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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition Brief
- **Published:** January 1, 1994
- **Citation:** 510 U.S. 1065

## Text

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386004_1848%3A3. Public record. Not legal advice.