Reply Brief — Riley v. Kingsley Underwriting Agencies, Ltd.

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FILED

No. 92-664 KO¥ 1 ) 1992

OBOE OF PHE CLERK

In The

Supreme Court of the United States

October Term, 1992

¢

RONALD H. RILEY,

Petitioner,

-

KINGSLEY UNDERWRITING AGENCIES, LTD., a British

corporation, LIME STREET UNDERWRITING AGEN-

CIES, LTD., a British corporation, BANKSIDE SYNDI-

CATE LIMITED, a British corporation, FIRSTBANK OF

VAIL, N.A., ROBIN C. KINGSLEY, ROBERT HALLAM,

SOCIETY AND COUNCIL OF LLOYD’S, and JOHN

DOES I through X,

Respondents.

¢

On Petition For A Writ Of Certiorari

To The United States Court Of Appeals

For The Tenth Circuit

¢

PETITIONER’S REPLY TO RESPONDENTS’

BRIEF IN OPPOSITION

*

PopHaM, Halk, SCHNOBRICH POPHAM, Halk, SCHNOBRICH

& KAUFMAN, LTD. & KAUFMAN, LTD.

A Professional Corporation A Professional Corporation

RICHARD G. SANDER SHARON R. JONES

1200 Seventeenth Street 1200 Seventeenth Street

Suite 2400 Suite 2400

Denver, Colorado 80202 Denver, Colorado 80202

(303) 893-1200 (303) 893-1200

Counsel of Record Counsel for Petitioner

COCKLE LAW BRIEF PRINTING CO., (800) 225-6964

OR CALL COLLECT (402) 342-2831

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TABLE OF CONTENTS

Page

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REPLY TO COUNTERSTATEMENT OF THE FACTS... 1

REPLY TO RESPONDENTS’ OPPOSITION TO CER-

pot! | errr reer rrr rr rer rT Try eer T 3

I. Denial of the Petition for Writ of Certiorari Sets

a Dangerous Precedent, in effect, Nullifying the

Court’s Holdings in Mitsubishi, McMahon, and

POIIUE ohn ya d5s os scion) SwGse teiwccansensass 3

II. The Arbitration Clause Cannot be Enforced

Since it Operates to Contravene Fundamental

United States’ Public Policies ................. 6

A. The General Policies Supporting Enforce-

ment of Arbitration Clauses do not Compel

Arbitration in this Case .................. 6

B. The Convention does not Require Enforce-

ment of Arbitration Agreements when

Enforcement Would Contravene Fundamen-

tal Public Policies of the Forum State..... 8

III. The Decisions of the District Courts Conflict

with each other and Conflict with the Holdings

of this Court and the Mandate of Congress in

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TABLE OF AUTHORITIES

Page

CASEs:

Bonny v. Society of Lloyd’s, [1992 Transfer Binder]

Fed. Sec. L. Rep. (CCH) $96,811 (N.D.IIl. Feb.

ye | peer are nuk Ua) ae eae 9

Carnival Cruise Lines, Inc. v. Shute, __ U.S. __, 111

AG. Ce CEE a's secu eer eta ae 4

Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213

(ROUE «6 v-vctin.g s uv.c's'hdn a6 S82 eae ae es 5

Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976)....... 8

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

135. SAE Re Clee oho eeeee ee Reueo teks 4, 6

Hirsch v. Oakeley Vaughan Underwriting, Ltd. et al.,

No. 89-2563, unpublished slip opinion (5th Cir.

ROP anv v.59 0s unoh nkig peewee ek ene eR bass 9

Howe v. Goldcorp Invs., Ltd., 946 F.2d 944 (1st Cir.

1991), cert. denied, .... US. — , Ta B EE. TivaZ

CCRUIED a cus £55 wa0c nas Used ees es «5 9

Interamerican Trade Corp. v. Companhia Fabricadora

de Pecas, 973 F.2d 467 (6th Cir. 1992)............... 6

McDermott Int'l, Inc. v. Underwriters at Lloyd's, 944

PO SI9P Gh CAS, BOR vcknccccceccccdesssasainsss 6

Meadows Indemnity Co. v. Baccala & Shoop Insurance

Services Inc., 760 F. Supp. 1036 (E.D.N.Y. 1991)..... 8

Ministry of Defense of the Islamic Republic v. Gould,

nc., DOP BA FOG CU CI Feels kets cece ce vescssss 6

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth,

at. SIO UD. GEG CE ov cc anasnavenxaccces ee AS

M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1

a Rp eppremmeep repent r btn iar, ney y cae ee 4

iii

TABLE OF AUTHORITIES - Continued

Page

Paper Express, Ltd. v. Pfankuch Maschinen GmbH,

Be WE FO FUE GM BOOED ches cnnvaveenvnscecs 6

Rhone Mediterranee Compagnia v. Lauro, 712 F.2d 50,

oo RG eee er 8

Roby v. Corporation of Lloyd’s, [1992 Transfer

Binder] Fed. Sec. L. Rep. (CCH) 496,971

ee > 4,9

Rodriguez de Quijas v. Shearson/American Express,

mme., SPO US. 477 (1909)... cee eeccccccess 3, 4, 6, 9

Scherk v. Alberto-Culver Co., 417 U.S. 506 (1974)..... ae

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

ES ed Sa 5h ky bhas cess ueesakca sd ss passim

Siderman de Blake v. Republic of Argentina, 965 F.2d

RR SEA re rn err 6

STATUTES:

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REPLY TO COUNTERSTATEMENT OF THE FACTS

Respondents’ Counterstatement of the Facts frames

the issue before this court. While the Securities and

Exchange Commission (the “SEC”) has concluded that

Respondents’ sale of investments in Lloyd’s of London

(“Lloyd’s”) is subject to the Securities Act of 1933 (the

“Securities Act”) and the Securities Exchange Act of 1934

(the “Exchange Act”), the effect of the Tenth Circuit’s

decision is that it is not, thus operating to waive Mr.

Riley’s statutory protections under the U.S. Securities

laws. This decision is contrary to well established hold-

ings of this Court and the Congress.'

As Respondents point out, in 1987 and 1988 the SEC

reviewed the issue of whether the sale of interests in

Lloyd’s falls within the scope of the Securities Act and

the Exchange Act. The SEC determined that the sale of

interests in Lloyd’s “would be subject to all of the provi-

sions of the Securities Act and the Exchange Act, includ-

ing the anti-fraud provisions.” Respondents’ Brief in

Opposition, at RA-3 (“Respondents’ Brief”) (emphasis

added).

1 Congress has mandated that substantive protections of

the U.S. Securities laws cannot be waived by including

anti-waiver provisions in both Acts. See Section 14 of the Securi-

ties Act (15 U.S.C. Section 77n) and Section 29(a) of the Securi-

ties Exchange Act (15 U.S.C. Section 78cc (a)) (collectively the

“anti-waiver provisions”). Additionally, this Court has indi-

cated that where, as here, choice of law and choice of forum

clauses (“Choice Clauses”) operate in tandem as a prospective

waiver of a parties’ right to pursue statutory remedies, this

Court would have “little hesitation in condemning the agree-

ment as against public policy.” Mitsubishi Motors Corp. v. Soler

Chrysler-Plymouth, 473 U.S. 614, 637, n. 19 (1985).

1

2

Respondents characterize their mass distribution of

securities to U.S. citizens as having an “international

character.”2 Respondents’ Brief, at 1. However, each of

Petitioner’s claims arise from his purchase of securities

from Respondents during the time period 1988 through

1990, and not before. All solicitations from Respondents

during this time period were received by Petitioner in

Colorado, by mail or by telephone, from England. The

international character of the transaction arises only

because Respondents are foreign issuers of securities

operating in the U.S. The SEC opined that the “provisions

of the Federal securities laws generally are applicable to

the sales of foreign securities (including participations in

Lloyd's) ....” See Respondents’ Brief, at RA-4. (emphasis

added). Contrary to the SEC’s opinion, the impact of the

Tenth Circuit’s decision is that the Federal securities laws

are not applicable to Respondents’ sale of securities in the

US.

2 Assuming each of the 2,900 U.S. Names who participated

in Lloyd’s invested the relatively low amount of £250,000 (Peti-

tioner invested over £1,000,000 his last four years), Lloyd’s

raised in excess of One Billion U.S. Dollars in capital from U.S.

investors. Respondents place great weight on the fact that “if the

Members Agents solicited participation in Lloyd’s in compli-

ance with the procedures of the Commission’s Regulation D,”

registration was not required. Respondents’ Brief, at 1

(emphasis added). First, it is inconceivable that Respondents

could raise $1 billion from U.S. investors and meet the require-

ments of Regulation D which relates to raising capital through

other than a public offering of securities. Second, regardless of

whether registration would be required, the anti-fraud provi-

sions of the U.S. Securities laws would continue to apply.

3

REPLY TO RESPONDENTS’ OPPOSITION

TO CERTIORARI

I.

Denial of the Petition for Writ of Certiorari Sets a Dan-

gerous Precedent, in effect, Nullifying this Court's

Holdings in Mitsubishi, McMahon, and Rodriguez.

Respondents argue in their Brief that Mr. Riley’s

Petition should be denied because the decision of the

Tenth Circuit to enforce the Choice Clauses, which waives —

substantive protections of the U.S. Securities laws, is

consistent with this Court’s holdings that Choice Clauses

in international agreements must be upheld. To the con-

trary, the decision of the Tenth Circuit directly conflicts

with the holding of this Court in Mitsubishi, wherein

Justice Blackmun, writing for the Court, concluded that

the Court would not hesitate to strike down Choice

Clauses in international agreements, and condemn them

as against public policy, if they operate in tandem as a

prospective waiver of a party’s right to pursue U.S. statu-

tory remedies.

Moreover, the Tenth Circuit’s decision is directly con-

trary to the Congressional mandate in the anti-waiver

3 473 U.S. 605, 637, n. 19. Respondents ignore this plain

holding of Mitsubishi, instead arguing that Mitsubishi stands for

the principle that public policy issues are ripe for application, if

ever, only at the enforcement stage of arbitral or litigation pro-

ceedings. Such argument clearly misconstrues the holding of

Mitsubishi in footnote 19. The Court in Mitsubishi clearly stated

it would condemn the agreement itself, not the award, if there

was a prospective waiver of the right to pursue statutory

remedies. Since counsel for Mitsubishi had conceded that Amer-

ican law applied, and the antitrust claims had been submitted to

the Japanese panel on that basis, the Court then did not need to

speculate whether U.S. law would be displaced.

4

provisions of the U.S. Securities laws that any agreements

“to waive compliance with any provision of [either Act]

are void,” and this Court’s holdings in Shearson/American

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

Quijas v. Shearson/American Express, Inc., 490 U.S. 477

(1989), and Gilmer v. Interstate/Johnson Lane Corp., U.S.

__, 111 S. Ct. 1647 (1991), interpreting the same, that the

substantive provisions of the U.S. Securities laws cannot

be waived.

The Choice Clauses in the case at hand seek to apply

English law. These Clauses clearly operate as a waiver of

the substantive protections of the U.S. Securities laws,

since Respondents would be exempt from claims for vio-

lations of the registration, disclosure, and anti-fraud pro-

visions under English law by virtue of the Lloyd’s Act

and the Financial Services Act.4 Respondents have com-

pletely exempted themselves through use of such clauses

even though the SEC has flatly concluded that investment

and participation in Lloyd’s by a U.S. Name constitute a

security. Respondents’ Brief, at RA-3, 4.

The other cases relied upon by Respondents also do

not support their argument. Respondents’ Brief, at 4-10.

The Choice Clauses at issue in M/S The Bremen v. Zapata

Off-Shore Co., 407 U.S. 1 (1972) and Carnival Cruise Lines,

4 See Petition for Certiorari, at 13-15 (“Petition”). Respon-

dents’ argument that it is impossible to determine whether arbi-

tration in England under English laws would ultimately

infringe to an unacceptable degree upon Petitioner’s rights is

thus without merit. Moreover, Respondents’ reliance on Roby v.

Corporation of Lloyd’s, [1992 Transfer Binder] Fed. Sec. L. Rep.

(CCH) $96,971 (S.D.N.Y. Aug. 18, 1992) is misplaced, as that

decision, along with the Tenth Circuit decision, was decided

directly contrary to the authority of this Court and Congress

that substantive protections of the U.S. Securities laws cannot be

waived.

5

Inc. v. Shute, __ U.S. __, 111 S. Ct. 1522 (1991) did not

operate to deprive the respective parties of statutory

rights, since no statutory rights were at issue. Moreover,

The Bremen specifically recognized that Choice Clauses

should not be enforced where to do so would contravene

a strong public policy. 407 U.S. at 15; see also Petition, at

16-17.

Similarly, the clauses at issue in Scherk v. Alberto-

Culver Co., 417 U.S. 506 (1974) provided that Illinois law

would apply; thus, potential waivers of statutory protec-

tions were not at issue. See Petition, at 17. The Court in

Howe v. Goldcorp Invs., Ltd., 946 F.2d 944 (1st Cir. 1991),

cert. denied, __ U.S. __, 112 S. Ct. 1172 (1992), deter-

mined that, since only procedural and small differences

in standards existed between Canadian law and Ameri-

can law, trial in Canada would not deprive the plaintiff of

relevant substantive legal advantages. Finally, Dean Wit-

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

involved the possible collateral estoppel effect of an arbi-

tration clause to another proceeding which is not at issue

here.

Denial of Mr. Riley’s Petition will, in effect, nullify

the holdings of this Court in Mitsubishi, McMahon, and

Rodriguez, as well as nullify the effectiveness of the anti-

waiver provisions of the U.S. Securities laws, by allowing

a decision of a Circuit Court to stand that is directly

contrary to their explicit instructions without so much as

a review by this Court. Further, denial would set a dan-

gerous precedent by sending a clear message to foreign

entities doing business with American citizens that they

may avoid compliance with the U.S. Securities laws by

the simple expedient of using Choice Clauses which pro-

vide for a less restrictive foreign law to apply. This Court

6

should thus grant certiorari to settle this important and

far reaching question of federal law.

Il.

The Arbitration Clause Cannot be Enforced Since it

Operates to Contravene Fundamental United States’

Public Policies.

A. The General Policies Supporting Enforcement of

Arbitration Clauses do not Compel Arbitration in

this Case.

Respondents have utterly failed to address this

Court’s directive as expressed in McMahon, Rodriguez,

and Gilmer, that enforcement of an arbitration agreement

cannot undermine the substantive protections afforded

U.S. investors by the U.S. Securities laws.5 McMahon, 482

U.S. at 230; Rodriguez, 490 U.S. at 481-82; Gilmer, 111 S.Ct.

at 1653.

Where the arbitral proceedings will deprive plaintiffs

of their substantive statutory rights, this court has flatly

> None of the other cases cited by Respondents deal with

arbitration of securities claims. See Respondents’ Brief in Oppo-

sition, at 12-13. In fact, several of the cases cited do not even

deal with the issue of enforcement of arbitration agreements, in

general. See Siderman de Blake v. Republic of Argentina, 965 F.2d

699 (9th Cir. 1992) (dealing with Foreign Sovereign Immunities

Act); Ministry of Defense of the Islamic Republic v. Gould, Inc., 969

F.2d 764 (9th Cir. 1992) (dealing with the enforcement of an

award from the U.S.-Iran Claims Tribunal); McDermott Int'l, Inc.

v. Underwriters at Lloyd's, 944 F.2d 1199 (5th Cir. 1991) (dealing

with removal rights); Interamerican Trade Corp. v. Companhia Fab-

ricadora de Pecas, 973 F.2d 487 (6th Cir. 1992) (dealing with forum

selection clause); Paper Express, Ltd. v. Pfankuch Maschinen

GmbH, 972 F.2d 753 (7th Cir. 1992) (dealing with forum selection

clause).

7

stated that such agreements would be void as against

public policy. Mitsubishi, 473 U.S. at 637, n. 19; see also

McMahon, 482 U.S. at 230. In the case at issue, this Court

is faced with just that situation.

Mr. Riley signed, in Colorado, several pre-printed,

form agreements with Respondents. One of those agree-

ments, the agreement with his Member’s Agents, con-

tained a clause requiring arbitration of disputes in

England, under English law.® As stated in the Petition, an

English arbitrator faced with such an agreement would

apply English law. Petition, at 13-15. Even assuming Mr.

Riley could maintain a right to pursue Respondents on a

theory of common law fraud, he is flatly precluded from

bringing a claim for failure to register the securities

under the Securities Act, and from bringing a claim pur-

suant to the anti-fraud provisions of the Securities Act

and the Exchange Act. Mr. Riley benefits from strict lia-

bility for Lloyd’s violations of the registration provisions

and anti-fraud provisions of the U.S. Securities laws.

Under English law, Mr. Riley must prove bad faith. Thus,

Mr. Riley would be deprived of his statutory rights under

the U.S. Securities laws if the Arbitration Agreement is

enforced. Such a deprivation fits squarely within this

Court’s decision in Mitsubishi.

© The only parties subject to the Arbitration Agreement are

the Member’s Agents. Lloyd’s and the other Respondents are

not parties to an arbitration agreement with Mr. Riley. There-

fore, even if this Court decides that the Convention must prevail

with regard to the Arbitration Agreement, such a decision

would have no effect on the enforceability of the Choice Clauses

present in the other agreements.

8

B. The Convention does not Require Enforcement of

Arbitration Agreements when Enforcement Would

Contravene Fundamental Public Policies of the

Forum State.

The Convention on the Recognition and Enforcement

of Foreign Arbitral Awards requires the enforcement of

arbitration clauses unless such clauses are “null and void,

inoperative or incapable of being performed.” 9 U.S.C.

§ 201, et seq. (the “Convention”). According to this Court,

an agreement to arbitrate is “null and void” when it

“contravenes fundamental policies of the forum state.”

Scherk v. Alberto-Culver Co., 417 U.S. 506, 530, n. 10 (1974);

see also Rhone Mediterranee Compagnia v. Lauro, 712 F.2d 50,

53 (3rd Cir. 1983); Meadows Indemnity Co. v. Baccala &

Shoop Insurance Services, Inc., 760 F.Supp. 1036, 1043

(E.D.N.Y. 1991) (emphasis added). Respondents fail to

even address this distinction in their Opposition.

Here, a fundamental public policy of the United

States is contravened. This Court has flatly stated that the

fundamental policy behind the Securities laws is the pro-

tection of the investor. Ernst & Ernst v. Hochfelder, 425 U.S.

185, 193 (1976). For that reason, the Securities laws pro-

vide for strict liability for failure to register and for

misrepresentations and omissions in the offering docu-

ments as well as a broad anti-fraud provision to prevent

misrepresentations in the purchase and sale of securities.

Respondents have raised over one billion dollars sell-

ing securities in the United States to U.S. citizens. By

virtue of a form arbitration agreement in their offering

documents, Respondents now claim to be exempt from

enforcement of the registration and anti-fraud provisions

of the U.S. Securities laws. To allow foreign issuers, such

as Lloyd’s and its agents, to evade the protections of the

9

U.S. Securities laws by invoking the Convention would

clearly circumvent the cornerstone of our Securities laws

and constitute a judicially created exemption to an inves-

tor’s strong remedies against the sellers of securities. This

is clearly not the purpose nor the intent of the Conven-

tion and this Court should not allow it to be interpreted

in such a way.

III.

The Decisions of the District Courts Conflict with each

other and Conflict with the Holdings of this Court and

the Mandate of Congress in the U.S. Securities laws.

Petitioner does not contend, and has never con-

tended, that certiorari should be granted because deci-

sions of the Courts of Appeals are in conflict. Instead,

Petitioner informed this Court in its Petition that deci-

sions of the federal district courts are in conflict on this

issue. Two of these decisions, Bonny v. Society of Lloyd's,

[1992 Transfer Binder] Fed. Sec. L. Rep. (CCH) 796,811

(N.D.Ill. Feb. 24, 1992) and Roby, supra were decided in

accordance with the Tenth Circuit decision at issue herein

that conflicts with Mitsubishi, McMahon, Rodriguez, and

the anti-waiver provisions of the U.S. Securities laws, as

discussed above. See § I, supra.” Since the district courts

and the Tenth Circuit have decided an issue of far reach-

ing consequence, and set important and dangerous prece-

dents that are contrary to the holdings of this Court and

? Hirsch v. Oakeley Vaughan Underwriting, Ltd. et al., No.

89-2563, unpublished slip opinion (5th Cir. 1989) and Howe v.

Goldcorp, supra, are not relevant to the case at hand, as they

involved the issue of forum non conveniens which is not at issue

in this Petition.

10

the mandate of Congress, Petitioner requests that this

Court grant certiorari to settle the issue.

CONCLUSION

For the reasons set forth herein, the Petition for Writ

of Certiorari should be granted.

Respectfully Submitted,

PopHaM, Haik, SCHNOBRICH &

KAUFMAN, LTD.

A Professional Corporation

RICHARD G. SANDER

1200 Seventeenth Street

Suite 2400

Denver, Colorado 80202

(303) 893-1200

Counsel of Record

PopHaM, Haik, SCHNOBRICH &

KAUFMAN, LTD.

A Professional Corporation

SHARON R. JONEs

1200 Seventeenth Street

Suite 2400

Denver, Colorado 80202

(303) 893-1200

Counsel for Petitioner

November 19, 1992