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SHAFFER v. STRATTON OAKMONT

January 28, 1991

JOHN E. SHAFFER, Plaintiff,
v.
STRATTON OAKMONT, INC., and ROBERT KOCH, Defendants



The opinion of the court was delivered by: NORGLE

 CHARLES R. NORGLE, UNITED STATES DISTRICT JUDGE

 Before the court is the motion of defendants Stratton Oakmont, Inc. and Robert Koch for a stay pending arbitration and for a protective order staying discovery. *fn1" For the reasons discussed below, this motion is denied.

 FACTS

 In February of 1990, plaintiff John E. Shaffer ("Shaffer") opened an account with Stratton Oakmont, Inc. ("Stratton"), a securities broker and dealer, through Robert Koch ("Koch"), an employee of Shaffer. Unlike those securities brokers known in the industry as "self-clearing" brokers, Stratton is an "introducing" broker (also known as a "corresponding" broker), and does not perform its own "clearing" services. Stratton must contract with a "clearing broker" in order to consummate the securities transactions which it recommends to its customers. *fn2" Pursuant to opening his account with Stratton, Shaffer signed a brokerage account agreement (the "Brokerage Agreement") provided by Ameritrade, Inc., Stratton's clearing broker.

 The Brokerage Agreement consists of several pages of pre-printed forms. See Exhibit A to Motion of Defendants Stratton Oakmont, Inc. and Robert W. Koch For a Stay Pending Arbitration and For a Protective Order Staying Discovery ("Defendants' Motion for Stay"). The top of the first page of the Brokerage Agreement contains Ameritrade's name in large letters and bold print and provides a space for identification of the introducing broker. This space, however, is left blank on the form. On the bottom of the page, immediately above the signature line on which Shaffer's signature appears, is printed: "This brokerage account agreement contains a pre-dispute arbitration clause in form AM-9-89, section 1, paragraph 7." The arbitration clause referred to in this notice appears subsequently in the agreement, and reads, in relevant part:

 
Any controversy between Ameritrade, Inc. and me arising out of or relating to this Agreement or the breach thereof may be settled by arbitration. . . . If I do not make such election by registered mail addressed to Ameritrade, Inc. at its main office within five days after the mailing by Ameritrade, Inc. of a notice requesting such election, I authorize Ameritrade, Inc. to make such election in behalf of myself. [Emphasis added.]

 Exhibit A to Defendants' Motion for Stay, (unnumbered) p. 4. Neither defendant's name appears anywhere in the agreement.

 After the parties transacted two securities purchases in February and April of 1990, a dispute between them arose regarding a June 1990 stock transaction. Plaintiff contends that on June 27, 1990, without his express consent, defendants purchased 30,000 shares of Ventura Motion Picture Group Stock on his account, at $ 8 per share. Defendants contend that plaintiff had agreed to purchase the stock but failed to make a timely margin deposit payment in order to secure the acquisition. Defendants then sold the stock at $ 7 per share, resulting in a loss of $ 30,000 on the deal. In order to cover the loss, defendants liquidated the remaining stocks in plaintiff's account and returned to plaintiff the remaining balance.

 On October 10, 1990, plaintiff filed this action, alleging claims for federal securities fraud, as well as pendant state claims for breach of fiduciary duty and violations of the Illinois Consumer Fraud and Deceptive Practices Act. On December 13, 1990, defendants filed this motion for a stay pending arbitration and for a protective order staying discovery.

 DISCUSSION

 The parties agree that the sole question at issue here is whether defendants Stratton and Koch have standing to compel plaintiff to arbitrate his grievances with them pursuant to the arbitration provision in the Ameritrade Brokerage Agreement. In the memorandum in support of its motion for stay, defendants acknowledge that there is some division of authority on this question. They argue that the better rule resolves all doubts in favor of arbitration. Defendants further argue that they should be permitted to invoke the arbitration provision under either an agency theory or a third party beneficiary theory. Plaintiff, on the other hand, argues that the defendants are not parties to the Brokerage Agreement and have no standing to benefit from its arbitration provision. He cites to a number of cases in which courts have refused to apply the third party beneficiary doctrine or the principles of agency to permit an introducing broker to benefit from an arbitration agreement signed only by the clearing broker and the investor. As a policy issue, plaintiff also argues that it would be unfair for the court to compel him to arbitrate his dispute with defendants when he never consented to relinquish his right to be heard in federal court.

 It is well established that the:

 
federal policy in favor of arbitration does not give courts license to compel arbitration where there has been no agreement to arbitrate. Thus, "the first task of a court asked to compel arbitration of a dispute is to determine whether the parties agreed to arbitrate that dispute." Mitsubishi Motors Corp. v. Soler ...

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