# Opposition Brief — UBS PaineWebber Inc. v. Cohen

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition Brief
- **Published:** January 1, 2002
- **Citation:** 537 U.S. 974

## Text

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No. 02-247. scx of THE CLERE

In the
Supreme Court of the GAnited States

UBS PAINEWEBBER INC. AND RICHARD WILHELM,

Petitioners,
Vv.

ALFRED M. CoHEN,
EXECUTOR OF THE ESTATE OF SAMUEL GINSBURG,
Respondents.

On PETITION For Writ OF CERTIORARI
To Tue UNITED STATES Court Or APPEALS
For THe S1ixtTH Circuit

RESPONDENT'S BRIEF IN OPPOSITION

STANLEY M. CHESLEY
Counsel of Record

TERRENCE L. GOODMAN

1513 CENTRAL TRUST TOWER

5 WEsT FourTH STREET

CINCINNATI, OH 45202

(513) 621-0267

(513) 381-2375 FACSIMILE

Counsel for Respondent
Alfred M. Cohen, Executor of
the Estate of Samuel Ginsburg

BECKER GALLAGHER LEGAL PUBLISHING, INC.,
CINCINNATI, OHIO 800-890-5001

QUESTION PRESENTED

Whether the Federal Arbitration Act, 9 U.S.C.
§ 1 et seq., requires the enforcement of an arbitration
clause that does not cover theft?

TABLE OF CONTENTS

Page
Parties to the Proceedings ...............02008: i
‘Sees OF CORO ios veeden deo eecnse eee ool
Tattle of Amtinorihies «oo 505 ce kuckevccusseuneoes iii
AURORE oo cass vcenedan eee eee 1
L. The Hamilton County Court of
Appeals decision interprets
established and routine principles
OF ComtretS BAW ove ks cvcawnesscenes 3
II. The Petitioners fail to cite a single
case establishing a conflict exists
among the circuits, federal courts,
ee er err or Tee 8
CONN on 60 Sew 11
FT eT Ee ree re ey ere ony la

ii

TABLE OF AUTHORITIES

Page
Aspero v. Shearson American Express, Inc.,
768 F.2d 106 (6th Cir. 1985) ............... 8
Coudert v. PaineWebber Jackson & Curtis,
eg |) 8

Ex Parte Discount Foods Inc.,
711 So. 2d 992 (Ala.), cert. Denied sub nom.
Supervalu Inc. v. Discount Foods, Inc.,
929 U.S. 825 (1998), reconsidered in part
We We OS COE) no cece vnesen 9,10

Fazio v. Lehman Brothers,
2002 U.S. LEXIS 15174
GN.D. Ohio July 19, 20902) .........ccccc. 10

First Options of Chicago, Inc v. Kaplan,
014 U.S. 938, 115 S. Ct. 1920 (1995) ....... 3, 4

Gregory v. Electro-Mechanical Corp.,
Se wae eee (li Cir. 1996) ................ 9

Hirschfeld Prods v. Mirvish,
aw wees BO (N.S, LOUD) o.oo ec ccc c ewes 9

Kerr-McGee Ref. Corp. v. M/T Triumph,
og ah ee) ) rn 9

Leadertex, Inc. v. Morganton Dyeing &
Fishing Corp., 67 F.3d 20 (2d Cir. 1995) ..... 4

ili

Long v. Silver,
248 F.3d 309 (4th Cir., cert. denied,
Be ic Se I) os KG haa oben h caves hues 8

Marchese v. Shearson Hayden Stone, Inc., ;
734 F.2d 414 (9 Cir. 1984) ..........0c000. 9

Mastrobuono v. Shearson Lehman Hutton, Inc.,
514 US. 52, 115 S. Ct. 1212 (1995) .......... 3

Mitsubishi Motors Corp. v.
Soler Chrysler-Plymouth, Inc.,
LGD DAA Ee chia ssc cb ate ansevase ce 4

Roney & Co. v. Kassab,
961 F 2a G4 (6th Cir. 1982) on... ic ccwesscns 4

Sandvik AB v. Advent International Corp.,
Sad F a BO (SG Cir, DOGO) oon ccc cc cseesss 4

Seifert v. U.S. Home Corp.,
750 So. 2d GSS (Pim. 19GB) ow. cc cccevcsssss 9

Stout v. J.D. Byrider,
228 F.3d 709 (6th Cir. 2000),
cert denied, 121 S.Ct. 1088 (2001) .......... 4

Three Valleys Municipal Water District v.
E.F. Hutton & Company, Inc.,
O25 F.2d LEG th Cir. 1GBL) .. ne ccccssess 4

Rosenblum v. Travelbyus.com Ltd.,
200 F.3d GST C7" Cie: BO0B) ow... eevee cess 4

iV

Volt Information Sciences, Inc. v.
Board of Trustees of Leland Stanford Junior

University, 109 S. Ct. 1248 (1989) .......... 3
Wood v. Prudential Ins. Co. of America,

PSG G74 Gd Cir. 2000) 2. cece cccccnccuss 8
Statutes

Federal Arbitration Act, 9 U.S.C. § 4 et seq... passim

STATEMENT

The Respondent, Alfred Cohen is the executor
of the estate of Samuel Ginsburg. Petitioner, UBS
PaineWebber, Inc ("PaineWebber") provides
investment planning. The investment planning
includes recommendations regarding the purchase
and sale of stock and portfolio management.
Petitioner Richard Wilhelm ("Wilhelm") is the manager
of PaineWebber’s Cincinnati, Ohio office. As the
manager of the Cincinnati office, Wilhelm accepted the
responsibility to supervise each broker in his Office
and each account in the Cincinnati office.

In August of 1992, PaineWebber broker Richard
Zenni encouraged Samuel Ginsburg to open a
PaineWebber account. When he opened his account,
Samuel Ginsburg was 78 years old. As a condition of
opening his account, Samuel Ginsburg executed
several complex and standard documents. Some of
the executed documents include generic language
regarding arbitration. The generic arbitration
language does not, however, mention or refer to claims
involving theft.

Richard Zenni, as an employee of PaineWebber
and under the direct supervision of Richard Wilhelm,
admits to stealing millions of dollars from elderly
investors including Samuel Ginsburg. The Respondent
alleges that PaineWebber and Richard Wilhelm
participated in the theft by encouraging Zenni to
befriend elderly investors, by recklessly failing to
monitor Zenni’s criminal conduct, and by failing to
monitor Mr. Ginsburg's accounts.

After learning of the theft, the executor of
Samuel Ginsburg's estate, Alfred Cohen initiated this
action by filing a complaint against PaineWebber Inc.
and Richard Wilhelm in the Hamilton County Ohio
Court of Common Pleas. In the complaint, the
Petitioner alleged that PaineWebber and Richard
Wilhelm participated in the admitted theft from
Samuel Ginsburg and are liable under theories of
conversion and fraudulent concealment.

On January 12, 2001, PaineWebber and Wilhelm
sought an order from the Hamilton County Court of
Common Pleas to compel the Estate to arbitrate its
claims against the Petitioners. The trial court, after
briefing and oral argument denied the motion.

The Petitioners appealed the ruling to Ohio's
First District Court of Appeals. On January 18, 2002,
the First District issued its Decision denying the
Petitioners’ motions to compel arbitration and stay of
state court proceedings. In its Opinion, the First
District Court of Appeals conducted a de novo review
and held that as a matter of contract law the parties

did not contemplate arbitrating the claims arising from
theft.

The Petitioners, after the Ohio First District
Court of Appeals affirmed the trial court, filed a
motion to certify an alleged conflict and stay state
court proceedings to the First District Court of
Appeals. The First District Court of Appeals denied
the motion to certify a conflict on February 22, 2002.
The Petitioners subsequently filed an appeal to the
Supreme Court of Ohio. On May 15, 2002, the Ohio
Supreme Court refused to hear the appeal.

LP Dey tae eahiapeiien

REASONS FOR DENYING THE WRIT

This matter does not involve novel or
unresolved issues regarding how the courts should
apply and interpret the Federal Arbitration Act, 9
U.S.C. § 1 et seq. Nor, does this matter involve a split

“among the various courts regarding the application of

the Federal Arbitration Act. To the contrary, this
matter merely involves traditional and accepted
principles of contact interpretation. As to an alleged
split among the courts whether the Federal
Arbitration Act requires the arbitration of theft claims,
the Petitioners fail to cite a single authority that holds
that theft must be arbitrated under the FAA. The lack
of division of authority in itself is a reason to deny the
petition.

I. The Hamilton County Court of
Appeals decision interprets
established and _ routine
principles of contract law.

Despite the pleas of the Petitioner to the
contrary, the mere incantation of "arbitration
agreement" does not mean that the parties are
required to arbitrate all disputes. When deciding
whether the parties agreed to arbitrate, the Federal
Arbitration Act requires both state and federal courts
to apply traditional principles that govern the
formation of contracts. First Options of Chicago, Inc v.
Kaplan, , 514 U.S. 938, 943, 115 S. Ct. 1920, 1924 (1995);
Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S.
92, 60-61, 115 S. Ct. 1212, 1218-1219 (1995); Volt
Information Sciences, Inc. v. Board of Trustees of
Leland Stanford Junior University, 489 U.S. 468, 474-
475, 109 S. Ct. 1248, 1253-1254 (1989). Federal courts

must use state law principles of contract formation.
First Options of Chicago, Inc v. Kaplan, 514 U.S. 938,
944, 115 S. Ct. 1920, 1924 (1995); Rosenblum v.
Travelbyus.com Ltd., 299 F.3d 657, 662 (7 Cir. 2002).
These established principles require a court to
determine whether the dispute falls within the
arbitration clause before issuing an order compelling
arbitration. See Mitsubishi Motors Corp. v. Soler
Chrysler-Plymouth, Inc., 473 U.S. 614, 105 S.Ct. 3346,
3387 (1985); Stout v. J.D. Byrider, 228 F.3d 709, 714 (6th
Cir. 2000), cert denied, 121 S.Ct. 1088 (2001). This
approach is consistent with the requirements of the
Federal Arbitration Act.

The court shall hear the parties, and
upon being satisfied that the making of
the agreement for arbitration or the
failure to comply therewith is not in
issue, the court shall make an order
directing the parties to proceed to
arbitration in accordance with the terms
of the agreement.

9 U.S.C. § 4.

Furthermore, traditional principles of contract
law along with the Federal Arbitration Act clearly
establish that a court can not compel arbitration if the
parties to the arbitration agreement did not
contemplate arbitrating the particular claim. See
Sandvik AB v. Advent International Corp., 220 F.3d 99,
105 (3d Cir. 2000); Roney & Co. v. Kassab, 981 F.2d 894,
897 (6th Cir. 1992); Three Valleys Municipal Water
District v. E.F. Hutton & Company, Inc., 925 F.2d 1136
(9th Cir. 1991); Leadertex, Inc. v. Morganton Dyeing &
Fishing Corp., 67 F.3d 20, 27 (2d Cir. 1995). Thus, the

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Petitioners are wrong to rely primarily on the favored
status of arbitration as the basis to secure this Court's
review of an Ohio Appellate Court decision.

Although the First Appellate District recognized
that the law favors arbitration, the First Appellate
District also considered the need to apply contract law.
Accordingly, Ohio's First Appellate District carefully
examined the unique circumstances involved in this
case and applied traditional notions of contract law.
After performing its analysis the court held that the
arbitration provision did not apply to the theft claims
alleged in the Respondent's complaint.

In the complaint, Cohen alleged that
Wilhelm and PaineWebber had had
direct notice of, and thus knowledge of,
Zenni’s conduct because of the obvious
pattern of risky and questionable trades
made by Zenni on behalf of Ginsburg,
and because of the numerous accounts
opened in Ginsburg’s name when only
one account would have sufficed. Cohen
also alleged that PaineWebber and
Wilhelm had encouraged Zenni_ to
befriend elderly investors, and that
Wilhelm and PaineWebber had chosen to
disregard their knowledge of Zenni’s
conduct and had failed to notify their
elderly investors, including Ginsburg, of
the theft. These facts essentially alleged
a form of theft, i.e., that PaineWebber
and Wilhelm had “aided and abetted”
Zenni in stealing Ginsburg’s money.

Alfred Cohen, Executor of the Estate of Samuel
Ginsburg v. PaineWebber, Incorporated, APPEAL NO.
C-010312, TRIAL NO. A-0004567, (Hamilton County,
January 18, 2002) at 5.

The First District, in reaching its decision,
appropriately applied contract law to the allegations in
the complaint to determine that the parties had failed
to reach a meeting of the minds to arbitrate claims
involving theft.

Although the arbitration provision is
broad, stating that it covers “any and all
controversies” pertaining to the
brokerage account, we cannot say, as a
matter of law, that a claim alleging such
tortious conduct as the “aiding and
abetting” of a theft is subject to the
arbitration provision here. An
arbitration clause itself is a contract. A
contract requires a “meeting of the
minds” as to the terms contained within.
At the time that the parties entered into

the contract, there was no meeting of the
minds that the arbitration provision

Id lai llegi i
forms of theft.

Id at 5-6.

The First District's reasoning, based on the
record before it, reflects the appropriate approach that
a court should pursue when determining whether a
claim is subject to arbitration. The First District's
decision does not establish disrespect for the Federal
Arbitration Act. The First District's decision
demonstrates, based on the record, that the Petitioner

6

——————K

failed to establish that the parties agreed to arbitrate
theft claims. Nilavar v. Osborn, (1998), 127 Ohio App.3d
1,11, 711 N.E.2d 726, 732-733. “In order to declare the
existence of a contract, both parties to the contract
must consent to its terms; there must be a meeting of
the minds of both parties; and the contract must be
definite and certain.” Episcopal Retirement Homes,
Inc. v. Ohio Department of Industrial Relations, (1991),
61 Ohio St.3d 366, 369, 575 N.E.2d 134, 137. Here, the
Petitioners failed to meet their burden.

In light of the record, the First Appellate
District appropriately held, the arbitration agreement
did not apply because a “meeting of the minds” did not
exist and because of the specific and unique
circumstance of this case. The First Appellant District
did not hold as a matter of public policy that
arbitration can not apply to claims involving the
trading of securities. ;

The Petitioners ignore the clear wording of the
decision and criticize the First Appellate District. The
purpose of this criticism is to secure a change in the
manner that courts use to determine whether a claim
is subject to arbitration. The Petitioners, through this
Petition, seek to enlarge any arbitration arrangement
so that that the agreement encompasses any and all
claims even if the parties did not intend to include the
claims within the net of arbitration. The Petitioners
hope to prevent courts from inquiring whether the
parties reached a meeting of the minds to include the
subject claims within the net of arbitration. The
Petitioners' approach ignores the traditional
requirement of contract formation and interpretation
and would result in a fundamental change in the
application of the Federal Arbitration Act.

7

II. The Petitioners fail to cite a
single case establishing a conflict
exists among the circuits, federal
courts, or state courts.

The Petitioner suggests that this Court should
review this matter because an alleged judicial conflict
exists regarding how Courts interpret and apply the
Federal Arbitration Act. In their quest to create a
conflict, the Petitioners cite to numerous cases from
various jurisdictions. Interestingly, however, none of
the cited cases involve the issue presented by this case:
whether the parties had a meeting of the minds to
arbitrate claims involving theft.

A review of the federal cases cited by the
Petitioners reflects that these cases involve a variety of
issues including defamation and claims for emotional
distress. None of the cases, however, involve the issue
in this case regarding the intent of the parties to
arbitrate claims involving theft. See Long v. Silver, 248
F.3d 309 (4th Cir.) cert. denied, 122 S. Ct. 213 (2001)
(Arbitration involving defamation), Coudert v.
PaineWebber Jackson & Curtis, 705 F.2d 78, 81-82 (2d
Cir. 1983) (Arbitration involving intentional infliction
of emotional distress), Aspero v. Shearson American
Express, Inc., 768 F.2d 106, 107 (6th Cir. 1985)
(Arbitration involving defamation, invasion of privacy,
and intentional infliction of emotional distress), Wood
v. Prudential Ins: Co. of America, F.3d 674, 681 (3d Cir.
2000) (Arbitration involving defamation and
intentional infliction of emotional distress). These
cases hardly demonstrate a split among the federal
courts regarding the unique arbitration issue
presented in this case.

The closest the Petitioners come to establishing
a “conflict” is their citations of cases involving fraud
and conversion. See Gregory v. Electro-Mechanical
Corp., 83 F.3d 382 (11" Cir. 1996); Kerr-McGee Ref.
Corp. v. M/T Triumph, 924 F.2d 467, 468, 469 (2d Cir.
1991); Marchese v. Shearson Hayden Stone, Inc., 734
F.2d 414, 419 (9" Cir. 1984). These cases, however: are
not relevant because they failed to examine whether
the parties had a meeting of the minds to arbitrate
theft claims. In fact, the Eleventh Circuit Court of
Appeals, in Gregory, recognized that certain disputes
may not be subject to arbitration. Gregory v. Electro-
Mechanical Corp., 83 F.3d 382, 385.

The Petitioners also seek to create a conflict by
referring to selected state cases. The Petitioner, for
example, cites Hirschfeld Prods v. Mirvish, 673 N.E.2d
1232, 1233 (N.Y. 1996) (Arbitration involving tortious
interference and breach of fiduciary duty). This case,
similar to the federal cases, does not involve theft and
the parties intent to arbitrate theft claims.

Finally, the Petitioners attempt to create the
appearance of a conflict by citing two state cases that
allegedly disfavor arbitration. However, neither of
these cases examines contract formation and theft.
Seifert v. U.S. Home Corp. 750 So. 2d 633 (Fla. 1999)
(Arbitration involving wrongful death); Ex Parte
Discount Foods Inc., 711 So. 2d 992 (Ala.), cert. Denied
sub nom. Supervalu Inc. v. Discount Foods, Inc., 525
U.S. 825 (1998), reconsidered in part 789 So. 2d 842
(2001) (Arbitration involving tortious interference with
contract, unfair competition, and violation of trade
secret laws.). When the Alabama Supreme Court
reconsidered its plurality opinion in Discount Foods,
moreover, the Alabama Supreme Court essentially

9

reversed itself regarding any unfavor that it may have
toward arbitration. Ex Parte Discount Foods Inc., 789
So. 2d 842 (2001). Accordingly, the cases cited by the
Petitioner fail to establish any meaningful conflict
among the courts regarding how to apply and interpret
the Federal Arbitration Act.

The lack of a conflict is highlighted by the fact
that a United States District Court has recognized that
the First District decision is unique and novel. Thus, a
conflict can not exist. In a recent federal court
decision, the United States District Court for the
Northern District of Ohio found the First District
opinion was the only reported decision that has
examined whether a party entered into an arbitration
agreement intending to arbitrate theft claims. In Fazio
v. Lehman Brothers, 2002 U.S. Dist. LEXIS 15174(N.D.
Ohio July 19, 2002)[Respondent’s Exhibit 1 at la] the
district court determined:

Cohen (the First District's decision) is the
only case cited by the parties in which
tort claims were brought based upon
broker theft. In other contexts, however,
Courts have considered the broader issue
of whether tortious conduct is within the
scope of broad, contractual arbitration
clauses. Thus, Cohen, is not aberration,
but merely constitutes one example of
the broader issue of applying contractual
arbitration clauses to tort claims.

Fazio v. Lehman Brothers, 2002 U.S. Dist. LEXIS 15174
(N.D. Ohio July 19, 2002)[Respondent’s Exhibit 1 at
la].

10

As the United States District Court for the
Northern District of Ohio found, the First District's
decision involves a unique and novel analysis of
contract formation and theft. Thus, a conflict can not
exist among the United States Circuit Courts of
Appeal, or among the various state judiciaries. If this
Court chooses to review this issue, this Court should
permit decisions from other circuits, federal courts, or
state courts to surface regarding this issue.

Conclusion

For the foregoing reasons, the petition for a
writ of certiorari should be denied.

Respectfully submitted,

Stanley M. Chesley (No. 0000852)
Counsel of Record

Terrence L. Goodman (No. 0009148)
WAITE, SCHNEIDER, BAYLESS
& CHESLEY CoO., L.P.A.

1513 Central Trust Tower

> West Fourth Street

Cincinnati, Ohio 45202

(513) 621-0267

11

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RESPONDENTS APPENDIX 1

UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF OHIO,
EASTERN DIVISION

CASE NO. 1:02CV157, CASE NO. 1: :02CV370,

CASE NO. 1:02CV382, CASE NO. 1: 02CV761,

CASE NO. 1:02CV764, CASE NO. 1 :02CV968,
CASE NO. 1:02CV1018

July 19, 2002, Decided

ROBERT FAZIO, et al.,

Plaintiffs,

Vs.

LEHMAN BROTHERS, INC., et al.,
Defendants.

SAMUEL GLAZER,

Plaintiff,

Vs.

LEHMAN BROTHERS, INC., et al.,
Defendants.

DOMINIC A. VISCONSI, et al.,
Plaintiff,

VS.

LEHMAN BROTHERS, INC., et al.,
Defendants.

NNO a aa aa ase SS GS Ss

la

PETER A. SPITALIERI, et al.,
Plaintiff,

VS.

LEHMAN BROTHERS, INC., et al.,
Defendants.

RICHARD LOPARDO, et al.,
Plaintiff,

VS.

LEHMAN BROTHERS, INC., et al.,
Defendants.

THOMAS J. SAVOCA, et al.,
Plaintiff,

Vs.

LEHMAN BROTHERS, INC., et al.,
Defendants.

PETER M. BONUTTI,

Plaintiff,

VS.

LEHMAN BROTHERS, INC., et al.,
Defendants.

me eee eee ee”

DISPOSITION

Defendants’ motions to compel arbitration and stay
proceedings denied.

MEMORANDUM OF OPINION
In each of these cases, the Defendants have filed

motions to compel arbitration and stay proceedings.'
(See Fazio Docket Nos. 38, 48 and 54; Glazer Docket
Nos. 26 and 36; Visconsi Docket Nos. 23 and 35;
Spitalieri Docket Nos. 11 and 12; Lopardo Docket Nos.
13 and 17; Savoca Docket Nos. 12 and 16; Bonutti
Docket No. 13.) The parties have briefed these issues
extensively. The arbitration issues overlap sufficiently
to permit the Court to issue a single opinion applicable
to all these cases.

For the following reasons, the motions to compel
arbitration and stay proceedings are DENIED.”

I. FACTS

These actions arise out of the conduct of Frank
Gruttadauria, who formerly acted as an investment
broker for each of the Plaintiffs. He is charged with
stealing from the investment accounts he was
servicing over a period of approximately fifteen years,
and covering up his activity by providing false account
statements to the Plaintiffs.

The Plaintiffs have sued the brokerage firms for
which Gruttadauria worked over the period of the
alleged theft. Generally, the Plaintiffs assert that the
brokerages are liable for his conduct. They have

: For convenience, the Court will refer to each

case by the last name of the first Plaintiff.

. Some of these motions also seek dismissal of

certain claims pursuant to Fed. it. Civ. P. 12(b)(6). These
issues will be addressed in separate opinions.

3a

brought fraud claims under the federal securities laws,
including Section 10(b) of the Securities and Exchange
Act of 1934 (15 U.S.C. § 78j(b)) and S.E.C. Rule 10(b)(5),
as well as related claims under state law.

Viewing the cases collectively, the brokerage
defendants include Lehman Brothers, Inc. and certain
affiliated companies (collectively “Lehman”); SG
Cowen Securities Corp., its predecessor Cowen &
Company, and its parent Societe Generale (collectively
“SG Cowen”); and Hambrecht & Quist, Inc., now
known as J.P. Morgan Securities, Inc., and its parent
J.P. Morgan Chase & Co. (collectively “J.P. Morgan”).

The Defendants allege that the Plaintiffs executed
various agreements governing their brokerage
accounts. These agreements were presented to the
Plaintiffs in connection with the accounts to be
serviced by Gruttadauria, and allegedly require that all
disputes arising out of account activity be resolved
through arbitration. The agreement allegedly executed
between Plaintiff Robert Fazio and S.G. Cowen’s
predecessor is representative:

Any controversy arising out of or relating
to any of [Fazio’s] accounts, to
transactions with [Cowen] for [Fazio’s],
or to this or any other agreement or the
construction, performance or breach
thereof, shall be settled by arbitration
before an arbitration panel appointed by
the NASD or the New York Stock
Exchange, Inc. or the American Stock
Exchange, Inc. as [Fazio] may elect.

(See Motion of SG Cowen, Fazio Docket No. 38, at 3.)

4a

Although there may be minor differences among the
agreements signed by the various Plaintiffs, they all
contain an arbitration provision comparable to that
quoted above.

The Defendants assert that the arbitration
provisions govern all issues raised in these cases.
They, therefore, seek a stay of all court proceedings
and an order compelling the Plaintiffs to submit to
arbitration. The Plaintiffs essentially argue that the
arbitration provisions should not be enforced because
Gruttadauria’s conduct was far outside the
contemplation and foreseeability of the parties at the
time the account agreements were executed.

II. LAW AND ANALYSIS

The Federal Arbitration Act (“FAA”) provides in
relevant part:

A written provision in any ... contract
evidencing a_ transaction involving
commerce to settle by arbitration a
controversy thereafter arising out of such
contract or transaction, or the refusal to
perform the whole or any part thereof, or
an agreement in writing to submit to
arbitration an existing controversy
arising out of such a contract,
transaction, or refusal, shall be valid,
irrevocable, and enforceable, save upon
such grounds as exist at law or in equity
for the revocation of any contract.

9 U.S.C. § 2. Once a court determines that issues in
litigation are subject to arbitration, the court

5a

proceedings must be stayed until the arbitration
process is complete. 9 U.S.C. § 3.

Courts have characterized the FAA as expressing
a congressional policy favoring enforcement of
arbitration provisions. Doubts regarding such
provisions should be resolved in favor of arbitration.
Southland Corp. v. Keating, 465 U.S. 1, 10-13, 79 L. Ed.
2d 1, 104 S. Ct. 852 (1984); Moses H. Cone Memorial
Hospital v. Mercury Construction Corp., 460 U.S. 1, 24-
25, 74 L. Ed. 2d 765, 103 S. Ct. 927 (1983) These
principles apply to arbitration provisions contained in
agreements governing brokerage accounts. Rodriguez
de Quijas v. Shearson/American Express, Inc., 490 U.S.
477, 480-83, 104 L. Ed. 2d 526, 109 S. Ct. 1917 (1989);
Shearson/American Express, Inc. v. McMahon, 482 U.S.
220, 226, 96 L. Ed. 2d 185, 107 S. Ct. 2332 (1987); Dean
Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 219-21, 84 L.
Ed. 2d 158, 105 S. Ct. 1238 (1985); Stout v. J.D. Byrider,
228 F.3d 709, 714 (6th Cir. 2000), cert. denied, 531 U.S.
1148, 121 S. Ct. 1088, 148 L. Ed. 2d 963 (2001); Ferro
Corp. v. Garrison Industries, Inc., 142 F.3d 926, 932 (6th
Cir. 1998).

Enforcement of an arbitration clause, however, has
limits. First, the dispute at issue must be within the
scope of the arbitration provision. Stout, 228 F.3d at
714. A party cannot be forced to arbitrate issues for
which there was not an agreement to do so, and the
parties intentions control. Sandvik AB v. Advent
International Corp., 220 F.3d 99, 105 (3d Cir. 2000);
Leadertex, Inc. v. Morganton Dyeing & Fishing Corp.,
67 F.3d 20, 27 (2d Cir. 1995); Three Valleys Municipal
Water District v. E.F. Hutton & Company, Inc., 925 F.2d
1136 (9th Cir. 1991); Roney & Co. v. Kassab, 981 F.2d
894, 897 (6th Cir. 1992). In addition, an arbitration

6a

A, ee Te ee a ee ee ee eee ee a ee ee

provision will not be enforced if it resulted from
conduct that would provide for revocation of the
contract. McMahon, 482 U.S. at 226; Ferro, 142 F.3d at
932.

In support of arbitration, the Defendants rely ona
body of cases beginning with Prima Paint Corp. v.
Flood & Conklin Manufacturing Co., 388 U.S. 395,18 L.
Ed. 2d 1270, 87 S. Ct. 1801 (1967). Prima Paint dealt
with a situation in which the party opposing
arbitration alleged fraudulent inducement to enter the
contract. The Supreme Court held that if the alleged
fraud pertains to the contract as a whole, then the issue
of fraudulent inducement must be decided as part of
the arbitration process. On the other hand, a fraud
claim should be decided by the court if the alleged
fraudulent inducement is directed at the agreement to
arbitrate specifically. In essence, the alleged
agreement to arbitrate is effectively considered a
separate agreement which may be valid despite being
contained in an otherwise fraudulently induced
contract. Prima Paint Corp. v. Flood & Conklin
Manufacturing Co., 388 U.S. 395, 403-04, 18 L. Ed. 2d
1270, 87 S. Ct. 1801 (1967); see also Burden v. Check
Into Cash of Kentucky, LLC, 267 F.3d 483, 488 (6th Cir.
2001), cert. denied, 152 L. Ed. 2d 380, 122 S. Ct. 1436
(2002); Ferro, 142 F.3d at 931, 933.

As shown in the cases cited by the parties, Prima
Paint has been applied generally to challenges based
upon the making of the contract. The analysis
proceeds upon the following principles. First, there
must be a valid and enforceable contract which
includes an obligation to arbitrate disputes. Second,
the scope of the arbitration obligation must include the
dispute at issue. Third, if the claim is for fraudulent

Ta

inducement to enter the agreement as a whole, then
the disputed issues must be decided by arbitration. If,
however, the claim is for fraudulent inducement of the
agreement to arbitrate, then the disputed issues are for
the Court to decide because the alleged fraud goes to
the very legitimacy of the arbitration procedure.

The Court concludes that the Defendants have
misapplied Prima Paint and its progeny. Those cases
apply only to situations in which a party seeks to avoid
or rescind an existing contract. It does not apply to
challenges to the very existence of the contract on the
ground that there was never an agreement at all.
Three Valleys, 925 F.2d at 1140-41 (whether a contract’s
signatory had authority to bind a party is a question for
the court); Sandvik, 220 F.3d at 106 (court must decide
whether the underlying agreement containing the
arbitration clause exists). An arbitration obligation
cannot arise out of a broader contract if the broader
contract never existed. Burden, 267 F.3d at 488. To
avoid arbitration based on the ground that a contract
never actually existed, the substance of any alleged
misrepresentation must go to its character or essential
terms. Id. at 490, citing, Restatement (Second) of
Contracts § 163 cmt. a (1979).

Here, assuming the Plaintiffs executed the account
agreements, they did so with the understanding and
expectation that Gruttadauria would act as their
broker. He allegedly, however, never had any intention
to do so, but rather only intended to steal their money.
Because the intentions of the parties differed
drastically, there was never any meeting of the minds,
both as to the contract as a whole, and as to the
arbitration clause specifically. Thus, an enforceable
contract never existed. In Prima Paint, the alleged

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fraud centered around the circumstances under which
the contract was executed. In contrast, in the current
cases the alleged fraud goes beyond just the execution
of the account agreements, but goes to the very nature
of the relationship. Under the Plaintiffs’ allegations,
there never really was a broker/investor relationship,
so the account agreements are entirely void ab initio,
including the arbitration provisions.

In this vein, several of the Plaintiffs note that the
arbitration provisions relate only to “accounts”. They
argue that those provisions do not apply because there
never were any “accounts” as that term is understood
in the brokerage industry. The Court agrees. The plain
meaning of “account” in this context is essentially a
pool of assets either invested or maintained by the
brokerage in cash accounts. Here, the Plaintiffs’ assets
for the most part were neither invested nor maintained
as cash, but stolen. Accordingly, there effectively were
no accounts, and the alleged agreements are therefore
unenforceable against the Plaintiffs.

4 The Court recognizes that many of the

Plaintiffs make additional arguments as to why particular
account agreements are invalid. Such arguments include,
for example, that certain account agreements were never
signed, that signatures were actually forged, and/or that the
agreements pertain to accounts or transaction categories
not at issue. If demonstrated, these arguments would
provide additional bases for concluding that the arbitration
provisions are invalid and unenforceable. Because the
general principles governing contracts and arbitration
clauses render the provisions at issue ineffective, the Court
need not address each and every specific argument raised
by the Plaintiffs.

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Even assuming the existence of valid account
agreements, Prima Paint and its progeny still do not
apply because such cases only apply upon the
threshold finding that the disputes at issue fall within
the scope of the arbitration provisions. Even absent
any contractual defects, parties cannot be compelled to
arbitrate disputes outside the scope of an arbitration
provision. If the Court concludes that claims based
upon outright theft are not encompassed by the
arbitration provisions here, then the analysis set forth
in Prima Paint never arises as an issue.

Generally, the underlying basis for the Plaintiffs’
claims is Gruttadauria’s alleged theft of their assets.
They argue that despite the breadth of the arbitration
provisions, claims based upon the outright theft of
assets are outside the scope. They rely heavily on an
unreported Ohio appellate decision, Cohen v.
Painewebber, Inc., 2002 Ohio App. LEXIS 161, 2002 WL
63578 (Hamilton Cty. App. January 18, 2002). Like
here, the plaintiff in Cohen sued a brokerage firm
based upon allegations that a broker had stolen assets
from a brokerage account. The account agreement
required arbitration of “any and all controversies”
relating to the account. The court held that claims
based on theft were not within the scope of the
arbitration clause:

Although the arbitration provision is
broad, stating that it covers any and all
controversies pertaining to the brokerage
account, we cannot say, as a matter of
law, that a claim alleging such tortious
conduct as the aiding and abetting of a
theft is subject to the arbitration

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PRUE TPE Oe TS

provision here. An arbitration clause
itself is a contract. A contract requires a
meeting of the minds as to the terms
contained within. At the time that the
parties entered into the contract, there
was no meeting of the minds that the
arbitration provision would cover claims
alleging tortious forms of theft. If the
parties had contemplated, at the time
that they entered into the arbitration
agreement, that PaineWebber would
possibly steal from Ginsburg, that would
surely be against public policy. Matters
more likely to have been contemplated by
both parties would have involved
questions of whether a_ particular
transaction was authorized or whether
there was any miscalculation in the sum
of money contained in the account. Here,
the claims filed by Cohen alleged that
PaineWebber and Wilhelm had engaged
in conduct beyond the scope of the
brokerage agreement. Zenni, allegedly
with the knowledge of PaineWebber and
Wilhelm, had sent altered and false
monthly account statements to Ginsburg.
Accordingly, under the stated
circumstances in this case, we hold that,
as a matter of law, the claims of unlawful
conversion and fraudulent concealment,
were not subject to the arbitration
provision.

Id. at *3. Although Cohen, an unreported Ohio
appellate decision, is not binding, this Court concurs

lla

with its reasoning. Conduct amounting to theft is so
beyond what is expected from a broker that such
conduct could not have been within the reasonable
contemplation of the Plaintiffs when they signed the
alleged account agreements.

Recognizing that Cohen is not binding, the
Defendants argue that the decision should be
disregarded because it goes against the weight of long-
standing case law favoring arbitration. The Court
disagrees with the Defendants’ characterization of
Cohen as an aberration. The Plaintiffs assert tort
claims such as fraud, conversion, theft, and breach of
fiduciary duty. Cohen is the only case cited by the
parties in which tort claims were brought based upon
broker theft. In other contexts, however, Courts have
considered the broader issue of whether tortious
conduct is within the scope of broad, contractual
arbitration clauses. Thus, Cohen is not an aberration,
but merely constitutes one example of the broader
issue of applying contractual arbitration clauses to tort
claims.

Tort claims are subject to a contractual arbitration
provision if based on factual allegations that fall within
the scope of the provision. Fyrnetics (Hong Kong)
Limited v. Quantum Group, Inc., 2002 U.S. App. LEXIS
11923, 2002 WL 1312989 at *6 (7th Cir. June 18, 2002)
(designated for publication); Gregory v. Electro-
Mechanical Corp., 83 F.3d 382, 384 (11th Cir. 1996);
Carib Aviation and Marine Consultants, Ltd. v.
Mitsubishi Aircraft International, Inc., 640 F. Supp. 582,
588 (S.D. Fla. 1986). Tort claims are outside the scope
of the arbitration provision if they can be asserted
independently without reference to the contract. Ford
v. Nylcare Health Plans of Gulf Coast, Inc., 141 F.3d 243,

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290 (Sth Cir. 1998) (applying comparable Texas law).
Applying these principles, courts in many cases have
determined that tort claims are outside the scope of
arbitration clauses of breadth comparable to that at
issue here.

For example, in Telecom Italia, SPA v. Whole
Telecom Corp., 248 F.3d 1109 (11th Cir. 2001), the
defendant brought a third party complaint against an
entity from which it leased telecommunications
circuits. The lease agreement called for arbitration of
“any dispute arising out of or relating to this service
agreement”. The defendant alleged that the third party
tortiously interfered and conspired to undermine its
relationship with the plaintiff. The court (quoting a
commentator) stated that “parties to an arbitration
agreement should be compelled to arbitrate only those
torts contemplated by the arbitration agreement.” Id.
at 1114. In determining whether the tort claims were
subject to arbitration, the court considered whether
the claims were the “immediate, foreseeable result of
the performance of contractual duties”. There, the tort
claims were not arbitratable because the third party’s
conduct extended far beyond the reasonable
expectations of the contracting parties. Id. at 1116-17
(emphasis added).

In Ford, supra, a physician entered into a medical
services contract with an HMO. The contract had a
provision requiring arbitration of all disputes “arising
out of or relating to” the agreement. Dissatisfied with
the way the HMO was advertising medical services, the
physician brought suit for false advertising under the
Lanham Act. The court concluded that, although the
terms and polices set forth in the medical services
contract were relevant, the competitive injuries alleged

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under the false advertising claims rendered such
claims outside the scope of arbitration. The false
advertising claims were wholly independent from the
existence of the contract. Ford, 141 F.3d at 252.

Similarly, in Leadertezx, Inc. v. Morganton Dyeing &
Fishing Corp., 67 F.3d 20 (2d Cir. 1995), the parties
executed a contract for the purchase of goods. In
addition to claims arising from allegations of non-
payment, the plaintiff brought a defamation claim
asserting that the defendant made defamatory
comments about the quality of the plaintiff's products
to one of its customers. The underlying contract
contained a broad arbitration provision applicable to
“any controversy or claim arising under or in relation
to this order or contract”. The issue was whether the
defamation claim was within the scope of the
arbitration clause. The court recognized that
resolution of the defamation claim would necessitate
examining evidence relevant to the contract claims.
The court concluded, however, that the defamation
claim was not subject to arbitration because such a
claim was beyond the parties reasonable expectations,

and never contemplated, at the time the contract was
executed. Id. at 28-29.

In Sutton v. Hollywood Entertainment Corp., 181 F.
Supp. 2d 504 (D. Md. 2002), the parties executed an
agreement by which the plaintiff could rent movie
videos from the defendant’s store. There was an
arbitration clause applicable to “any dispute arising
out of or relating in any way to Applicant’s relationship
with HOLLYWOOD VIDEO”. On March 1, 2001, an
employee of the defendant incorrectly identified the
plaintiff as the man who robbed the store the previous
evening. The plaintiff was arrested and detained, but

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later was exonerated after a review of the store
surveillance video revealed that he was not the
perpetrator. He brought suit for false imprisonment,
malicious prosecution, and negligence. The court
reasoned that the “relationship” referenced in the
agreement meant the “relationship as a video renter”.
The court concluded that it was “logically untenable”
that the video membership agreement was
contemplated to cover claims arising out of accusations
of theft. The claims, therefore, were not subject to
arbitration. Id. at 510-12.

Finally, in Hersman, Inc. v. Fleming Companies, Inc.,
19 F. Supp. 2d 1282 (M.D. Ala. 1998), aff-d, 180 F.3d 271
(11th Cir. 1999), the plaintiff hired the defendant to
oversee the development of a shopping center. As part
of the project, they selected an architect and the
parties executed an architectural agreement. It
required that all “claims, disputes, or other matters in
question ... arising out of or relating to this Agreement”
be submitted to arbitration. Ultimately, the plaintiff
brought suit asserting negligence and fraud in
connection with the defendant’s oversight of the
project. The court concluded that the tort claims were
not subject to arbitration because the plaintiff's
allegations were independent of the obligations
imposed by the architectural agreement. 19 F. Supp.
2d at 1286-87.

These cases stand for the general proposition that
tort claims are not subject even to a broad arbitration
clause if the conduct at issue was beyond any
reasonable foreseeability or contemplation at the time
the contract was executed. Under these principles,
Cohen was decided correctly and applies to this case.

15a

Except for Cohen, the cases cited by the Defendants
demonstrate the types of improper conduct that are
reasonably foreseeable in a brokerage relationship.
The cases involve such conduct as unauthorized
trades, executing risky or poor investments
inconsistent with an investor’s stated investment
objectives, generally failing to follow instructions, and
“churning” (excessive trading for the purpose of
artificially increasing commissions). What these
activities have in common is that they stem from
trading activity generally within the scope of
employment of a broker. When an investor opens an
account, it is at least reasonably foreseeable that
disputes may arise concerning the propriety of certain
trading activity. Such conduct can be subjected to
arbitration regardless of how the claims are legally
fashioned, be they, for example, framed as common
law fraud, breach of fiduciary duty, statutory securities
fraud, or even R.I.C.O.

On the other hand, an investor does not open a
brokerage account contemplating the possibility that
the assets might be stolen outright. The Plaintiffs’
claims are outside the scope of the arbitration
provisions because they arise out of alleged activity far
beyond any conduct reasonably foreseeable or
contemplated from a brokerage relationship. In
addition, such claims are independent of any account
agreements because they could be asserted even if
there had never been any written account agreements.

III. CONCLUSION

Stated plainly, when the Plaintiffs signed the
alleged account agreements, they had no reasonable
concern or contemplation that their assets would be

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Ohi dtr (ints

ide ~ eno -

stolen. There was, therefore, never any meeting of the
minds with respect to any portion of the alleged
account agreements, including the arbitration
provisions. In addition, claims arising from allegations
of outright theft are beyond the scope of such
arbitration provisions. Accordingly, the Defendants’
motions to compel arbitration and stay proceedings
are DENIED.

IT IS SO ORDERED.
Issued: July 19, 2002

s/ John M. Manos
UNITED STATES DISTRICT JUDGE

ORDER

Pursuant to the Memorandum of Opinion issued in
the above-captioned cases this date, the Plaintiffs’
claims are not subject to the arbitration provisions
contained in the account agreements at’ issue.
Accordingly, the Defendants’ motions to compel
arbitration and stay proceedings are DENIED. (See
Fazio Docket Nos. 38, 48 and 54; Glazer Docket Nos. 26
and 36; Visconsi Docket Nos. 23 and 35; Spitalieri
Docket Nos. 11 and 12; Lopardo Docket Nos. 13 and 17;
Savoca Docket Nos. 12 and 16; Bonutti Docket No. 13.)

IT IS SO ORDERED.

Issued: July 19, 2002
s/ John M. Manos
UNITED STATES DISTRICT JUDGE

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386015_0262%3A2. Public record. Not legal advice.