which

would cover the dispute at issue.” Id. quoting Wick v. Atlantic

Marine, Inc., 605 F.2d 166, 168 (5th Cir. 1979). Thus, as a general

rule, whenever the scope of an arbitration clause is in question,

the court should construe the clause in favor of arbitration. United

Steelworkers of America v. Warrior & Gulf Navigational Co.,

363 U.S. 574, 583, 80 S.Ct. 1347, 1353, 4 L.Ed.2d 1409 (1960).

The Court, after reviewing the arbitration clause in this case,

is of the opinion that it is more than sufficiently broad to cover

all the claims involved in this cause of action:

' The arbitration agreement in paragraph 13 reads as follows:

“Unless unenforceable due to federal or state law, any controver-

sy arising out of or relating to my accounts, to transactions with

you for me or to this agreement or the breach thereof, shall be

settled by arbitration in accordance with the rules then in effect,

of the National Association of Securities Dealers, Inc. as I may

elect. If I do not make my election by registered mail addressed

to you at your main office within 5 days after demand by you

that I make such election, then you may make such election. Judg-

ment upon any award rendered by the arbitration may be entered

in any court having jurisdiction thereof.”

A-16

The Plaintiffs contend that the arbitration clause was

fraudulently induced and thus cannot control the disposition

of this case. In Prima Paint Corp. v. Flood & Conklin Manufac-

turing Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967),

the United States Supreme Court dealt with the issue of whether

fraudulent inducement can be brought before an arbitrator in-

stead of district court. The Supreme Court reasoned that:

If the claim is fraud in the inducement of the arbitra-

tion clause itself —an issue which goes to the ‘mak-

ing’ of the agreement to arbitrate — the federal court

may proceed to adjudicate it. But the statutory

language does not permit the federal court to consider

claims of fraud in the inducement generally ... [A]

federal court may consider only issues relating to the

making and performance of the agreement to

arbitrate.

Id. at 403-04, 87 S.Ct. at 1805-06.

The Seventh Circuit in Schacht v. Beacon Ins. Co., 742 F.2d

386, 389 (7th Cir. 1984), reaffirmed this position and noted that

only when the claimed contractual invalidity goes to the arbitra-

tion clause itself does the court decide the existence of a con-

tractual provision. See also Mar-Len of LA., Inc. v. Parsons-

Gilbane, 773 F.2d 633 (1985) (alleging fraud in the inducement

of a modification to the original contract).

Although Plaintiffs, in their brief in Opposition to Motions

to Dismiss and Compel Arbitration, purport to allege only fraud

in the inducement of the arbitration clause itself, the Court sees

nothing before it which would lead the Court to believe the alleg-

ed fraud in the inducement applied solely to the arbitration

clause. To the contrary, in all the Plaintiffs’ Affidavits in Op-

position to Defendants’ Motion to Stay, they stated that the “con-

tracts” were not explained to them, and that they could not

understand the technical Shearson “contract”; not just the ar-

bitration clause. The Court believes that Plaintiffs cannot avoid

the application of Prima Paint by simply alleging the fraud on

the clause itself when the substance of the complaint reveals

fraud on the whole contract. Accordingly, Plaintiffs’ claim of

fraud in the inducement must be resolved in the arbitral forum.

A-i7

B) The Securities Act Claims

In Wilco v. Swan, 346 U.S. 427, 74 S.Ct. 182. 98 L.Ed. 168

(1958), the United States Supreme Court held that predispute

agreements to arbitrate claims that arise under Securities Act

of 1933 are not enforceable. The Court pointed to language in

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

declared “void” any “stipulation” waiving compliance with any

“provision” of the Securities Act. The Supreme Court thus held

that an agreement to arbitrate amounted to a stipulation waiving

the right to seek a judicial remedy, and was therefore void. 346

U.S. at 434-435. Subsequent court decisions have preserved the

vitality of this Supreme Court holding. See Dean Witter

Reynolds, Inc. v. Byrd, 105 S.Ct. 1238, 1240 n.1 (1985); Merrill

Lynch, Pierce, Fenner & Smith, Inc. v. Moore, 590 F.2d 823.

826-827 (10th Cir. 1979); Weissbuch v. Merrill Lynch, Pierce,

Fenner & Smith, Inc., 558 F.2d 831 (7th Cir. 1977). According-

ly, the 1933 Securities Act claims cannot be arbitrated.

Although Defendants would fail on the 1933 Act claim, they

would assert that the claims arising under § 10(b) of the

Securities Exchange Act of 1934 are distinguishable and should

not be governed by the Wilco v. Swan holding. In Scherk v.

Alberto Culvert Company, 417 U.S. 506, 94 S.Ct. 2449. 41

L.Ed.2d 270 (1974), the Supreme Court failed to extend Wilco

to § 10(b) claims. The Court stated that the provisions of the

1934 Act differed from those of the 1933 Act and thus the reason-

ing ot Wilco was inapplicable. Recently, in Dean Witter

Reynolds, Inc. v. Byrd, 105 S.Ct. 1238 (1985), Justice White.

in his concurrence, resurfaced the apparent difference between

the two Acts but the Supreme Court's majority declined to direct-

ly resolve the question.

* The Supreme Court questioned the applicability of Wilco to a claim arising

under § 10(b) of the Securities Exchange Act of 1934 because unlike the 1933

Act, the 1934 Act did not expressly give rise to a private cause of action. Addi-

tionally, since a cause of action under § 10(b) and Rule 106-5 is implied rather

than express, the “waiver” provision under the 1933 Act would not be literal-

ly applicable.

A-18

Notwithstanding the doubts raised by the Supreme Court,

the case law in the Fifth Circuit is clear on the issue of the ar-

bitrability of the 1934 Act. The Court has consistently held that

Congress intended these claims to be non-arbitrable. See, e.g.,

Mayaja, Inc. v. Bodkin, et al., No. 85-2762, slip op. 671, 679

(5th Cir. October 17, 1986); Bustamante v. Rotan Mosle, Inc.,

No. 86-2300, slip op. 339, 340 (5th Cir. October 17, 1986);

Smokey Greenhaw Cotton Co. v. Merrill Lunch, Pierce, Fen-

ner & Smith, Inc., 785 F.2d 1274, 1275 n.1 (5th Cir. 1986); Sibley

v. Tandy Corp., 543 F.2d 540, 543 (5th Cir. 1976), cert. denied,

434 U.S. 824 (1977). Basing their decisions upon an extension

of the Supreme Court's analysis in Wilco v. Swan, these opi-

nions adhered to the view that the similarities between the 1933

Securities Act and the 1934 Exchange Act far outweighed any

differences that might exist.

Additionally, Defendants would assert that the recent Supreme

Court decision in Mitsubishi Motors Corp. v. Solar Chrysler-

Plymouth, Inc., 105 S.Ct. 3346 (1985) would diminish the vitality

of its holding in Wilco and implicitly overrule the established

precedent in the Fifth Circuit. Presented with this argument

in Mayaja, Inc. v. Bodkin, et al., No. 85-2762, slip. op. 671 (5th

Cir. October 24, 1986), the Fifth Circuit declined to give it much

consideration. Instead, it elected to follow the established prece-

dent in the Circuit and held, absent a clearer statement from

the Supreme Court on the issue, that the 1934 Exchange Act

claims are not arbitrable. Jd. at 679. This Court must follow

the precedent set forth by the Fifth Circuit and rule that both

the 1933 Securities Act claims and the 1934 Exchange Act claims

are not arbitrable. Therefore, solely with regard to these claims,

the Defendant’s Motion to Compel Arbitration is hereby

DENIED.

C) The RICO Claims

The question of whether private RICO claims may be ar-

bitrated is the subject of a split of authority among the Circuit

Courts. The Second Circuit, in McMahon v. Shearson/American

Express, Inc., 788 F.2d 94 (2d Cir. 1986), cert. granted, 55

U.S.L.W. 3197 (U.S. Oct. 6, 1986) (86-44), held that no RICO

claims were ever arbitrable, regardless of the predicate offenses

A-19

asserted. The Third Circuit, in contrast, held in Jacobson v. Mer-

rill Lynch, Pierce, Fenner, & Smith, Inc., 797 F.2d 1197 (3rd

Cir. 1986) that RICO claims may be arbitrated when the of-

fenses predicate to the required “pattern of racketeering activi-

ty” are arbitrable.’ The Fifth Circuit, until its recent decision

in Mayaja, Inc. v. Bodkin, No. 85-2762, slip op. 671 (5th Cir.

October 24, 1986), had not expresslv ruled on the issue.* In the

decision, the Fifth Circuit held that private RICO claims must

be submitted to arbitration if a valid clause encompasses the

claims. Id.

In order for a statutory claim like the civil RICO statute to

overcome the overriding federal policy in favor of arbitration.

it is necessary to show that Congress intended the statutory claim

to be non-arbitrable. Moses H. Cone Memorial Hosp. v. Mer-

cury Constr. Corp., 460 U.S. 1, 24-25 (1983). In reaching its deci-

sion in Mayaja, Inc., the Panel relied on the legislative history

of the civil RICO statute; specifically, section 1964(c), the treble

damages provision. Finding nothing in the express intent of Con-

gress, the Panel examined the underlying purpose of the statute

to determine whether Congress implicitly intended that all such

claims be non-arbitrable. The Panel then relied on the Supreme

Court's examination in Mitsubishi of section 4 of the Clayton

Act.* 105 S.Ct. at 3358-60. The Panel agreed with the Supreme

' Therefore, if the Third Circuit were controlling, and the predicate offenses

alleged were separate acts of wire and mail fraud, the RICO claims founded

under 18 U.S.C. § 1341 and § 1342 would be arbitrable. If, however, the

Securities Act violations were the predicate offenses alleged, the claims would

be non-arbitrable pursuant to Wilco v. Swan and subsequent decisions. Supra.

*In Smokey Greenhaw Cotton, Co. v. Merrill Lynch, Pierce, Fenner & Smith

Inc., 785 F.2d 1274, 1280-82 (5th Cir. 1986), the Fifth Circuit addressed, in

dicta, the issue of arbitrability of private RICO claims. On petition for rehear-

ing en banc, the Court noted that its reasoning was called into question by

Mitsubishi. The Court thereafter amended its opinion “to refuse to decide the

arbitrability vel non of the plaintiff's RICO claim.” Id. at 1282.

* The Panel reasoned that since the legislative history of section 1964(c) made

repeated references to section 4 of the Clayton Act, these references to the

Clayton Act could be adopted by reference to the purposes of the Clayton

Act's treble damages provision

A-20

Court's assessment that the treble damages provision served a

crucial deterrent function. In citing Mitsubishi at 3359, however,

they found that the “action .. . seeks primarily to enable an in-

jured competitor to gain compensation for that injury.” Therefore,

since the deterrent function was secondary to the compensatory

function, the statute would continue to serve both its remeciial

and deterrent functions “so long as the prospective litigant ef-

fectively may vindicate its statutory cause of action in the ar-

bitral forum.” Mayaja, Inc. v. Bodkin, No. 85-2762, slip op. 671

(5th Cir. October 24, 1986) citing Mitsubishi, 105 S.Ct. at 3359-60.

Having paralleled Mitsubishi's analysis, the Panel found that the

congressional purposes of compensation and deterrence underly-

ing section 1964(c) may be fulfilled by arbitration of the RICO

claims. Thus, there was no evidence that Congress implied that

all RICO claims were non-arbitrable.

Following the precedent set forth in Mayaja, Inc., the Court

accordingly rules that Plaintiffs’ RICO claims are arbitrable and

that the Defendants’ Motion to Compel Arbitration of these

claims is hereby GRANTED.

D) The Deceptive Trade Practices Act Claim

There is no Texas case law authority which would definitive-

ly determine whether Plaintiffs’ case under the Texas Decep-

tive Trade Practices Act can or cannot be arbitrated. However,

in Ommani v. Doctor’s Associates, Inc., 789 F.2d 298, 300 (5th

Cir. 1986), the Fifth Circuit stated that enforcement of an other-

wise valid arbitration clause cannot be denied solely by virtue

of the suggestion that a claim is also based on the Texas Decep-

tive Trade Practices Act. The Panel cited the U.S. Supreme Court

decision in Southland Corp. v. Keating, 465 U.S. 1, 104 S.Ct.

852, 79 L.Ed.2d 1 (1984) for the proposition that states may not

thwart the strong federal policy favoring arbitration. Although

these statements are rather broad, the Court is persuaded that

the Deceptive Trade claims can be arbitrated under the Federal

Arbitration Act. Absent any clear Texas authority to the con-

trary, this Court is compelled to do so.’ See also Marley v.

* Plaintiffs assert the novel argument that the contract provision in this case

is self-limiting and the federal preemption doctrine would not be controlling.

(footnote continued )

A-21

Drexel Burnham, Inc., 566 F.Supp. 333 (N.D. Tex. 1983).

Therefore, the Defendants’ Motion to Compel Arbitration of the

Texas Deceptive Trade Practices Act is hereby GRANTED.

E) Motion To Dismiss The Section 17(a) Claims

Although the Supreme Court has not ruled on the issue, the

Fifth Circuit has clearly held that there is no private cause of

action under Section 17(a) of the Securities Exchange Act of 1933.

Landry v. All American Assurance Company, 688 F.2d 381 (5th

Cir. 1982. The Court therefore concludes that Defendants’ Mo-

tion to Dismiss under Rule 12(b)(6) (failure to state a claim upon

which relief can be granted) is hereby GRANTED and the claims

under § 17 be DISMISSED.

F) The Stay Issue

The Court hereby ORDERS that the non-arbitrable Securities

Act claims proceed under this cause of action and those claims

will not be stayed pending resolution of the arbitrable claims.

See Dean Witter Reynolds, Inc. v. Byrd, 105 S.Ct. at 1245 (1985).

Therefore, the Defendants’ Motion to Stay Pending Arbitration

will be DENIED with-tegard to the Securities Act claims. As

only the Securities Act claims remain before this Court, all other

claims asserted by Plaintiffs will be presented in arbitration.

It is so ORDERED.

DONE at Brownsville, Texas this 18th day of November,

1986.

s' Filemon B. Vela

FILEMON B. VELA

United States District Judge

(footnote continued )

The relevant provision states: “Unless unenforceable due to federal or state

law, any controversy shall be settled by arbitration.” Even if the arbitra-

tion would be unenforceable under Texas law, the Court cannot concede that

the provisions in the language of this contract would override the Federal Ar

bitration Act.

A-22

APPENDIX E

IN THE UNITED STATES DISTRICT COURT FOR

THE SOUTHERN DISTRICT OF TEXAS

BROWNSVILLE DIVISION

OFELIA RODRIGUEZ DE QUIJAS,

JOSE LUIS RODRIGUEZ, JOSE LUIS

RODRIGUEZ MORENO, MARTHA

LETICIA RODRIGUEZ MORENO,

LUIS ALEJANDRO RODRIGUEZ

MORENO AND BEATRIZ

RODRIGUEZ :

B-85-360

VS.

(

Plaintiffs (

(

SHEARSON/AMERICAN EXPRESS, (

INC., ITS SUCCESSORS AND ASSIGNS (|

AND JON GRADY DEATON (

(

Defendants

ORDER

CAME ON TO BE CONSIDERED the motion of Defendant

Shearson/American Express to compel all of Plaintiffs’ causes of

action to be subjected to arbitration, and the Court, having

considered same, is of the opinion that all of Plaintiffs’ 1934

Securities Act Claims against Shearson/American Express should

be submitted to arbitration but that Plaintiffs’ claims under §12(2)

of the 1933 Securities Act be litigated in Federal District Court

and that a default judgment should be entered against Defendant

Deaton, and accordingly, it is ORDERED, ADJUDGED AND

DECREED as follows:

l. That Plaintiffs’ 1933 Securities Act §12(2) claims remain

in Federal District Court;

A-23

. That all other of Plaintiffs’ claims against Shearson/

American Express be submitted to arbitration:

3. That Defendant Shearson/American Express submit the

yr way claims to the appropriate arbitral forum within

ays;

4. That default judgment be entered against Defendant Jon

Grady Deaton and that a hearing be held on damages

on the 3lst day of July, 1987 at 9:00 o'clock A.M.:

. That all other relief not expressly granted herein, be

denied.

Signed for entry this 9th day of July, 1987.

JUDGE PRESIDING

TRUE COPY I CERTIFY

ATTEST:

JESSE E. CLARK, Clerk

Deputy Clerk

A-24

APPENDIX F

United States Court of Appeals

For THE FirrH Circuit

No. 87-2888

D.C. Docket No. CA-B-85-360

OPELIA RODRIGUEZ DE QUIJAS, ET AL.,

Plaintiffs-Appellees,

versus

SHEARSON/LEHMAN BROTHERS, INC..

f/kia SHEARSON/AMERICAN EXPRESS, INC..,

and JON GRADY DEATON,

Defendants-Appellants.

Appeal from the United States District Court for the

Southern District of Texas

Before THORNBERRY, WILLIAMS, and DAVIS, Circuit Judges.

JUDGMENT

This cause came on to be heard on the record on appeal and

was argued by counsel.

ON CONSIDERATION WHEREOF, It is now here ordered

and adjudged by this Court that the portion of the judgment

of the District Court in this cause which denied directing arbitra-

tion of the Securities Act § 12(2) claims is reversed, and the cause

is remanded to the District Court for further proceedings in ac-

cordance with the opinion of this Court.

A-25

IT IS FURTHER ORDERED that plaintiffs-appellees pay to

defendants-appellants the costs on appeal, to be taxed by the

Clerk of this Court.

May 31, 1988

ISSUED AS MANDATE: JUL 5 1988

Clerk, U.S. Court of Appeals, Fifth Circuit

By ‘s/ Sarah L. Holmes

Deputy

New Orleans, Louisiana

A-26

APPENDIX G

District Court Cases Addressing the Enforceability of Agreements

to Arbitrate 1933 Act Claims Post-McMahon

A. Cases Holding 1933 Act Claims Arbitrable Based on McMahon

Second Circuit

DeKuyper v. A.G. Edwards & Sons, Inc., No. N-85-529

(D. Conn. Dec. 10, 1987)

Third Circuit

Kavouras v. Visual Products Systems, Inc., 680 F. Supp. 205

(W.D. Pa. 1988)

Ryan v. Liss, Tenner & Goldberg Securities Corp. , 683 F. Supp.

480 (D.N.J. 1988)

Fifth Circuit

Baldwin v. Cowen & Company, No. H-86-4247 (S.D. Tex.

Jan. 19, 1988)

Rosenblum v. Drexel Burnham Lambert, Inc., No. 87-1903

(E.D. La. Aug. 18, 1987)

Ninth Circuit

Staiman v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 673

F. Supp. 1009 (C.D. Cal. 1987)

Tenth Circuit

Reed v. Bear, Stearns & Co., No. 88-2040-0 (D. Kan. Aug. 19,

1988) (LEXIS, Fedsec library, Courts file)

A-27

Adams v. Merrill Lynch, Pierce, Fenner & Smith, Inc., [1987-88

Transfer Binder] Fed. Sec. L. Rep. (CCH) € 93,741 (W.D.

Okla. April 21, 1988)

Jeppsen v. Piper, Jaffray & Hopwood, Inc., |Current] Fed. Sec.

L. Rep. (CCH) € 93,996 (D. Utah Aug. 16, 1988)

Eleventh Circuit

Aronson v. Dean Witter Reynolds, Inc., 675 F. Supp. 1324 (S.D.

Fla. 1987)

Bender v. Prudential-Bache Securities, Inc., No. 87-8572-CIV-

ZLOCH (S.D. Fla. Mar. 14, 1988)

(S.D. Fla. Jan. 8, 1988)

State Court Cases

Rocz v. Drexel Burnham Lambert. Inc., 743 P. 2d 971 (Ariz.

App. 1987)

U.S. Optical Frame Co. v. Prudential-Bache Securities. Inc..

No. 86-14071 (Cir. Ct. Fla. Sept. 28, 1987)

B. Cases Holding 1933 Act Claims Nonarbitrable Based on Wilko

Second Circuit

McCowan v. Dean Witter Reynolds, Inc., 682 F. Supp. 741

(S.D.N.Y. 1987)

Third Circuit

Abadian v. Drexel Burnham Lambert. Inc., No. 88-0186

(E.D. Pa. Aug. 4, 1988)(LEXIS, Fedsec library, Courts file)

Helfricht v. Jeffries & Co., No. 85-0466 (D.N.J. Oct. 8.

1987)(LEXIS, Fedsec library, Courts file)

A-28

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.