Opinion
No. C 07-02844 JSW.
January 16, 2008
ORDER GRANTING MOTION TO COMPEL ARBITRATION AND DENYING MOTION FOR PRELIMINARY INJUNCTION
Now before the Court are the motions to compel arbitration filed by defendant Daniel Maria Cui ("Maria Cui") and for preliminary injunction filed by plaintiff O.N. Equity Sales Company ("ONESCO"). The Court finds that these matters are appropriate for disposition without oral argument and they are hereby deemed submitted. See Civ. L.R. 7-1(b). Accordingly, the hearing set for January 18, 2008 is HEREBY VACATED. Having considered the parties' pleadings and the relevant legal authority, the Court hereby grants Maria Cui's motion to compel arbitration and denies ONESCO's motion for preliminary injunction as moot.
BACKGROUND
This is an action for declaratory and injunctive relief filed by ONESCO against Maria Cui. ONESCO seeks to enjoin an arbitration Maria Cui filed with the National Association of Securities Dealers ("NASD"), relating to Maria Cui's investment in Lancorp Financial Fund Business Trust ("Lancorp").
Gary Lancaster ("Lancaster") was associated with ONESCO between March 23, 2004 and January 3, 2005. Maria Cui's claims in arbitration arise from Lancaster's alleged sale of Lancorp and ONESCO's alleged failure to supervise Lancaster while he was associated with ONESCO. (Compl., Ex. C. ("First Amended Statement of Claim").) On March 17, 2003, Lancaster distributed a private placement memorandum ("Private Placement Memorandum") for Lancorp. (Compl., Ex. A.) On July 30, 2003, Maria Cui executed a Subscription Agreement to subscribe to the Private Placement Memorandum. ( Id., Ex. B.) The Private Placement Memorandum provided that the amount paid by investors for shares in Lancorp would be deposited into an escrow account and would be held in the escrow account until the closing date. ( Id., Ex. A.) Although the Private Placement Memorandum provides that investors agreed that they "may not cancel, terminate or revoke [the Subscription Agreement]," it also provides that the Lancorp offering was subject to "withdrawal, cancellation, or modification by [Lancorp] without notice." ( Id.)
After being a registered representative of ONESCO, in April 2004, Lancaster notified Maria Cui that a condition of his investment had changed, specifically, that Lancorp had replaced the insurance component on their proposed investment. Maria Cui was required to either confirm the agreement to invest in Lancorp and acknowledge the change in the investment component, or request withdrawal of his funds. (Lancaster Declaration, attached as Exhibit 3 to Maria Cui's response to ONESCO's Objections to Discovery Order.) In April 2004, Maria Cui acknowledged the changes and reconfirmed his desire to invest in Lancorp. ( Id.)
Maria Cui alleges that based on Lancaster's recommendations, he invested $32,000 in Lancorp in April 2004 and another $1,241.96 in April 2005. (Compl., Ex. C at ¶ 39.) Maria Cui further alleges that he invested in Lancorp based on misrepresentations and omissions Lancaster made while he was a registered representative of ONESCO and that ONESCO failed to supervise Lancorp during this time. (Compl, Ex. C. at ¶¶ 7-32.)
ONESCO moved to take discovery in this action. Magistrate Judge Maria-Elena James ruled that ONESCO was not permitted to take discovery on the issue of whether arbitration is appropriate. ONESCO objected to Judge James' discovery order. In affirming the discovery order, this Court rejected the same arguments ONESCO profers with respect to the present motions.
Maria Cui now moves to compel arbitration and ONESCO moves to preliminary enjoin the arbitration. The Court shall address additional facts as necessary to its analysis in the remainder of this Order.
ANALYSIS
Pursuant to the Federal Arbitration Act ("FAA"), arbitration agreements "shall be valid, irrevocable, and enforceable, save upon such grounds that exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. Once the Court has determined that an arbitration agreement involves a transaction involving interstate commerce, thereby falling under the FAA, the Court's only role is to determine whether a valid arbitration agreement exists and whether the scope of the parties' dispute falls within that agreement. 9 U.S.C. § 4; Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000).
The FAA represents the "liberal federal policy favoring arbitration agreements" and "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration." Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983). Under the FAA, "once [the Court] is satisfied that an agreement for arbitration has been made and has not been honored," and the dispute falls within the scope of that agreement, the Court must order arbitration. Prima Paint Corp. v. Flood Conklin Mfg. Co., 388 U.S. 395, 400 (1967).
NASD Rule 10301 acts a written arbitration contract for purposes of the FAA, and ONESCO, as an NASD member, is a party to such contract. Se MONY Securities Corp. v. Bornstein, 390 F.3d 1340, 1342 (11th Cir. 2004); see also Washington Square Securities, Inc. v. Aune, 385 F.3d 432, 435 (4th Cir. 2004) ("The NASD Code consitutes `an agreement in writing' under the [FAA] which binds [the plaintiff], an NASD member, to submit an eligible dispute to arbitration upon a customer's demand"); O.N. Equity Sales Co. v. Rahner, ___ F. Supp. 2d ___, 2007 WL 4258642, * 2 (D. Colo. Nov. 30, 2007). Rule 10301 provides: "Any dispute, claim, or controversy eligible for submission . . . 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."
Courts have applied a two-part test to determine whether the arbitration requirement is triggered under Rule 10301. O.N. Equity Sales Co. v. Steinke, 504 F. Supp. 2d 913, 916 (C.D. Cal. 2007). "First, the claim must involve a dispute between either an NASD-member and a customer, or an associated person and a customer. Second, the dispute must arise in connection with the activities of the member or in connection with the business activities of the associated person." Id. (citations omitted).
In an effort to avoid the application of Rule 10301, ONESCO attempts to narrowly construe Maria Cui's claims and argues that all relevant conduct occurred before Lancaster was associated with ONESCO. ONESCO thus contends that Maria Cui was not a customer and Lancaster was not associated with ONESCO during the relevant time. However, pursuant to the Subscription Agreement and the Private Placement Memorandum, Maria Cui's investment was held in escrow and Lancaster had complete discretion to modify, withdraw or cancel the offering at any time before Lancorp's closing date, on May 14, 2004. While Lancaster was ONESCO's representative, Maria Cui was provided an opportunity confirm his investment or withdraw his funds. Thus, contrary to ONESCO's argument, all the relevant conduct did not occur before Lancaster became ONESCO's registered representative. Steinke, 504 F. Supp. 2d at 917 (based on the same facts present here, finding there was no sale of securities until the closing date in May 2004) (citing Cohen v. Stratosphere Corp., 115 F.3d 695, 700-01 (9th Cir. 1997)). To the extent Lancaster made misrepresentations or omissions before March 23, 2004, Maria Cui contends such information would be pertinent merely as background information.
Moreover, ONESCO ignores that Maria Cui contends that ONESCO failed to investigate Lancaster and negligently supervised him during the time Lancaster was a registered representative of ONESCO. (Compl., Ex. C. at ¶¶ 7-32.) According to Maria Cui, if ONESCO had properly supervised Lancaster, it could have prevented Maria Cui from being injured. Such allegations standing alone are sufficient to demonstrate that Maria Cui's claims fall within Rule 10301. See O.N. Equity Sales Co. v. Theirs, 2008 WL 110603, *4 n. 5 (D. Ariz. Jan. 10, 2008) (distinguishing authority relied on by ONESCO and rejecting ONESCO's construction of the arbitration claims because the negligent supervision claim arose after Lancaster became an associated person of ONESCO). The Court thus finds that Maria Cui was a "customer" of Lancaster during the period when Lancaster was an "associated person" of ONESCO and that Maria Cui's claims arose in connection with Lancaster's activities during that time period. Accordingly, Maria Cui is a customer entitled to demand arbitration under Rule 10301. The Court therefore GRANTS Maria Cui's motion to compel arbitration and denies ONESCO's motion for preliminary injunction and requests for further discovery as MOOT.
The Court notes that ONESCO filed actions in different federal courts raising the same issues. To date, all the courts that have addressed these issues have come to the same conclusion. See O.N. Equity Sales Co. v. Emmertz, ___ F. Supp. 2d ___, 2007 WL 4462655 (E.D. Pa. Dec. 19, 2007) (granting motion to compel arbitration and denying ONESCO's request to take discovery and to enjoin the arbitration); O.N. Equity Sales Co. v. Rahner, ___ F.Supp.2d ___, 2007 WL 4258642 (D. Colo. Nov. 30, 2007) (granting motion to compel arbitration and denying ONESCO's request to take discovery); O.N. Equity Sales Co. v. Prins, ___ F.Supp.2d ___, 2007 WL 3286406 (D. Minn. Nov. 7, 2007) (granting motion to compel arbitration and denying ONESCO's request to take discovery and to enjoin the arbitration); O.N. Equity Sales Co. v. Gibson, 514 F. Supp. 2d 857 (S.D.W.Va. 2007) (same); O.N. Equity Sales Co. v. Pals, 509 F. Supp. 2d 761 (N.D. Iowa 2007) (granting motion to compel arbitration and denying ONESCO's request to take discovery and to enjoin the arbitration); O.N. Equity Sales Co. v. Venrick, 508 F. Supp. 2d 872 (W.D. Wash. 2007) (same); O.N. Equity Sales Co. v. Steinke, 504 F. Supp. 2d 913 (C.D. Cal. 2007) (same); O.N. Equity Sales Co. v. Theirs, 2008 WL 110603 (D. Ariz. Jan. 10, 2008) (granting motion to compel arbitration and denying ONESCO's request to take discovery and to enjoin the arbitration); O.N. Equity Sales Co. v. Samuels, 2007 WL 4237013 (M.D. Fla. Nov. 30, 2007) (same); O.N. Equity Sales Co. v. Wallace, 2007 WL 4106476 (S.D. Cal. Nov. 15, 2007) (same); O.N. Equity Sales Co. v. Robinson, 2007 WL 2840477 (E.D. Va. Sept. 27, 2007) (same)