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Lynch v. Thompson

United States District Court, D. Kansas

March 23, 2018




         This matter comes before the court upon plaintiff Merrill Lynch, Pierce, Fenner & Smith's Motion to Strike Affidavit of Jarrod J. Malone (Doc. 29), defendants John Thompson and Karen Thompson's Motion to Dismiss or In the Alternative, Stay Proceedings and Compel Arbitration (Doc. 13), and plaintiff's Motion for Preliminary Injunction Against Proceedings in FINRA Arbitration (Doc. 18). Plaintiff filed this case against defendants, seeking to enjoin proceedings in a Financial Industry Regulatory Authority (“FINRA”) arbitration defendants initiated. In the FINRA arbitration, defendants filed a statement of claims against plaintiff, asserting damages related to loss of stock value, fraud, and violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”). Defendants responded by filing their motion to dismiss or stay proceedings in this case pending the outcome of the FINRA arbitration. Plaintiff then filed its motion for preliminary injunction to stop the FINRA arbitration.

         For the reasons stated below, the court denies plaintiff's motion to strike Malone's affidavit, grants defendants' motion to stay proceedings and compel arbitration, deems defendants' motion to dismiss for lack of subject matter jurisdiction and improper venue as moot, and denies plaintiff's motion for preliminary injunction.

         I. Background

         Plaintiff is a broker-dealer and member of FINRA. Defendant John Thompson was plaintiff's employee and a registered FINRA Associated Person. When plaintiff employed Defendant John Thompson, plaintiff required him to submit a Uniform Application for Securities Industry Registration or Transfer (Form U4). Form U4, paragraph 5 requires employees to arbitrate any claim between the employee and firm that FINRA requires to be arbitrated.

         While plaintiff employed defendant John Thompson, plaintiff compensated him partially with stock shares or stock options of plaintiff's affiliate, Merrill Lynch & Co. These stocks were deposited into plaintiff's brokerage accounts that plaintiff required all employees to open and maintain while employed. Defendants opened an account together and defendant John Thompson signed a customer agreement. The customer agreement included a requirement to arbitrate any disputes.

         In 2014, plaintiff and its parent company, Bank of America, settled with the United States Department of Justice to resolve fraud charges for $17 billion. In this settlement, plaintiff and Bank of America admitted to flagrant misconduct and wrongdoing. These actions caused Merrill Lynch & Co.'s share value to decrease. This deprecation caused defendants' brokerage account with plaintiff to suffer losses greater than $25 million. As a result, defendants filed FINRA claims for FINRA arbitration.

         II. The Court Denies Plaintiff's Motion To Strike Affidavit Of Jarrod J. Malone

         Defendants do not have a copy of the customer agreement they signed with plaintiff around 1973. In lieu of the original, defendants filed a representative customer agreement from 2017 that is available on plaintiff's website, along with defense counsel's signed affidavit. The affidavit explains that defendants requested the original customer agreement signed by the parties in this case, but have not received it from plaintiff. Id. Plaintiff argues that the affidavit is untimely and cites examples of other cases where defendants' counsel represented other former employees of plaintiff with similar claims in which representative customer agreements were used. Plaintiff suggests that defendants' counsel should have provided the representative agreement earlier since the other cases show that he possessed it. Plaintiff does not address defendants' statement that plaintiff failed to provide defendants with a copy of the agreement they signed.

         The court declines to strike the affidavit. While the court agrees that defendants could have filed the representative agreement earlier, it also accepts that defendants were waiting to receive a copy of the original agreement they signed. In any event, the court's ruling does not depend on the affidavit. The parties' briefing on this issue is limited to whether the document is timely and the court is not persuaded by that argument. The court denies the motion to strike.

         III. The Court Grants Defendants' Motion To Stay Proceedings And Compel Arbitration

         Both parties agree that they signed arbitration agreements requiring FINRA arbitration. This dispute must therefore be resolved through FINRA arbitration. Under the Federal Arbitration Act (“FAA”), written agreements to arbitrate are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for revocation of any contract.” 9 U.S.C. § 2. 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 on issues as to which an arbitration agreement has been signed.” Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 218 (1985). Defendants and plaintiff entered into two arbitration agreements that they agree are valid.

         Despite the valid arbitration agreements signed by the parties, plaintiff argues that defendants' claims do not fall under the signed arbitration agreement for two reasons. First, plaintiff argues that defendants' dispute is with the wrong party. Plaintiff states the defendants' claims involved Merrill Lynch & Co. and not plaintiff. Plaintiff is a FINRA member, but Merrill Lynch & Co. is not, and plaintiff argues, should therefore not be compelled to arbitrate defendants' claims. But any dispute about who the correct party should be is a question for arbitration. See Dean Witter, 470 U.S. at 218. Defendant brought claims against plaintiff, which is undisputedly a FINRA member, not Merrill Lynch & Co.

         Second, plaintiff claims that defendants cannot suggest that plaintiff took any action causing the devaluation of defendants' stock. Again, this is a ...

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