Opposition Brief — Shearson Lehman Bros. v. Mayaja, Inc.

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Text

) FILED ®

FEB 18 1987

No. 86-1160 JOSEPH F. SPANIOL, JR,

fad bael'<

IN THE

SUPREME COURT OF THE

UNITED STATES OF

AMERICA

OCTOBER TERM, 1986

SHEARSON LEHMAN BROTHERS, INC.,

JOSEPH F. BODKIN, AND NICHOLAS BUSTAMANTE,

Petitioners

MAYAJA, INC., ORART, S.A. TEXAS, INC.,

ELIAS SHEINBERG, AND MARCIA SHEINBERG,

Respondents

RESPONDENTS’ BRIEF ON

PETITION FOR A WRIT OF CERTIORARI

THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

CHARLES R. SHADDOX

SHADDOX, COMPERE, GORHAM &

GOOD, P.Cc.

1250 N.E. Loop 410, Suite 725

San Antonio, Texas 78209

(512) 822-2018

COUNSEL OF RECORD

CHARLES B. GORHAM

SHADDOX, COMPERE, GORHAM &

GOOD, P.C.

1250 N.E. Loop 410, Suite 725

San Antonio, Texas 78209

(512) 822-2018

COUNSEL FOR RESPONDENTS

Question Presented

Whether claims brought under Section 10(b) of the Securi-

ties Exchange Act of 1934, 15 U.S.C. § 78j(b) are subject to

arbitration.

List of Parties

The parties to the proceeding in the Court of Appeals were

the Respondents:

1. Mayaja, Inc., a Cayman Islands Corporation;

2. Orart, S.A., Texas, Inc., a Texas corporation;

3. Elias Sheinberg, a resident of Mexico City, Mexico;

and

4. Marcia Sheinberg, the wife of Elias Sheinberg and

also a resident of Mexico City, Mexico.

The officers, directors and shareholders of Mayaja and Orart are

all members of the family of Salomon Smilovici, a resident of

Mexico City, Mexico. Marcia Sheinberg is the stepdaughter of

Salomon Smilovici.

Also before the Court of Appeals were the Petitioners:

1. Shearson Lehman Brothers, Inc.;

2. Nicholas Bustamante; and

3. Joseph F. Bodkin.

Petitioner Shearson Lehman Brothers, Inc., in its petition for

certiorari, has stated that it is a wholly owned subsidiary of

Shearson Lehman Brothers Holdings Inc. and that Shearson

Lehman Brothers Holdings Inc. is a wholly owned subsidiary of

American Express Company. Further, Shearson Lehman Broth-

ers, Inc. has stated that the following are non-wholly owned

subsidiaries and affiliates:

Active Subsidiaries:

(a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)

(i)

(j)

(k)

(1)

Boston Hambro Corp.

Boulevard Investors Inc.

Boulevard Real Estate Corp.

Burlington Investors Inc.

E. B. Realty

Lombard Realty Corporation

Lowell Investors Inc.

Lowell Real Estate Corp.

Shearson Dat-Cheong Company Limited

Shearson Lehman/Amex Finanz A.G.

Shearson/ KM, Inc.

Shearson/NGP Inc.

Inactive Subsidiaries:

(a)

(b)

Affiliates:

Genex Insurance Brokerage Ltd.

Mideast-American, Inc.

Banque Eurofin

Barony Company Ltd.

California S.A. ;

Carnegie Capital Management Company

Shearson Financial Services of Oklahoma,

Inc.

Shearson Financial Services of Texas, Inc.

Shearson Lehman Brothers SARL

Intermodal Equipment Associates

KCC Syndicate Managers, Inc.

McLeod Young Weir Limited

New World Corporation

Rex Moor Properties Incorporated

Russell Energy Inc.

Sovran Energy Corp.

ill

Shearson Lehman Brothers, Inc. has also stated that the

non-wholly owned subsidiaries of Shearson Lehman Brothers

Holdings Inc. are as follows: ~

(a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)

(i)

(Gj)

(k)

(1)

(m)

(n)

American Express Asset Management

Limited

American Express Asset Management N.V.

American Express Asset Management S.A.

American Express U.K. Holding Company

Inc.

Dr. Pepper Holding Company

FGIC Corporation

Kuhn Loeb Lehman Brothers International

B.V.

Lehman Brothers International UK Ltd.

Lehman International Finance N.V.

Lehman Overseas N.V.

LBKL 82-1 Investors Inc.

Shearson Lehman Broadgate North Inc.

Shearson Lehman Broadgate South Inc.

Shearson Lehman Brothers Limited

(0) The McLeod Young Weir Corporation.

Table of Contents

II soot kson.saudsvsedad ta suivandanw cures

Nt aks ses ns aa Fh ORAL RA ea

irs and A's ako peak aes abe Pee eae ees

re oie lis aidan avdas dea Need ee heuer eee

I nk a rkuand wae thee edhess aeons

ee er ob obs onnukercécaaddnaskdacnne

In Dean Witter Reynolds, Inc. v. Byrd, 470 U.S.

—___., 84 L.Ed.2d 158, 162 (1985), this Court

noted that the arbitrability of claims arising under

§ 10(b) of the Securities Exchange Act of 1934,

or under Rule 10b-5, had not been resolved. This

is an important issue of federal law with respect to

which there is a conflict among the Circuits.

Although Respondents believe the issue was cor-

rectly decided by the Fifth Circuit, Respondents

support the granting of a writ of certiorari. .............

ON al paea ds 20004 nt estas Nhbabcatecilss ccs ek cas

A. Opinion of the United States Court of

Appedio for the THUR Carewht wii ec cec cece.

B. Orders entered by the United States District

Court for the Western District of Texas,

San Antonio Division denying Defendants

motions to stay and compel arbitration..............

Table of Authorities

Case Authorities Page

AFP Imaging Corp. v. Ross,

ope F he ie |) Ay rrr rr or ers 8

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

538 F.2d 532 (3d Cir. 1976),

cert. Gonled, 420 UB. MOTD CIPO ono c cio cc ce codes ews vies 8

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

Bee we: 8, Lk | rey eer rrr ry 8

Colonial Realty Corp. v. Bache & Co.,

i. ow By et 2 S| Ree pre rer rt reer e rrr 1]

Conover v. Dean Witter Reynolds, Inc.,

rc ge Bo EF, Lk | Teer rrr erry 8, 11

Cort v. Ash,

Prvgib @ et. |. | Dammit pan reenter me rr ae Ty 9

Dean Witter Reynolds, Inc. v. Byrd,

SI UE: ee So och oA iso ee eh ee v, 6,8

De Lancie v. Birr, Wilson & Co.,

gs a> Fe | BAe wens 8

Herman & Maclean v. Huddleston,

OID US. FIO Cae a ok x hh ce Rak taka cee eeasceeses 10

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

Vie ek Bie) oe | Re verc res eee ee 8

J. I. Case Co. v. Beak,

poem) ee eee ro rey Fae ee, ee eee 9

Mayaja, Inc. v. Bodkin,

gS Ft ie) tt A, | RR Rees mee l

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, 1906) (No. 6-04) oo. cece ccwccceseess 8

(Continued on following page)

Table of Authorities (Continued)

Case Authorities (Continued)

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

ee ae ee rere eg ee ree

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

ee Fe Be Ee | ree rere eeerr eee

Moran v. Paine, Webber, Jackson & Curtis,

See We GOs NORD oi knee cee sella eccakaae.

Page v. Moseley, Hallgarten, Estabrook & Weeden, Inc.,

gf & gi te & | Pere rre rrr rrr vererear

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

pote Ghee | rrr Trove re rer

Piper v. Chris Craft Industries, Inc.,

5 ee SS eer pere rece yer Tes Tree

Superintendent of Insurance v. Bankers Life & Casualty Co.,

es BO ere ree rT se ry rrr ee

Weissbuch v. Merrill Lynch, Pierce, Fenner & Smith, 'nc.,

~- # 2 Rs 4S JF 7s eeeeree eee res Tear ere

Wilko v. Swan,

A ET I ogg oc anc do ck ond Kee eee keen

Wolfe v. E. F. Hutton & Co., Inc.,

800 F.2d 1032 (11th Cir. 1986) (en banc) ...........

(Continued on following page)

Vii

Table of Authorities (Continued)

Page

Federal Statutes

Racketeer Influenced and Corrupt Organizations Act,

ig lem rer rere Terre er rr err rr 4, 6

es OED ine a ca bie cd Wewesvccaesageabeced a 4

Securities Act of 1933,

ke ot bs PPPePer rT TT rer eeerrereeree 8,9, 11

AWE acy hb dnc es cs heanta bene de ChGsenen ews 9

ME dk cain ds Fea pdad Ae NCEA HA ta ooo ad oe 8,9

TT at.” Cy rn pres tr ee rene rare fre 8

es ON eh a kb dw ka ER a Rew eee Cian news G

Securities Acts Amendments of 1975,

ee he, a acd nok a ecs oon en's pil vais 10

Securities Exchange Act of 1934,

pelt Tome & Sree: Terr 4, 6, 8, 9, 11

pets os a eer ere ree os Mate en 9

ETS oe DE ee ore nr rr Re Red agen 9

heh Cok y | | i, v, 2, 4, 5, 6, 7, 8, 9, 10, 11, 12

CREME cy Gk vuoi unehiuscansanscareeenaawes 9

I pc ce oo esa an) Ova soe dmg es Fae es Dagar 9

SU cb bos Seiden ss vin depeneaen wn veswns 2,9

oh | ge Perea rarer arr e 3, 8, 9, 10

United States Arbitration Act,

0 SL er eres ere re ner pire 7

saab ace kes cee k ok eneenn a pias ee mak 7

EE rg ls uti Las Op rte oeke ds <acanbaseneyes 7

2 ere ay eT PT eee rr ry rere 7

SE PEED 2 ib c.ds Cekdudebcerseahesidkowuscavasas 2

. —_

(Continued on following page)

Vili

Table of Authorities (Continued)

Page

Federal Regulations

Securities and Exchange Commission Regulations,

(Rule 10b-5),

Cae ID. ee tabbed swtsnbaceses v. 4, 6, 7, 9

Federai Rules

sida heh he wdike kek UKE ON ReaD Aa Kew oo 2

Legislative History

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

reprinted in, 1975 U.S. Code Cong. & Ad. News,

I lai Sd aL a eS akc tee Maal lg kita ce ek wa ede 11

Appendices

A. Opinion of the United States Court of Appeals for the Fifth

ES a hae Cin veo bade oth wae bak de Genoese kia dase A-1

B. Orders entered by the United States District Court for the

Western District of Texas, San Antonio Division denying

Defendants’ motions to dismiss and compel arbitration... ... B-1

No. 86-1160

IN THE

SUPREME COURT OF THE

UNITED STATES OF

AMERICA

OCTOBER TERM, 1986

SHEARSON LEHMAN BROTHERS, INC.,

JOSEPH F. BODKIN, AND NICHOLAS BUSTAMANTE,

Petitioners

MAYAJA, INC., ORART, S.A. TEXAS, INC.,

ELIAS SHEINBERG, AND MARCIA SHEINBERG,

Respondents

RESPONDENTS’ BRIEF ON

PETITION FOR A WRIT OF CERTIORARI

THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

Respondents, Mayaja, Inc., Orart, S.A. Texas, Inc., Elias

Sheinberg, and Marcia Sheinberg, respectfully pray that a writ of

certiorari issue to review the judgment and opinion of the United

States Court of Appeals for the Fifth Circuit, entered in the

above-entitled proceeding on October 24, 1986.

Opinion Below

The opinion of the Court of Appeals for the Fifth Circuit is

reported at 803 F.2d 157 and is reproduced herein at Appendix A.

The Orders of the United States District Court for the

Western District of Texas (Garcia, D.J.) denying Petitioners’

motions to stay and compel arbitration are reproduced herein at

Appendix B. Those orders were not reported.

Jurisdiction

The judgment of the Court of Appeals for the Fifth Circuit

was entered on October 24, 1986. The jurisdiction of this Court is

invoked under 28 U.S.C. § 1254(1). This is a response brief_filed

pursuant to Sup. Ct. R. 22.1. The Petitioners’ petition for

certiorari was filed in this Court on January 14, 1987, and was

received by Respondents’ counsel on January 16, 1987. This

response brief is being filed not more than 30 days thereafter.

Statutes Involved

The Securities Exchange Act of 1934

15 U.S.C. § 78j(b):

It shall be unlawful for any person, directly or indirectly, by

the use of any means or instrumentality of interstate com-

merce or of the mails, or of any facility of any national

securities exchange —

(b) to use or employ, in connection with the purchase or

sale of any security registered on a national securities

exchange or any security not so registered, any manipu-

lative or deceptive device or contrivance in contraven-

tion of such rules and regulations as the commission

may prescribe as necessary or appropriate in the public

interest or for the protection of investors.

15 U.S.C. § 78aa:

The district courts of the United States, the district court of

the United States for the District of Columbia, 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 title or the rules and regula-

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

brought to enforce any liability or duty created by this title or

the rules and regulations thereunder. Any criminal proceed-

ing may 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 title or

rules and regulations thereunder, or to enjoin any violation of

such title or rules and regulations, may be brought in any

such district or in the district wherein the defendant 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 inhabitant or wherever the defendant may be

found. Judgments and decrees so rendered shall be subject

to review as provided in sections 128 and 240 of the Judicial

Code, as amended (U.S.C., title 28, secs. 225 and 347). No

costs shall be assessed for or against the Commission in any

proceeding under this title brought by or against it in the

Supreme Court or such other courts.

15 U.S.C. §§ 78cc(a) and (b):

(a) Any condition, stipulation, or provision binding any

person to waive compliance with any provision of this

title or of any rule or regulation thereunder, or of any

rule of an exchange required thereby shall be void.

(b) Every contract made in violation of any provision of this

title or of any rule or regulation thereunder, and every

contract (including any contract for listing a security on

an exchange) heretofore or hereafter made the perform-

ance of which involves the violation of, or the continu-

ance of any relationship or practice in violation of, any

provision of this title or any rule or regulation thereun-

der, shall be void (1) as regards the rights of any person

who, in violation of any such provision, rule, or regula-

tion, shall have made or engaged in the performance of

any such contract, and (2) as regards the rights of any

person who, not being a party to such contract, shall

have acquired any right thereunder with actual knowl-

edge of the facts by reason of which the making or

performance of such contract was in violation of any

such provision, rule or regulation; Provided, (A) That

no contract shall be void by reason of this subsection

because of any violation of any rule or regulation pre-

scribed pursuant to paragraph (2) or (3) of subsection

shall be deemed to be void by reason in any action

maintained in reliance upon this subsection, by any

person to or for whom any broker or dealer sells, or from

or for whom any broker or dealer purchases, a security -

in violation of any rule or regulation prescribed pursuant

to paragraph (1) of section (c) of section 15 of this

title, unless such action is brought within one year after

the discovery that such sale or purchase involves such

violation and within 3 years after such violation.

‘

Statement of the Case

Respondents filed their original complaint in the United

States District Court for the Western District of Texas, San

Antonio Division on July 11, 1985 complaining that they had

suffered money damages as a consequence of Petitioners’ acts in

violation of the Securities Exchange Act of 1934, 15 U.S.C.

§§ 78a-78kk, and the Racketeer Influenced and Corrupt Organi-

zations Act (“RICO”), 18 U.S.C. §§ 1961-1968. On August 30,

1985, Petitioners filed their first responsive pleadings in the form

of a motion to dismiss and compel arbitration. That motion was

denied by the District Court on September 20, 1985. A subse-

quent amended motion was denied on October 7, 1985. Thereaf-

ter, Petitioners commenced their appeal to the Court of Appeals

for the Fifth Circuit. On October 24, 1986, the Fifth Circuit

Court of Appeals rendered its opinion and held that claims

brought under § 10(b) of the Securities Exchange Act of 1934,

15 U.S.C. § 78j(b), and Rule 10b-5 of the Securities and Ex-

change Commission, 15 C.F.R. § 240.10b-5, were not arbitrable

while claims brought under § 1964(c) of RICO, 18 U.S.C.

§ 1964(c), were arbitrable. Petitioners’ application for a writ of

certiorari is based upon that portion of the opinion rendered by

the United States Court of Appeals for the Fifth Circuit which

denies the arbitration of the Section 10(b) claims.

Respondents’ allegations contained in their original com-

plaint may be summarized as follows:

Respondent Mayaja, Inc. (““Mayaja”) is a Cayman Islands

corporation. Respondent Orart, S.A. Texas, Inc. (“Orart”) is a

Texas corporation. The officers, directors and shareholders of

both corporations are members of the family of Salomon

Smilovici, a resident of Mexico City, Mexico. Respondents Elias

and Marcia Sheinberg are husband and wife and reside in Mexico

City, Mexico. Marcia Sheinberg is Salomon Smilovici’s

stepdaughter.

Petitioner Shearson Lehman Brothers, Inc. (“Shearson”) is

a Delaware corporation engaged in the securities brokerage busi-

ness with an office in San Antonio, Texas. Petitioner Joseph F.

Bodkin (“Bodkin”) managed that office and Petitioner Nicholas

S. Bustamante (“Bustamante”) was a broker employed in that

office during all periods material to this suit.

Mayaja, Orart, and the Sheinbergs maintained accounts with

Shearson. At Bustamante’s urgings, Mayaja and Orart entered

into commodity trading agreements with Shearson. Thereafter,

Bustamante purchased and sold silver contracts for the accounts

of Mayaja and Orart. These transactions resulted in large

unrealized losses which were incurred despite specific instructions

that the losses to Mayaja were never to exceed $20,000 and the

losses to Orart were never to exceed $10,000.

When Mayaja and Orart discovered the magnitude of the

unrealized losses, they instructed Bustamante to immediately

dispose of all silver contracts. Bustamante refused to do so and

subsequently took delivery of the silver. Mayaja and Orart then

instructed Bustamante to sell the silver in their accounts. Again,

Bustamante refused to comply with their instructions. The

unrealized losses increased as the price of silver fell. The

unrealized losses were accompanied by margin calls. Bustamante

satisfied these calls against Mayaja by selling certificates of

deposit owned by Mayaja and applying the proceeds to the

amounts called. These sales were without authority. When

Mayaja demanded an accounting of its certificates of deposit,

Bustamante denied that they had been sold and provided Mayaja

with false brokerage tickets indicating that the corporation still

owned the certificates.

After margin calls exhausted all funds belonging to Mayaja

and Orart, Bustamante forged the signatures of the Sheinbergs to

a transfer authorization and illegally withdrew $39,700 from their

account. Bustamante used these funds to meet Mayaja and Orart

margin calls.

Although Bodkin was aware of these facts and was directly

responsible for supervising and controlling Bustamante, he failed

and refused to take any action to correct these transactions or

discipline Bustamante. Instead, he attempted to cover up Busta-

mante’s fraudulent actions and aided and abetted in the commis-

sion of his fraudulent actions.

Respondents have sought relief under the Securities Ex-

change Act of 1934, 15 U.S.C. §§ 78a-78kk and the Racketeer

Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-

1968.

The Petitioners generally deny all allegations of wrongdoing.

Summary of the Argument

The arbitration agreements considered by the Court of Ap-

peals are not enforceable because the claims which Respondents

have asserted against Petitioners are not subject to arbitration.

Reason for Granting the Writ

In Dean Witter Reynolds, Inc. v. Byrd, 470 U.S

84 L.Ed.2d 158, 162 (1985, this Court

noted that the arbitrability of claims arising under

§ 10(b) of the Securities Exchange Act of 1934, or

under Rule 10b-5, had not been resolved. This is an

important issue of federal law with respect to which

there is a conflict among the Circuits. Although

Respondents believe the issue was correctly decided by

the Fifth Circuit, Respondents support the granting of

a writ of certiorari.

Petitioners’ application for a writ of certiorari presents the

issue of whether claims asserted under § 10(b) of the Securities

Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 of the

Securities and Exchange Commission, 15 C.F.R. § 240.10b-5, are

arbitrable. The Arbitration Act, 9 U.S.C. §§ 1-14, permits parties

to contract for the arbitration of their disputes:

A written provision in any maritime transaction or

a contract evidencing a transaction involving commerce

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 contro-

versy 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. §2.

Section 3 of the act permits federal courts to stay proceedings that

are referrable to arbitration. Section 4 empowers federal courts

with authority to order a party to arbitrate a dispute arising out of

a written agreement for arbitration. The Fifth Circuit Court of

Appeals has held that Respondents’ claims under § 10(b) and

Rule 10b-5 were not subject to arbitration. A conflict exists

between the Circuits as to the arbitrability of 10(b) claims. In

addition to the Fifth Circuit, the Second, Third, Seventh, Ninth,

Tenth and Eleventh Circuits hold that § 10(b) claims are not

arbitrable.’ In contrast, the First and Eighth Circuits hold that

§ 10(b) claims may be arbitrated.”

The Supreme Court has ruled that private claims brought

under § 12(2) of the Securities Act of 1933, 15 U.S.C. § 77/(2),

are not arbitrable. Wilko v. Swan, 346 U.S. 427 (1953). It held

that § 14 of the Securities Act of 1933, 15 U.S.C. § 77n, prohib-

ited the waiver of the right to select a judicial forum for the

resolution of disputes arising under the Securities Act. This

Court has not ruled on the arbitrability of claims arising under the

Securities Exchange Act of 1934. Petitioners argue that these

claims are arbitrable and have cited as authority Justice White’s

concurring opinion in ean Witter Reynolds, Inc. v. Byrd, 470

U.S. 213, 84 L.Ed.2d 158, 167-68 (1985). Respondents contend

that such claims are not arbitrable because the Exchange Act has

its own anti-waiver clause applicable to all causes of action arising

under the statute, the effect of which Congress has acknowledged.

The anti-waiver clause appearing in § 14 of the Securities

Act of 1933 is duplicated with minor change in § 29(2) of the

Securities Exchange Act of 1934. Both provisions express the will

of Congress that there be no waiver of compliance with the rules

and regulations of the statutes. 15 U.S.C. §77n and 15 U.S.C.

§ 78cc. Both statutes reserve jurisdiction over disputes arising

'See McMahon v. Shearson/American Express, Inc., 788 F.2d 94, 96-98

(2d Cir. 1986), cert. granted, 55 U.S.L.W. 3197 (U.S. Oct. 6, 1986)

(No. 86-44); AFP Imaging Corporation v. Ross, 780 F.2d 202, 205 (2d

Cir. 1985); Ayres v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 538

F.2d 532, 536-37 (3d Cir. 1976), cert. denied, 429 U.S. 1010 (1976);

Jacobson v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 797 F.2d 1197

(3d Cir. 1986); Weissbuch v. Merrill Lynch, Pierce, Fenner & Smith

Inc., 558 F.2d 831, 833-36 (7th Cir. 1977); De Lancie v. Birr, Wilson &

Co., 648 F.2d 1255, 1257-59 (9th Cir. 1981); Conover v. Dean Witter

Reynolds, Inc., 794 F.2d 520 (9th Cir. 1986); Bodart v. Merrill Lynch,

Pierce, Fenner & Smith, Inc., 797 F.2d 775 (9th Cir. 1986); Merrill

Lynch, Pierce, Fenner & Smith, Inc. v. Moore, 590 F.2d 823, 827-29

(10th Cir. 1978); and Wolfe v. E. F. Hutton & Co., Inc., 800 F.2d 1032

(11th Cir. 1986) (en banc).

See Page v. Moseley, Hallgarten, Estabrook & Weeden, Inc., 806 F.2d

291 (1st Cir. 1986); and Phillips v. Merrill Lynch, Pierce, Fenner &

Smith, Inc., 795 F.2d 1393 (8th Cir. 1986).

under the statutes to courts of law. 15 U.S.C. §77v and 15

U.S.C. § 78aa. There are, therefore, no differences in the anti-

waiver or jurisdiction clauses of the statutes that would warrant

this Court in holding that the private remedies of the Securities

Exchange Act are arbitrable while those of the Securities Act are

not. But would a different holding be justified in the case of

§ 10(b) and Rule 10b-5 claims where the private remedy is

implied rather than express? Respondents contend that a com-

parison of the statutes and this Court’s rulings suggests otherwise.

The Securities Act of 1933°-and the Securities Exchange Act

of 1934 are two sides of the same coin. The Securities Act

focuses on the registration and the sale of securities. The Ex-

change Act regulates securities transactions occurring after the

securities have entered into the stream of commerce. 15 U.S.C.

§ 78b. Both statutes grant express private remedies.’ In addition,

this Court has held that remedies may be implied under the anti-

fraud provisions of the statutes and their regulations.* These

implied remedies are not court created laws. In order to imply a

private remedy, courts must first find that Congress intended such

aright. Cort v. Ash, 422 U.S. 62, 82 (1975). The implied private

remedy is an expression of congressional intent. The right springs

from the statute and is entitled to the same deference as any other

congressional pronouncement. Thus, to degredate the rights

found in implied statutory remedies while strictly enforcing those

which are express would be to selectively enforce the will of

Congress. Just as § 29(a) prohibits the waiver of the right of

judicial enforcement of the express private remedies contained in

Sections 9(e), 16(b) and 18(a) of the Exchange Act, it prohibits

>See Sections 11 and 12 of the Securities Act of 1933, 15 U.S.C. §§ 77k

and 771, and Sections 9(e), 16(b), and 18(a) of the Securities Ex-

change Act of 1934, 15 U.S.C. §§ 78i, 78p, and 78r.

“See Superintendent of Insurance v. Bankers Life & Casualty Co., 404

U.S. 6, 16 (1971) (acknowledging implied remedy under Section 10(b)

and Rule 10b-5 of the Exchange Act); J. /. Case Co. v. Borak, 377 U.S.

426 (1964) (holding that a private remedy could be asserted under

Section 14(a) and Rule 14a-9 of the Exchange Act); and Piper v. Chris

Craft Industries, Inc., 430 U.S. 35 (1977) (permitting private action for

violation of Section 14(e) of the Exchange Act).

the waiver of a judicial determination of disputes arising out of

Section 10(b). ;

In Merrill Lynch, Pierce, Fenner & Smith v. Curran, 456

U.S. 353, 378-79 (1982), this Court noted that a private cause of

action may be implied from the statute and its legislative history

at the time of its enactment or from the recognition of implied

rights at the time of its amendment.

In determining whether a private cause of action is

implicit in a federal statutory scheme when the statute

by its terms is silent on that issue, the initial focus must

be on the state of the law at the time the legislation was

enacted. More precisely, we must examine Congress’

perception of the law that-it was shaping or reshaping.

When Congress enacts new legislation, the question is

whether Congress intended to create a private remedy

as a supplement to the express enforcement provisions

of the statute. When Congress acts in a statutory con-

text in which an implied remedy has already been

recognized by the courts, however, the inquiry logically

is different. Congress need not have intended to create

a new remedy, since one already existed; the question is

whether Congress intended to preserve the pre-existing

remedy.

Applying this rationale, this Court in Curran found that the

failure of Congress to legislate-out the private cause of action

under the Commodities Exchange Act which was routinely recog-

nized when the statute was amended in 1974, was indicative of

Congress’ intent to afford a private cause of action.

The rationale of Curran is particularly useful in analyzing the

private cause of action under § 10(b) and the application of the

§ 29(a) anti-waiver provision. The Securities Acts Amendments

of 1975, Pub. L. 94-29, 89 Stat. 97, were the “most substantial

and significant revision of the country’s federal securities law

since the passage of the Securities Exchange Act of 1934.”

Herman & MacLean v. Huddleston, 459 U.S. 375, 384-85

(1983). By 1975 this Court had recognized the private cause of

action under § 10(b), Superintendent of Insurance v. Bankers

Life & Casualty Co., 404 U.S. 6, 16 (1971), and the federal

courts had cited Wilko v. Swan, supra, for the proposition that

private causes of action brought under the Securities Exchange

Act were not arbitrable.* But in 1975, Congress made no effort to

amend § 10(b) to eliminate the private cause of action, and, in

discussing its amendment of § 28 of the Securities Exchange Act,

it expressly recognized that private causes of action under that

statute were not arbitrable:

It was the clear understanding of the conferees that this

amendment did not change existing law, as articulated

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

effect of arbitration proceeding provisions and agree-

ments entered into by persons dealing with members

and participants of self-regulatory organizations.

H.R. Rep. No. 94-229, 94th Cong., Ist Sess. (1975), reprinted in,

1975 U.S. Code Cong. & Ad. News 179, 321, 342. See, Conover

v. Dean Witter Reynolds, Inc., 794 F.2d 520, 522-24 (9th Cir.

1986).

By refusing to legislate-out the private remedies implied

under § 10(b) and by recognizing that those remedies were non-

arbitrable, Congress has indicated in the clearest terms its intent

to judicially enforce through private action the provisions of

§ 10(b).

Conclusion

For the same reasons that this Court found that Congress did

not intend to permit the arbitration of claims arising under the

Securities Act of 1933, claims arising under the Securities Ex-

change Act of 1934 are non-arbitrable. The intent of Congress to

require the judicial determination of claims arising under the

Securities Exchange Act is apparent both in the words of the

statute and in the legislative history. Because there is a division

°E.g. Colonial Realty Corp. v. Bache & Co., 358 F.2d 178, 183 (2d Cir.

1966); and Moran v. Paine, Webber, Jackson & Curtis, 389 F.2d 242,

245-46 (3d Cir. 1968).

among the Circuits as to the arbitrability of 10(b) claims, and

because this is a matter of national importance, this Court should

grant a petition for certiorari.

Respectfully submitjed,

SHADDOX, COMPERE, GORHAM & GOOD, P.C.

1250 N.E. Loop 410, Suite 725

San Antonio, Texas 78209

(512) 822-2018

COUNSEL OF RECORD FOR RESPONDENTS

Certificate of Service

I, Charles R. Shaddox, Counsel of Record for Respondents,

hereby certify that on today’s date, Monday, February 16, 1987,

six copies of the Respondents’ Brief on Petition for a Writ of

Certiorari to The United States Court of Appeals for the Fifth

Circuit with regard to the above-styled case have been deposited

in the United States Mail, with sufficient first class postage affixed

thereto, with three copies sent addressed to Mr. Theodore A.

Krebsbach and- Mr. Jeffrey L. Friedman, Office of the General

Counsel, Shearson Lehman Brothers, Inc., Two World Trade

Center, New York, New York 10048; and three copies sent

addressed to Mr. William D. Sims, Jr. and Mr. Will S. Montgom-

ery, Jenkens & Gilchrist, 3200 Allied Bank Tower, Dallas, Texas

75202-2711, counsel for Petitioners. I further hereby certify that

all parties required to be served have been served.

CHARLES R. SHADDOX

SHADDOX, COMPERE, GORHAM & GOOD, P.C.

1250 N.E. Loop 410, Suite 725

a San Antonio, Texas 78209

(512) §22-2018

COUNSEL OF RECORD FOR RESPONDENTS

APPENDIX A

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

Mayaja, INc., S.A. ORART, ELIAS

SHEINBERG, and MARCIA SHEINBERG,

Plaintiffs-Appellees,

= No. 85-2762

JOSEPH F. BODKIN, NICHOLAS S. OPINION

BUSTAMANTE, and SHEARSON LEHMAN

BROTHERS, INC.,

Defendants-Appellants.

Filed October 24, 1986

Before: Thomas Gibbs Gee, Carolyn Dineen Randall and

W. Eugene Davis, Circuit Judges.

Opinion by Judge Carolyn Dineen Randall

Appeal from the United States District Court

for the Western District of Texas

H. F. Garcia, District Judge, Presiding

SUMMARY

Abritration/RICO/Securities

Appeal from a decision denying a motion to compel arbitration

of securities fraud claims and RICO claims. Affirmed in part,

reversed in part and remanded.

Plaintiffs brought suit against defendants Shearson Lehman

Brothers, Inc. (Shearson), a Shearson manager, and the manager’s

supervisor based upon a series of transactions involving plaintiffs’

financial management and commodity accounts with Shearson.

Plaintiffs assert claims of securities fraud under section 10(b) of the

Securities Exchange Act of 1934 (the 1934 Act) and under Rule

A-1

Mayasa. INC.. ET AL. V. BODKIN, ET AL.

10b-5 of the Securities and Exchange Commission. They also assert

civil RICO claims based upon predicate acts of mail and wire fraud

as well as upon the acts of securities fraud independently asserted.

Defendants filed a motien to compel arbitration, which the district

court denied.

[1] Agreements to transact in commodities futures and securities

involve interstate commerce, which makes the Federal Arbitration

Act applicable to the instant proceeding, and [2] the arbitration

clauses involved here encompass the claims asserted. Both the 1934

Act claims and the RICO claims arise out of or relate to the plain-

tiffs’ accounts or transactions with Shearson. [3] In order for a stat-

utory claim to overcome the overriding federal policy in favor of

arbitration, the party opposing the motion to compel must produce

evidence that Congress intended the statutory claim to be non-

arbitrable. [4] Based on the anti-waiver provision of the 1934 Act,

Fifth Circuit cases have consistently held that Congress intended

1934 Act claims to be non-arbitrable. [5] Although defendants

argue that recent Supreme Court decisions have implicitly over-

ruled this established precedent, absent a clear statement from the

Supreme Court, the confirmed precedent will not be upset. [6] As to

the RICO claims. RICO contains no anti-waiver provisions similar

to those of the 1933 and 1934 securities acts. [7] The primary pur-

pose of section 1964(c), RICO’s private treble-damages provision,

is to compensate those inujured by organized crime; the section’s

secondary purpose is to deter racketeers from inflicing such inju-

ries. Since plaintiffs may effectively vindicate their section 1964(c)

cause of action in the arbitral forum, the congressional purpose

behind section 1964(c) will be served by arbitration. [8] This case

presents another instance when, instead of being used against mob-

sters and organized criminals, section !964(c) has become a tool for

everyday fraud cases against respected and legitimate enterprises.

The claims presented as a whole are the kind of claims for which

the Commodity Futures Trading Commission has enacted exten-

sive regulations governing arbitration. In this type of case, the con-

gressional purpose of compensation and deterrence underlying

section 1964(c)—to the extent that any considerations of deter-

rence are present—may be fulfilled by arbitration. Thus, the RICO

claims must be submitted to arbitration under the Federal Arbitra-

tion Act.

A-2

MAYAJA, INC., ET AL. Vv. BODKIN, ET AL.

OPINION

CAROLYN DINEEN RANDALL, Circuit Judge:

In July of 1985, plaintiffs Mayaja, Inc. (Mayaja), Orart S.A.

Texas, Inc. (Orart), and Elias and Marcia Sheinberg brought suit

against defendants based upon a series of transactions involving

their financial management and commodity accounts with defen-

dant Shearson Lehman Brothers, Inc. (Shearson). Both Mayaja and

Orart are closely-held private corporations whose officers and

directors are members of the Sheinbergs’ family. Mayaja and Orart

allege that defendant Bustamante, the manager of their discretion-

ary commodity accounts with Shearson, conducted a number of

unauthorized transactions on the accounts with the complicity of

his supervisor, defendant Bodkin, resulting in staggering losses.

The Sheinbergs allege that Bustamante forged their signatures and

withdrew money from their financial management account in order

to meet margin calls on the commodity accounts of Mayaja and

Orart. The plaintiffs assert against defendants claims of securities

fraud under section 10(b) of the Securities Exchange Act of 1934,

15 U.S.C. § 78}(b), and Rule 10b-5 of the Securities and Exchange

Commission. Plaintiffs also assert civil RICO claims based upon

predicate acts of mail and wire fraud, in violation of 18 U.S.C.

§§ 1341 and 1343, as well as upon the acts of securities fraud inde-

pendently asserted.’

1 See Racketeer Influenced and Corrupt Organizations Act (RICO), 18

U.S.C. §§ 1964(c), 1962 & 1961(1). Section 1964(c) provides treble damages for

persons injured by RICO violations:

tion of section 1962 of this chapter may sue therefor in any appropri-

ate United States district court and shall recover threefold the damages

he sustains and the cost of the suit, including a reasonable attorney's

fee.

18 U.S.C. § 1964(c). Section 1962, in turn, describes the activities that RICO

prohibits:

(a) It shall be unlawful for any person who has received any income

derived, directly or indirectly, from a pattern of racketeering activity

or through collection of an unlawful debt in which such person has par-

A-3

MayaJA, INC.. ET AL. v. BODKIN, ET AL.

Defendants responded to the complaint with a motion to compel

arbitration. Plaintiffs had agreed to arbitrate “any controversy aris-

ing out of or relating to [their] accounts, to transactions with

[Shearson] ... or to [their] agreement[{s] or the breach thereof”

when they signed their respective agreements.*? The defendants

ticipated as a principal ... to use or invest, directly or indirectly, any

part of such income. or the proceeds of such income, in acquisition of

any interest in, or the establishment or operation of, any enterprise

which is engaged in, or the activities of which affect, interstate or for-

eign commerce. ...

any enterprise engaged in. or the activities of which affect, interstate or

foreign commerce, to conduct or participate. directly or indirectly, in

the conduct of such enterprise's affairs through a pattern of racketeer-

ing activity or collection of unlawful debt.

(d) It shall be unlawful for any person to conspire to violate any of the

provisions of subsections (a), (b). or (c) of this section.

18 U.S.C. § 1962. Finally, section 1961 defines the key phrases “racketeering

activity” and “pattern of racketeering activity”:

As used in this chapter —

(1) “racketeering activity” means... (B) any act which is indictable

under any of the following provisions of title 18, United States Code:

... section 134] (relating to mail fraud), section 1343 (relating to wire

fraud), ... or (D) any offense involving .. . fraud in the sale of securi-

ties....

(5) “pattern of racketeering activity” requires at least two acts of

racketeering activity. one of which occurred after the effective date of

this chapter and the last of which occurred within ten years (excluding

any period of imprisonment) after the commission of a prior act of

racketeering activity ....

18 U.S.C. § 1961(1). (5).

2 Paragraph 13 of the Customer’s Agreement signed by Elias and Marcia

Sheinberg reads in pertinent part:

Unless unenforceable due to federal or state law, any controversy aris-

ing out of or relating to my accounts, to transactions with [Shearson]

A-4

ead

MayaJA, INC., ET AL. v. BODKIN, ET AL.

argued that the Supreme Court’s decisions in Dean Witter Reynolds

Inc. vy. Byrd, 105 S. Ct. 1238 (1985), and in Mitsubishi Motors Corp.

v. Soler Chrvsler-Plymouth, Inc., 105 S. Ct. 3346 (1985), implicitly

overruled established precedent in this circuit holding that securi-

ties fraud claims under the 1934 Act are not arbitrable. E.g., Sibley

v. Tandy Corp., 543 F.2d 540 (Sth Cir. 1976), cert. denied, 434 U.S.

824 (1977). Defendants also asserted that these same Supreme

Court decisions argue for the arbitrability of,the RICO claims.

The district court found that the Court’s opinions specifically

declined to address the question of the artwirability of 1934 Act

claims. Holding that Justice White’s suggestion that 1934 Act

claims may be arbitrable, contained in his concurring opinion in

Byrd, was insufficient to overcome established precedent in this cir-

cuit, the court below denied the motion to compel arbitration.

On appeal of the order denying the motion to compel

arbitration,’ we affirm in part and reverse in part.

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 | may elect.

Supplemental Record on Appeal at 7.

The Commodity Account Agreements signed by Mayaja and Orart con-

tained, as an addendum, a separately signed Arbitration Agreement that reads

in part as foliows:

Any controversy arising out of or relating to the Corporation's

account, to transactions with [Shearson] for the Corporation or to this

agreement or the breach thereof, shall be settled by arbitration in

accordance with the rules, then in effect, of the Board of Directors of

the New York Stock Exchange, Inc. or of the American Arbitration

Association Inc., as the Corporation may elect... .

While the Commodity Futures Trading Commission (CFTC) encour-

ages the settlement of disputes by arbitration, it requires that your con-

sent to such an agreemeni be voluntary. You need not sign this

Arbitration Agreement to open an account with Shearson. (See 17 CFR

180.1-180.6)

Id. at 14, 19.

3 We note jurisdiction over this interlocutory appeal under 28 U.S.C.

§ 1292(aX1). An appeal of an order denying a motion to compel arbitration

A-5

Mayasa. INC.. ET AL. Vv. BODKIN, ET AL.

Il.

This appeal presents the question of whether, under the Federal

Arbitration Act, 9 U.S.C. §§ 1-14. plaintiffs’ securities fraud and

RICO claims must be submitted to arbitration. Like any decision

whether to order arbitration under the Act, the inquiry 1n this case

divides into two broad parts: first, did the parties agree to arbitrate

the disputes in question, and, second, did Congress intend that the

claims sub judice be arbitrable? See Mitsubishi, 105 S. Ct. at 3354,

3355. Accordingly. we first examine whether plaintiffs’ arbitration

agreements encompass the statutory claims asserted; in Part III we

consider the arbitrability of these claims.

[1] As a preliminary matter, we note that the contracts before us

involve “commerce” within sections | and 2 of the Act sufficient to

bring sections 3 and 4 of the Act into play. Agreements to transact

in commodities futures withcut question involve interstate

“commerce” as that term is defined in section 1,“ and an agreement

falls within the purview of the decrepit Enclow-Ettelson rule. recently reiterated

by this court as follows:

“An order staving or refusing to stay proceedings in the District Court

is appealable under § 1292(a)(1) only if (A) the action in which the

order was made is an action which, before the fusion of law and equity.

was by its nature an action at law; and (B) the stay was sought to permit

the prior determination of some equitable defense or counterclaim.”

Tenneco Resins, Inc. v. Davy Int'l, AG, 770 F.2d 416, 418 (Sth Cir. 1985) (quot-

ing Jackson Brewing Co. v. Clarke, 303 F.2d 844, 845 (5th Cir.), cert. denied,

371 U.S. 891 (1962)) (emphasis in original): see Ettelson v. Metropolitan Life

Ins. Co., 317 U.S. 188 (1942). It is clear that the securities fraud and RICO

claims are legal causes of action. See Cobb v. Lewis, 488 F.2d 41, 46 (Sth Cir.

1974) (claims for damages under securities fraud and antitrust laws are legal

claims): see also Byrd, 105 S. Ct. 1238 (taking jurisdiction, without discussion,

of appeal of order denying motion to compel arbitration in context of securities

fraud claims). Since a stay pending arbitration is an equitable defens*, Tenneco

Resins, 770 F.2d at 419. the order appealed sub judice falls within the

Enelow-Ettelson rule and is appealable.

“ “(C]ommerce™. as herein defined, means commerce among the several

States or with foreign nations, or in any Territory of the United States

or in the District of Columbia. or between any such Territory and

another. or between any such Territory and any State or foreign

nation. or between the District of Columbia and any State or Territory

or foreign nation....

A-6

MayasJA, INC., ET AL. v. BODKIN, ET AL.

to transact in securities is no less interstate in nature. Having deter-

mined the applicability of the Arbitration Act to the instant pro-

ceeding, we now pause to consider whether “the issue involved in

[this] suit or proceeding is referable to arbitration under such an

agreement.” 9 U.S.C. § 3.

[2] We find that the arbitration clauses before us encompass the

claims asserted in this dispute. Both the 1934 Act claims and the

RICO claims “aris[e] out of or relat[e] to” the plaintiffs’ accounts or

transactions with Shearson: the securities fraud allegations and the

other acts predicate to the RICO claim all derive from Shearson’s

handling of the plaintiffs’ accounts or from transactions on those

accounts made by Shearson’s agents. Bearing in mind the federal

policy that “any doubts concerning the scope of arbitrable issues

should be resolved in favor of arbitration,” Moses H. Cone Memo-

rial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983), we

find it clear that the parties agreed to arbitrate these claims. Cf. Mit-

subishi, 105 §. Ct. at 3353 n.13 (construing more restrictive arbitra-

tion clause as encompassing arbitration of antitrust claims). We

now turn to consider whether plaintiffs’: 1934 Act and RICO claims

are non-arbitrable even though they have agreed to arbitrate them.

Ill.

[3] In order for a statutory claim to overcome the overriding fed-

eral policy in favor of arbitration, Moses H. Cone, 460 U.S. at

24-25, it is necessary that the party opposing the motion to compel

produce evidence that Congress intended the statutory claim to be

non-arbitrable. See Mitsubishi, 105 S. Ct. at 3355. A mere absence

of >vidence that Congress intended the claims to be arbitrable is

insufficient to overcome the presumption in favor of arbitrability;

the party opposing the motion must show that Congress intended

to make an exception to the Arbitration Act of the statutory claim

in question. As the Supreme Court instructed in its Mitsubishi

opinion:

Federal Arbitration Act, 9 U.S.C. § 1. Section 2 of the Act provides that a

“written provision in ... a contract evidencing a transaction involving com-

merce to settle by arbitration ... shall be valid, irrevocable, and enforceable.

save upon such grounds as exist at law or in equity for the revocation of ary

contract.” 9 U.S.C. § 2.

A-7

Mayasa. INC., ET AL. Vv. BODKIN, ET AL.

Jusi as it is the congressional policy manifested in the fed-

eral Arbitration Act that requires courts liberally to con-

strue the scope of arbitration agreements covered by that

Act, it is the congressional intention expressed in some

other statute on which the courts must rely to identify any

category of claims as to which agreements to arbitrate will

be held unenforceable .. .. We must assume that if Con-

gress intended the substantive protection afforded by a

given statute to include protection against waiver of the

right to a judicial forum, that intention will be deducible

from text or legislative history.

Id.

Thus. the task of a court in determining the arbitrability of a

claim under the Federal Arbitration Act is, first, to examine the rel-

evant Statutory text and legislative history for express evidence that

Congress intended the statutory claim concerned to be non-

arbitrable. In many cases Congress may not have explicitly

addressed the arbitrability question. In this event, the court must

carefully examine the congressional policies prompting the enact-

ment of the cause of action to determine whether, in light of these

policies. an implicit congressional intention that the claims under

the statute not be subjected to arbitration may be inferred due to

the inability of these policies 10 be furthered if the claims are sub-

ject to arbitration. See Mitsubishi, 105 S. Ct. at 3357-59 (examin-

ing, in the absence of an explicit statement of congressional intent

as to arbitrability, congressional policies behind § 4 of the Clayton

Act); cf, McDonald v. City of West Branch, 104 S. Ct. 1799, 1803-04

(1984) (basing finding of congressional intent that § 1983 claims be

non-arbitrable upon conflict between arbitration and § 1983's

objectives); Barrentine v. Arkansas-Best Freight Sys., 450 U.S. 728,

740-45 (1981) (finding congressional intent that FLSA claims be

non-arbitrable because of conflict between arbitration and FLSA’s

purposes); Alexander v. Garner-Denver Co., 415 U.S. 36, 56 (1974)

(“The purpose and procedures of Title VII indicate that Congress

intended federal courts to exercise final responsibility for enforce-

ment of Title VII; deferral to arbitral decisions would be inconsis-

tent with that goal.”).

With these rules of statutory interpretation in mind, we turn to

the questions of whether Congress intended that 1934 Act and pn-

A-8

Mayaja, INC., ET AL. Vv. BODKIN, ET AL.

vate RICO claims be litigated in factual settings similar to that of

the case before us.

[4] This court has on many occasions addressed the question of

the arbitrability of 1934 Act claims, and consistently held that Con-

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

manite v. Rotan Mosle, Inc., No. 86-2300, slip op. 339, 340 (Sth Cir.

Oct. 17, 1986); Smoky Greenhaw Cotton Co. v. Merrill Lynch,

Pierce, Fenner & Smith, Inc., 785 F.2d 1274, 1275 n.1 (Sth Cir.

1986); Sawver v. Ravmond, James & Assocs., Inc., 642 F.2d 791.

792 (Sth Cir. Unit B 1981); Sibley v. Tandy Corp., 543 F.2d 540,

543 (Sth Cir. 1976), cert. denied, 434 U.S. 824 (1977). Basing their

decisions upon an extension of the Supreme Court's analysis of the

anti-waiver provision of the Securities Act of 1933 in Wilko vy.

Swan, 346 U.S. 427 (1953), these opinions found the similar

anti-waiver provision of the 1934 Act to expressly preclude arbitra-

tion of the private cause of action that Congress implied in section

10(b) of the 1934 Act. See, e.g., Sibley, 543 F.2d at 543 n.3.

[5] Defendants argue that the Supreme Court’s decisions in

Mitsubishi and in Dean Witter Reynolds Inc. v. Byrd, 105 S. Ct.

1238 (1985), implicitly overrule our established precedent. As this

court recently held in Bustamante v. Rotan Mosle, Inc., neither of

these Supreme Court opinions addressed the question of the

arbitrability of 1934 Act claims. No. 86-2300, slip op. at 340-41

(Sth Cir. Oct. 17, 1986). We agree with Bustamante and four other

circuits that, absent a clearer statement from the Court as to the

arbitrability of 1934 Act claims, we must abide by the confirmed

precedent of our circuit. Jd.; accord Wolfe v. E.F. Hutton & Co..

Inc., Nos. 85-3352, 85-5419 (11th Cir. Sept. 29, 1986) (en banc):

Jacobson v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 797 F.2d

1197 (3rd Cir. 1986); Conover v. Dean Witter Reynolds, Inc., 794

F.2d 520 (9th Cir. 1986) (finding, as a matter of first impression,

1934 Act claims to be non-arbitrable); McMahon vy. Shearson/

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

U.S.L.W. 3197 (U.S. Oct. 6, 1986) (No. 86-44). Contra Phillips v.

Merrill Lynch, Pierce, Fenner & Smith, Inc., 795 F.2d 1393 (8th

Cir. 1986). We therefore hold that the district court did not err in

refusing to compel arbitration of the 1934 Act claims.

A-9

MayajJA, INC.. ET AL. v. BODKIN, ET AL.

; B.

The question of whether private RICO claims may be arbitrated

is of first impression in this court.* Both the Second and Third Cir-

cuits have ruled on this question: the Second Circuit holding that

private RICO claims may never be arbitrated, and the Third Cir-

cuit holding that such claims may be arbitrated when the offenses

predicate to the required “pattern of racketeering activity” are arbi-

trable. McMahon v. Shearson/American Express, Inc., 788 F.2d 94

(2d Cir.), cert. granted, 55 U.S.L.W. 3197 (U.S. Oct. 6, 1986)

(86-44); Jacobson v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,

797 F.2d 1197 (3rd Cir. 1986). We hold that, at least in the context

of claims like that sub judice, private RICO claims must be arbi-

trated under the Federal Arbitration Act.®

(Text continued on page 682)

> A panel of this court briefly addressed, in dicta, the question of the arbitra-

bility of private RICO claims. Smoky Greenhaw Cotton Co. v. Merrill Lynch,

Pierce. Fenner & Smith, Inc., 785 F.2d 1274, 1280-82 (Sth Cir. 1986). On peti-

tion for rehearing and suggestion for rehearing en banc, the panel noted that its

reasoning on the RICO issue was seriously called into question by Mitsubishi.

Id. at 1282. The panel therefore amended its opinion “to refuse to decide the

arbitrability ve/ non of the plaintiffs’ RICO claim.” Jd.

Jacobson, further adding to the split already present among the circuits.

McMahon, 788 F.2d 94 (2d Cir.), cert. granted, 55 U.S.L.W. 3197 (U.S. Oct. 6,

1986) (No. 86-44): Jacobson, 797 F.2d 1197 (3rd Cir. 1986) (2-1 decision). We

respectfully cannot agree with the reasoning of either of these two opinions.

McMahon based its holding that RICO claims can never be arbitrated on

“strong policy concerns. the need for development of the record, and judicial

clarification and resulting consistency in resolving disputes under this rela-

tively new statute.” 788 F.2d at 99. The policy concerns mentioned by the court

were developed by analogy to American Safety Equip. v. J.P. Maguire & Co.,

Inc., 391 F.2d 821 (2d Cir. 1968), a Second Circuit opinion banning arbitration

of antitrust claims. 4merican Safety argued that a “plaintiff asserting his rights

under the [Sherman] Act has been likened to a private attorney-general who

protects the public’s interest.” 391 F.2d at 826. McMahon held that compara-

ble concerns inherent in the enforcement of RICO claims preciuded their arbi-

tration. 788 F.2d at 98.

We decline to follow McMahon because, as the Third Circuit noted, “the

McMahon court paid too little deference to the Supreme Court's decision in

Mitsubishi.” Jacobson, 797 F.2d at 1202. McMahon ignores Mitsubishi's

instruction that congressional intent governs the analysis of arbitrability of a

statutory claim under the Arbitration Act. After Mitsubishi, “determining stat-

A-10

MayaJa, INC., ET AL. Vv. BODKIN, ET AL.

utory claims to be nonarbitrable on the basis of some judicially recognized pub-

lic policy rather than as a matter of statutory interpretation is no longer

permissible.” /d. Since McMahon does not base its decision on a statutory

interpretation of section |964(c). we cannot follow its analysis. Moreover. we

find \fceMahon’s reliance on American Safety misplaced. Although the Supreme

Court did not explicitly overrule 4imerican Safety in the domestic context.

Mitsubishi rejected so much of American Safety's reasoning it is difficult to say

what 1s left of the opinion to rely on. See Mitsubishi, 105 S. Ct. at 3357-60. Cer-

tainly the Court rejected that portion of American Safety's reasoning relied

upon by McMahon. See id. at 3359 (“Notwithstanding its important incidental

policing function. ... § 4 of the Clayton Act ... seeks primarily to enable an

injured competitor to gain compensation for that injury.”).

On the other hand. we must also respectfully decline to follow the reasoning

of the Third Circuit. Jacobson defined the relevant field of statutory interpreta-

tion as consisting of (or at least including) the predicate statutes necessary for

a section | 964(c) action: “Because of the unique structure of the RICO statute.

which cross-references other predicate statutes, we must, in making the statu-

tory interpretation required by Wi/ko and Mitsubishi, look to those statutes as

well.” Jacobson, 797 F.2d at 1202. In fact, Jacobson did not examine section

1964(c)’s text or legislative history. instead relying exclusively upon the text of

predicate statutes. See id. at 1203. Following precedent holding 1934 Act

claims to be non-arbitrable, Jacobson ruled that RICO claims based on predi-

cate violations of the 1934 Act were not subject to arbitration. /d. Finding no

indication of a congressional intent to make violations of the federal mail fraud

statute. 18 U.S.C. §1341. and wire fraud statute, 18 U.S.C. § 1342,

non-arbitrable, however, Jacobson held that RICO claims founded upon these

predicate statutes were arbitrable. 797 F.2d at 1203.

We find. however, that a claim under section 1964(c) is logically discrete

from claims under its predicate statutes. As Judge Adams observes in his dis-

sent from the majority opinion in Jacobson:

A private right of action under RICO is a unique and separate claim to

which the Arbitration Act logically applies. RICO is a manifestation of

congressional concern with the special harm caused by those who

engage in a pattern of wrongful offenses, and the private right of action

under the RICO statute is distinct from one based on an underlying

offense alone.

Jacobson, 797 F.2d at 1209 (Adams, J., dissenting). Judge Adams also notes

that the difference between the RICO action and its predicate violations is

demonstrated by the structure of the RICO statute. Unlike any individual pred-

icate offense, RICO proscribes the operation of any “enterprise” engaged in or

whose activities affect interstate or foreign commerce, using income derived

from a “pattern of racketeering activity.” /d. (citing 18 U.S.C. § 1962). “Pattern

of racketeering activity” is defined as at least two violations of any predicate

A-11

MayajJa, INC., ET AL. v. BODKIN, ET AL.

[6] As the Third Circuit pointed out, RICO contains no anti-

waiver provision similar to those of the 1933 and 1934 securities

acts. Jacobson, 797 F.2d at 1202. In the instant case, the congressio-

nal intent as to the arbitrability of private RICO claims cannot be

ascertained from the text of the statute. We turn, then, to the legis-

lative history for guidance.

Added to the House version of the bill after the original bill had

been passed by the Senate, the private treble-damages provision

later codified as section 1964(c) received relatively little discussion

in either house of Congress. See Sedima, S.P.R.L. v. Imrex Co., 105

S. Ct. 3275, 3280 (1985). The congressional discussion of the

treble-damages provision did not touch upon the arbitrability of

statute within a ten-year period. 18 U.S.C. § 1961(5). Section 1964(c) further

adds the requirement that the plaintiff asserting a private RICO action have

been injured by the “enterprise” as a result of such “racketeering activity.”

Thus, by its very structure, the RICO claim is distinct from its predicate

offenses.

Judge Adams criticizes the majority opinion in Jacobson for splitting a single

RICO count when that count is predicated upon arbitrable and non-arbitrable

offenses:

[T]he result reached by the majority would divide that [single RICO]

count in order to allow for arbitration of the mail and wire fraud issues

and litigation in a court of the securities issues—despite the fact that

the unique RICO offense depends, in this case, on whether the enter-

prise has engaged in mail and wire fraud as well as securities fraud

within a ten-year period.

Id. at 1210 (emphasis in original). The fallacy in Jacobson’s reasoning is further

pointed out by its handling of the mail and wire fraud issues. The majority

opinion held that RICO claims predicated upon mail or wire fraud statutes are

arbitrable because “[n]o provision of the mail or wire fraud statutes bears any

similarity to the anti-waiver provision of the 1933 and 1934 securities acts.” /d.

at 1203. No such anti-waiver provision can be found in the mail and wire fraud

statutes because these are criminal felony statutes: arbitration of a felony charge

simp.y does not occur in our legal system. A court searching for congressional

intent as to arbitrability in criminal statutes will always return with empty

hands. Private parties such as the plaintiffs in this case do not have standing to

bring suit under these statutes. Only through RICO’s section 1964(c) do they

have standing to invoke these mail and wire fraud statutes at all, and it is, logi-

cally, to RICO that courts must look to determine the arbitrability of their

claims.

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MayajJa, INC., ET AL. Vv. BODKIN, ET AL.

claims brought under the provision. Accord Jacobson, 797 F.2d at

1202. Since Congress has not expressly indicated its intent as to the

arbitrability of these claims, we examine the congressional pur-

poses underlying the enactment of section 1964(c) to determine

whether, because of an inherent conflict between these purposes

and the arbitration of the claims, Congress implicitly intended that

all such claims be non-arbitrable.

Representative Steiger introduced the private treble-damages

provision to the House Judiciary Committee as a primarily com-

pensatory, and secondarily deterrent, measure:

One possible amendment, for example, which I would

raise for your consideration, would add a private civil

damage remedy to title IX [the RICO subchapter of the

Organized Crime Control Act], similar to the private dam-

age remedy found in the anti-trust laws. Not every busi-

nessman, of course, will wish to take advantage of such a

« remedy, but those who have been wronged by organized

crime should at least be given access to a legal remedy. In

addition, the availability of such a remedy would enhance

the effectiveness of title IX’s prohibitions.

Hearings on S.30, and Related Proposals, before Subcommittee No.

5 of the House Committee on the Judiciary, 91st Cong., 2d Sess..,

520 (1970) [hereinafter cited as House Hearings]. The American

Bar Association independently proposed an amendment to RICO

“authorizing private damage suits based upon the concept of Sec-

tion 4 of the Clayton Act.” Jd. at 544; see also id. at 559, 560 (iden-

tical proposal by ABA Section of Criminal Law).

While the bill was debated before the full House, several repre-

sentatives referred to the private treble-damages provision. Repre-

sentative Poff mentioned the provision as “another example of the

antitrust remedy being adapted for use against organized crimi-

nality.” 116 Cong. Rec. at 35,295 (1970); see also id. at 35,346

(Representative Poff noting that the provision “has its counterpart

almost in haec verba in the antitrust statutes”). Representative

Steiger asserted that “[i]t is the intent of this body, I am certain, to

see that innocent parties who are the victims of organized crime

have a right to obtain proper redress.... It represents the one

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MayajJA, INC., ET AL. Vv. BODKIN, ET AL.

opportunity for those of us who have been seriously affected by

organized crime activity to recover.” Jd. at 35,346-47. Representa-

tive Mikva, referring to the treble-damages provision, proposed

amending title IX of the bill to ensure that “we do not let some

criminal law be abused by an overzealous competitor.” Jd. at

35,343. In proposing his amendment, which was rejected by the

House, id., Mr. Mikva noted the similarity of the treble-damages

provision to the antitrust laws and implied that the purpose of the

provision was compensatory. Jd. at 35,342 (describing the private

treble-damages provision as “sauce for the goose” injured by orga-

nized crime whereas his amendment provided “protection for the

gander” that might be injured by frivolous suits brought by an

aggressive competitor).

While the bill was pending in the House, Senator McClellan

brought the attention of the Senate to the proposed treble-damages

amendment. /d. at 25,190. Senator McClellan explained that the

proposed amendment would “authorize private civil damage suits

based upon the concept of section 4 of the Clayton Antitrust Act.

This amendment, particularly, should prove, if accepted by the

House, to be a major new tool in extirpating the baneful influence

of organized crime in our economic life.” Jd. It is difficult to evalu-

ate from his statement whether the senator regarded the treble-

damages provision as a primarily compensatory or deterrent mea-

sure. While the word “extirpate,” to root out, suggests a more deter-

rent connotation, the sentence’s object, the “baneful influence of

organized crirne in our economic life,” suggests that the wrong

addressed by the provision is the economic damage caused by orga-

nized crime—a wrong more appropriately addressed by compensa-

tory measures than by deterrent measures.

The House passed the ill with the treble-damages provision in

the form proposed by the Committee. Jd. at 35,363-64; Sedima,

105 S. Ct. at 3281. The Senate did not seek a conference, and

adopted the bill as amended in the House. 116 Cong. Rec. at

36,296; Sedima, 105 S. Ct. at 3281.

The legislative history of section 1964(c) thus reveals three cur-

rents of congressional purpose. First, and perhaps foremost, is the

congressional intention of compensating “the victims of organized

crime.” Second, the provision was intended to deter organized

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MayaJa, INC., ET AL. v. BODKIN, ET AL.

crime by “enhanc[ing] the effectiveness of title IX’s prohibitions.”

Finally, one notes that the most recurrent theme in the legislative

history of the section is found in the repeated references to section

4 of the Clayton Act. Since these references to the Clayton Act

could be argued to be an adoption by reference of the purposes of

the Clayton Act's treble-damages provision, we survey the goals of

the Clayton Act for further clarification of the congressional intent

behind section 1964(c).

The Supreme Court in Mitsubishi thoroughly examined the legis-

lative intent behind section 4 of the Clayton Act for the purpose of

determining the arbitrability of section 4 claims. 105 S. Ct. at

3358-60. While acknowledging that “[t]he treble-damages provi-

sion wielded by the private litigant is a chief tool in the antitrust

enforcement scheme, posing a crucial deterrent to potential

violators,” id. at 3358, the Court held that “[nJotwithstanding its

important incidental policing function, the treble-damages cause of

action ... seeks primarily to enable an injured competitor to gain

compensation for that injury.” Jd. at 3359. Emphasizing the prior-

ity of the role of treble damages as compensation over its role as

enticement for private attorneys general, the Court noted that the

antitrust cause of action remains at all times under the control of

the individual litigant, and that the private antitrust plaintiff needs

no executive or judicial approval before settling a treble-damages

suit. Jd. Because the deterrent function was secondary to the com-

pensatory function, the Court concluded that “so long as the pro-

spective litigant effectively may vindicate its statutory cause of

action in the arbitral forum, the statute will continue to serve both

its remedial and deterrent function.” Jd. at 3359-60.

[7] Mitsubishi's reading of the legislative purpose of section 4 of

the Clayton Act, recurrently invoked during the congressional dis-

cussion of RICO’s private treble-damages provision, accords with

our analysis of the legislative history of section 1964(c). The pri-

mary purpose of the section is to compensate those injured by orga-

nized crime: the section’s secondary purpose is to deter racketeers

from inflicting such injuries. Paralleling Mitsubishi’s analysis, we

find no evidence that Congress implied that all RICO claims be

non-arbitrable. Since plaintiffs may effectively vindicate their sec-

tion 1964(c) cause of action in the arbitral forum, the congressional

purpose behind section 1964(c) will continue to be served.

A-15

Mayaja, INC., ET AL. v. BODKIN, ET AL.

{8] The case sub judice presents yet another instance when,

“[iJnstead of being used against mobsters and organized criminals,

{section 1964(c)] has become a tool for everyday fraud cases

brought against ‘respected and legitimate ‘enterprises.’’ ” Sedima,

105 S. Ct. at 3287 (quoting Sedima, S.P.R.L. v. Imrex Co., 741 F.2d

482, 487 (2d Cir. 1984)). The claims presented as a whole are the

kind of claims for which the Commodity Futures Trading Commis-

sion has enacted extensive regulations governing arbitration. See

17 C.F.R. §§ 180.1-.5 (1986). In cases like that before us, the con-

gressional purposes of compensation and deterrence underlying

section 1964(c)—to the extent that any considerations of deter-

rence are present—may be fulfilled by arbitration of the plaintiffs’

claims. We hold, therefore, that the plaintiffs’ RICO claims must be

submitted to arbitration under the Federal Arbitration Act.

IV.

The order of the district court denying defendants’ motion to

compel arbitration is AFFIRMED with respect to plaintiffs’ 1934

Act claims; with respect to plaintiffs’ private RICO claims the dis-

trict court’s order is REVERSED and REMANDED with instruc-

tion to compel arbitration in accordance with the Federal Arbitra-

tion Act and relevant agency regulations.

PRINTED FOR

ADMINISTRATIVE OFFICE — U.S. COURTS

BY ELECTROGRAPHIC CORP. — SAN FRANCISCO

The summary, which does not constitute a part of the opinion of the court,

A-16

APPENDIX B

= yn) o>

APPENDIX B

IN THE UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF TEXAS

SAN ANTONIO DIVISION

SA-85-CA-2051

MAYAJA, INC., et al,

Plaintiffs

JOSEPH F. BopkIN, et al,

Defendants

ORDER

On this day came on to be considered defendant’s motion to

dismiss and compel arbitration. The Court finds plaintiffs’ allega-

tions to be sufficiently specific to comply with Rule 9(b)

F.R.Civ.P. Arbitration of the federal securities claim will be

denied based upon the established law in the Fifth Circuit. See,

Smokey Greenhaw Cotton Co., Inc. v. Merrill, Lynch, Pierce,

Fenner & Smith, Inc., 720 F.2d 1446, 1448 (Sth Cir. 1983).

Defendants argue that claims brought pursuant to the 1934 Act,

are subject to arbitration since the Supreme Court’s decision in

Dean Witter Reynolds, Inc. v. Byrd, ___. U.S. ___, 105 S.Ct.

1238 (1985). Among other authorities, a recent order from the

Austin Division of this district is cited in support of defendants’

position; this Court is of the contrary opinion. The Supreme

Court in Byrd, 105 S.Ct. at 1240, n.1, specifically stated that the

issue Of the arbitrability of 1934 Act claims was not before it. The

suggestion in the concurring opinion of Justice White that such

claims are arbitrable is insufficient to overcome clearly estab-

lished Fifth Circuit precedent.

FILED

SEP 2 2 9965

CHARLE Wi. YAGNE cea]

By Deavty |

It is therefore ORDERED that defendants’ motion to dis-

miss and compel arbitration is DENIED.

SIGNED this 20th day of September, 1985.

H. F. GARCIA

United States District Judge

B-2

tiling

ROBIE eh AIRE NMEN PIES AL OPE ADA ADE thier Be bin’

rere

IN THE UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF TEXAS

SAN ANTONIO DIVISION FILED

GCT 7

SA-85-CA-2051 viens ae

>. Vawlick, Cf,

By Lf rien

MayajJA, INc., et al, aa

Plaintiffs

Vv.

JOSEPH F. BODKIN, et al,

Defendants

ORDER

On this day came on to be considered defendants’ motion to

reconsider order denying defendants’ motion to stay or dismiss

and compel arbitration and amended motion to stay or dismiss

and compel arbitration . The Court has considered same and is of

the opinion that it should be in all things DENIED.

It is so ORDERED.

SIGNED this 7th day of October, 1985.

H. F. GARCIA

United States District Judge

B-3

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