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SARANTAKIS v. GRUTTADAURIA

March 14, 2003

GEORGIA G. SARANTAKIS AND CAROL ANN COYLE, PLAINTIFFS,
v.
FRANK DOMINIC GRUTTADAURIA, LEHMAN BROTHERS, INC., LEHMAN BROTHERS HOLDINGS, INC., HAMBRECHT & QUIST, INC., J.P. MORGAN SECURITIES, INC., DEGRANDIS & DEGRANDIS, CPA, AND JOSEPH DEGRANDIS, JR., DEFENDANTS.



The opinion of the court was delivered by: Amy J. St. Eve, United States District Court

MEMORANDUM OPINION AND ORDER

Plaintiffs Georgia G. Sarantakis and Carol Ann Coyle bring this securities fraud action, alleging that their broker, Frank D. Gruttadauria, misappropriated their investments through an elaborate scheme involving phony investment accounts, forgery, the misdirection of mail, and repeated misrepresentations of the value of their investments. Gruttadauria pleaded guilty in the Northern District of Ohio on August 28, 2002, to securities fraud, bank fraud, wire fraud, and identity theft. His scam swindled more than $268 million dollars from investors and was sentenced to seven years in prison in November 2002. Gruttadauria has also been barred from associating with NYSE members or member firms. Not surprisingly, Gruttadauria faces multiple suits from his former clients, in districts as diverse as the Northern District of Ohio and the Southern District of California.

In addition to their claims against Gruttadauria, Plaintiffs also allege that Gruttadauria's employers — Hambrecht & Quist, Inc. (now known as J.P. Morgan Securities, Inc.) and Lehman Brothers, Inc. (collectively, "broker-dealer Defendants") — are responsible for Gruttadauria's wrongdoing because they allowed him to perpetuate his scheme and failed to supervise and control his activities.*fn1 Plaintiffs further allege that their accountants, DeGrandis & DeGrandis (and, individually, Joseph DeGrandis, Jr.), were professionally negligent in failing to uncover Gruttadauria's misappropriation and as a result overreported their income taxes.

Before the Court are multiple motions filed by the broker-dealer Defendants to stay the proceedings pending arbitration or to dismiss. Further, Lehman Brothers, Inc., moves to dismiss parts of Plaintiffs' complaint because matters of fraud are not pleaded with sufficient particularity. Finally, the accountant Defendants have filed a motion to dismiss for lack of in personam jurisdiction and improper venue, or alternatively, to transfer venue.

I. Factual Background

According to the Plaintiffs, each of the broker-dealer Defendants employed Gruttadauria during some portion of the time during which he managed their investments. The Plaintiffs' investment history is as follows. Sarantakis initially invested $226,000 with Gruttadauria in 1987, when he was employed by Hambrecht & Quist (which was acquired by J.P. Morgan Securities in 1999, whom Plaintiffs sue in its capacity as a successor in interest). Gruttadauria left Hambrecht & Quist in 1989 to work for Cowen & Co., and Sarantakis transferred her accounts at that time. While Gruttadauria was employed by Cowen & Co., Coyle (Sarantakis's daughter) invested approximately $70,000 with him over a ten year period, beginning in 1991. In 1998, Societe Generale acquired Cowen & Co. and opened S.C. Cowen, which then managed Plaintiffs' accounts. Two years later, Societe Generale sold S.G. Cowen to Lehman Brothers, making it the successor in interest to the Plaintiffs' accounts. At some point during their dealings with Gruttadauria, Sarantakis and Coyle combined their individual accounts, creating a single joint account. As of November 2001, according to the statement the Plaintiffs received from Lehman Brothers through Gruttadauria, the Plaintiffs' joint account had a balance of $896,500. But in January 2002, Plaintiffs learned that Gruttadauria had been falsifying the account statements he sent to them and that their actual account balance totaled only $5,118.70 because Gruttadauria had absconded with most of their investment. The Plaintiffs assert that the broker-dealer Defendants failed to supervise Gruttadauria and enabled him to perpetuate his fraudulent scheme for nearly fifteen years and thus are liable pursuant to § 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t, and under the common law doctrine of respondeat superior.

When Sarantakis opened her account with Gruttadauria, she signed an account agreement with Hambrecht & Quist that contained an arbitration clause. Similarly, both Sarantakis and Coyle signed account agreements with Cowen & Co. that contained an arbitration clause. The arbitration clauses in the agreements do not contain the same wording, and the difference is material. The arbitration clause agreed to by Sarantakis with Hambrecht & Quist reads as follows:

Any controversy, other than a controversy arising under the federal securities laws, between you and the undersigned arising out of or relating to this agreement or the breach thereof, shall be settled by arbitration. . . .
A controversy arising under the federal securities laws may be resolved through litigation in the courts or arbitration at your election.
The arbitration clause agreed to by Sarantakis and Coyle that governs their account with Lehman reads:
Any controversy arising out of or relating to any of my accounts, to transactions with you for me, or to this or any other agreement between us, or the construction, performance, or breach thereof, shall be settled by arbitration. . . . The provisions of this paragraph shall also apply to any such controversy involving any agent or employee of yours.
The broker-dealer Defendants argue that the arbitration clauses are so broad as to apply to Plaintiffs' claims that they failed to supervise and control the fraudulent actions of Gruttadauria, and thus argue that the Plaintiffs' claims must be submitted to arbitration. The Plaintiffs counter by suggesting that Gruttadauria's premeditated theft necessarily falls outside the scope of the parties' arbitration agreements.

II. Analysis

The Federal Arbitration Act's (FAA) establishes a "federal policy favoring arbitration." Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 941 (1983). One purpose of the FAA is "to reverse the longstanding judicial hostility to arbitration agreements . . . and to place arbitration agreements upon the same footing as other contracts." Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24, Ill. S.Ct. 1647, 1651 (1991). Federal statutory claims, such as those protected by the Securities Exchange Act of 1934, can be resolved through arbitration. See Shearson/American Express Inc. v. McMahon, 482 U.S. 220, 107 S.Ct. 2332 (1987). Section 3 of the FAA directs district courts to stay the trial of the action pending arbitration upon the application of one of the parties "upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement." 9 U.S.C. § 3. As worded, Section 3 of the FAA "leaves no place for the exercise of discretion by a district court, but instead mandates that district courts shall direct the parties to proceed to arbitration . . . ." Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 218, 105 S.Ct. 1238, 1241 (1985).

Whether an issue is referable to arbitration is a question of contract interpretation, for "`a party cannot be required to submit to arbitration any dispute which [she] has not agreed so to submit.'" Matthews v. Railings Hudig Hall Co., 72 F.3d 50, 53 (7th Cir. 1995) (quoting Schacht v. Beacon Ins. Co., 742 F.2d 386, 390 (7th Cir. 1984)). in interpreting arbitration clauses, the Supreme Court has instructed lower courts to "rigorously enforce agreements to arbitrate." Dean Witter Reynolds, Inc., 470 U.S. at 221, 105 S.Ct. at 1242. The scope of the agreement therefore must be interpreted liberally and "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration." Moses H. Cone Mem'l Hosp., 460 U.S. at 24-25. Under this pro-arbitration rubric, "[a] n order to arbitrate the particular grievance should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute." Matthews, 72 F.3d at 53.

A. Lehman Brothers

The arbitration clause contained in the agreements between Plaintiffs and Cowen & Co. (to which Lehman Brothers is the successor in interest) requires that "any controversy arising out of or relating to my accounts . . . shall be settled by arbitration." Based upon these agreements, Lehman Brothers moves to compel arbitration of the Plaintiffs' claims against it. Plaintiffs argue that Lehman Brothers' motion should be denied for two reasons. First, Plaintiffs argue that because they signed account agreements with Cowen & Co. but not with Lehman Brothers, Lehman Brothers has no right to compel them to arbitrate their claims. Second, Plaintiffs argue that ...


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