they sell the stock of another company in which plaintiff had a substantial investment.
In time, plaintiff did report the unauthorized transactions to PaineWebber. After repeated demands that the transactions be cancelled, the Ventrex stock was finally sold from his account at a loss of more than $ 50,000.
Plaintiff states his § 10(b) and Rule 10b-5 claims in two counts. Count I alleges fraud in Forsberg's failure to disclose that the unauthorized purchases were for the purpose of manipulating the price of the Ventrex stock. Count II alleges fraud in Forsberg's failure to notify plaintiff that the purchases were being made at all, and in Forsberg's subsequent representations that he would immediately reverse the transactions. Plaintiff seeks to hold PaineWebber responsible for the fraud as a controlling person pursuant to § 20(a) of the Securities Exchange Act, 15 U.S.C. §§ 77(o) and 77t(a). PaineWebber has moved to dismiss the amended complaint, or in the alternative, to compel arbitration.
The first issue this court faces, one not discussed by the parties, is the proper order in which to proceed. PaineWebber asks the court to first rule on the motion to dismiss and then, if that motion is denied, to turn to the motion to compel arbitration. In its earlier ruling, however, this court explained that arbitrators are as qualified as courts to rule on the sufficiency of pleadings, and that a defendant "generally may not 'forum-shop' by first asking a court to examine the merits of [the] claims and then, if displeased with the result, demanding that the court send them to an arbitrator." Kayne v. PaineWebber, 684 F. Supp. 978, 981. Thus, the court will first address the motion to compel arbitration.
The Motion to Compel Arbitration
The question of whether a claim brought in federal court is subject to arbitration is, first and foremost, a matter of contract law. See Shearson American Express, Inc. v. McMahon, 482 U.S. 220, 107 S. Ct. 2332, 2337, 96 L. Ed. 2d 185 (1987); Giles v. Blunt, Ellis & Leowi, Inc., 845 F.2d 131 (7th Cir. 1988). With McMahon's ruling that § 10(b) and Rule 10b-5 claims are arbitrable, it is now settled that the Arbitration Clause in plaintiff's agreement with PaineWebber requires this court to compel arbitration here unless the clause specifically excludes it. See Dickinson v. Heinold Securities, Inc., 661 F.2d 638, 643 (7th Cir. 1981).
The Arbitration Clause provides for the arbitration of all controversies arising between plaintiff and PaineWebber, with the exception of those delineated in a parenthetical ("the Exception Clause"). The Exception Clause excepts from arbitration "any claim for relief by a public customer for which a remedy may exist pursuant to an express or implied right of action under the federal securities laws." Since § 10(b) and Rule 10b-5 claims are implied rights of action under the federal securities laws, plaintiff reasons that PaineWebber cannot force him to arbitrate these claims. PaineWebber contends, however, that the Exception Clause must be read in its historical and legal setting.
In Wilko v. Swan, 346 U.S. 427, 98 L. Ed. 168, 74 S. Ct. 182 (1953), the Supreme Court held that a predispute agreement to arbitrate claims arising under § 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l(2), could not be enforced. Section § 10(b) comes from the Securities Exchange Act of 1934, and hence did not fall within the expres ruling of Wilko, but the Securities Exchange Commission ("SEC") interpreted Wilko as applying to § 10(b) claims, and subsequently promulgated a rule making it unlawful "for a broker or dealer to enter into an agreemeent with any public customer which purports to bind the customer to the arbitration of future disputes between them arising out of the federal securities laws, or to have in effect such an agreement, pursuant to which it effects transactions with or for a customer." SEC Rule 15c2-2, 17 C.F.R. 15c2-2. After McMahon was decided, the SEC rescinded the rule. See SEC Rescinds Fraud Arbitration Rule, Fed. Sec. Law Rep. (CCH) No. 1255 at 1 (October 21, 1987).
PaineWebber contends that because the Exception Clause in plaintiff's Customer Agreement was drafted and executed prior to McMahon, it should be read as pertaining only to claims nonarbitrable under governing law, and that because § 10(b) and Rule 10b-5 claims are now arbitrable, the Exception Clause no longer applies. It cites a number of cases decided in the year and a half since McMahon issued in which courts have compelled arbitration of federal securities claims despite the presence of pre-McMahon arbitration clauses indicating that federal securities claims were non-arbitrable. See Sease v. PaineWebber, Inc., 697 F. Supp. 1190 (S.D. Fla. 1988); Ketchum v. Almahurst Bloodstock IV, 685 F. Supp. 786 (D. Kan. 1988); Willis v. Rubiera-zim, No. 87 C 1121, slip op. (D.N.J. Jan. 20, 1988); Frankel v. Shearson Lehman Brothers, No. 86 C 2520, slip op. (D.N.J. Oct. 30, 1987).
There is no doubt that a properly drafted pre-McMahon arbitration clause could have provided for arbitration of federal securities claims in the event that such claims were held to be arbitrable. For example, the arbitration clause at issue in McMahon read:
Unless unenforceable due to federal or state law, any controversy arising out of or relating to my accounts, to transactions with you for me or to this agreement or the breach thereof, shall be settled by arbitration.
McMahon, 107 S. Ct. at 2335-6. This clause clearly provided that § 10(b) and Rule 10b-5 claims would be non-arbitrable only if such claims were non-arbitrable at the time they were brought. Once the Court held that such claims were arbitrable, the clause no longer barred arbitrating them.
It is equally indisputable, however, that certain pre-McMahon arbitration clauses simply did not provide for the arbitration of § 10(b) and Rule 10b-5 claims even after McMahon. In Giles v. Blunt, Ellis & Loewi, Inc., 845 F.2d 131 (7th Cir. 1988), for instance, the Seventh Circuit had no trouble ruling that the securities firm could not compel arbitration of § 10(b) claims when the arbitration clause read as follows:
If any controversy arises between us in connection with my accounts it may be settled by arbitration. . . . I understand that my entering this agreement bars me from pursuing any claims not arising under the federal securities laws in court, but does not bar me from pursuing claims based solely on alleged violations of the federal securities laws in a judicial forum rather than in arbitration.