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Traderight Securities, Inc v. Richard G. Kirschman Ira; Denise J.

February 15, 2011


The opinion of the court was delivered by: Honorable Edmond E. Chang United States District Judge

Judge Edmond E. Chang


Traderight Securities was a brokerage firm at which Enterprise Trust Company, an investment firm, maintained trading accounts. R. 1 ¶¶ 2, 5.*fn1 Alas, Enterprise allegedly committed a massive fraud against its clients, was put into receivership, and ordered to disgorge over $25 million and to distribute its remaining $37 million in assets to Enterprise clients. Id. ¶¶ 2, 23; SEC v. Enterprise Trust Co., USDC No. 08 C 01260 (R. 158, Order of 9/23/08) (Zagel, J.). Traderight and three of its employees (we will refer to the firm and the employees collectively as Traderight unless the context demands otherwise) seek a declaration that they have not breached any legal duty to Defendants, who were clients of Enterprise. R. 1 ¶ 38.*fn2 Additionally, Traderight wishes to enjoin an arbitration proceeding in which the clients hope to impose liability on Traderight for the losses caused by Enterprise. Id. ¶ 41. But Traderight did enter into a written agreement to arbitrate the Enterprise clients' claims against Traderight. Indeed, Traderight participated in the arbitration until the arbitration panel denied Traderight's motions to dismiss, which argued that there had been no breach of duty to the clients -- the same declaration Traderight seeks in this suit. For the reasons discussed below, Defendants' motion (R. 26) to stay this suit and compel the completion of the arbitration is granted.


The following facts are drawn from the complaint. Defendants are two separate groups of investors who claim to have been defrauded by Enterprise. R. 1 ¶ 2. To recover their losses, Defendants initiated two separate arbitration proceedings before the Financial Industry Regulatory Authority (FINRA) against Enterprise's founders and executives and four brokerage firms. Id. ¶¶ 3-4. One of the four brokerage firms is Traderight. Id. ¶ 5. Traderight was a securities broker-dealer and member of FINRA. Id. ¶ 40. Dragel, Rukujzo, and Wurtzinger were allegedly "supervisors and control persons" of Traderight. Id. ¶¶ 6, 13-16.

Defendants allege that Traderight and its employees aided and abetted Enterprise's fraud. R. 1 ¶ 5. Enterprise held one or more accounts in Enterprise's name with Traderight and purchased and sold securities using those accounts. Id. Traderight alleges that it executed non-discretionary trades submitted by Enterprise and that it did not give trading advice or recommendations to any of the defendants. Id. Defendants allege that Traderight negligently failed to exercise appropriate supervision over Enterprise's accounts in violation of common law and state Blue Sky statutes, and that Dragel, Rukujzo, and Wurtzinger negligently failed to take steps to detect, prevent, and report Enterprise's fraud. Id.

To initiate the FINRA arbitrations, all parties signed "uniform submission agreements" (USAs). R. 27, Exhs. A-D. Plaintiffs signed USAs that included this language:

The undersigned parties hereby submit the present matter in controversy, as set forth in the attached statement of claim, answers, . . . and all related counterclaims and/or third party claims which may be asserted, to arbitration . . . . R. 27, Exh. A, C. Defendants signed USAs that contained identical language. R. 27, Exh. B, D. Defendants executed their USAs and filed their claim statements in late 2008. R. 27, Exh. B, D. Plaintiffs executed their USAs and filed written answers to the claims on January 5, 2009. R. 26, Exh. A, C. During the arbitration proceedings, Plaintiffs filed motions to dismiss: in the Kirschmans' proceedings, the motion to dismiss was filed in July 2009, R. 32, Exh. B; in Gibson's proceedings, the motion to dismiss was filed in November 2009, R. 32, Exh. A. Both motions argued that there was no relationship between Traderight and Defendants that could form the basis of liability. R. 32, Exh. A at 3, 5, 8, 10, Exh. B at 3, 5, 8, 10. Significantly, the motions did not argue that the arbitrators were without authority to adjudicate the controversy.

R. 32, Exh. A, B.

After the arbitration panel denied the motions to dismiss, R. 26 at 3,*fn3 Traderight filed the present action on April 1, 2010. In the complaint, Plaintiffs seek a declaration that they breached no legal duty to the former clients of Enterprise, and also seek preliminary and permanent injunctions restraining the former clients from pursuing the arbitration proceedings. R. 1 ¶ 38, 41. Defendants argue that their dispute with Traderight is indeed subject to arbitration, and now move this Court to compel arbitration. R. 26.

Under the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq., if the parties entered into an arbitration agreement and the asserted claims in a lawsuit are within the arbitration agreement's scope, a motion to compel arbitration must be granted. 9 U.S.C. §§ 3, 4; Sharif v. Wellness Int'l Network Ltd., 375 F.3d 720, 726 (7th Cir. 2004) (citing Kiefer Specialty Flooring v. Tercet, Inc., 174 F.3d 907, 909 (7th Cir. 1999)). Section 3 of the FAA specifically requires granting a motion to stay a lawsuit where "the issue involved in such suit . . . is referable to arbitration" under a written agreement. 9 U.S.C. § 3. And Section 4 requires that the court order the parties to proceed in arbitration if there is an agreement to arbitrate. 9 U.S.C. § 4.


Here, the former clients of Enterprise argue that Traderight agreed to arbitrate the claims at issue in the lawsuit -- Traderight's potential liability to Defendants -- by executing the uniform submission agreements. Traderight's first response is that the question of whether there exists an agreement to arbitrate is a question for this Court to decide, not for the arbitrators to decide. R. 32 at 3-4.*fn4 But that response misses the mark: Defendants too believe that it is for the Court to decide whether the parties have agreed to arbitration. R. 26 at 1, 4.*fn5

The parties did agree to arbitration. The Kirschmans and Gibson brought claims in the arbitration against Traderight, seeking to impose liability on Traderight for the losses caused by Enterprise's conduct. Compl. ¶ 38; R. 26, Exh. A ¶ 1, Exh. B ¶ 1. Traderight ...

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