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WILMOT v. MCNABB

July 2, 2003

CONAL WILMOT AND VON WILMOT, PLAINTIFFS,
v.
ROBIN B. MCNABB, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Jeremy Fogel, District Judge.

ORDER GRANTING MOTIONS TO COMPEL ARBITRATION AND TO STAY PROCEEDINGS

Defendants Cambridge Investment Research, Inc. ("Cambridge"), American Investors Company ("AIC"), National Financial Services Corporation ("NFS"), and First Trust Corporation ("First Trust") and Fiserv, Inc. ("Fiserv") move separately to compel arbitration and to stay proceedings in the above-entitled matter. Defendant John Roslund joins in the motion of AIC. Plaintiffs oppose. The Court has read the moving and responding papers and has considered the oral arguments of counsel presented on April 7, 2003. For the reasons set forth below, the motions brought by Cambridge, AIC, and NFS will be granted. The motion brought by First Trust and Fiserv will be granted on the condition that arbitration of Plaintiffs' claims against First Trust and Fiserv occur within California.

I. BACKGROUND

On August 1, 2002, Plaintiffs Dr. Conal Wilmot and Von Wilmot filed the instant action, alleging that they were defrauded by their former financial advisor, Defendant Robin B. McNabb ("McNabb"), and that Defendants Cambridge, AIC, NFS, First Trust, Fiserv, and other individuals and corporate entities assisted McNabb with his fraudulent scheme. Plaintiffs assert claims for securities fraud under the Securities Exchange Act of 1934, 15 U.S.C. § 78a, et seq. ("the Exchange Act"), common law fraud, breach of fiduciary duty, and breach of contract.

Plaintiffs, an elderly married couple who reside in Santa Cruz, California, allege the following in their amended complaint. From approximately 1994 to 2001, Plaintiffs maintained a business relationship with McNabb, who represented that he was a competent financial planner and investment advisor. During this period, Plaintiffs entrusted McNabb and other Defendants with management of their retirement accounts and other assets. Although Plaintiffs repeatedly instructed him to invest their assets only in conservative, lowrisk investments, McNabb invested their assets in high-risk securities and other investment vehicles, engaged in excessive trading in order to generate management fees, and misrepresented to Plaintiffs the state of their assets. McNabb also failed to disclose to Plaintiffs that in 1995 his association with AIC was terminated for mishandling client funds, that in 1999 the National Association of Securities Dealers, Inc. ("NASD") fined him $50,000 and barred him from association with any NASD member in any capacity for violating its rules, and that in 2000 the United States Securities and Exchange Commission upheld the NASD's disciplinary action. The value of Plaintiffs' assets declined substantially during the course of their association with McNabb and other Defendants.

Plaintiffs have submitted evidence that Dr. Wilmot suffers from a progressive brain condition similar to dementia and that since the mid 1990s he has manifested increasingly severe symptoms of his condition. See Ex. B to Declaration of Denis S. Kenny; Declaration of Von Wilmot ("Wilmot Decl.") ¶¶ 4-9. They assert that Dr. Wilmot's health has deteriorated to the point that he is unable to care for himself today. See Wilmot Decl. ¶ 9.*fn1

Cambridge, AIC, and NFS move to compel arbitration based on two agreements to arbitrate entered into by Plaintiffs. On November 13, 1993, Plaintiffs signed a "Transmittal Form" in connection with their AIC investment account. This form includes an arbitration provision specifying that "any controversy between us arising out or relating to my [AIC] account . . . shall be settled by arbitration in accordance with the rules, then obtaining, of the National Association of Securities Dealers, Inc." Ex. A to Declaration of Clarence Yee. On January 29, 1996, Plaintiffs opened an investment account with NFS and entered into a "Brokerage Account Pre Dispute Arbitration Agreement" with Cambridge and NFS. See Ex. A to Declaration of Jennifer Moran. That arbitration agreement provides for arbitration of "all controversies that may arise between us" concerning Plaintiffs' NFS investment account "before an independent panel of arbitrators set by either the New York Stock Exchange, Inc. or National Association of Securities Dealers, Inc., as [Plaintiffs] may designate." Id.

First Trust and Fiserv*fn2 move to compel arbitration pursuant to a third agreement entered into by Plaintiffs. On August 20, 1997, Dr. Wilmot completed and executed a First Trust IRA application, which states expressly that he agrees to the "Arbitration Statement" attached to the IRA application. See Ex. 1 to First Trust's Motion to Compel Arbitration. The "Arbitration Statement" provides that any dispute arising out of the IRA will be resolved in binding arbitration before the American Arbitration Association in Denver, Colorado. See id.

II. DISCUSSION

The moving Defendants argue that Plaintiffs must be compelled to arbitrate their claims pursuant to the Federal Arbitration Act, 9 U.S.C. § 1, et seq. ("FAA"). Section 2 of the FAA provides that a written agreement to arbitrate in any contract involving interstate commerce "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. The FAA "leaves no place for the exercise of discretion by a district court, but instead mandates that district courts shall direct the parties to proceed to arbitration on issues as to which an arbitration agreement has been signed." Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 218, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985). If a district court determines that a party has failed to comply with a valid agreement to arbitrate, it must order the parties "to proceed to arbitration in accordance with the terms of the agreement," 9 U.S.C. § 4, and it may stay the litigation until the arbitration process is complete. 9 U.S.C. § 3. Plaintiffs do not dispute that the FAA mandates arbitration in certain cases and that they entered into the agreements to arbitrate at issue in this case, but they argue that those agreements are invalid or unenforceable.

A. Motions Brought By Cambridge, AIC, and NFS

AIC moves to compel arbitration of Plaintiffs' claims against it based on the agreement to arbitrate contained in the AIC form signed by Plaintiffs on November 13, 1993. Cambridge and NFS move separately to compel arbitration of the claims against them based on the NFS arbitration agreement entered into by Plaintiffs on January 29, 1996.

Plaintiffs oppose the motions brought by Cambridge, AIC, and NFS, claiming that the parties made a mutual mistake of fact when they entered into the two agreements to arbitrate discussed above. In particular, Plaintiffs argue that they are entitled to proceed with arbitration in California before an arbitration panel that is compliant with new ethics standards for arbitrators adopted by the Judicial Council of California in April 2002. The new "Ethics Standards for Neutral Arbitrators in Contractual Arbitration" ("the California standards"), which are codified at Division VI of the Appendix to the California Rules of Court, took effect on July 1, 2002.*fn3 Plaintiffs contend that the refusal of the New York Stock Exchange, Inc. ("NYSE") and the NASD to appoint an arbitration panel that is compliant with the California standards renders their agreements to arbitrate unenforceable because of the parties' mutual mistake of fact as to the availability of the arbitral fora provided by the NYSE and the NASD.

In Mayo v. Dean Witter Reynolds, Inc., 258 F. Supp.2d 1097 (N.D.Cal. 2003), amended by Mayo v. Dean Witter Reynolds, Inc., 260 F. Supp.2d 979 (N.D.Cal. 2003), this Court considered whether an individual who entered into a valid and enforceable agreement to arbitrate his or her dispute before "self-regulatory organizations" (SROs) such as the NYSE and the NASD is entitled to proceed before an arbitration panel that is compliant with the California standards.*fn4 The Court concluded that application of the California standards to SROs is preempted by the Exchange Act and the comprehensive system of federal regulation of the securities industry established pursuant to the Exchange Act. Id. at 258 F. Supp.2d at ___-___, 2003 WL 1922963, at *9-13. The Court also concluded that at least as they were applied to the plaintiff in Mayo, the California standards also are preempted by ยง 2 of the FAA. Id. at 258 F. Supp.2d at ___, 2003 WL 1922963 at *14-17. The Court thus ...


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