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Dickinson v. Heinold Securities Inc.

decided: October 6, 1981.

CLARANCE B. DICKINSON,*FN* PLAINTIFF-APPELLEE,
v.
HEINOLD SECURITIES, INC., DEFENDANT-APPELLANT



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 78-C-1419 -- Stanley J. Roszkowski, Judge .

Before Fairchild, Circuit Judge, Gibson, Senior Circuit Judge,*fn* and Cudahy, Circuit Judge.

Author: Cudahy

Defendant Heinold Securities, Inc. ("Heinold") appeals from the order of the district court denying defendant's motion for a stay of these proceedings pending arbitration and its motion to compel arbitration on selected counts of the complaint.*fn1 We reverse and remand for further proceedings.

Plaintiff is a former client of the defendant's stock options brokerage service. Plaintiff opened his account with Heinold in September of 1975. The agreement between the parties gave Heinold a limited discretionary power to trade plaintiff's account on the Chicago Board Options Exchange ("CBOE") in accordance with certain pre-selected strategies. The original agreement between the parties, as well as the subsequent "Options Agreement," contained a clause providing for the arbitration of any future disputes that might arise over the handling of the account.*fn2

Plaintiff's account remained open for approximately one year. Plaintiff then withdrew the bulk of his funds in September of 1976 and notified Heinold that he felt that Heinold had failed to trade his account in accordance with the investment strategies set out in the agreement between the parties. On September 24, 1976, plaintiff wrote the CBOE complaining of Heinold's handling of his account.

Considerable time passed while that body investigated the charges.*fn3 On February 14, 1978, plaintiff wrote Heinold threatening a lawsuit unless a satisfactory settlement was reached before February 26, 1978. Heinold replied by electing to arbitrate the dispute pursuant to the terms of the agreement between the parties. Plaintiff failed to respond and on or about April 10, 1978, Heinold commenced an arbitration proceeding before the Arbitration Committee of the CBOE.

Plaintiff filed the present action three days later and denied that it could be compelled to arbitrate the dispute. Plaintiff's complaint contained two counts. The first count stated in paragraph one that the matters alleged in this count

give rise to a cause of action under Section 10(b) of the Securities Exchange Act of 1934, as amended, 15 U.S.C. Section 78J, and Rule 10b-5 of the Regulations of the Securities and Exchange Commission.

Additional paragraphs of Count I alleged that Heinold made certain misrepresentations in soliciting the account and traded the account to maximize Heinold's profits from commissions. Under this court's decision in Weissbuch v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 558 F.2d 831 (7th Cir. 1977) (relying upon Wilko v. Swan, 346 U.S. 427, 74 S. Ct. 182, 98 L. Ed. 168 (1953)), Count I was not arbitrable regardless of the agreement between the parties because of certain provisions and policies of federal securities law.

The first paragraph of Count II stated that "(as) for its paragraphs 1 through 11 of this Count II, plaintiff realleges, and incorporates herein by reference, paragraphs 1 through 10 of Count I, above." Count II thus incorporated the above-quoted allegation that the Count stated a cause of action under the federal securities laws. If Count II is construed as stating a claim under the securities laws, Weissbuch would bar arbitration of its allegations. Additional paragraphs of Count II alleged that Heinold's conduct violated the agreement between the parties.

Heinold filed an answer to the complaint which denied the pertinent allegations. In particular, Heinold stated as an affirmative defense to both Counts that

(t)he complaint fails to state a claim under Section 10(b) of the Securities Exchange Set (sic) of 1934 or Rule 10b-5 promulgated by the Securities and Exchange Commission. Pursuant to an agreement between the parties, the complaint should be referred to arbitration.*fn4

Discovery proceeded rapidly with both parties filing, inter alia, interrogatories, requests for admissions and requests for the production of certain documents.

Plaintiff filed an amended four-count complaint on March 29, 1979, which expanded and clarified his earlier allegations. All references to federal securities law claims were consolidated in Count I and clearly labelled as such. Counts II, III and IV alleged various state law tort and contract claims based upon essentially the same facts relevant to the federal claim. ...


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