Opposition Brief — Hubbard, Securities Commissioner of Delaware v. Olde Discount Corp

7

S Bpreme Court, U8,

No. 93-680 FILED

NOV 30 1993 |

In The

Supreme Court of the Unite States ——~

so

October Term, 1993

te.

RICHARD W. HUBBARD, Securities Commissioner of the

State of Delaware,

Petitioner,

VS.

OLDE DISCOUNT CORPORATION,

Respondent.

On Petition for Writ of Certiorari to the United States Court

of Appeals for the Third Circuit

RESPONDENT?’S BRIEF IN OPPOSITION

Re a

tes

ROBERT P. BRAMNIK

Counsel of Record

THOMAS P. FITZGERALD

ALTHEIMER & GRAY

Attorneys for Respondent

Of Counsel: 10 South Wacker Drive

JAMES S. GREEN Suite 4000

DUANE, MORRIS & HECKSCHER Chicago, Illinois 60606

1201 Market Street (312) 715-4000

Suite 1500

Wilmington, Delaware 19899

(302) 571-5550

——

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COUNTERSTATEMENT OF QUESTION PRESENTED

The two questions presented by petitioner are inappropriate

under the criteria outlined in Rule 10 of the Supreme Court Rules,

since they are not implicated by the record below. The record

below does support the following question:

Whether state officials, acting under color of state law, may

circumvent and interfere with a valid arbitration agreement by

asserting and interpositioning the civil claim of the party bound to

arbitrate in the guise of a state administrative proceeding. !

1. In accordance with Supreme Court Rule 29.1, respondent OLDE Discount

Corporation (“OLDE”) states that it isa Michigan corporation with its principal place

of business in Detroit, Michigan. OLDE Discountis a wholly-owned subsidiary of

OLDE Financial Corporation. OLDE Financial Corporation has debentures

outstanding which were previously issued ina public offering.

ii

TABLE OF CONTENTS

Counterstatement of Question Presented .............

TAD ORCS gov v kdicaccedeceeceresee eee

Reasons for Denyingthe Writ ..................205.

I.

The Petition Relies on New Factual Assertions to

the Exclusion of Those Found by the District Court

and the Court of Appeals. ....................

The District Court and the Court of Appeals

Applied the Proper Preemption Analysis in That

Petitioner’s Implementation of Delaware Law

Interferes With Federal Arbitration Rights Granted

re ere a en on err

The FAA Requires Enforcement of Arbitration

Agreements Against Non-Signatories to the

PATIO, 6.6.6. 0.56654 404k R ea

In Circumstances Where a State Statutory Remedy

Is Implemented by State Officials to Circumvent

Federal Rights to Arbitration, the FAA Necessarily

Provides an Exception to the Younger Abstention

DOCU. wi iccccnvcdecaaeewseeReieariem.s

CONCRIOIOR |... od oo does eee eee

10

15

18

22

ili

Contents

TABLE OFAUTHORITIES

Cases Cited:

Ankenbrandt v. Richards, 504 U.S. cms BAe GL. 2206

a oe 4 lea eR Ae ra

Barrowclough v. Kidder, Peabody & Co., Inc., 752 F.2d

I OE oy os nk basse cn ncescd acces

Colorado River Watch Conservation Dist. v. United States,

RE

Gilmer v. Interstate/Johnson Lane Corp.,500U.S.__, 111

ng cava das koe sec vccceodtuaccee

Gwynedd Properties, Inc. v. Lower Gwynedd Township,

970 F.2d 1195 (3rd Cir. 1992) ....................

Harman v. Forssenius, 380 U.S. 528 ( 2A

Heritage Farms, Inc. v. Solebury Township, 671 F.2d 743

(3rd Cir. 1982), cert. denied, 456 U.S.990(1982) ....

In Re Oil Spill by Amoco Cadiz, et al., 659 F.2d 789 (7th

eas Vi caas ease vn ced cicsecene

Letizia v. Prudential Bache Securities, Inc., 802 F.2d 1185

te es dS o.a be bb ow oo vnwkcces

Page

19

15,16

19

11,12

iv

Contents

Page

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

ieee ot.) Pree yar re rare |

Moses H. Cone Memorial Hospital v. Mercury

Construction Corp., 460 U.S. 1(1983) ............. 11,15

National Labor Relations Board v. Hendricks County

Rural Electronic Corp., 454U.S.170(1981) ........ 9

Ohio Civil Rights Commission v. Dayton Christian

ie ee a |) 18,19

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

i eG | a ne 1]

Perry v. Thomas, 482 U.S. 483 (1987) ................ 11

Porter v. Warner Holding Co., 327 U.S.395 (1946) ..... 13

Rodriguez De Quijas v. Shearson/American Express, Inc.,

ee eT TEE oes accu enh AvsN i eeshecnsnoese 11

Securities Industry Assoc. v. Connolly, 883 F.2d 1114 (1st

Cir. 1989), cert. denied, 495 U.S.956(1990) ........ 11

Shearson/American Express, Inc. v. McMahon, 482 U.S.

PRUE bck Vek Soins 440A ee ae eee ees 1]

Southland Corp. v. Keating, 465 U.S. 1(1984) ........ 11,17,20

Texas v. Mead, 465 U.S. 1041 (1984) .............0.0.. 9

Vv

Contents

Page

Younger v. Harris, 401 U.S. 37,91 S. Ct. 746 (1971) . 8,18, 20,21

Wooley v. Maynard, 430 U.S. 705 og: Dae ae 18

Statutes Cited:

Del. Code Ann. titl. 6, §7325(b) ..................... 6,7

Pe ne NI oo 455455 eee 7

Pe BR Frere ra oko Conran eee eae ee 7,19

Sc Ln PRUETT PUTER POETS ETD ns LI. 20

18 U.S.C. §§ 1961-1968 ..... 2... 6

EIU oe koa kee ta ee 6

Rules Cited:

si sch varias bon REET PETC TIT eeren e oe i, i

WORSE Bee suicide pee ee ]

PO CERI 6s0x2;, cee eee i

APPENDIX

Appendix A — Joint Verified Statement .............. la

Appendix B — Affidavit of Michael Tupman .......... 9a

a

]

No. 93-680

In the

Supreme Court of the United States

—~—

October Term, 1993

——

RICHARD W. HUBBARD, Securities Commissioner of the State

of Delaware,

Petitioner,

VS.

OLDE DISCOUNT CORPORATION,

Respondent.

On Petition for Writ of Certiorari to the United States Court of

Appeals for the Third Circuit

RESPONDENT’S BRIEF IN OPPOSITION

COUNTERSTATEMENT OF THE CASE

In accordance with Supreme Court Rule i ae

Counterstatement of the Case is necessary because the petition

recites as “fact” many assertions which are either not part of the

record or were otherwise rejected below. More importantly, the

y

petition fails to provide the Court with the underlying facts which

grounded the decisions below. The “Questions Presented” recited

in the petition are not the issues which would be before the Court if

a writ of certiorari were issued, since they are derived from

misstatements and omissions of fact and assertions of “fact” which

improperly posture the record below. For these reasons alone, the

petition is devoid of any merit for review and should be denied.”

Contrary to the impression left by the petition, the underlying

facts and circumstances which gave rise to this action do not relate

to the traditional or even bona fide exercise of a state’s regulatory

powers to enforce its securities laws. The record below evidences

the improper use of prosecutorial threats and extortion by public

officials for the sole purpose of advancing purely private interests

and resolving private disputes, in the guise of investor protection.

A more appropriate statement of the background, facts and

proceedings below demonstrates the absence of any issue

warranting review by the Court.

OLDE Discount Corporation (“OLDE”) is a securities broker-

dealer registered with the U. S. Securities and Exchange

Commission and with numerous states, including Delaware.

Eugene H. and Carol D. Engelhardt (the “Engelhardts”) are

2. For example, petitioner’s Statement of the Case relies heavily upon the

allegations contained in the Notice of Intent to Suspend or Revoke Broker-

Dealer Registration (“Notice”). (App. 76-88). However, the allegations of

wrongdoing contained in the Notice have never been findings in the record

below. The Notice is significant solely in that petitioner, in the context of an

administrative proceeding, sought private relief in the form of rescission on

behalf of two investors, Eugene H. and Carol D. Engelhardt, appellants below,

who had entered into an arbitration agreement with respondent OLDE. The court

below attached particular significance to the fact that the Notice “proposed

individual relief for the Engelhardts only.” (App. 6). [References to “App.” are

to the Appendix accompanying the Petition for Writ of Certiorari.]}

3

Delaware residents who opened a joint brokerage account with

OLDE. In connection with the opening and maintenance of their

account, the Engelhardts signed a brokerage account agreement

with OLDE which contains an arbitration clause requiring the

Engelhardts to submit to arbitration, any and all controversies or

claims arising out of their brokerage transactions or account with

OLDE.

In May and June, 1990, the Engelhardts purchased shares of

the common stock of Second National Federal Savings Bank

(“SNFS”) in their OLDE account. Months after that purchase, the

market price of SNFS declined. The Engelhardts became

dissatisfied with their SNFS purchases, but never submitted a

written complaint to OLDE, even though their account agreement

expressly required them to do so in writing, within ten days of any

disputed transaction. (App. 52). Subsequently, in September 1990,

when the market value of their SNFS stock had declined

approximately $20,375 from their initial investment, the

Engelhardts transferred their SNFS stock out of their OLDE

account. (App. 52).

Over a year after their purchase of SNFS stock, in July 1991,

the Engelhardts complained to the Division of Securities of the

Delaware Department of Justice about their SNFS stock purchases.

(App. 5). The Division, primarily through W. Michael Tupman

(“Tupman”), a Delaware Deputy Attorney General responsible for

securities law enforcement, investigated the Engelhardts’

complaint. (App. 5). After completion of a nearly year long

investigation of OLDE, in May 1992, Tupman sent OLDE a draft

“Notice of Intent to Suspend or Revoke Broker-Dealer

R »gistration” (“Notice”). (App. 53). The Notice read like a private

civil complaint of the Engelhardts. It alleged violations of the

Delaware Securities Act solely in connection with the Engelhardts’

SNFS stock purchases; and sought private relief solely on behalf of

the Engelhardts, including rescission of their purchases of SNFS

Ee

4

stock. (App. 6).° If filed, the Notice would trigger an

administrative proceeding which, among other things, would

resolve the Engelhardts’ complaint against OLDE. Resolution of

that dispute in the state’s administrative proceeding would, in turn,

circumvent OLDE’s mght to have the dispute resolved in

arbitration, in accordance with the Engelhardts’ arbitration

agreement.

In an effort to settle the threatened (but not yet initiated)

administrative proceeding which had been crafted solely on behalf

of the Engelhardts, counsel for OLDE engaged in settlement

communications with Tupman. Ultimately, OLDE offered to make

a $15,000 contribution to the Delaware Investor Protection Fund

(which was to “reimburse” the State for its expenses in the

investigation) to resolve any putative public interest in the

threatened administrative proceeding, and offered to pay $20,375

to the Engelhardts to settle their private complaint. The offer of

payment to the Engelhardts represented the difference between the

total price paid for their SNFS stock and the market value of the

stock in September, 1990 when they transferred their stock out of

OLDE. (App. 6-7). Alternatively, OLDE offered to pay all the

filing and forum fees for the Engelhardts’ claim to be heard and

decided in arbitration. (App.54).

Significantly, it is undisputed that Tupman agreed to accept

OLDE’s $15,000 contribution to the Investor Protection Fund to

resolve and settle any state putative public interest. (App. 7,54).

Tupman refused, however, on behalf of the Engelhardts, OLDE’s

settlement offer and instead demanded complete rescission of the

Engelhardts’ SNFS stock purchases, as contemplated by the

threatened administrative proceeding. (App. 7, 54). Throughout

3. In July, 1990, the Delaware Securities Act was amended to authorize

the Securities Commissioner to award private civil relief to Delaware residents

in state administrative proceedings.

5

the communications with Tupman, OLDE consistently maintained

that Tupman and petitioner Richard W. Hubbard (“Hubbard”), the

Delaware Securities Commissioner could not properly pursue in

any administrative proceeding, private rescissionary relief on

behalf of the Engelhardts, since OLDE had a contractual right to

arbitrate the Engelhardts’ complaint. (App. 7).

The culmination of the settlement discussions between OLDE

and Tupman occurred at a meeting on August 5, 1992 between

Tupman and representatives of OLDE. At that meeting, it was

confirmed that Tupman was acting as the agent of the Engelhardts,

representing their personal interests. (App. 55, Resp. App. la-8a,

13a).* Tupman vehemently expressed his disdain and contempt for

arbitration of the Engelhardts’ dispute. (Resp. App. 3a, 13a). On

behalf of the Engelhardts, Tupman stated that they refused to

arbitrate their civil claim; rather, they had selected the Delaware

Securities Commissioner’s Office to pursue their claim. (App. 55).

Also at the August 5 meeting, Tupman coerced OLDE,

through prosecutorial/extortionist threats, to pay the Engelhardts

the complete rescissionary value of their SNFS stock purchases.

(Resp. App. 4a). If OLDE did not pay the Engelhardts full

rescission, Tupman warned the OLDE representatives that they

should consider the exponential costs and difficulties it would

experience, including: adverse publicity; expanded investigation

of OLDE with additional costly and time-consuming discovery

requests and subpoenas; and notification to other regulators who,

in turn, would also investigate OLDE’s sales of SNFS stock to

residents in their respective states. (Resp. App. 6a-7a).

Just as a private attorney would meet with his or her client to

discuss settlement proposals, Tupman subsequently met with the

Engelhardts to convey OLDE’s settlement offer to them in the

4. Cites to “Resp. App.” refer to respondent's Appendix attached hereto.

6

amount of $20,375. (App. 56). The Engelhardts instructed Tupman

that they rejected OLDE’s offer and wanted the state to go forward

with its case. (App. 56). Moreover, Tupman characterized as

“baffling,” OLDE’s claim of its contractual right to arbitrate the

Engelhardts’ dispute and the federal preemption of Delaware’s

private rescission remedy. (App. 7).

OLDE insisted upon its federal right to arbitrate the

Engelhardts’ private claim and served the Engelhardts with a

written demand to arbitrate their dispute, pursuant to their contract.

(App. 7, 55). In turn, petitioner Hubbard issued the Notice which

included the demand for rescission of the Engelhardts’ SNFS stock

purchases. (App. 7, 57). Tupman viewed OLDE’s (contractually

mandated) demand for arbitration as an attempt to “pressure” the

Engelhardts into arbitration, and suggested that it was evidence of

OLDE’s bad faith, since he had disagreed with OLDE’s legal

position. (App. 56).

Facing the prospect of an administrative proceeding which

would resolve the Engelhardts’ private dispute with OLDE,

thereby frustrating and avoiding OLDE’s federal substantive right

to arbitrate that dispute, OLDE chose to protect that right by

commencing this action.* As here relevant, OLDE’s Verified

Complaint sought a preliminary injunction to halt petitioner’s

pursuit of rescission for the Engelhardts in his administrative

proceeding, ostensibiy authorized by the Delaware Securities Act,

Del. Code Ann. tit. 6, §7325(b).° As pursued by petitioner,

5. The court below held that petitioner’s administrative proceeding would

serve merely as a “substitute for the arbitration.” (App. 18).

6. Beyond the preliminary injunction which is the subject of this appeal,

the district court granted no further relief. An Amended Verified Complaint was

later filed, which included alleged violations of the Civil Rights Act, 42 U.S.C. §

1983 and civil “RICO,” 18 U.S.C. §§ 1961-1968. Trial on the remaining counts

is now scheduled for September, 1994.

7

§ 7325(b) would circumvent OLDE’s right to arbitration under the

Federal Arbitration Act, 9 U.S.C. § 1, et seg. (“FAA”), and thus

would violate the Supremacy Clause. (App. 8).

At the preliminary injunction hearing, in which Tupman

appeared on behalf of and represented himself, petitioner Hubbard

and the Engelhardts, the district court fook evidence in the form of

affidavits and numerous supporting documents, along with

assertions/admissions by Tupman and argument from counsel.

Tupman admitted in open court that these circumstances and

events were “very well memorialized” and the only issue

concerned the conclusions to be drawn from them. The district

court, in its Memorandum Opinion, noted that the material facts

were not in dispute. (App. 49). By Order dated September 16,

1992, the district court enjoined petitioner from pursuing a

rescission action under § 7325(b) of the Delaware Securities Act

on behalf of the Engelhardts, since their arbitration agreement with

OLDE is enforceable under the Federal Arbitration Act,9U.S.C. §

2. (App. 75). The court declined to abstain and held that the FAA

preempted the private rescission remedy of the Delaware

Securities Act, § 7325(b). (App. 9, 66).

Signally, contrary to the implication of the petition, the district

court did not enjoin petitioner from investigating OLDE or from

pursuing administrative remedies other than private relief on

behalf of the Engelhardts. (App. 21). The preliminary injunction

for which the petitioner seeks review did not infringe upon or

interfere with the state’s proper role, interest or traditional State

objectives in securities law enforcement. The petitioner was

enjoined only from pursuing administrative proceedings and

private remedies which pose obstacles to the full purposes and

objectives of Congress in adopting the FAA. (App. 17, 21, 66-67).

The court below affirmed on two different grounds, holding:

(1) that the FAA preempts petitioner’s authority under Delaware

8

law to pursue private administrative relief in these circumstances,

and (2) that principles of contract law preclude petitioner from

pursuing private remedies in an administrative proceeding which

would interfere with and “end run” around the terms of a valid

arbitration agreement. (App. 3, 34). The court below also

unanimously affirmed the district court’s decision to intervene

(rather than abstain).’ The petitioner’s authority under the

Delaware statute is preempted since it authorizes relief directly in

conflict with rights secured by the FAA, and necessarily presents

an exception to the abstention doctrine of Younger v. Harris, 401

U.S. 37,91 S.Ct. 746 (1971). The two independent grounds for the

decisions by the court below are amply supported by the record, are

consistent with the law favoring arbitration and therefore should

not be disturbed.

REASONS FOR DENYING THE WRIT

The court of appeal’s decision does not present any question

which warrants review by this Court. That decision reaffirmed and

applied well-settled authority on the strong federal policy favoring

arbitration. An integral component of that policy, as embodied by

the decision below, is that states may not disfavor arbitration by

compelling the resolution of arbitral disputes into alternative state-

mandated forums. In this regard, the petition raises ne issue that

merits review. Rather, the petition offers case-specific, fact-driven

issues which have already been decided adversely to petitioner by

both the district court and the court of appeals.

Reexamination of the substantial record and detailed analysis

supporting the lower court’s affirmance of the order of preliminary

injunction is a factbound task that does not warrant certiorari. The

petition raises no substantial question of law. There is no conflict in

the lower courts. This case merely represents a new variation on an

7. Petitioner’s request for rehearing en banc was also denied.

9

old theme: state interference with federal substantive rights to

arbitration.

I.

THE PETITION RELIES ON NEW FACTUAL

ASSERTIONS TO THE EXCLUSION OF THOSE

FOUND BY THE DISTRICT COURT AND THE

COURT OF APPEALS.

The findings of fact below were concededly uncontroverted:

and the District Court noted that the material facts were not in

dispute. (App. 49). The Court of Appeals also concurred in the

factual findings. Petitioner now improperly takes issue with the

findings of fact, offers new facts which are not in the record below

and suggests that some of the findings were “erroneously labeled

‘undisputed’.” (Petition for Writ of Certiorari, hereinafter “Pet.”

5). Signally, petitioner never sought reconsideration of the

findings in the district court. Now, in hindsight, petitioner

inappropriately requests this Court to review evidence, take new

“evidence” and discuss specific facts. The petition is ill-advised in

that it seeks review of a decision which presents primarily a

question arising out of the particular facts involved. For this reason

alone, the petition is improvident and should be denied. National

Labor Relations Board v. Hendricks County Rural Electronic

Corp., 454 U.S. 170, 176, n. 8 (1981); Texas v. Mead, 465 U.S.

1041 (1984) (Stevens, J.).

Beyond its omission of the central, relevant facts and

circumstances upon which the decisions rest, the petition offers

new “facts” in an attempt to controvert the heretofore “undisputed”

facts. For example, the petition takes issue with a factual finding

concerning the Engelhardts’ investment objectives, offering new

hearsay allegations in a belated attempt to rebut the findings. (Pet.

5, n. 2). Similarly, the petition claims that the court of appeal’s

description of OLDE’s business in 1990 is incorrect. In support of

10

its assertion, the petition references a brochure, allegedly sent by

OLDE to Delaware residents in August 1993, more than three

years after the relevant period encompassed by the Engelhardts’

1990 stock transactions. (Pet. 6, n. 3). The referenced “brochure” is

found nowhere in the record below, which explains petitioner’s

lack of citation to the record on this new factual assertion. The

petition also takes issue with the district court’s finding that

OLDE’s settlement offer would have fully compensated the

Engelhardts for their loss in SNFS during the period they held their

stock at OLDE, suggesting that the court overlooked other “facts”

now offered in the petition. (Pet. 9, n. 5). These examples

demonstrate petitioner’s displeasure with the “undisputed facts.”

In this regard, the petition raises fact-driven issues and therefore

should be denied.

I.

THE DISTRICT COURT AND THE COURT OF

APPEALS APPLIED THE PROPER PRE-

EMPTION ANALYSIS IN THAT PETITIONER’S

IMPLEMENTATION OF DELAWARE LAW

INTERFERES WITH FEDERAL ARBITRATION

RIGHTS GRANTED BY THE FAA.

Given the peculiar facts and circumstances of this case, both

lower courts correctly found that federal preemption was

appropriate, in that petitioner’s pursuit of private remedies in an

administrative forum would interfere with and create an obstacle to

OLDE’s federal rights under the FAA. Delaware created a

statutory scheme which, as implemented by petitioner here,

circumvents and forecloses federal arbitration rights. The

aggravating record below demonstrates that petitioner’s Notice

was issued solely to assert and adjudicate the Engelhardts’ civil

claim in the administrative forum, in retribution for OLDE’s

failure to settle that single claim on terms demanded by Tupman, in

11

violation of OLDE’s federal substantive right to arbitrate that

dispute. The court of appeals correctly perceived the state-created

conflict, noting that petitioner sought to “adjudicate

administratively the very same [claim] that the Engelhardts

themselves could pursue only within an arbitration.” (App. 17).

This Court has historically and routinely accorded preer-ptive

effect to the FAA, invalidating state laws that discriminate against,

circumvent or create obstacles to the enforcement of federal

arbitration rights. See generally Moses H. Cone Memorial

Hospital v. Mercury Construction Corp., 460 U.S. 1 (1983);

Southland Corp. v. Keating, 465 U.S. 1 (1984); Mitsubishi Motors

Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985);

Perry v. Thomas, 482 U.S. 483 (1987); Shearson/American

Express, Inc. v. McMahon, 482 U.S. 220 (1987); Rodriguez De

Quijas v. Shearson/American Express, Inc., 490 U.S. 477 ( 1989);

Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. __, 111 S. Ct.

1647 (1991). See also Osterneck v. Merrill Lynch, Pierce, Fenner

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

Assoc. v. Connolly, 883 F.2d 1114 (1st Cir. 1989), cert. denied, 495

U.S. 956 (1990).

Although petitioner disagrees with the preemptive force of the

FAA, the petition ignores the longstanding preemption rationale

which was correctly applied by the courts below. Rather, in a

desperate attempt to incite interest, the petition incorrectly states

that the decision below “blatantly disregards” this Court’s holding

in Gilmer, supra. (Pet. 14). Contrary to this bald assertion, both the

district court and the court of appeals below expressly considered

and followed the teachings of Gilmer. (App. 62-63, 15, 19-20, 42-

43). In Gilmer, this Court rejected any contention that the

involvement of a federal administrative agency (Equal

Employment Opportunity Commission) in a statutory scheme of

enforcement was sufficient to preclude arbitration of those claims.

In the face of this clear and expansive holding, petitioner clings to

Aicta in that decision which stated that the EEOC is not precluded

12

from bringing an action seeking “class-wide and equitable relief.”

Gilmer, 1118S. Ct. at 1655.

However, petitioner’s reliance upon that language has no

relevance to the facts in this case. Significantly, as the court below

noted, petitioner was not seeking “class-wide equitable relief” in

the Notice issued against OLDE. (App. 20, n. 5). Rather,

petitioner’s Notice expressly sought rescission specifically on

behalf of the Engelhardts, a claim which was bound to arbitration.

The court below considered and correctly rejected petitioner’s

contention that Gilmer establishes that the state’s interest in the

private remedy of rescission should be given “special exemption”

from traditional preemption principles. (App. 20). Simply, the

issue of “class-wide relief” in the context of federal arbitration

rights will not be before this Court if the petition is granted.

Similarly, petitioner’s “distinction” between restitution and

damages, and the so-called “public interest” in the remedy of

rescission are both illusive under these circumstances. (Pet. 18, 23-

24). In Gilmer, this Court expressly considered and dismissed such

veiled distinctions. Specifically, in the context of a private claim

which the Court held was required to be decided in an arbitral

forum, the Court noted:

It is true that arbitration focuses on specific

disputes between the parties involved. The

same can be said, however, of judicial

[administrative] resolution of claims. Both of

these dispute resolution mechanisms

nevertheless also can further broader social

purposes. The Sherman Act, the Securities

Exchange Act of 1934, RICO, and the

Securities Act of 1933 all are designed to

advance important public policies, but, as

noted above, claims under those statutes are

13

appropriate for arbitration. “[S]o long as the

prospective litigant effectively may vindicate

[his or her] statutory cause of action in the

arbitral forum, the statute will continue to serve

both its remedial [private interest] and

deterrent [public interest] function.” Gilmer,

supra, at 1653 (emphasis supplied), citing

Mitsubishi, supra, at 637.

Clearly, the totality of the factual record below demonstrates

that petitioner’s institution of the administrative proceeding

against OLDE was not in the “public interest,” but was instead

instituted solely on behalf of the Engelhardts, as the district court

found. (App. 75). The private claim which petitioner was pursuing

on behalf of the Engelhardts in the administrative proceeding

would clearly be subject to arbitration if pursued directly by the

Engelhardts themselves. Tupman, as Deputy Attorney General,

using the power of his title and office was, in effect, the de facto

attorney for the Engelhardts.

The court below correctly held that preemption was

appropriate, given the “community of interest” among petitioner,

Tupman and the Engelhardts, which “implicitly demonstrates that

the administrative proceedings are an obstacle to Congress’

purpose in adopting the FAA.” (App. 17). Simply put, preemption

Was necessary since petitioner was attempting to do indirectly

what the Engelhardts could not do directly (i.e,. avoid arbitration).®

8. Petitioner’s reliance upon Porter v. Warner Holding Co., 327 U.S. 395

(1946) and Kelly v. Robinson, 479 U.S. 36 (1986) is misplaced. In Porter, the

tenants who benefitted from an award of restitution could not have brought their

own private actions to recover rent overpayments. In contrast, the Engelhardts

could have brought their own claims, in arbitration, but were relying on

petitioner “to obtain a remedy that would frustrate the arbitration.” (App. 17).

Although neither case concerned federal arbitration rights, both cases involved _

bona fide government proceedings seeking “class-wide” as opposed to singular

equitable relief.

iia laa

14

Moreover, contrary to the petitioner’s suggestion, the state

putative “public interest” will not be substantially interfered with

by the decision below. In this regard, the district court did not

enjoin petitioner from pursuing any other administrative remedies;

only private rescission of the Engelhardts’ purchases.’ Therefore,

petitioner retains many avenues for its pursuit of proper state

objectives in securities law enforcement.

Petitioner stretches the boundary of plausible argument in

suggesting that the decision below is “incorrect.” (Pet. 21).

Specifically, petitioner takes issue with the decision below which

effectively held that the federal right to arbitrate would be

“meaningless” if petitioner could order private rescission to the

Engelhardts in the administrative proceeding. Fundamentally and

practically flawed, petitioner suggests that OLDE might still

derive a “great benefit” from its arbitration agreement even if

petitioner were allowed to order rescission on behalf of the

Engelhardts. (Pet. 21). Such an illogical contention was correctly

dismissed by the court below. (App. 16-19).

The reality is that the Engelhardts did not initiate an

arbitration claim against OLDE as required by their arbitration

agreement. Rather, as the court of appeals observed, they relied

upon petitioner and Tupman to obtain a private remedy which

would circumvent the arbitration. (App. 17). Petitioner’s

suggestion of harmony between the state’s private rescissionary

statute and the FAA is “illusory,” as found below. (App. 18). If, for

example, petitioner awarded rescission to the Engelhardts in his

administrative proceeding, clearly there would be no arbitration of

the dispute, since the Engelhardts would receive full rescission in

the administrative proceeding. In such a case, OLDE’s federal

right to arbitrate would be meaningless.

9. As discussed at pp. 16-17, 21 below, this argument is a “red herring”

since, in this particular case, there was no issue of state or public interest; any

such interest having been resolved. (App. 6-7).

ee

ee

——————

15

Moreover, as the court below correctly observed, if forced to

defend the Engelhardts’ claim in the state’s administrative

proceeding, OLDE “would be deprived of its right to the presumed

simplicity and efficiency of the arbitral forum.” (App. 19).

Therefore, the private rescission remedy, as implemented here by

petitioner on behalf of the Engelhardts, would completely

eviscerate OLDE’s federal arbitration right. The court below

correctly held that the state’s private rescission remedy is

preempted by the FAA since it “presents an obstacle to the

accomplishment of the congressional purpose of enforcing

arbitration agreements, and because it is impossible to give effect

to both the administrative rescission remedy and the federal right

to arbitration.” (App. 19). The decision is consistent with the broad

and unbroken line of decisions by this Court favoring arbitration in

the face of a state’s attempt to bypass federal rights to arbitrate.

Il.

THE FAA REQUIRES ENFORCEMENT OF

ARBITRATION AGREEMENTS AGAINST

NON-SIGNATORIES TO THE AGREEMENT.

Petitioner contends, without citation to any authority, that

since he was not a party to the arbitration agreement, he cannot be

bound by its terms. (Pet. 13, 22). This concept was, contrary to the

petition, not ignored. The court below considered this point, but did

not alter its decision. Reminiscent of this Court’s opinion in Moses

H. Cone Memorial Hospital, the court of appeals stated that under

the FAA “an arbitration must be enforced notwithstanding the

presence of other persons who are parties to the underlying dispute

but not to the arbitration agreement.” (App. 18), citing, Moses H.

Cone Memorial Hospital, supra, 460 U.S. at 20. Numerous other

federal court decisions have held that nonsignatory agents of

principals are bound by the terms of the arbitration agreement. See

generally Barrowclough v. Kidder, Peabody & Co., Inc., 752 F.2d

16

923 (3rd Cir. 1985) (employee and nonsignatory contingent

beneficiaries bound by arbitration agreement); Letizia v.

Prudential Bache Securities, Inc., 802 F.2d 1185 (9th Cir. 1986)

(employees/agents who were nonsignatories to a customer

brokerage agreement could be bound by the arbitration clause); /n

Re Oil Spill by Amoco Cadiz, et al., 659 F.2d 789 (7th Cir. 1981)

(nonsignatory agent bound to arbitration where purposes of FAA

would not be advanced if agent were allowed to disavow principal-

agent relationship for purposes of arbitration).

The court below had ample evidence upon which to conclude

that petitioner was acting as agent of the Engelhardts, parties to the

arbitration agreement, and tl.crefore bound by its terms. First, the

district court necessarily found that petitioner was expressly

pursuing private rescissionary relief “on behalf of the

Engelhardts.” (App. 75, 67). Indeed, the administrative

proceedings were instituted based solely upon the Engelhardt’s

complaint; the Notice itself was predicated exclusively upon the

dispute between OLDE and the Engelhardts. (App. 17, 20, n. 5).

The record below fully supports the conclusion that

petitioner’s administrative proceeding would merely be a

substitute for the arbitration. (App. 18). There was no “public

interest” in the state’s pursuit of private relief for the Engelhardts.

Tupman had agreed to accept OLDE’s $15,000 contribution to the

Investor Protection Fund to resolve any putative state public

interest. (App. 7), (Resp. App. 4a). The purpose of the

administrative proceeding was to pursue the private interests of the

Engelhardts, which the district court found. (App. 75).

The principal-agent relationship among petitioner, Tupman

and the Engelhardts was described by the court below as a

“community of interest” in the Engelhardts’ complaint. (App. 17).

Not unlike a private attorney, Tupman met with the Engelhardts to

discuss OLDE’s settlement proposal. (Resp. App. 13a). The

Ba iru gt, i at is a gy ak i ga

17

Engelhardts instructed Tupman to proceed with the administrative

proceedings and, in retaliation for OLDE’s demand to arbitrate the

dispute, Tupman and petitioner instituted the proceedings.'°

Before the district court, Tupman refused to bifurcate the state’s

pursuit of rescission for the Engelhardts (a private interest) from

the remainder of the administrative proceeding (the public

interest). (App. 26, n. 9). Furthermore, as the court below also

recognized, Tupman filed the appeal on behalf of the Engelhardts,

who were not represented by separate and independent counsel on

either the appeal or in the earlier settlement negotiations with

OLDE. (App. 17).

Based upon this abundance of evidence, it is clear that

petitioner and his agent Tupman stepped into the shoes of the

Engelhardts and instituted administrative proceedings not for any

“public purpose,” but solely to pursue private rescission for the

Engelhardts. Without the district court injunction, the Engelhardts,

through the assistance of their agents, petitioner and Tupman,

acting through the subterfuge of the administrative proceeding,

would have been able to “end run” around the arbitration. Such a

result would defeat the FAA’s fundamental purpose: a national

policy which favors arbitration and withdraws the power of states

to require an alternative forum for the resolution of claims which

the parties agreed to resolve by arbitration. Southland Corp.,

supra, 465 U.S. at 10.

10. Curiously, Mr. Tupman has not joined in this petition, notwithstanding

findings that his actions were not on behalf of the state, but on behalf of the

private interests of Mr. & Mrs. Engelhardt. (App. 17).

18

IV.

IN CIRCUMSTANCES WHERE A _ STATE

STATUTORY REMEDY IS IMPLEMENTED BY

STATE OFFICIALS TO CIRCUMVENT

FEDERAL RIGHTS TO ARBITRATION, THE

FAA NECESSARILY PROVIDES AN EX-

CEPTION TO THE YOUNGER ABSTENTION

DOCTRINE.

The district court and the court of appeals concluded that the

abstention doctrine of Younger v. Harris, 401 U.S. 37 (1971) was

not applicable to OLDE’s claim of federal entitlement to

arbitration under the FAA. (App. 3). Petitioner’s suggestion that

the court below “carved out a new exception for FAA preemption

claims” is incorrect. (Pet. 25). Rather, the court appropriately

balanced the confrontation between the normal limits of Younger

abstention against the “highly favored” and congressionally

mandated right to arbitration. (App. 30). The court below resolved

the collision between these two competing interests in favor of

arbitration, since deference to the petitioner’s administrative

proceeding would present a significant and immediate potential for

irreparable harm to the federal interest asserted. (App. 25-26),

citing Wooley v. Maynard, 430 U.S. 705, 710 (1977); Ohio Civil

Rights Commission v. Dayton Christian Schools, Inc., 477 U.S.

619, 626 (1986); Harman v. Forssenius, 380 U.S. 528, 537 (1965).

In these unusual circumstances, where petitioner instituted

administrative proceedings, yet OLDE, under the auspices of the

FAA, is guaranteed in the first instance an arbitral forum in which

to resolve the Engelhardt’s dispute, the delay inherent in waiting

for guidance from the state appellate court after petitioner’s

administrative proceeding is concluded would necessarily result in

great and immediate irreparable injury, since OLDE’s federal right

would be rendered meaningless and lost forever. Jd. Therefore, the

ie

19

courts below properly intervened to protect OLDE’s rights under

Section 2 of the FAA.

This Court has instructed that the doctrine of abstention “is an

extraordinary and narrow exception to the duty of the District

Court to adjudicate a controversy properly before it ....”

Colorado River Water Conservation Dist. v. United States, 424

U.S. 800, 813 (1976). Therefore, “[a]bstention rarely should be

invoked.” Ankenbrandt v. Richards, 504 U.S. —_., 112S. Ct. 2206,

2215 (1992).

There can be no dispute, as the district court noted, that

petitioner (and Tupman) were “engaged in a course of action

openly inconsistent with [OLDE’s] rights under Section 2 of the

FAA ....” (App. 30). In these circumstances, OLDE cannot be

turned away from federal court by petitioner’s expedient

invocation of Younger abstention. The very nature of OLDE’s

contractual right, as sanctioned by the FAA, is to have claims

addressed in an arbitration forum in the first instance. The court

below correctly observed that if the district court abstained in this

case, it would be refusing to protect, and OLDE would suffer

immediate irreparable harm to, federal rights established by the

FAA. (App. 27-28).

Petitioner’s argument, rejected below, would obviously evade

federal arbitration rights rendering those rights meaningless.

Petitioner’s insistence upon pursuing administratively, a

private rescission remedy in conflict with OLDE’s right to an

arbitral forum under the FAA presents “the very unusual situation

that an injunction is necessary to prevent great and immediate

irreparable injury.” Ohio Civil Rights Commission, supra, at 626.

Hence, the court below correctly noted that OLDE’s

procedural right to an arbitration forum is “raised to a substantive

20

right by the FAA.” (App. 28). The district court appropriately

intervened to uphold and protect that right. This Court intervened

in a similar case where a person bound to arbitration ignored and

avoided the arbitration requirement and instead resorted to the

courts. Southland Corp., supra, 465 U.S. at 6-8. Southland

instructs federal courts not to stand idle while the FAA’s mandate is

evaded. (App. 28)."'

Beyond the reasons articulated by the court below, the record

fully supports intervention for another reason as well. Important

state interests implicating Younger are not raised in circumstances

as here, where state officials abuse state process to violate federal

constitutional and statutory rights. Heritage Farms, Inc. v.

Solebury Township, 671 F.2d 743, 748 (3rd Cir. 1982), cert. denied,

456 U.S. 990 (1982); Gwynedd Properties, Inc. vy. Lower Gwynedd

Township, 970 F.2d 1195, 1202 (3rd Cir. 1992). The abusive

manner by which these proceedings have been pursued

overshadows any legitimate interest which the state might

otherwise have in the enforcement of the underlying statute.

Although Delaware may have an important interest in policing the

securities industry, that interest is not furthered (or even served) by

petitioner’s (and prosecutor Tupman’s) use of the Delaware

Securities Act as an implement for coercing private settlements on

-behalf-of investors who are otherwise bound to arbitrate their

claims. As in Gwynedd Properties and in Heritage Farms, the

11. The pervasive and expansive enforcement of arbitration rights and the

need for federal intervention when arbitration rights are challenged, can be

gleaned from the congressional intent reflected directly in the FAA, 9 U.S.C.

§ 16. That section, entitled “Appeals,” provides that while orders compelling

arbitration are not immediately appealable, orders denying requests to compel

arbitration are immediately appealable. The court below noted that “[t)his

dichotomy reflects the paramount importance that Congress has placed on

arbitration . . . [granting] the Courts of Appeals broad authority to ensure that

district courts are not circumscribing the rights granted by the FAA... .” (App.

29).

21

conduct here is so outrageous as to transcend any putative state

interest which might otherwise justify federal abstention.

Moreover, Younger has always excepted from its scope those state

proceedings that are not “good faith attempts” to enforce a state

statute. Younger, supra, at 54.

Finally, the district court’s intervention was carefully limited

to protect OLDE’s federal rights to arbitration, but did not interfere

with petitioner’s putative public interest in state securities law

enforcement. The court of appeals noted this limitation

approvingly, as well. (App. 20-21, 36, n.1). The order of

preliminary injunction did not usurp the state’s power to enforce its

securities law generally, nor did it restrain petitioner’s

administrative proceedings against OLDE. The decision to

intervene was vital since “delayed enforcement destroys the

federal statutory right.” (App. 31).

22

CONCLUSION

For the foregoing reasons and controlling authorities, the

petition for a writ of certiorari should be denied.

Respectfully submitted,

ROBERT P. BRAMNIK

Counsel of Record

THOMAS P. FITZGERALD

ALTHEIMER & GRAY

Attorneys for Respondent

10 South Wacker Drive

Suite 4000

Chicago, Illinois 60606

(312)715-4000

Of Counsel:

JAMES S. GREEN

DUANE, MORRIS & HECKSCHER

1201 Market Street

Suite 1500

Wilmington, Delaware 19899

(302) 571-5550

APPENDIX

The attached documents, part of the record below, were

referenced and relied upon by the district court and court of appeals

in reaching their decisions. (App. 7, 17, 53-56).

la

APPENDIX A — JOINT VERIFIED STATEMENT

Joint Verified S

This Verified Statement is subscribed and sworn to jointly by

Randal J. Mudge, Bruce A. Campbell and J. Richard Tucker based

upon their personal knowledge and belief.

On August 5, 1992, a meeting took place between

representatives of the Office of the Attorney General of the State of

Delaware and OLDE Discount Corporation (“OLDE”), a broker-

dealer. The meeting was held at the request of OLDE. Deputy

Attorney General W. Michael Tupman and securities Investi gator

F. Gregory Gause, Jr. attended the meeting on behalf of the State of

Delaware. Randal J. Mudge, Managing Director and CEO of

OLDE, Bruce A. Campbell, Corporate Attorney and J. Richard

Tucker, special counsel, attended on behalf of OLDE. The

meeting commenced at approximately 10:30 AM at the offices of

Mr. Tupman in Wilmington, Delaware.

At the outset of the meeting, Mr. Tupman referred to a recent

broker-dealer revocation action instituted by the State against

another securities brokerage firm. Mr. Mudge responded and

presented a brief history of OLDE in order to distinguish OLDE

from the firm whose broker-dealer registration had recently been

revoked by the State Securities Commissioner. In response, Mr.

Tupman stated in substance that:

We do not consider you [OLDE] to be in the

same class as that firm, we consider Hibbard

Brown to be at one end of the spectrum and

OLDE to be at the other end. It is because we

consider you to be at the level of the most

honorable of firms, that we have a higher

standard for you and we have greater

expectations from you. -

2a

Appendix A

Mr. Tucker then stated that he did not believe or understand

that Donohoe’s alleged conduct to be fraudulent, and that the

alleged omissions concerning the impact of the Financial

Institutions Reform, Recovery and Enforcement Act of 1989,

enacted August 9, 1989 (“FIRREA”), on Second National Federal

Savings (“SNFS”), (as contained in the draft Notice sent to OLDE

by Mr. Tupman) were harmless omissions, even if it was omitted

from Donohoe’s discussions with the Engelhardts. Mr. Tucker

noted that conditions in the Savings and Loan Industry as well as

the U.S. government’s efforts to improve the capital for thrifts

were common knowledge because they had been enacted almost a

full year before the Engelhardts’ purchases and were the subject of

daily writings and discussions by both the print and broadcast

media. In response, Mr. Tupman stated in substance that:

The Engelhardts are unsophisticated investors

and they would have needed such an

explanation.

The conversation then turned to the issue of the State pursuing

penal sanctions at the same time it was negotiating a civil

settlement on behalf of the Engelhardts. OLDE representatives

urged the State to bifurcate its enforcement activities from the

interests of the Engelhardts by accepting OLDE’s offer of

settlement which had previously been negotiated with the State

(i.e. payment of $15,000.00 to the Delaware Investors Protection

Fund in return for the State closing of its files without the filing of

any complaint). In response, Mr. Tupman stated in substance that:

Oh you brokers would love nothing more! You

brokers ‘never’ respond to customer

complaints! You never pay off complaining

clients, you force customers to sign arbitration

Gp BES tae GEE SE se

OLE De ADT Cm mee

3a

Appendix A

agreements and you always force the claimants

to go to arbitration which is stacked against

them! Brokerage clients cannot go to lawyers

for redress in the courts because (1) it takes

forever; (2) the clients get terrible results; (3)

the clients have the costs of litigation,

including legal fees; and (4) you brokers would

love nothing more than to force a client into a

settlement! The Engelhardts are not going to

arbitration and they are not going into the state

or federal courts because, as I said earlier this

morning, they have chosen their remedy which

is rescission under Section 7325(b) of the

Delaware Code!

OLDE representatives once again reiterated its offer to pay a

fine or penalty in the amount of $15,000.00 to the Delaware

Investor Protection Fund, to settle the charges without publicity or

any formal proceeding, particularly since the State agreed that the

alleged misconduct did not amount to securities fraud, because the

State offered to close its files without the filing of any public notice

or action in return for such payment, and OLDE considered the

absence of adverse publicity to be advantageous. In response, Mr.

Tupman stated in substance that:

We can understand why you would like to

avoid the bad publicity, but we will settle with

you only if you repay the Engelhardts in full

($52,875.00).

OLDE representatives inquired as to whether the State had

any disagreement with the portion of the settlement which

included the payment of $15,000.00 to the Delaware Investors

4a

Appendix A

Protection Fund. In response, Mr. Tupman stated in substance that:

No, as we have stated, we are in agreement on

that. OLDE’s proposed contribution is

acceptable. The only remaining question is

whether rescission or restitution for the

Engelhardts is appropriate. We believe that

rescission in the amount of $52,875.00 is

appropriate.

Mr. Tucker stated that the application of amended Section

7325(b), in the contemplated matter, was inappropriate for two

reasons. First, the alleged misconduct occurred prior to the

Delaware legislature’s enactment of amended Section 7325(b) and

that such an application would amount to a violation of the due

process clauses of the U.S. and Delaware Constitutions as an ex

post facto law. Second, OLDE representatives suggested that the

imposition of such a remedy was in violation of the Due Process

clauses of both the U.S. and the Delaware State Constitutions if, as

it appeared, the office of the State Attorney General was, in effect,

forcing the settlement of civil litigation (with the Engelhardts) by

threatening penal actions including fines and revocation of

OLDE’s broker-dealer registration, unless OLDE paid the amount

demanded by the State to settle any potential civil litigation with

the Engelhardts. In response, Mr. Tupman stated in substance that:

Delaware is one of the few jurisdictions which

have such (rescission/restitution) legislation

and we intend to pursue it vigorously even if

those other jurisdictions don’t want to help

their citizens. None of the other States and

none of the self-regulatory bodies are imposing

such remedies and I am the only one who is

Sa

Appendix A

doing my job. I certainly resent you coming in

here and giving me a first year law student

lecture. We [the office of the securities

Commissioner] have recently upheld this

Section in the Hibbard Brown matter and this is

the law in Delaware, even though that decision

is now being appealed from the Administrative

process to the Delaware Court of Chancery,

this is the law in Delaware!

OLDE representatives then suggested that the State Attorney

General was in an awkward ethical dilemma. It appeared as if Mr.

Tupman was providing private legal advice to the Engelhardts [by

advising them concerning OLDE’s settlement offer to them and

counselling that they ignore OLDE’s offer and pursue a remedy

under amended Section 7325(b)], while simultaneously purporting

to act as the State’s lawyer [which has somewhat different interest

from those of the Engelhardts] in its ostensible pursuit of penal

enforcement proceedings against OLDE. In response, Mr. Tupman

stated in substance that:

We will have to terminate this meeting. If you

are suggesting that I am doing something

unethical then you are really skating on thin

ice! I am a representative of the State and I

resent you implying that I would do anything

unethical, and if you are suggesting that I am,

then we will terminate this meeting!

OLDE representatives then suggested that the Engelhardts

had failed to mitigate any damages which may have been caused by

OLDE or its agents, if in fact OLDE’s actions resulted in any

damages, and that no court or arbitrator would be likely to

6a

Appendix A

conclude, as a matter of law, that OLDE should pay the full amount

of $52,875, even if there was a finding of liability. Accordingly,

the State’s insistence upon rescission of the total amount that the

Engelhardts invested was tantamount to OLDE becoming a

guarantor of the performance of its clients’ investments.

Therefore, management of OLDE, while expressing a desire to

resolve this matter through settlement, couldn’t justify such

resolution under the patently unreasonable economic terms

demanded by the State. In response, Mr. Tupman stated in

substance that:

I am not certain you have considered the

economics of the exponential difficulties

which you will experience if you do not accept

the State’s offer. First, there will be adverse

publicity for OLDE. Have you considered the

exponential costs of responding to all of the

fifty states when we notify them of our action,

and to the Exchanges and the other self-

regulators? You will have to amend your U-6

(Uniform Registration Form) with all the

regulators, in order to notify them of the

institution of our action and again with the

results of our Proceedings. We will expand this

investigation with respect to Delaware

residents and the other states will investigate

OLDE’s sales of SNFS in their states. We will

file additional discovery requests and issue

subpoenas which will be time consuming and

costly for you to answer. It will be very costly if

we conduct a full-bore SNFS investigation.

When you consider the exponential effect and

the economics of all of those actions, then

7a

Appendix A

maybe you will think that our offer is not so

unreasonable and you will accept it (to avoid

these consequences).

In closing, Mr. Tucker indicated that there would be a letter

following this meeting which letter would memorialize the points

made during the meeting. In response, Mr. Tupman stated in

substance that:

I strongly advise that a letter memorializing

our meeting should not be sent! Why would

you do that? You do not want to do that. You

indicated that you didn’t want publicity and I

could not protect such a letter under the

Freedom of Information Act (“FOIA”). I could

protect our previous correspondence under

FOIA, but I would be unable to protect a letter

confirming this meeting. I would not

appreciate disclosure of my deliberative

process.

Nevertheless, shortly after the meeting, OLDE delivered to

Mr. Tupman a letter dated August 5, 1992 which memorialized the

substantive points raised by OLDE representatives in their meeting

with Mr. Tupman and Mr. Gause. Acopy of the letter delivered to

Mr. Tupman is contained in the Appendix Exhibit J.

8a

Appendix A

JOINT VERIFICATION

The undersigned: Randal J. Mudge, Chief Executive Officer

of the plaintiff; Bruce A. Campbell, Corporate Attorney of the

plaintiff; and J. Richard Tucker, an outside attorney and consultant

to the plaintiff hereby verify, under the penalty of perjury under the

laws of the United States of America, that the undersigned have

read the attached joint verified statement and the statements

contained therein are true and correct.

/s/ /s/ /s/

Randal J. Mudge Bruce A. Campbell J. Richard Tucker

9a

APPENDIX B — AFFIDAVIT OF MICHAEL TUPMAN

IN THE UNITED STATES DISTRICT COURT

DISTRICT OF DELAWARE

CivilAction No. 92-498

OLDE DISCOUNT CORP.,

Plaintiff,

W.MICHAELTUPMAN, Deputy Attorney General, and

RICHARD W. HUBBARD, Securities Commissioner of the State

of Delaware,

Defendants.

AFFIDAVIT OF W, MICHAEL TUPMAN

STATE OF DELAWARE

NEW CASTLECOUNTY : ss

W. MICHAEL TUPMAN, being duly sworn, states as

follows:

1. Lama Deputy Attorney General in the Securities Division

of the Delaware Department of Justice. I make this affidavit in

opposition to the motion of Olde Discount Corporation (“Olde

Discount”) for a temporary restraining order and preliminary

injunction. I have personal knowledge of all of the facts set forth

herein.

10a

Appendix B

2. InJuly 1991, the Securities Division received a complaint

from a Wilmington couple (the Engelhardts) against Olde

Discount and one of its former agents, Michael Donohoe, with

regard to the purchases of stock in Second National Federal

Savings Bank in May and June of 1990. The Engelhardts had lost

almost their entire investment in those securities ($52,000). The

Division sent a letter to the firm on July 31, 1991 asking for their

response, in writing, to the complaint. By letter dated October 24,

1992, the firm responded denying that Donohoe had made any

misrepresentations or failed to disclose material facts in

connection with those sales of stock, or otherwise violated the state

securities law.

3. Then followed a Series of requests for documents and

information from Olde Discount over the course of December

1991-April 1992. Among other things, by letter dated February 6,

1992, the Division asked for a list of all Delaware investors who

bought SNFS stock from Olde Discount in 1989 and 1990; the

State had good reason to believe that there might have been other

Delaware residents victimized by Donohoe. Olde responded,

however, by saying that “our computer system is unable to

generate such a list. . . . Manually generating such a list by state

would be very time-consuming. If this information is vital to your

investigation we will provide it. Please advise.”

4. During a telephone conversation with Olde Discount’s

corporate counsel (Bruce A. Campbell), Mr. Campbell asked if I

would notify him in advance of taking any action against the firm

(if any were contemplated), to allow Olde a further opportunity to

respond to any allegations. I agreed to extend Mr. Campbell this

courtesy.

5. By late May 1992, the Division had completed its

lla

Appendix B

investigation of the Engelhardts’ complaint, and determined that

there was probable cause of as many as fifteen violations of the

Delaware Securities Act. Rather than recommending to the

Commissioner that charges be issued at that time, however, I senta

draft of the charges to Mr. Campbell by overnight courier on June

5, 1992. Mr. Campbell then called to ask that I take no further

action until Olde had a chance to review the charges, and I agreed.

6. Inatelephone conference on July 13, 1992, Olde Discount

made a settlement offer that would have paid the investors less than

half of their investment loss. On July 17, 1992, I countered their

offer asking for rescission of the stock trades (any settlement being

subject to the approval of the Commissioner). Olde Discount then

asked to meet with me in Wilmington and I agreed. The meeting

took place on August 5, 1992 in the offices of the Securities

Division.

7. I attended that meeting with one of my investigators, F.

Gregory Gause, Jr. (The Commissioner did not attend that

meeting, or otherwise participate in any way in the settlement

negotiations.) Olde Discount was represented by a Richard

Tucker, who purported to be advising them on issues of Delaware

law, but I later learned that he is not admitted to practice in this

State. Far from a negotiation, it quickly turned out that Olde

Discount was only there to reiterate its previous settlement offer.

Mr. Tucker stated his opinion that the State had less than a “ten

percent” chance of prevailing on the merits, and expounded on

various legal defenses such as pre-emption. He referred to the

Delaware Securities Act as “dysfunctional,” and suggested that the

Division should simply ignore its Statutory mandate and do

nothing to heip individual investors. Mr. Tucker also suggested

that I had been providing legal advice to the Engelhardts, which I

categorically denied because that is false. At no time, before or

12a

Appendix B

after that meeting, have I ever purported to provide legal advice to

the Engelhardts.

8. It is not true, as stated in Olde’s Joint Verified Statement,

that the State had “agree[d] that the alleged misconduct did not

amount to securities fraud.” In drafting and then issuing the notice

of intent, the State clearly had found probable cause of numerous

violations of the Delaware Securities Act. As to any alleged

“threats,” at no time did I ever threaten to recommend that an

administrative proceeding be brought in order to try to force a

settlement. Indeed, the charges had already been drafted, and it

was only to accommodate Olde’s request that the State delayed in

issuing the charges.

9. As in any settlement negotiations of this kind, the

respondents often ask that the matter be kept confidential. As I

explained to Olde Discount at the meeting in Wilmington, as a

public agency the Securities Division cannot cloak its activities in

secrecy, since we are subject to such statutes as the Freedom of

Information Act. In addition, I explained to them that because of

the reciprocal system of enforcement under the Uniform Securities

Act, any administrative proceeding in Delaware would necessarily

be public. Accordingly, if we were not able to come to some sort of

agreement before charges issued, it would be virtually impossible

to negotiate at some future point about this issue.

10. After the settlement meeting, the Division learned for the

first time that despite Olde Discount’s repeated misrepresentations

to the contrary, the investors had complained in July 1990 to Olde

Discount’s home office in Detroit, Michigan, but had been told by a

vice president of the firm that there was no basis for their

complaint. This is an important fact, because Olde contends that if

they had been notified of a complaint by the Engelhardts, they

)

13a

Appendix B

would have been in a position (hypothetically) to have redressed

the wrong at that time. Although Olde Discount’s compliance

manual requires that the firm maintain written customer complaint

files, no record was created by the firm in this case.

11. I met with the Engelhardts on August 10, 1992 to inform

them that Olde Discount had made a settlement offer. I emphasized

that I was not their attorney and could not give them legal advice,

and also that the final decision would rest with the Division and the

Commissioner, since we had the larger public interest to consider.

Nevertheless, we wanted their input, and I explained that there

were two possible scenarios: either they could receive a sum

certain now, or else go to a hearing, where the outcome was

problematic. Even if the Commissioner ruled in their favor, that

decision could be appealed, and they might not see any money fora

long time. Both the Engelhardts emphatically agreed that they

wanted the State to go forward with its case.

12. It was only at this meeting with the Engelhardts that the

Division learned that on the very same day of the settlement

conference in Wilmington, Olde Discount had served by hand-

delivery on the Engelhardts a demand for them to invoke NASD

arbitration, or Olde would do it on their behalf. Thus, while Olde

Discount was purporting to try to settle the case, they were starting

a “race to the courthouse” to try to initiate an NASD arbitration

before the State commenced its administrative proceeding.

13. I wrote to Olde Discount on August 10, 1992 to bring this

matter to their attention, and to reject the firm’s final settlement

offer. The Division also renewed its request (though much more

narrowed in scope) of February 6, 1992 for a list of Delaware

residents to whom Donohoe had sold SNFS stock during the seven

months that he worked at Olde Discount.

l4a

Appendix B

14. At an impasse, with settlement negotiations completely

broken down, the Division recommended to the Commissioner

that a notice of intent to suspend or revoke broker-dealer

registration be issued. The Commissioner agreed, and signed an

order that same day giving Olde Discount thirty days to request a

hearing on the matter. (Acopy of the notice and order are attached

to this affidavit as Exhibit 1.) To date, Olde Discount has not

requested a hearing.

15. On August 17, 1992, the Department of Justice issued a

press release concerning the notice of intent against Olde Discount

and Donohoe after the charges had been filed. An article reporting

the notice appeared the next day in the News-Journal, and in

response to that article, the Division received a number of new

complaints from Delaware investors who also had bought SNFS

stock from Donohoe. In addition, the Division has contacted some

other investors similarly situated, not to “foment” new complaints,

as Olde Discount alleges (without any factual basis), but rather

merely to inquire if they had any problem with their investment.

The investigations are in accordance with the Division’s statutory

mandate.

16. On August 19, 1992, again pursuant to its standard

operating procedures, the Division gave notice over a computer

wire (known as the CRD) to all other state securities agencies of the

pending disciplinary proceeding in Delaware. To date, the

Division has not received a response from any other state. It is

simply false for Olde Discount to allege (without any factual

foundation) that the Division is “fomenting” disciplinary

proceedings in other states.

15a

Appendix B

/s/

W. Michael Tupman

Subscribed to and sworn

before me this 26th day

of August, 1992

/s/

Notary Public