Opinion
Case No. 6:03-cv-103-Orl-22KRS
June 6, 2003
REPORT AND RECOMMENDATION
TO THE UNITED STATES DISTRICT COURT
This cause came on for consideration after oral argument on the following motions filed herein:
MOTION: PLAINTIFF IFG NETWORK SECURITIES, INC.'S MOTION FOR PRELIMINARY AND PERMANENT INJUNCTION (Doc. No. 2)
MOTION: DEFENDANTS' MOTION TO COMPEL ARBITRATION (Doc. No. 15)
FILED: January 27, 2003 THEREON it is RECOMMENDED that the motion DENIED FILED: March 7, 2003 THEREON it is RECOMMENDED that the motion be DENIED without prejudice I. PROCEDURAL HISTORY
In September 2002, Rex T. King and Rua L. King initiated an arbitration proceeding before the National Association of Securities Dealers ("NASD") against IFG Network Securities, Inc. ("IFG").
In January 2003, IFG filed the complaint against the Kings in the instant case. IFG seeks a declaratory judgment that the issues raised by the Kings are not subject to arbitration and a preliminary and permanent stay of the arbitration proceeding. (Doc. No. 1). Simultaneously with filing the complaint, IFG filed a motion for a preliminary and permanent injunction to enjoin the Kings and those acting in concert with them from proceeding with the arbitration. (Doc. Nos. 2, 3). The motion was supported by an appendix of exhibits that include the declarations of Elaine M. Rice, David Ledbetter, Philip J. Hoblin, Jr., Thomas Wiltrakis, Carolyn G. Nussbaum, Marion H. Little, Jr., Kevin R. McDermott, and Jonathan Kord Lagemann. (Doc. No. 2, appendix).
This Declaration is incomplete. IFG later filed the complete Wiltrakis Declaration. (Doc. No. 36, tab 1).
In its memorandum of law in support of the motion for preliminary injunction, IFG refers to the "Williams Declaration." (Doc. No. 3 at 7, 14). This declaration is not before the Court. After oral argument on this matter, I gave IFG an opportunity to supplement its submissions, but it has not submitted a copy of this declaration.
In March 2003, the Kings filed a motion to compel arbitration. (Doc. Nos. 15, 20). They supported the motion with various documents, including the March 5, 2003 Affidavit of Rex and Rua King. (Doc. No. 18). They also filed a response to the motion for preliminary and permanent injunction. (Doc. No. 20).
The Kings' submissions purportedly included the Central Registration Depository ("CRD") information on Anthony V. Micciche, but the CRD report on another person is mistakenly included in their papers. (Doc. No. 18, ex. 2). The CRD report for Micciche is attached as an exhibit to the Kings' Statement of Claim. (Doc. No. 2, appendix, tab 1).
The Honorable Anne C. Conway, presiding district judge, referred these motions to me for ruling or issuance of a report and recommendation if necessary. (Doc. No. 21).
I issued an order scheduling oral argument on the motions and providing the parties with an opportunity to file any additional evidence or arguments which they wished to have considered. (Doc. No. 22). In response, IFG filed supplemental memoranda of law and appendices of exhibits. (Doc. Nos. 23, 30, 35, 36). The appendices contain the Declaration of Anthony V. Micciche (Doc. No. 24), the Declaration of R.W. "Bill" Cuthill, Jr. (Doc. No. 30), and the March 20, 2003 Declaration of David Ledbetter (Doc. No. 30), as well as other documents (Doc. No. 36). The Kings filed their March 19, 2003 affidavit (Doc. No. 26), and the Affidavit of Stephen Krosschell (Doc. No. 27). They also filed supplemental memoranda of law (Doc. Nos. 29, 32), a notice of authority (Doc. No. 42), and a notice of supplemental authority (Doc. No. 46).
The arbitration hearing is scheduled for August 2003. (Doc. No. 47). II. FACTUAL BACKGROUND.
IFG is a member of the NASD. (Doc. No. 1 ¶ 7; Doc. No. 14 ¶ 7). As part of its membership in the NASD, IFG admits that "it agreed to arbitrate those disputes, claims or controversies that arise out of or in connection with its business between members or associated persons and customers. NASD Code of Arbitration Procedure, Sections 10101 and 10301(a)." (Doc. No. 1 ¶ 7) (emphasis omitted).
IFG conducts its securities business through various registered representatives who have contracts with IFG. At least some of these registered representatives have outside business activities, such as insurance sales and financial planning, which are beyond the scope of their contracts with IFG. (March 20, 2003 Ledbetter Decl. ¶ 4).
Between January 1997 and June 1999, Anthony Micciche was a registered representative with IFG. (Doc. No. 1 ¶ 23; Doc. No. 14 ¶ 23; Micciche Aff. ¶ 2; Krosschell Aff.). IFG describes him as an "independent contractor.11 (Doc. No. 1 ¶ 23).
Rex and Rua King are husband and wife. Rex King is eighty-three years old, and Rua King is eighty-one years old. (March 5, 2003 Kings Aff. ¶ 1).
Sometime before May 2, 1999, the Kings met with Anthony Micciche at their home. (March 5, 2003 Kings Aff. ¶ 3). The Kings aver that they knew and believed that Micciche was a licensed representative with IFG and that they relied on his affiliation with IFG in making the investment at issue. (Id. ¶¶ 3, 6). They filed a copy of a business card, which they aver Micciche gave to them in connection with the transaction at issue. (March 19, 2003 Kings Aff. ¶ 1). On its face, the card indicates that Micciche is affiliated with IFG.
Micciche denies that he represented that he was acting for IFG in this transaction. (Micciche Aff. ¶ 4). He avers that he did not provide the Kings an IFG business card or use IFG letterhead or other documents showing an affiliation with IFG. (Id. ¶ 6).
Micciche recommended that the Kings invest in Evergreen Securities, Ltd. (Intrados, SA). (March 5, 2003 Kings Aff. ¶ 3). He told the Kings that in order to make the investment, they would have to enter into a trust agreement, which Micciche provided to them. (Id. ¶ 5). Micciche advised the Kings that a Panamanian company, Intrados, S A, would be the trustee, and that the Kings would be the beneficiaries of the trust. He also told the Kings that the trust was irrevocable and that the trust agreement gave the trustee broad powers regarding investment of trust assets. (Micciche Aff. ¶¶ 12, 14).
In reliance on Micciche's advice, the Kings entered into the trust agreement, a copy of which is in the Court's file. (March 5, 2003 Kings Aff. ¶¶ 3, 5; see also Micciche Aff. ¶ 8, ex. A). They also signed a Letter of Wishes in which they requested that the trust assets be invested in government securities and acknowledged that their request was not binding on the trustee. (Micciche Aff. ¶ 14 and ex. C). On May 2, 1999, the Kings wrote two checks for a total of $45,800 payable to Intrados S.A. (March 5, 2003 Kings Aff. ¶¶ 3, 5; Micciche Aff. ¶ 13 and ex. B).
Intrados invested the trust assets in Evergreen Securities, Ltd. ("Evergreen"). (Micciche Aff. ¶ 14). Evergreen is in bankruptcy. Its principals, and Micciche, pleaded guilty to federal criminal violations arising from their association with Evergreen. (See Doc. No. 18, ex. 8).
Micciche did not report to IFG his activities involving the Kings, In trades, S.A., or Evergreen. (Micciche Aff. ¶ 15). IFG did not approve the sale of Evergreen stock by its representatives. (Ledbetter Decl. ¶ 9; Micciche Aff. ¶ 15). It does not have any records of the purchase of this investment by or for the Kings. (Ledbetter Decl. ¶ 7). The Kings never opened an account with IFG, and they do not have any agreement with IFG. (Id. ¶¶ 3-4)-IFG was not involved in the investment in Evergreen by or for the Kings. IFG did not process requests to invest, and it did not receive or disburse funds for this transaction. (Id. ¶ 11).
III. RULES GOVERNING NASD MEMBERS.
The NASD By-Laws authorize "the NASD Board of Governors to 'prescribe a code of arbitration procedure providing for the required or voluntary arbitration of controversies between . . . members and customers or others as it shall deem necessary or appropriate.'" First Montauk Sec. Corp. v. Four Mile Ranch Dev. Co., 65 F. Supp.2d 1371, 1378 n. 9 (S.D. Fla. 1999) (quoting NASD By-Laws, Art. Vll(1)(a)(4)). The NASD Code of Arbitration Procedure ("NASD Code") was promulgated pursuant to this provision. NASD Code § 1, quoted in Wheat, First See., Inc. v. Green, 993 F.2d 814, 819-20 (11th Cir. 1993). The rules within the NASD Code and other NASD rules, all of which are contained in the NASD Manual, govern NASD members. (Doc. No. 18, ex. 5, Rule 0115).
The NASD Code was amended in 1996. Its provisions, originally designated as sections, are now referred to as rules with new rule numbers. See S.E.C. Release No. 36698, 61 S.E.C. Docket 52, 1996 WL 20844 (Jan. 11, 1996).
The NASD Manual is located in Westlaw database "NASD-MANUAL".
Two rules within the NASD Code are at issue in this case. NASD Rule 10101 describes disputes eligible for arbitration, as follows:
This Code of Arbitration Procedure is prescribed and adopted pursuant to Article VII, Section 1(a)(iv) of the By-Laws of the Association for the arbitration of any dispute, claim, or controversy arising out of or in connection with the business of any member of the Association, or arising out of the employment or termination of employment of associated person(s) with any member, with the exception of disputes involving the insurance business of any member which is also an insurance company:
(a) between or among members;
(b) between or among members and associated persons;
(c) between or among members or associated persons and public customers, or others; . . . .
(Doc. No. 18, ex. 3, Rule 10101).
NASD Rule 10301 describes disputes that must be arbitrated under the NASD Code, as follows:
Any dispute, claim, or controversy eligible for submission under the Rule 10100 Series between a customer and a member and/or associated person arising in connection with the business of such member or in connection with the activities of such associated persons shall be arbitrated under this Code, as provided by any duly executed and enforceable written agreement or upon the demand of the customer. . . .(Id., Rule 10301(a)). The NASD generally defines a "customer" as not including a broker or dealer. (Id., ex. 4, Rule 0120(g)).
Other provisions of the NASD rules define customer differently. For instance, for purposes of "Margin Requirements" only, a customer is defined as "any person for whom securities are purchased or sold or to whom securities are purchased or sold whether on a regular way, when issued, delayed or future delivery basis " (Doc. No. 18, ex. 4, Rule 2520(a)(3)). This definition expressly applies only to Rule 2520. (Id., Rule 2520(a)).
In addition, the NASD Code of Conduct includes the following rules governing its members:
Each member shall establish and maintain a system to supervise the activities of each registered representative and associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with the Rules of this Association. Final responsibility for proper supervision shall rest with the member. A member's supervisory system shall provide, at a minimum, for the following:
The NASD By-Laws define an "associated person" to include "a natural person engaged in the investment banking or securities business who is directly or indirectly controlling or controlled by a member. . . ." NASD By-Laws, Art. I (dd). The parties agree that Micciche was an associated person of IFG when the transaction about which the Kings seek to arbitrate occurred.
. . . .
Each member shall establish, maintain, and enforce written procedures to supervise the types of business in which it engages and to supervise the activities of registered representatives and associated persons that are reasonably designed to achieve compliance with applicable securities laws and regulations, and with the applicable Rules of this Association.
(Id., ex. 5, Rule 3010(a), (b)(1)).
The NASD Code of Conduct further provides as follows:
No person associated with a member in any registered capacity shall be employed by, or accept compensation from, any other person as a result of any business activity, other than a passive investment, outside the scope of his relationship with his employer firm, unless he has provided prompt written notice to the member. . . .
(Id., Rule 3030).
Prior to participating in any private securities transaction, an associated person shall provide written notice to the member with which he is associated describing in detail the proposed transaction and the person's proposed role therein and stating whether he has received or may receive selling compensation in connection with the transaction; provided however that, in the case of a series of related transactions in which no selling compensation has been or will be received, an associated person may provide a single written notice.
(Doc. No. 2, appendix, tab P, Rule 3040(b)).
In a Notice to Members issued in 1986, the NASD informed its members that their duty to supervise extended to an associated person compensated as an independent contractor. NASD Notice 86-65, 1986 WL 591919, at *1 (Sep't 12, 1986). It specifically noted problems that had arisen from off-site representatives of a member selling unauthorized private securities, an activity referred to as "selling away." It stated that "firms that employ [off-site representatives] . . . are responsible for monitoring their activities in a manner reasonably intended to detect violations." Id., at *3. Further, "the obligations imposed upon the firm and the associated person under the rule are neither altered nor lessened in any way by the fact that the individual is compensated as an independent contractor." Id. IV. STANDARD OF REVIEW.
A. Preliminary Injunction.
To obtain a preliminary injunction, IFG must prove the following:
(1) that there is a substantial likelihood that it will prevail on the merits;
(2) that there is a substantial threat of irreparable injury to IFG if the injunction is not granted;
(3) that the threatened injury to IFG outweighs the threatened harm an injunction may impose on the Kings; and
(4) that granting the preliminary injunction will not disserve the public interest.
Suntrust Bank v. Houghton Mifflin Co., 252 F.3d 1165, 1166 (11th Cir. 2001). "[A] preliminary injunction is an extraordinary and drastic remedy that should not be granted unless the movant clearly carries its burden of persuasion on each of these prerequisites." Id.
B. Motion to Compel Arbitration.
The court must first determine whether the parties entered into an agreement to arbitrate. Wheat, First Sec., Inc., 993 F.2d at 817. `The question whether the parties have submitted a particular dispute to arbitration . . . is `an issue for judicial determination [u]nless the parties clearly and unmistakably provide otherwise.'" Howsam v. Dean Witter Reynolds, Inc., 123 S.Ct. 588, 591 (2002) (quoting AT T Tech., Inc. v. Communications Workers, 475 U.S. 643, 649 (1986)).
A motion to compel arbitration is considered under a standard similar to that applicable to a motion for summary judgment. See Bensadoun v. Jobe-Riat, 316 F.3d 171, 175 (2nd Cir. 2003); Investors Capital Corp. v. Brown, 145 F. Supp.2d 1302, 1305 (M.D. Fla. 2001). A party is entitled to judgment as a matter of law when "the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). The substantive law applicable to the case determines which facts are material. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).
"The party seeking summary judgment bears the initial burden of identifying for the district court those portions of the record `which it believes demonstrate the absence of a genuine issue of material fact."" Cohen v. United Am. Bank of Cent Fla., 83 F.3d 1347, 1349 (11th Cir. 1996) (quoting Cox v. Adm'r United States Steel Carnegie, 17 F.3d 1386, 1396 (11th Cir. 1994) and Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986)). Once that showing has been made, the burden shifts to the party opposing the motion to establish, "through the record presented to the court, that it is able to prove evidence sufficient for a jury to return a verdict in its favor." Cohen, 83 F.3d at 1349. Summary judgment is mandated "against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp., 477 U.S. at 322. If disputed issues of material fact exist regarding whether the dispute is arbitrable, the matter must be presented to a factfinder for resolution. 9 U.S.C. § 4.
V. ANALYSIS.
A. Standing.
IFG argues that the Kings do not have standing to assert a claim against it because Intrados S.A., not the Kings, bought the securities at issue. To have standing, a plaintiff must show (1) he has suffered an injury in fact that is (a) concrete and particularized and (b) actual or imminent, not conjectural or hypothetical; (2) the injury is fairly traceable to conduct of the defendant; and (3) it is likely, not just merely speculative, that the injury will be redressed by a favorable decision. See Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992).
In this case, the Kings allege that they have suffered an actual, concrete and particularized injury arising from loss of the money they transferred to Intrados S.A. for the purpose of investing in Evergreen. They allege that the conduct is fairly traceable to IFG because they were induced to transfer the money at the behest of IFG's agent, Micciche. Further, they assert that the injury will be redressed by a favorable decision. This is sufficient to establish their standing at this stage of the proceedings. See, e.g., Tetzlaff v. Raymond James Assoc., Inc., 649 So.2d 289, 291 (Fla. 4th Dist.Ct.App. 1995) (investor who provided money used by trust to purchase securities found to be a proper party to bring individual claims against brokerage company even though the brokerage account was in the name of the trust), questioned on other grounds, Corp. Sec. Group v. Lind, 753 So.2d 151 (Fla. 4th Dist. Ct. App. 2000); see also Oppenheimer Co. v. Neidhardt, 56 F.3d 352, 356-57 (2nd Cir. 1995) (beneficiary of trust that invested money permitted to bring claims against brokerage company).
B. Whether the Kings' Claims Are Subject to Arbitration.
The Federal Arbitration Act (TAA") provides that when a written agreement for arbitration exists and the issue presented to the court is referable to arbitration under the agreement, the court must stay the case until the arbitration is completed. 9 U.S.C. § 3. The motion to compel arbitration currently before the Court requires resolution of the question of whether there is a written agreement for arbitration, and whether the claims presented by the Kings are referable to arbitration under the agreement. Discussion of these issues will determine, also, whether IFG is likely to succeed on the merits of its assertion that the Kings1 claims are not arbitrable.
1. The Court Must Determine Whether An Arbitration Agreement Exists.
"`[A]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.'" Howsam, 123 S. Ct at 591 (quoting United Steelworkers of Am. v. Warrior Gulf Navigation Co., 363 U.S. 574, 582 (1960)). The question of whether an agreement to arbitrate exists is one for the court to decide if the party opposing arbitration unequivocally denies that it entered into an agreement to arbitrate and presents "some evidence" to support that denial. Wheat, First Sec. Inc., 993 F.2d at 817. Here, IFG unequivocally denies that it entered into an arbitration agreement with the Kings, and it offered the Ledbetter Declaration as evidence that no such agreement exists. The Kings have not offered evidence establishing that they had an written arbitration agreement with IFG. Under these circumstances, the Court must determine whether an agreement to arbitrate exists. Id. at 817-18; see also John Hancock Life Ins. Co. v. Wilson, 254 F.3d 48, 55 (2nd Cir. 2001) (holding that one party's membership in the NASD cannot constitute a clear and unmistakable intent to submit to arbitration in the absence of a separate agreement between the parties).
2. The NASD Code is a Written Agreement to Arbitrate Within the Meaning of the FAA.
Neither the United States Supreme Court nor the United States Court of Appeals for the Eleventh Circuit has addressed whether "the rules and regulations of self-regulatory organizations such as the NASD `are sufficient in and of themselves to compel arbitration of covered disputes under [FAA] § 3, whether or not they are incorporated in a purchase and sale agreement.'" Wheat, First Sec. Inc., 993 F.3d at 820 (quoting Paine, Webber, Jackson Curtis, Inc. v. Chase Manhattan Bank, N.A., 728 F.2d 577, 580 (2nd Cir. 1984)).
Other courts that have addressed this issue have found that the written agreement between the NASD and its members may be a sufficient written arbitration agreement for purposes of the FAA. See, e.g., MONYSec. Corp. v. Bomstein, Case No. 2:02-cv-9-FTM-29DNF, Doc. No. 31 at 5 (M.D. Fla., Feb. 8, 2002); First Montauk Sec. Corp. v. Four Mile Ranch Dev. Co., 65 F. Supp.2d 1371, 1377-79 (S.D. Fla. 1999) (citing Kidder, Peabody Co. v. Zinsmeyer Trusts Partnership, 41 F.3d 861, 863-64 (2nd Cir. 1994)); accord Spear, Leeds Kellogg v. Cent Life Assurance Co., 85 F.3d 21, 26 (2nd Cir. 1996) (finding arbitration rules of the New York Stock Exchange sufficient agreement to arbitrate for purposes of the FAA); Merrill Lynch, Pierce, Fenner Smith, Inc. v. Hovey, 726 F.2d 1286, 1288-89 (8th Cir. 1984) (finding rule of the New York Stock Exchange was a valid written agreement to arbitrate under the FAA). Based upon the analyses of these courts, I conclude that IFG's agreement to abide by the NASD rules, which include the NASD Code, is a written arbitration agreement for purposes of the FAA. The Kings may enforce this agreement to arbitrate if they show that they are intended third-party beneficiaries of it. See Scobee Combs Funeral Home, Inc. v. E.F. Mutton Co., 711 F. Supp. 605, 608 (S.D. Fla. 1989).
3. The Disputed Evidence Precludes a Finding That The Kings' Claims Are Arbitrable under the NASD Code.
The next question is whether the issues presented by the Kings are referable to arbitration under the NASD Code. IFG asserts that the claims at issue here are not referable to arbitration because they do not arise out of or in connection with the business of a member of the NASD, as required under NASD Rule 10101. It argues, alternatively, that the Kings are not "customers" who may compel arbitration under NASD Rule 10301.
The facts are largely undisputed. IFG and the Kings never entered into an agreement. The Kings did not have accounts at IFG, and their money was never held by IFG. IFG did not earn a commission from the transaction at issue. It is also undisputed that at the time of the transaction at issue here, Micciche was authorized to self securities only by virtue of his relationship as an associated person of IFG. Micciche induced the Kings to place their money into a trust, Intrados S.A., which invested in Evergreen. What is disputed is whether Micciche represented to the Kings that he was affiliated with IFG, and whether the Kings relied on that representation and intended to become customers of IFG.
In pertinent part, Rule 10101 permits arbitration of "any dispute, claim, or controversy arising out of or in connection with the business of any member of the Association/ In this case, the controversy arose out of a sales solicitation by Micciche, who was at the time an associated person of IFG. Micciche was only licensed to offer for sale and sell securities by virtue of his affiliation with IFG. IFG was responsible for supervising Micciche's activities, including the offers for sale and sale of securities that he did not conduct through IFG. See NASD Rules 3010, 3030, 3040; NASD notice 86-65, 1986 WL 591919, at *1 (Sep't 12, 1986). Because the record currently before the Court reflects that Micciche's offer to sell securities to the Kings was a transaction that was conducted by an associated person of IFG whom IFG had a duty to supervise, I conclude, based on this record, that the transaction at issue was part of the business of IFG for purposes of Rule 10101. See, e.g., Vestax Sec. Corp. v. McWood, 280 F.3d 1078, 1082 (6th Cir. 2002); Bernstein, Case No. 2:02-cv-9-FTM-29DNF, Doc. No. 31 at 8 (M.D. Fla., Feb. 8, 2002); WMA Sec., Inc. v. Ruppert, 80 F. Supp.2d 786, 790 (S.D. Ohio. 1999); First Montauk Sec. Corp., 65 F. Supp.2d at 1379-80 (citing Royal Alliance Assoc. v. Davis, 897 F. Supp. 783, 788 (S.D.N.Y. 1995)).
Based on this conclusion, I need not address the Kings' alternate argument that their claims arise in connection with the employment of an associated person.
The more difficult question is whether the Kings were customers within the meaning of Rule 10301. The meaning of customer for purposes of Rule 10301 has not been determined by the Supreme Court or the Eleventh Circuit.
Some courts have found that it is sufficient to show that the party seeking to compel arbitration did business with an associated person of the NASD member. See, e.g., John Hancock Life Ins. Co., 254 F.2d at 58-60; Wash. Square Sec., Inc. v. Aune, No. 3:02CV308-V, 3:02CV309-V, 2003 WL 1485816, at *4 (W.D.N.C., March 7, 2003); Homor, Townsend Kent, Inc., v. Hamilton, 218 F. Supp.2d 1369, 1376 (N.D. Ga. 2002); see also BMA Fin. Sev., Inc. v. Guin, 164 F. Supp.2d 813, 820 (W.D. La. 2001) (parties agreed that Rule 10301 requires arbitration even if investors are only customers of the associated person).
In Investors Capital Corp. v. Brown, the court found, however, that Rule 10301 requires the NASD member to "arbitrate disputes with its customers, rather than the customers of every person associated with [the NASD member]." 145 F. Supp.2d at 1308. The judge concluded that the parties seeking to compel arbitration need not show that they opened an account with the NASD member or present "other evidence of a traditional customer relationship" with the NASD member. Rather, the parties seeking to compel arbitration need only show that they established an informal business relationship with the NASD member or attempted to do, which showing would, "in large part, [be] dependent upon the Defendant's subjective intent at the time of the [transaction]." Id. at 1308-09. Under the facts presented in Brown, the court found that the parties were entitled to a jury trial pursuant to section 4 of the FAA on the issue of whether a customer relationship existed. Id. at 1309.
The court's records reflect that the case settled before trial.
Other courts appear to have used the rationale adopted in Brown. In cases in which there was undisputed evidence that the parties seeking to compel arbitration knew that the associated person with whom they dealt was affiliated with the NASD member and relied upon that affiliation in deciding to make the investment, courts have concluded that the parties seeking to compel arbitration were "customers" within the meaning of Rule 10301. See Bomstein, Case No. 2:02cv9FTM29DNF, Doc. No. 31 at 6-9; Investors Capital Corp. v. Rimmler, No. 600CV1092ORL22DAB, 2001 WL 114936, at *1 (M.D. Fla., Feb. 5, 2001); Ruppert, 80 F. Supp.2d at 788-89; First Montauk Sec. Corp., 65 F. Supp.2d at 1381-82. In a case in which the undisputed evidence showed that the parties seeking to compel arbitration did not know with which NASD member the associated person with whom they dealt was affiliated, the court found that the parties seeking to compel arbitration were not "customers" within the meaning of Rule 10301. MONYSec. Corp. v. Vasquez, 238 F. Supp.2d 1304, 1306-08 (M.D. Fla. 2002).
Recently, in Bensadoun v. Jobe-Riat, 316 F.3d 171, 177-78 (2nd Cir. 2003), the United States Court of Appeals for the Second Circuit also adopted the subjective intent test in certain circumstances for determining whether an investor is a customer within the meaning of Rule 10301. In Bensadoun, investors transferred funds to Paine Webber with the understanding that a third party, Michel Autard, would open accounts for them at Paine Webber and invest the funds. Autard was a customer of Jean Bensadoun, an employee of Paine Webber. Rather than opening accounts for the investors, Autard and Bensadoun opened accounts in the name of a company with which Autard was affiliated, referred to as CFM, and deposited the investors' money in the CFM accounts without the investors1 knowledge. When Bensadoun subsequently became employed by Smith Barney, he transferred some portions of the CFM accounts to Smith Barney. CFM later went into bankruptcy, and Autard was arrested for embezzlement. Id. at 173-74, 176.
The investors filed an arbitration claim with the NASD against Paine Webber, Smith Barney, and Bensadoun. Bensadoun filed suit seeking a declaration that the investors had no right to compel him to arbitrate their claims and an injunction preventing the investors from pursuing arbitration. Id. at 174. Bensadoun submitted a proposed preliminary injunction order, which the district court treated as a motion to stay arbitration. It found that the investors were engaged in a "`customer-like relationship' with Bensadoun, and that this allegation was `sufficient, on the present sparse record, to support sending the matter to arbitration. . . ." Id. at 174. It, therefore, dismissed the case.
The Second Circuit reversed this decision, finding that the question of whether the investors were customers of Bensadoun was "an issue of fact as to the making of the agreement for arbitration," that must be resolved by trial under section 4 of the FAA. Id. at 175. The court reasoned that because the investors dealt with two people — Autard, who was not an associated person, and Bensadoun, who was an associated person — the question of whether the investors were customers for purposes of Rule 10301 would turn on whether the investors intended to be customers of Bensadoun and Paine Webber or whether they believed that they were placing their funds with Autard and Autard would control the accounts. Id. at 177. The court concluded that this factual issue must be decided before a final decision on arbitrability could be reached. It remanded the case with instructions to the district court to stay arbitration pending resolution of the factual question regarding arbitrability. Id. at 178.
I find the reasoning in Brown and Bensadoun persuasive, and I recommend that the Court adopt it here. Under that analysis, the Kings may be found to be customers of IFG if the factfinder credits their averments that they knew and relied upon Micciche's affiliation with IFG in giving their money to Intrados S.A. to buy Evergreen, believing that they were developing a business relationship with Micciche and IFG. If, however, the factfinder determines that the Kings believed that they were delivering funds to Intrados, S.A. to be invested by that company under its sole control and they did not intend to develop a business relationship with IFG through Micciche, then they may not be found to be customers of IFG. Because there is disputed evidence on the question of whether Micciche told the Kings that he was affiliated with IFG, or gave them other indicia of his affiliation with IFG, material issues of fact preclude a finding at this juncture that the Kings are customers of IFG within the meaning of Rule 10301.
Based on my recommendation, I need not consider whether the Court should rely on extrinsic evidence if it finds that the term "customer" is ambiguous. Therefore, I do not consider the Hoblin, Wiltrakis, Nussbaum, Little and McDermott declarations.
I also do not consider the opinion of securities expert Lagemann, submitted by IFG, because his conclusions of law are not helpful to the Court. Further, the question of the legal interpretation of the NASD rules is a matter for the Court to determine. Cf. Montgomery v. Aetna Cas. Sur. Co., 898 F.2d 1537 (11th Cir. 1990) (expert testimony on meaning of an insurance contract improperly admitted at trial in breach of contract case).
Because IFG has not established a substantial likelihood of success on the merits of its claims, the motion for a preliminary injunction must be denied. Because the Kings have not presented undisputed facts that establish that their claims are arbitrable, the motion to compel arbitration must also be denied without prejudice to renewing it, if appropriate, after a determination of whether the Kings were customers of IFG.
VI. RECOMMENDATION.
For the reasons set forth above, I respectfully recommend that Plaintiff IFG Network Securities, Inc.'s Motion for Preliminary and Permanent Injunction (Doc. No. 2) be DENIED. I further recommend that Defendant's Motion to Compel Arbitration (Doc. No. 15) be DENIED without prejudice. If the Court adopts this report and recommendation, I further recommend that the Court lift the protective order precluding discovery pending the ruling on the instant motions. (Doc. No. 44).
Failure to file written objections to the proposed findings and recommendations contained in this report within ten (10) days from the date of its filing shall bar an aggrieved party from attacking the factual findings on appeal.