Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

O.N. Equity Sales Co. v. Wallave

November 15, 2007

THE O.N. EQUITY SALES COMPANY, PLAINTIFF,
v.
BETTY WALLACE, INDIVIDUALLY AND AS TRUSTEE OF THE BETTY WALLACE TRUST OF 1992, AND AS TRUSTEE OF THE BETTY WALLACE EMPLOYEE'S RETIREMENT TRUST-BETTY WALLACE PROFIT SHARING PLAN 002, DEFENDANTS.



The opinion of the court was delivered by: Hayes, Judge

ORDER

Four motions are pending before the Court: (1) Plaintiff's Motion for Preliminary Injunction (Doc. #15), (2) Defendant's Motion to Compel Arbitration (Doc. #20), (3) Defendant's Motion for Protective Order (Doc. # 22), and (4) Plaintiff's Motion for Order Under Civil Rule 56(f) Denying Defendant's Motion to Compel Arbitration or, Alternatively, Granting a Continuance to permit Discovery to be Taken on the Issue of Arbitrability by O.N. Equity Sales Company (Doc. #32).

Procedural History

On May 11, 2007, Plaintiff O.N. Equity Sales ("ONESCO") filed a Complaint seeking declaratory and injunctive relief against Betty Wallace, individually and as the trustee of the Betty Wallace Trust of 1998 and the Betty Wallace Employee's Retirement Trust ("Wallace"). (Doc. #1).*fn1 On June 13, 2007, ONESCO filed a Motion for Preliminary Injunction, which seeks to enjoin Wallace from taking any further action with respect to an arbitration claim ("NASD Complaint") filed by Wallace and other Investors with the National Association of Securities Dealers ("NASD"). On July 3, 2007, Wallace filed a Motion to Compel Arbitration. On July 9, 2007 Wallace filed a Motion for Protective Order. On September 24, ONESCO filed a Motion under Civil Rule 56(f) Denying Defendant's Motion to Compel Arbitration, or Alternatively, Granting a Continuance to Permit Discovery to be Taken on the Issue of Arbitrability by ONESCO. On September 24, 2007, the Court heard oral argument on these motions.

Factual Background

ONESCO is a full service retail broker-dealer registered in all 50 states. On or about March 17, 2003, non-party Gary Lancaster ("Lancaster") made available a private placement memorandum ("Private Placement Memorandum") for the Lancorp Fund Business Trust ("Lancorp" or "Lancorp Fund"). On September 17, 2003, Wallace executed a Lancorp Financial Fund Business Trust Subscription Agreement ("Subscription Agreement") to subscribe to the Private Placement Memorandum. Lancaster was a registered representative of ONESCO from March 23, 2004 to January 3, 2005.

According to the terms of the Subscription Agreement, Wallace "irrevocably offer[ed]" to tender to the Lancorp Fund a check in the amount of $100,000 for the purchase of 20 shares in the Lancorp Fund. The Subscription Agreement provided that "[t]he check tendered shall be held in a separate escrow account . . . and shall be promptly returned to the undersigned if the shares are not subscribed for and accepted by the [Lancorp Fund] . . . . Upon the acceptance of subscriptions for the Shares by the Trust . . . the cash held in the escrow account will be released to the Lancorp Fund." Complaint, Exhibit D92. The Subscription Agreement provided that Wallace "may not cancel, terminate, or revoke" her subscription. Id. atExhibit D96.

According to the terms of the Private Placement Memorandum, all cash payments for shares would be held in an escrow account until the closing date. Id. at Exhibit A2. The Private Placement Memorandum also provided that the Lancorp offering would be subject to "withdrawal, cancellation, or modification by [Lancorp] without notice," and that "in the event of any material changes during this offering, this memorandum will be amended or supplemented accordingly." Id. at Exhibit A3-4.

A feature of the Lancorp Fund was an option to purchase insurance, which would insure investors against any failure by Lancorp to return investor funds upon redemption of the Lancorp investor's shares. Motion to Compel Arbitration, Exhibit B19. Lancorp changed the insurance component of the Lancorp investment because of changes in the insurance industry. Id. On April 5, 2004, Lancaster notified all investors of this change, and required all investors to either confirm their investment or withdraw their subscription. Id. On April 9, 2004, Wallace acknowledged the change to the insurance component of her investment and confirmed her investment. Id. On June 14, 2004, Lancaster advised Lancorp investors that the Lancorp fund "officially became effective as of May 14, 2004." Id. at Exhibit B24.

The parties do not dispute that Lancaster invested significant dollars from the Lancorp Fund in Megafund, which later turned out to be a Texas-based Ponzi scheme. Because of this bad investment, many of the Lancorp Fund investors, including Wallace, suffered significant losses, and the Lancorp Fund went into receivership. Motion for Preliminary Injunction, p. 4.

Wallace's NASD Complaint alleges that based on Lancaster's recommendations, she made the following investments in the Lancorp Fund: April 13, 2004 - $100,000, April 13, 2004 - $100,000, June 3, 2004 - $100,000, June 3, 2004 - $100,000. Complaint, Exhibit E115.

Discussion

Wallace's NASD Complaint alleges claims that she invested in the Lancorp Fund based on misrepresentations and omissions made by Lancaster while he was a representative of ONESCO, and that ONESCO failed to supervise Lancaster while he was a representative of ONESCO. Complaint, Exhibit E ¶ 76-162. Wallace contends that none of her investments in the Lancorp Fund became final until after Lancaster became an associated person of ONESCO. Wallace also contends that during the period while Lancaster was a representative of ONESCO, he solicited and confirmed investments in the Lancorp Fund, and ONESCO failed to supervise him. Motion to Compel, p. 2-3. Wallace contends that NASD Rules 10101*fn2 and 10301(a)*fn3 apply to all of her claims arising out of her Lancorp investments. Wallace moves the Court to compel ONESCO to arbitrate her claims on grounds that Wallace was a "customer" of Lancaster, who was an "associated person" of ONESCO, at the time the dispute in question arose. See NASD Rules 10101, 10301(a).

ONESCO contends that Wallace was not its customer at the relevant time because Lancaster's alleged misrepresentations and omissions that accompanied Lancaster's offer of private placements and induced Wallace's investments in the Lancorp Fund occurred before Lancaster became an ONESCO representative. Opposition to Motion to Compel, p. 2. ONESCO also contends that Wallace's NASD Complaint does not allege that she made investments in the Lancorp Fund while Lancaster was a representative of ONESCO. Id. ONESCO states in its Motion for Preliminary Injunction that either Wallace "is bound by the express allegations in her NASD statement of claim and, thus, she has no legal basis for compelling ONESCO to arbitrate such claims; or she has identified a factual dispute as to the timing of events giving rise to her claims for purposes of arbitrability - a dispute that cannot be summarily resolved without discovery and ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.