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discussing examples of cases holding individuals were "customers"
Summary of this case from World Grp. Sec., Inc. v. SuggOpinion
No. C 02-0863 SI
August 5, 2002
ORDER DENYING DEFENDANTS' MOTION TO DISMISS; GRANTING IN PART AND DENYING IN PART PLAINTIFFS' MOTION FOR PRELIMINARY INJUNCTION
On August 2, 2002, the Court heard argument on defendants' motion to dismiss and plaintiffs' motion for preliminary injunction. Having carefully considered the arguments of the parties and the papers submitted, the Court hereby DENIES defendants' motion to dismiss and GRANTS TN PART and DENIES IN PART plaintiffs' motion for preliminary injunction.
BACKGROUND
This is a dispute regarding the arbitrability of claims brought by a group of investors against Brookstreet Securities Corporation ("Brookstreet"), which is a registered securities broker-dealer, and a number of its employees.
I. Factual Background
On March 27, 2001, the Roman Catholic Bishop of Santa Rosa ("the Diocese"); Bristol Air, Inc. ("Bristol Air"); Iceberg LTD ("Iceberg"); Louisiana Place Associates, LLC ("Louisiana Place"); Wood Roberts, LLC ("Wood Roberts"); and the Tiny Little Investment Club ("TLIC") (collectively, "claimants"), filed an arbitration proceeding before the NASD Dispute Resolution, Inc. ("NASD-DR"). Named as defendants were Brookstreet and several of its employees, namely Stanley C. Brooks, Stephen P. Washburn, Scott S. Brooks, Ronald C. Dyer, Sylvia Alcala, Victor A. Chu, and Antonio F. Uccello. Pl.'s Ex. A ("Statement of Claim").
All of the claimants report that they were independently the victims of investment fraud and embezzlement by a purported investment advisor named Mark Anthony Stroupe ("Stroupe") and his company, Practical Holdings Limited ("PHL"). Claimants allege that Stroupe and his cohorts convinced them to take part in an investment program involving the purchase of U.S. Treasury bonds so as to generate high returns with no risk to principal. Id. at p. 5. Their funds were maintained in an account held by Stroupe and PHL at Brookstreet. Without any authorization by claimants, Stroupe allegedly funneled the funds to friends and used them for personal expenses before the accounts were frozen by the United States Government.
According to claimants, Brookstreet and its named employees were aware that Stroupe was holding himself out as an investment advisor and that the funds in the PHL Brookstreet account belonged to individual investors, including claimants. Id. at p. 6. Claimants argue in their Statement of Claim that this knowledge created an affirmative duty on the part of Brookstreet and its named employees to "learn the essential facts related to Stroupe's background, investment agreements, licensing, personal credit history, veracity and character." Id. Had they done so, according to claimants, they would have learned, inter alia, that Stroupe was not registered with the SEC, that he was using Brookstreet's name in the "Investment Agreements" with his clients, and that he was touting his personal relationship with Stanley Brooks ("Brooks"), the president of Brookstreet. Id. Further, Brookstreet employees are alleged to have ignored "red flags" raised by Stroupe's withdrawals and to have approved wire transfers to pay for obvious personal expenses. Id. at p. 8. What follows is a summary of the allegations in the Statement of Claim related to each of the claimants:
A. Bristol Air, Inc.
Winston Bristol, the president of Bristol Air, met Stroupe while he was seeking to raise startup capital for his nascent airline. Stroupe explained to Bristol that he developed and managed an investment program using U.S. Treasury bonds that provided high returns with no risk to principal. Stroupe told Bristol that he had a personal relationship with Brookstreet's president, Brooks. According to Bristol, Stroupe referred him to Antonio Uccello ("Uccello"), an employee of Brookstreet, who assured him that Stroupe was "an experienced, proven investment advisor and that Stroupe's investment program offered very high returns with no risk to principal." Id. at pp. 15-16.
In November 1997, Bristol opened an account at Brookstreet on behalf of Bristol Air. Based on instructions from Stroupe and Uccello, Bristol transferred funds from his Brookstreet account to the PHL Brookstreet account on December 1, 1997. Soon afterwards, according to claimants, Stroupe made several wire transfers out of the PHL Brookstreet account to various entities, including his wife and his personal attorney. Id. at p. 16. When he had difficulty reaching Stroupe, Bristol claims to have contacted Uccello, who again assured him that the account was in good standing, that Stroupe "knew what he was doing", and that Bristol should not worry about the investment. Id. In July 1998, Bristol developed concerns that foul play was involved, but before he could contact authorities, he was informed that the United States government had already seized all of the assets in the PHL Brookstreet account. Id.
B. Iceberg, Louisiana Place, and Wood Roberts
Iceberg is a company allegedly created to hold and invest the funds of Louisiana Place. Wood Roberts is an investment banking firm engaged in the valuation of business and securities in connection with mergers, acquisitions and other corporate relationships. John Martinson ("Martinson") and John Ogden ("Ogden") are principals and managers of all three entities. The three entities will be referred to collectively as "the Louisiana Place claimants."
According to claimants, Martinson and Ogden met Donald Radle, who was then a broker with First Springfield Securities, Inc. ("FSSI"), in March 1998. Based on his claims that he could generate high profits with no risk to principal by trading U.S. Treasury bonds on margin, Martinson and Ogden entered into an investment agreement with Radle on behalf of Iceberg and transferred $1,000,000 to FSSI on April 9, 1998. Approximately one week after the deposit at FSSI, FSSI transferred the funds to the PHL Brookstreet account without the knowledge or consent of the Louisiana Place claimants. Id. at p. 18.
Martinson and Ogden were subsequently informed that Radle had resigned from FSSI, that the funds had been transferred to an account at Brookstreet, and that Stroupe was the investment advisor for the U.S. Treasury bond program. Claimants allege that Martinson and Ogden were informed that Brookstreet cleared through NFSC, which was a subsidiary of Fidelity Investments, so the funds were "safe." Id. at p. 19. In a telephone call, Stroupe further explained to Martinson and Ogden that Louisiana Place would be granted a power of attorney over the PHL Brookstreet account in an amount up to the total value of its investment. Martinson and Ogden then entered into a new "Joint Venture Investment Agreement" with PHL and Stroupe on behalf of Louisiana Place.Id. at p. 20.
During the same period, Martinson and Ogden contacted Brooks to seek information confirming representations made by Stroupe. During that conversation, Brooks allegedly told Martinson that he had "significant past professional dealings with Stroupe and vouched for Stroupe's character and professionalism." Id. at p. 21. Specifically, Brooks allegedly told Martinson that the PHL Brookstreet account was "handled well" and that he had been personally monitoring the account and would continue to do so in the future. Finally, Brooks allegedly informed Martinson of "Brookstreet's strong relationship with NFSC and stated that Stroupe qualified for a large credit line through NFSC." Id. On June 12, 1998, Wood Roberts, which was also controlled by Martinson and Ogden, entered into a separate agreement with Stroupe and PHL which was identical in all major terms and conditions to the Louisiana Place agreement.
On July 23, 1998, assets in PHL's account at Brookstreet were frozen by the United States Government. Claimants allege that in subsequent conversations with Brooks, Brooks acknowledged that he was aware that Stroupe was using the funds in the PHL Brookstreet account for personal expenditures and payments to third parties, that he had noticed these payments as early as February or March 1998, and that he thought this activity was "crazy." Id. at p. 23. Brooks allegedly informed Martinson and Ogden that when he learned of these payments, he placed a $10,000 limit on any check that could be written by Stroupe or other PHL representatives, but acknowledged that checks in amounts up to $150,000 were paid subsequent to that limitation. Brooks also confirmed that he personally approved several large transfers of funds from the PHL Brookstreet Account. Id.
C. The Tiny Little Investment Club
TLIC also initiated its investments through Radle. On April 20, 1998, TLIC entered into an investment agreement with Radle and FSSI and wire transferred $1,400,000 to an FSSI account. Again, without TLIC's knowledge or consent, FSSI transferred $1,000,000 of TLIC's funds to the PHL account at Brookstreet on April 22, 1998. Radle informed TLIC in a telephone conversation on May 7, 1998 that its funds had been transferred to PHL at Brookstreet and were invested pursuant to the terms of FSSI's Investment Agreement under the management of Stroupe. Id. at p. 25. Stroupe confirmed by telephone that he had received TLIC's funds and that he was holding them in the PHL Brookstreet account. Stroupe allegedly told TLIC that Brookstreet was "a reputable broker with offices nationwide and that all Brookstreet accounts were cleared and insured by NFSC, a Fidelity Investments company." Stroupe further informed TLIC that it would be granted a full trading authorization, including the privilege to withdraw funds or securities. Id.
In May 1998, TLIC met with Stroupe at his office because they had not previously heard of him. At the meeting, Stroupe allegedly provided TLIC with brochures and other information regarding Brookstreet, emphasized his personal relationship with Brooks, and stated that Brooks monitored and personally approved all transactions in the PHL account at Brookstreet. According to claimants, Stroupe also represented that Brookstreet would not allow Stroupe to make any errant transactions and that Brookstreet's trading desk would reject any order they deemed inappropriate. Id. at p. 26. Stroupe granted TLIC full trading authorization with privilege to withdraw funds or securities over the PHL Brookstreet account. TLIC then entered into a formal investment agreement with Stroupe on June 5, 1998. Stroupe subsequently provided TLIC with portions of the PHL Brookstreet account monthiy statements that listed the total value of the portfolio, but allegedly excluded portions of the statements that evidenced his withdrawal of funds for personal expenditures and payments to third parties. Id. at p. 27.
D. The Diocese
The Diocese of Santa Rosa manages portfolios of securities, most of which are allocated to a retirement fund maintained for the Roman Catholic priests in the service of the Diocese. Id. at p. 28. The retirement fund was under the management of Monsignor Thomas John Joseph Keys ("Keys"). Keys entered into an Investment Agreement with Stroupe wherein the Diocese would deposit cash and/or securities into the PHL Brookstreet account. Under the Investment Agreement, Keys was given full trading authorization with privilege to withdraw money and/or securities over the PHL Brookstreet account. Id. at p. 29. On May 13, 1998, the Diocese transferred $2,416,488 to the PHL account at Brookstreet. Claimants note that, although employees of Brookstreet were aware that Stroupe had previously transferred millions of dollars out of the PHL Brookstreet account for personal expenditures and as payments to third parties, they made no inquiry into the transfer of securities and cash into the PHL account. Id. at p. 29.
During May 1998, the Diocese transferred additional cash and securities into the PHL Brookstreet account. According to claimants, Stroupe then converted the Diocese's funds for personal expenditures and payments to third parties and transferred funds out of the PHL Brookstreet Account for various purposes. After being contacted by an Assistant U.S. Attorney regarding questionable activity in the PHL Brookstreet account, the Diocese contacted Stroupe and demanded the return of all of its funds. Stroupe returned $1.9 million to the Diocese on July 21, 1998, but the government seized all PHL accounts on July 23 and 24, 1998. The Diocese claims to have incurred losses of $3,268,241. Id. at p. 31.
II. Procedural Background
Each of the claimants filed a Statement of Claim with the NASD Dispute Resolution, Inc. on March 27, 2001 naming, among others, Brookstreet and the above named employees as respondents. The Statement of Claim alleges claims of negligence, breach of fiduciary duty, fraud, failure to supervise, and breach of state and federal securities rules and regulations.
Brookstreet and its employees filed an answer to the Statement of Claim on July 27, 2001 denying that NASD-DR had jurisdiction over the dispute. Pl.'s Ex. B. The parties have since submitted letters to the NASD-DR setting forth their respective positions regarding jurisdiction. No ruling has been made by the panel on the jurisdictional issues. The NASD appointed a panel for the arbitration on February 4, 2002. The evidentiary hearing for the arbitration is now set for January 27-February 7, 2003. Wall Decl., ¶ 8.
On February 20, 2002, the Brookstreet parties filed the instant complaint seeking a preliminary and permanent injunction preventing the Diocese and TLIC from pursuing their claims in arbitration and preventing all defendants from pursuing their claims against plaintiffs Sylvia Alcala and Scott Brooks in the arbitration. Now before the Court are two competing motions — defendants' motion to dismiss and plaintiffs' motion for preliminary injunction
DISCUSSION
I. DEFENDANTs' MOTION TO DISMISS
The central argument raised in defendants' motion to dismiss is that defendants' claims are covered by the NASD Code of Arbitration Procedure which, they claim, requires that the dispute be resolved through arbitration. Defendants contend that because plaintiffs agreed to arbitrate the dispute and the NASD-DR should determine the question of arbitrability, the instant case should be dismissed. As will be explained briefly below, these arguments would be better raised in a motion for summary judgment.
As it happens, because plaintiffs' motion for preliminary injunction was argued on the same day as the motion to dismiss, the issue of the arbitrabiity of defendants' claims will be addressed herein during the Court's discussion of that motion.
Under Federal Rule of Civil Procedure 12(b)(6), a district court must dismiss a complaint if it fails to state a claim upon which relief can be granted. The question presented by a motion to dismiss is not whether the plaintiffs will prevail in the action, but whether the plaintiffs are entitled to offer evidence in support of the claim. Scheuer v. Rhodes, 416 U.S. 232, 236 (1974), overruled on other grounds by Davis v. Scherer, 468 U.S. 183, 104 S.Ct. 3012 (1984). In answering this question, the Court must assume that the plaintiffs' factual allegations are true and must draw all reasonable inferences in the plaintiffs' favor. Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir. 1987). Even if the face of the pleadings suggests that the chance of recovery is remote, the Court must allow the plaintiffs to develop the case at this stage of the proceedings. United States v. City of Redwood City, 640 F.2d 963, 966 (9th Cir. 1981).
Here, plaintiffs have stated two causes of action for declaratory relief. Accepting the allegations in the complaint as true, plaintiffs have adequately stated a claim for declaratory and injunctive relief to enjoin the arbitration. Defendants do not argue otherwise. Instead, they argue the merits of the suit, relying in large part on their reading of the NASD Code of Arbitration Procedure. Defendants do not establish that there is no legal basis for the claims raised in the complaint. Accordingly, defendants' motion to dismiss is DENTED.
II. PLAINTIFFS' MOTION FOR PRELIMINARY INJUNCTION
Plaintiffs move for a preliminary injunction enjoining the Diocese and TLIC from pursuing any of their claims in arbitration and enjoining all defendants from arbitrating their claims against Brooks and Alcala in particular.
A. Legal Standard
The Court has the authority to grant a preliminary injunction in the exercise of its equitable powers. See Fed.R.Civ.P. 65. As the Court is acting in equity, the decision to enter a preliminary injunction is largely left to its discretion. See Big Country Foods, Inc. v. Board of Educ. of Anchorage School Dist., 868 F.2d 1085, 1087 (9th Cir. 1989). Traditionally, this rule has been interpreted to require the trial court to consider the likelihood that plaintiff will prevail on the merits and the possible harm to the parties from granting or denying the injunctive relief. See Arcamuzi v. Continental Air Lines, Inc., 819 F.2d 935, 937 (9th Cir. 1987); Sierra On-Line, Inc. v. Phoenix Software, Inc., 739 F.2d 1415, 1421 (9th Cir. 1984).
At the extremes, the party seeking injunctive relief must show either (1) a combination of probable success on the merits and the possibility of irreparable harm, or (2) that serious questions are raised and the balance of hardships tips sharply in the moving party's favor. See Miss World (UK) Ltd. v. Mrs. America Pageants, Inc., 856 F.2d 1445, 1448 (9th Cir. 1988); Rodeo Collection, Ltd. v. West Seventh, 812 F.2d 1215, 1217 (9th Cir. 1987). "These are not two distinct tests, but rather the opposite ends of a single `continuum in which the required showing of harm varies inversely with the required showing of meritoriousness.'" Miss World, 856 F.2d at 1448 (quoting Rodeo Collection, 812 F.2d at 1217). However, in any situation, the Court must find that there is some threat of an immediate irreparable injury, even if that injury is not of great magnitude. See Big Country, 868 F.2d at 1088 (citing cases); Oakland Tribune, Inc. v. Chronicle Publishing Co., Inc., 762 F.2d 1374, 1376 (9th Cir. 1985) (citing cases).
B. Proper Forum for Decision on Arbitrability
As an initial matter, defendants argue that this Court should leave the question of the arbitrability of the dispute to the arbitrator. Issues of arbitrability are "presumptively for the court to decide," while "issues other than `arbitrability' are presumptively for the arbitrator." Paine Webber v. Elahi, 87 F.3d 589, 595 (1st Cir. 1996). Under the Federal Arbitration Act, 9 U.S.C. § 1 et seq., courts should not assume that the parties agreed to submit the issue of arbitrability to arbitration unless there is "clear and unmistakable evidence that they did so." First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995). See also AT T Techs. v. Communications Workers of Am., 475 U.S. 643, 649 (1986) ("Unless the parties clearly and unmistakably provide otherwise, the question of whether the parties agreed to arbitrate is to be decided by the court, not the arbitrator.")
Here, defendants have pointed to no evidence of such a "clear and unmistakable" intent to submit the issue of arbitrability to the arbitrators. Indeed, there is no express agreement between plaintiffs and these defendants to arbitrate disputes at all, much less committing the question of arbitrability to the arbitrators. One party's membership in the NASD, in the absence of a separate agreement between the parties, cannot constitute a clear and unmistakable intent to submit the arbitrability of their disputes to the arbitrators. John Hancock Life Ins. Co. v. Wilson, 254 F.3d 48, 57 (2d Cir. 2001).
Defendants rely upon Section 10106 of the NASD Code of Arbitration Procedure, which reads, in relevant part: "No party shall, during the arbitration of any matter, prosecute or commence any suit, action, or proceeding against any other party touching upon any of the matters referred to arbitration pursuant to this code." This clause alone does not evidence the parties' clear and unmistakable intent to submit the arbitrability question to the arbitrators, particularly in light of the fact that the defendants do not claim to be members of the NASD, and thus are not generally governed by the terms of the NASD Code of Arbitration Procedure. See id. at 57 (rejecting investors' argument relying in part on Rule 10106). Defendants fail to cite a single case in which a court found that this provision constituted evidence of such an intent. In contrast, numerous courts have decided the question of arbitrability in suits involving the NASD Code. See, e.g., Oppenheimer Co., Inc. v. Neidhardt, 56 F.3d 352 (2d Cir. 1995); BMA Financial Services, Inc. v. Guin, 164 F. Supp.2d 813 (W.D. La. 2001); WMA Securities, Inc. v. Ruppert, 80 F. Supp.2d 786 (S.D. Ohio 1999). Accordingly, the Court finds that it must decide the issue of arbitrability.
C. Arbitrability of Claims of the Diocese and TLIC
Plaintiffs seek an order preliminarily enjoining defendants the Diocese and TLIC from pursuing their claims in the arbitration against all plaintiffs on the grounds that the two entities had no meaningful contact with Brookstreet so as to trigger the arbitration requirement set out in the NASD Code of Arbitration Procedure.
Plaintiffs do not in this case seek to enjoin Bristol Air and the Louisiana Place claimants from arbitrating their claims against every plaintiff.
"Our initial task is to determine whether [plaintiffs] entered into an agreement to arbitrate." Spear, Leeds Kellogg v. Central Life Assurance Co., 85 F.3d 21, 25 (2d Cir. 1996). Aside from Scott Brooks and Sylvia Alcala, plaintiffs acknowledge that they have agreed, by virtue of their membership in the NASD, to arbitrate all disputes contemplated under Rule 10301 of the NASD Code. The Court then turns to the question of whether the dispute between defendants and plaintiffs falls within the scope of the NASD Code. Id. at 28. A court may not deny arbitration unless "it may be said with positive assurance" that the clause does not cover the dispute. Steelworkers v. Warrior Gulf Navigation Co., 363 U.S. 574, 582-83 (1960).
The two parties rely upon different portions of the NASD-DR Code in support of their respective positions. Defendants argue that the dispute is subject to arbitration in reliance upon Section 10101, which is titled "Matters Eligible for Submission." The relevant portion of that clause reads as follows:
This Code of Arbitration Procedure is . . . for the arbitration of any dispute, claim, or controversy arising out of or in connection with the business of any member of the Association, . . .
(a) between or among members;
(b) between or among members and associated persons;
© between or among members or associated person and public customers, or others. . . .
NASD Code Arb. Proc. 10101. Defendants' reliance on this provision is misguided. Section 10101 merely describes types of dispute that an NASD panel has jurisdiction to hear. Armijo v. Prudential Ins. Co. of Am., 72 F.3d 793, 798 (10th Cir. 1995) (Rule 10101 "defines the general universe of issues that may be arbitrated"). The wording of the provision does not mandate that any dispute described therein be arbitrated. Plaintiffs argue, and the Court agrees, that the relevant portion of the NASD Code is Rule 10301, entitled "Required Submission." That section provides, in relevant part:
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 and duly executed and enforceable written agreement or upon the demand of the customer.Id. at 10301(a).
Under Section 10301, then, the central question in determining whether the dispute must be arbitrated is whether the Diocese and TLIC can be considered "customers" as described in that Section. See BMA Financial Services, 164 F. Supp.2d at 818 ("until this court determines that the Defendant-Investors were `customers' and are therefore entitled to invoke arbitration pursuant to the Rule, this court may not give Defendant-Investors the benefit of the federal policy favoring arbitration").
The NASD Code does not define the term "customer," although the definition section of the NASD Manual provides that "the term `customer' shall not include a broker or dealer." NASD Manual General Provisions § 0120(g). The NASD Rules of Conduct, which outline the standards of conduct expected of NASD members when dealing with customers, defines a "customer" as "any person who, in the regular course of such member's business, has cash or securities in the possession of such member." NASD Rules of Conduct § 2270. Narrow definitions of the term "customer" have been rejected See e.g., First Montauk Sec. Corp. v. Four Mile Ranch Dev. Co., Inc., 65 F. Supp.2d 1371, 1381 (S.D.Fla. 1999) ("customer" not limited to investors with accounts with the member firm). Most courts have rejected the requirement of indicia of a direct customer relationship between the member and the customer. See, e.g., John Hancock, 254 F.3d at 60. However, the term must not be defined so broadly as to upset the reasonable expectations of NASD members. See Wheat, First Sec., Inc. v. Green, 993 F.2d 814, 820 (11th Cir. 1993); Fleet Boston Robertson Stephens, Inc. v. Innovex, Inc., 264 F.3d 770, 772 (8th Cir. 2001) (recognizing general definition of "customer" as "one involved in a business relationship with an NASD member that is related directly to investment or brokerage services").
In general, those courts which have found that investors qualified as "customers" under Section 10301 did so in cases where there was a more significant connection between the investors and the broker than is alleged by defendants in their Statement of Claim. Typically, the individual who solicited the investments or provided investment advice to the purported "customers" was a representative or employee of the broker. For example, in Oppenheimer, a case in which the Second Circuit found that investors were "customers" of a broker dealer, the individual who solicited investments from the investors was the Vice President of the broker dealer. Oppenheimer, 56 F.3d at 354. In another case, the Second Circuit again found that investors were "customers" where the investment broker had entered a Sales Representative Agreement with the NASD member. The court found that, by virtue of his agreement with the member, the broker was an "associated person," and that a customer of an associated person may assert a claim arising out of the associated person's business. John Hancock, 254 F.3d at 59. Likewise, in WMA Sec., Inc. v. Ruppert, 80 F. Supp.2d 786, 787 (S.D. Ohio 1999), the district court found that investors qualified as "customers" where the investment advisers were the member's registered representatives at the time of the alleged misrepresentations. See also Vestax Sec. Corp. v. McWood, 280 F.3d 1078, 1080 (6th Cir. 2002) (poor investment advice came from member's registered agents); First Montauk, 65 F. Supp.2d at 1380 (investor received advice from registered representative of member, whom member had duty to supervise).
Here, accepting all of the allegations in the Statement of Claim as true, it cannot be said that TLIC or the Diocese had even an "informal business relationship" with Brookstreet or the individual plaintiffs. As set forth in the factual background, although Stroupe maintained an account at Brookstreet, he was never an employee, agent, or registered representative of the firm. Thus, unlike the cases cited above, Stroupe was not associated with Brookstreet during his dealings with TLIC or the Diocese. Moreover, the Statement of Claim contains no allegations suggesting that Brookstreet or its employees had any contact with TLIC or the Diocese. TLIC and the Diocese interacted only with their investment advisor, Stroupe. Unlike the Louisiana Place claimants, for example, they do not allege that any Brookstreet employees reassured them regarding Stroupe's character and professionalism or represented that Brookstreet would monitor the account. Instead, defendants' funds were simply placed into PHL's account at Brookstreet. Brookstreet sent reports on the account directly to their customer — Stroupe — not to defendants. Cf. Investors Capital Corp. v. Brown, 145 F. Supp.2d 1302, 1308 (M.D.Fla. 2001) ("[NASD member] agreed to arbitrate disputes with its customers, rather than the customers of every person associated with [NASD member]").
Defendants have not cited any cases in which a court has held that a person who is merely doing business with an account holder of a member firm becomes a "customer" of the firm itself. Spear, Leeds, 85 F.3d 21, relied upon by defendants, is of little assistance here because that case addresses not the NASD Code, but the New York Stock Exchange's Constitution and Arbitration Rules, which provide that a broker must, upon demand of a non-member, arbitrate claims or controversies that "aris[e] in connection with the business [of the broker]." This standard is broader than the language in Section 10301 and does not require a finding that one of the parties is a "customer." Further, Lehman Brothers Inc. v. Certified Reporting Co., et al., 939 F. Supp. 1333 (N.D. Ill. 1996) is inapposite because the investors in that case claimed to have purchased stocks in reliance on misrepresentations by the NASD member and its employees.
Because neither TLIC nor the Diocese qualifies as a "customer" under Section 10301, the two defendants do not have standing to arbitrate their claims against the plaintiffs before the NASD. Plaintiffs will suffer irreparable harm if the arbitration brought by TLIC and the Diocese is not stayed. Plaintiffs do not have available to them any remedy at law to avoid the scheduled commencement of the arbitration proceedings or to recover the funds expended during those proceedings. Further, the foregoing analysis demonstrates that plaintiffs have shown a probability of success on the merits of their claims regarding the arbitrability of the claims of the Diocese and TLIC. Accordingly, plaintiffs have made a sufficient showing to warrant the granting of a preliminary injunction with respect to the claims of TLIC and the Diocese.
D. Right to Compel Sylvia Alcala and Scott Brooks to Arbitrate
Plaintiffs report that plaintiff Sylvia Alcala is not a licensed member of the NASD and has never signed a U-4 registration form requiring her to arbitrate disputes. Further, plaintiffs claim that plaintiff Scott Brooks, although he is now a licensed member of the NASD, did not obtain a license until 1999. Compl., ¶ 21. All of the allegations in defendants' Statement of Claim occurred prior to that time. Accordingly, they argue that neither Alcala nor Brooks should be required to arbitrate the claims raised by defendants. In response, defendants argue that Alcala and Brooks qualify as "associated persons," and that they are therefore subject to arbitration pursuant to the NASD Code.
Again, Section 10301(a) mandates arbitration of disputes "between a customer and a member and/or associated person. . . ." The existing NASD By-Laws define "person associated with a member" and "associated person of a member" to mean:
The Court here assumes, because plaintiffs do not argue otherwise, that the Louisiana Place claimants and Bristol Air may be considered "customers" of Brookstreet.
(1) a natural person who is registered or has applied for registration under the Rules of the Association;
(2) a sole proprietor, partner, officer, director, or branch manager of a member; or other natural person occupying a similar status or performing similar functions, or a natural person engaged in the investment banking or securities business who is directly or indirectly controlling or controlled by a member, whether or not any such person is registered or exempt from registration with the NASD under these By-Laws or the Rules of the Association; and
(3) for purposes of Rule 8210, any other person listed in Schedule A of Form BD of a member. . . .
By-Laws of NASD, Inc., Art. I(dd). Further, the existing definition of "person associated with a member" or "associated person of a member" under the NASD-DR By-Laws is as follows:
(1) a natural person registered under the Rules of the Association; or (2) a sole proprietor, partner, officer, director, or branch manager of a member, or a natural person occupying a similar status or performing similar functions, or a natural person engaged in the investment banking or securities business who is directly or indirectly controlling or controlled by a member, whether or not any such person is registered or exempt from registration with the NASD under these By-Laws or the Rules of the Association. . . .
By-Laws of NASD Dispute Resolution, Inc., Art. I(v). On their faces, both of these definitions would appear to encompass individuals, including Scott Brooks and Sylvia Alcala, who were engaged in the investment banking or securities business and were directly controlled by a member (i.e. Brookstreet and/or other member-employees) even though they themselves were not registered with the NASD.
Neither party devotes significant attention to this question. Plaintiffs cite only two cases in support of their argument, neither of which addresses whether Brooks or Alcala can be considered "associated persons" under Section 10301. It is not at all clear that the issue is as straightforward as plaintiffs represent. At least one court has adopted defendants' position, finding that individuals may be "associated persons" despite the fact that they were not individual members of the NASD. Miller v. Flume, 139 F.3d 1130, 1134 (7th Cir. 1998). But see BMA Fin. Serv., Inc. v. Guin, 164 F. Supp.2d 813, 821 (W.D. La. 2001) (finding individual to be "associated person" after he filed Form U-4).
In short, while the Court does not here make a binding determination regarding the arbitrability of defendants' claims against Brooks and Alcala, plaintiffs have not here made a sufficient showing to warrant a grant of a preliminary injunction.
CONCLUSION
For the foregoing reasons, defendants' motion to dismiss is DENIED. [Docket No. 13] Plaintiffs' motion for preliminary injunction is GRANTED IN PART and DENIED IN PART. [Docket No. 17] It is hereby ORDERED that, pending final resolution of this action, the Diocese and TLIC and each of their agents, servants, employees, and attorneys and all those in active concert or participation with them or any of them are hereby RESTRAINED and ENJOINED from pursuing any of their claims in the Arbitration against any of the Brookstreet parties.