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PRUDENTIAL SECS. INC. v. HORNSBY

August 23, 1994

PRUDENTIAL SECURITIES INCORPORATED, a Delaware corporation and J. FREDERIC STORASKA, Plaintiffs,
v.
ARTHUR HORNSBY, Defendant.


Conlon


The opinion of the court was delivered by: SUZANNE B. CONLON

Prudential Securities Incorporated and J. Frederic Storaska ("Prudential") seek declaratory and injunctive relief to enjoin Arthur Hornsby from arbitrating a claim before the National Association of Securities Dealers ("NASD"). Hornsby files a cross-motion to compel arbitration.

 BACKGROUND

 The essential facts are undisputed. Prudential bought and sold securities for Hornsby. The brokerage contract provided that any dispute between Hornsby and Prudential relating to the securities account would be settled by arbitration before the American Arbitration Association ("AAA") or the New York Stock Exchange ("NYSE"). In November 1990, Hornsby filed a demand for arbitration and statement of claim with the AAA seeking $ 950,000 in damages for wrongful conduct by Prudential. Specifically, Hornsby alleged that Storaska, an employee of Prudential, mismanaged his account, resulting in a considerable loss. Hornsby also alleged that Prudential had supervised Storaska inadequately and fraudulently concealed his wrongdoing. In January 1993, the AAA awarded Hornsby $ 290,000 in full settlement of his claims, and Prudential paid the award on February 11, 1993.

 On October 6, 1993, ten months after the AAA award, Hornsby filed his current arbitration claim with the NASD. In the NASD claim, Hornsby alleges a conspiracy between Prudential and Storaska "in connection with the conduct of a prior arbitration between the parties held under the auspices of the [AAA]." In particular, Hornsby claims that Prudential feigned compliance with his document requests during the AAA arbitration while fraudulently concealing internal memoranda that confirmed Storaska's improper sales practices and Prudential's toleration of those practices. Surmising that the AAA award would have been higher had the arbitrators known of the memoranda and Prudential's attempt to suppress them, Hornsby seeks compensatory and punitive damages in excess of $ 1,000,000 against Prudential.

 In a series of letters and motions, Prudential asked the NASD to decline the arbitration. Although the NASD initially refused Prudential's request, it has since reversed itself and decided that it will not hear Hornsby's claim. Hornsby has asked the NASD for reconsideration. The NASD's reconsideration decision is pending.

 DISCUSSION

 Prudential seeks to enjoin the NASD arbitration and to obtain a declaration that Hornsby's claim is an impermissible collateral attack on his original arbitration award. In contrast, Hornsby asks the court to compel the NASD arbitration. Both parties move for judgment on the pleadings. Fed. R. Civ. P. 12(c). Judgment on the pleadings is proper if it is "beyond doubt that the non-movant can plead no facts that would support his claim for relief." United States v. Wood, 925 F.2d 1580, 1581 (7th Cir. 1991); Thomason v. Nachtrieb, 888 F.2d 1202, 1204 (7th Cir. 1989). Although the court may not look beyond the pleadings to render its decision, it may consider documents incorporated by reference to the pleadings. Wood, 925 F.2d at 1581. Uncontested allegations to which a party could respond are taken as true, Flora v. Home Federal Savings & Loan Ass'n, 685 F.2d 209, 211 (7th Cir. 1982), and all facts are viewed in the light most favorable to the nonmoving party. Wood, 925 F.2d at 1581.

 1. Choice Of Law

 Prudential and Hornsby disagree on the law governing this dispute. *fn1" Prudential contends that the Federal Arbitration Act ("Act"), 9 U.S.C. §§ 1-16, is the applicable law for four alternative reasons: (1) the AAA arbitration stemmed from a securities contract between Prudential and Hornsby that related to interstate commerce; (2) Hornsby previously supported his NASD claim by invoking the Act; (3) the contract between Prudential and the NASD relates to interstate commerce; and (4) the Act preempts state arbitration law if the contract providing for arbitration relates to interstate commerce. Hornsby, on the other hand, argues that the FAA does not apply because his NASD claim is a common law fraud action bearing no relation to interstate commerce. Hornsby does not suggest an alternative choice of law, although he cites New York cases.

 Notwithstanding the parties' arguments, the only relevant law is that governing the original arbitration. The Federal Arbitration Act creates a body of substantive federal arbitration law governing any agreement that is within its coverage. Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24, 74 L. Ed. 2d 765, 103 S. Ct. 927 (1983). The Act applies to written arbitration provisions in any contract evidencing a transaction involving commerce, 9 U.S.C. § 2; Moses, 460 U.S. at 24, and its reach is coextensive with Congressional power to regulate under the Commerce Clause. Snyder v. Smith, 736 F.2d 409, 418 (7th Cir.), cert. denied, 469 U.S. 1037, 83 L. Ed. 2d 403, 105 S. Ct. 513 (1984); see also 9 U.S.C. § 1. It is axiomatic that the purchase and sale of securities relates to interstate commerce. As a result, Hornsby's AAA arbitration is governed by federal arbitration law because it arises from a securities brokerage contract. See, e.g., Austin Municipal Secur., Inc. v. NASD, 757 F.2d 676, 697 (5th Cir. 1985) (arbitration clause in brokerage contract "evinces a transaction involving commerce"); see also Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477, 104 L. Ed. 2d 526, 109 S. Ct. 1917 (1989) (applying Act to arbitration conducted pursuant to brokerage contract).

  Under the Act, an arbitration award is final unless either party moves to vacate or modify the award under section 10 *fn2" within the three month time period prescribed by section 12. *fn3" Corey v. New York Stock Exchange, 691 F.2d 1205, 1212 (6th Cir. 1982). Section 10 strictly limits the grounds available for vacating an award, and it is the exclusive remedy for misconduct in an arbitration proceeding governed by the Act. Tamari v. Bache & Co. (Lebanon) S.A.L., 565 F.2d 1194, 1202 (7th Cir. 1977), cert. denied, 435 U.S. 905, 55 L. Ed. 2d 495, 98 S. Ct. 1450 (1978); Foster v. Turley, 808 F.2d 38, 41-42 (10th Cir. 1986); Corey, 691 F.2d at 1212. The strictures of section 10 and section 12 are designed to afford an arbitration award finality in a timely fashion, promoting arbitration as an expedient method of resolving disputes without resort to the courts. Chauffeurs, Teamsters, etc. v. Jefferson Trucking Co., 628 F.2d 1023, 1027 (7th Cir. 1980), cert. denied, 449 U.S. 1125, 67 L. Ed. 2d 111, 101 S. Ct. 942 (1981). Because Hornsby's first arbitration was governed by the Act, the award can only be modified pursuant to section 10.

 The character of Hornsby's current NASD arbitration proceeding thus becomes relevant at this point. If the NASD claim is independent, then it may proceed because the Act does not apply. If, however, the NASD proceeding is properly characterized as an attempt to modify the AAA award, then it must be enjoined because the current ...


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