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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition Brief
- **Published:** January 1, 1987
- **Citation:** 482 U.S. 923

## Text

) FILED ®

FEB 18 1987

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

fad bael' 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)

vi

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 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).

9

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

10

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).

1]

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

13

APPENDIX A

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:
I.

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:

(c) Any person injured in his business or property by reason of a viola-
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. ...

(c) It shall be unlawful for any person employed by or associated with
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.

A.

[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.

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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.

© We recognize that our decision accords neither with McMahon nor with
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-

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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

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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.

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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,
is copyrighted © 1986 by Electrographic Corporation, Sen Francisco.

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

vs

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

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385017_0499%3A2. Public record. Not legal advice.