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Interactive Brokers, LLC v. Duran

February 17, 2009


The opinion of the court was delivered by: Robert M. Dow, Jr. United States District Judge

District Judge Robert M. Dow, Jr.


Plaintiff Interactive Brokers, LLC has moved for an order preliminarily enjoining Defendants from proceeding with three arbitration proceedings initiated against Interactive in Dallas and Houston, Texas, and Madison, Wisconsin. For the following reasons, the Court grants Plaintiff's motion for preliminary injunction [8].

I. Background

Interactive, an online brokerage firm, brings this action for declaratory and injunctive relief against three groups of investors who claim to have been defrauded by one of Interactive's customers, Enterprise Trust Company.*fn1 Count I seeks a declaration of Interactive's rights and obligations with respect to Defendants. In Count II, Interactive asks the Court to preliminarily and permanently restrain Defendants from pursuing claims against Interactive in arbitration proceedings before the Financial Industry Regulatory Authority ("FINRA").*fn2

In March 2008, the Securities and Exchange Commission sued Enterprise and its principals, John Lohmeier and Rebecca Townsend, for securities fraud and forced the company into receivership.*fn3 To recover their alleged losses, Defendants asserted claims against Enterprise in the receivership proceeding. In the FINRA arbitrations, Defendants have alleged that they entrusted certain investment assets to Enterprise, which Enterprise commingled with the assets of other customers and used to fund speculative margin trading that was neither authorized by nor intended to benefit Defendants. Defendants assert claims against Lohmeier, Townsend, and four brokerage firms, including Interactive, that transacted business with Enterprise. Defendants allege that Lohmeier and Townsend are liable as the primary architects of Enterprise's fraud, and that the four broker-dealers are secondarily liable as aiders and abettors. For example, Defendants allege that Interactive is responsible for Defendants' investment losses because Interactive negligently or recklessly failed to detect, prevent, and report Enterprise's fraud. Defendants also allege that Interactive and the other brokers violated state Blue Sky laws.

As submitted by Interactive and not rebutted by Defendants, Interactive is a "discount" online brokerage firm that does not give trading advice or make recommendations and that does not manage or otherwise exercise discretion over customer accounts. In the months prior to its termination, Enterprise opened two trading accounts at Interactive, only one of which was used. Both accounts were in Enterprise's name, not in the name of any Defendant. Interactive executed online trades selected by Enterprise and carried the resulting positions in an online account in the name of Enterprise. None of the Defendants has ever opened, maintained, controlled, or traded in an account at Interactive or entered into an account or customer agreement with Interactive.

II. Analysis

"[A]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." United Steelworkers of America v. Warrior and Gulf Navigation Co., 363 U.S. 574, 582 (1960). Whether a party has consented to arbitration has long been recognized to be a question of law, to be decided by the court, not the arbitrator, "[u]nless the parties clearly and unmistakably provide otherwise." AT & T Techs., Inc. v. Communications Workers, 475 U.S. 643, 649 (1986); see also Geneva Securities, Inc. v. Johnson, 138 F.3d 688, 691 (7th Cir. 1998); Sphere Drake Ins. Ltd. v. All American Ins. Co., 256 F.3d 587, 589-90 (7th Cir. 2001) ("courts, rather than arbitrators, usually determine whether the parties have agreed to arbitrate"). In determining whether the parties have agreed to arbitrate, "courts generally * * * should apply ordinary state-law principles that govern the formation of contracts." First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995). Defendants concede that they did not have arbitration agreements with Interactive. Instead, Defendants contend that they are third party beneficiaries of an arbitration agreement between Enterprise and Interactive and have a right to compel arbitration on that basis.

A. Preliminary Injunction Standard

Like all forms of injunctive relief, a preliminary injunction is "an extraordinary remedy that should not be granted unless the movant, by a clear showing, carries the burden of persuasion." Mazurek v. Armstrong, 520 U.S. 968, 972 (1997) (emphasis in original). In the Seventh Circuit, a court must consider the following factors in deciding whether to grant a preliminary injunction: (i) the absence of an adequate remedy at law, (ii) the presence of irreparable harm to the moving party, (iii) the balance of the harms between the parties, (iv) the prospect of some likelihood of success on the merits of the claim, and (v) the public interest. Roland Machinery Co. v. Dresser Industries, Inc., 749 F.2d 380, 386-88 (7th Cir. 1984). The first two factors must be considered at the threshold, for when the moving party has no likelihood of success on the merits or cannot make any showing of irreparable harm, a motion for preliminary injunction ordinarily will be denied on that ground alone. See Praefke Auto Elec. & Battery Co. v. Tecumseh Prods. Co., 255 F.3d 460, 463 (7th Cir. 2001); Abbott Laboratories v. Mead Johnson & Co., 971 F.2d 6, 11-12 (7th Cir. 1992). Under the "sliding scale" approach employed in this circuit, "the more likely plaintiff will succeed on the merits, the less the balance of irreparable harms need favor plaintiff's position." See, e.g., Ty, Inc. v. The Jones Group, 237 F.3d 891, 895 (7th Cir. 2001). "The sliding scale approach is not mathematical in nature; rather it is more properly characterized as subjective and intuitive, one which permits district courts to weigh the competing considerations and mold appropriate relief." Id. at 895-96.

1. Likelihood of Success on the Merits

FINRA Rule 12200 provides, in relevant part, that a member firm must arbitrate a dispute if the "dispute is between a member and a customer," the dispute "arises in connection with the business activities of the member," and arbitration "is * * * requested by the customer." As set forth above, Defendants claim to be third party beneficiaries of the arbitration agreement between Interactive and Enterprise and assert that "under the well established [principle] of equitable estoppel, Interactive should be required to arbitrate the dispute with them * * *." Def. Resp. at 6.

The parties have not presented the Court with any Seventh Circuit decisions on point, nor has the Court discovered any in its own research. However, the Second Circuit's decision in Bensadoun v. Jobe-Riat, 316 F.3d 171 (2d Cir. 2003), is highly instructive. In Bensadoun, eight investors filed an NASD arbitration against Jean Bensadoun, a stockbroker associated with PaineWebber, an NASD member firm. The investors alleged that they transferred investment funds to PaineWebber expecting that a third party, Michael Autard, would invest the proceeds in a combination of stocks and bonds. Instead, Autard and Bensadoun arranged for the money to be deposited into a commingled account controlled by Autard. When the account eventually was closed, the investors learned of Autard's fraud and brought an arbitration proceeding against Bensadoun, presumably because Autard was a foreign national who was not registered with the NASD. Bensadoun responded by suing to enjoin the arbitration, alleging that the investors were not his customers and could not compel him to arbitrate. The Second Circuit held that the district court had erred in disregarding Bensadoun's argument that the investors were not his customers, but rather Autard's. The court noted that if the investors believed they were entrusting their funds to Autard, then they were his customers, not Bensadoun's, and had no right to force Bensadoun into arbitration. Any other result would mean that "every purchaser of shares in a mutual fund and every beneficiary of a pension ...

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