Haviland v. TD Ameritrade Incorporated

Filing 29

ORDER - Defendant TD Ameritrade Inc.'s Motion to Vacate the FINRA Arbitration Award (Doc. 14 ) is denied. Plaintiff Douglas A. Haviland's Motion to Confirm FINRA Arbitration Award (Doc. 1 ) is granted to the extent, and only to the exte nt, that TD Ameritrade must continue to make good faith efforts to transfer to Haviland a certificate recognizing ownership in his name of the 75,000 Bancorp X106 shares currently held by the Depository Trust Company. IT IS FURTHER ORDERED that the Clerk shall enter judgment in favor of Haviland and against TD Ameritrade, confirming the Award to the extent, and only to the extent, as stated above. The Clerk shall terminate this case. See document for further details. Signed by Judge Neil V Wake on 06/25/15. (ATD)

1

WO

2
3
4
5
6

IN THE UNITED STATES DISTRICT COURT

7

FOR THE DISTRICT OF ARIZONA

8
9

Douglas A. Haviland,
Plaintiff,

10
11

ORDER

v.

12

No. CV-15-00611-PHX-NVW

TD Ameritrade Incorporated,

13

Defendant.

14
15

Before the court are Plaintiff Douglas A. Haviland’s Motion to Confirm FINRA

16

Arbitration Award (Doc. 1) and Defendant TD Ameritrade Inc.’s Motion to Vacate the

17

FINRA Arbitration Award (Doc. 14). For the reasons that follow, Haviland’s Motion

18

will be granted in part.

19
20

I.

BACKGROUND

21

The following facts are taken from TD Ameritrade’s Motion and the sworn

22

Declaration (Doc. 14-2) of its attorney, Miles D. Hart, as well as exhibits attached to that

23

Declaration. In his brief Response (Doc. 22), Haviland does not appear to contest the

24

accuracy of TD Ameritrade’s factual assertions.

25

allegations at TD Ameritrade and disputes several of TD Ameritrade’s facts, but these

26

disagreements are largely irrelevant to the pending motions. Given the posture of this

27

case, the parties have not had the opportunity to exchange discovery. The court will

28

therefore assume that TD Ameritrade’s version of events is accurate.

Haviland’s Motion levels various

1

Haviland opened a brokerage account with a predecessor to TD Ameritrade in

2

2001. (Doc. 14 at 4.) On July 13, 2005, TD Ameritrade executed for Haviland the

3

purchase of 75,000 shares of Bancorp International Group (“Bancorp”), which sold for

4

$0.0026 per share. (Id. at 5.) These shares were part of an issuance assigned No.

5

05968X106 (“X106”) by the Committee on Uniform Securities Identification Procedures

6

(“CUSIP”). (Id. at 3 & n.2.) TD Ameritrade held the stock in its name for the benefit of

7

Haviland. (See id. at 4-5.) Later that summer, on August 16, 2005, the Depository Trust

8

Company issued a “Global Lock” on Bancorp shares in its custody. (Id. at 7.) The

9

Depository Trust Company is “the central securities depository and clearing agency in the

10

United States operating under regulatory oversight of the SEC.” (Id. at 6.) Pursuant to

11

its own rules, which are regulated by the Securities and Exchange Commission, the

12

Depository Trust Company “determine[s] whether to accept a security as an ‘eligible

13

security’ and when an eligible security ceases to be an eligible security.” (See id. at 7.)

14

When it imposes a global lock, also known as a “freeze,” the Depository Trust Company

15

“discontinue[s] all non-custodial services for a security.”

16

Company] participants such as [TD Ameritrade], issuers such as [Bancorp], and owners

17

of issuers’ stock are bound by these restrictions. As a broker-dealer, [TD Ameritrade] is

18

required, under FINRA Rule 11310, to use [Depository Trust Company] (and its parent)

19

to clear electronic transactions.” (Id. (citation omitted).).

(Id.)

“[Depository Trust

20

The SEC temporarily suspended the trading of Bancorp stock on August 31, 2005.

21

(Id. at 8.) The SEC lifted the suspension on September 14, 2005, but on November 3,

22

2009, it “revoked the registration of all [Bancorp] securities because of [Bancorp’s]

23

repeated failure to satisfy its public reporting requirements.” (Id.) The Global Lock and

24

the revocation both remain in effect. (Id. at 7-8.) At some unspecified time “after

25

[Depository Trust Company] imposed the Global Lock,” Bancorp issued a second

26

category of stock with CUSIP No. 05968X205 (“X205”). (Id. at 3, 8.) “These shares

27

were not registered with the SEC and are not publicly traded.” (Id. at 8.) In February

28

2012, Bancorp purported to “‘ . . . require the mandatory exchange’ of all existing

-2-

1

common stock certificates issued under CUSIP X106 for new certificates bearing CUSIP

2

X205.” (Id.) The Financial Industry Regulatory Authority (“FINRA”), however, did not

3

approve the exchange because “the stock was delisted in 2006 and the SEC revoked the

4

registration of [Bancorp’s] stock in 2009.” (Id.) Accordingly, the Depository Trust

5

Company “could not process the exchange.” (Id.)

6

On July 14, 2014, Haviland filed an arbitration claim with FINRA, asserting that

7

in September 2011 he had “made a demand to [TD Ameritrade] to transfer [his] 75,000

8

[Bancorp] shares into [his] name on the books of [Bancorp] and to deliver a certificate,”

9

and that TD Ameritrade had refused in light of the Global Lock. (Doc. 14-2 at 1; Doc.

10

14-3 at 4.) Haviland asked the arbitrator for an order compelling TD Ameritrade to

11

transfer his Bancorp shares into his name and to deliver “a [Bancorp] stock certificate as

12

proof of [his] registered ownership.” (Doc. 14-3 at 3.) The prayer for relief also

13

contained the following request: “If [TD Ameritrade] do[es] not have the shares [it] can

14

either buy-in the seller, or obtain my [Bancorp] shares from another source, or in the

15

alternative, authorize me to buy-in for [TD Ameritrade] with a guarantee I will be

16

reimbursed the purchase price and other costs for doing so.” (Id.)

17

TD Ameritrade agreed on July 31, 2014, to submit to arbitration of Haviland’s

18

complaint. (Id. at 32-33.) The Submission Agreement provides that if the arbitrator

19

issues an award, “a judgment and any interest due thereon, may be entered upon such

20

award(s) and, for these purposes, the parties hereby voluntarily consent to submit to the

21

jurisdiction of any court of competent jurisdiction which may properly enter such

22

judgment.” (Id. at 32.) In its Answer and Affirmative Defenses, filed with FINRA on

23

September 4, 2014, TD Ameritrade explained that it had already relayed Haviland’s

24

request to the Depository Trust Company, which “could not (and cannot) honor

25

[Haviland’s] demand as a result of restrictions it (DTC) placed on the security.” (Id. at

26

36.)

27

Company],” TD Ameritrade wrote, “it is not able to provide [Haviland] with a

28

certificate.” (Id. at 37.)

“Since [TD Ameritrade] has no control or authority over [Depository Trust

-3-

1

The single arbitrator in the case read the parties’ paper submissions but did not

2

conduct a hearing. (Doc. 14 at 9; Doc. 1-1 at 3.) In a March 12, 2015 Award, the

3

arbitrator announced that TD Ameritrade “is liable for and shall pay to [Haviland]

4

$205.00 in compensatory damages” and “must deliver to [Haviland] a physical share

5

certificate for 75,000 Bancorp International Group, Inc. shares registered in [Haviland’s]

6

name.” (Doc. 1-1 at 3.) The Award does not specify which type of shares—X106 or

7

X205—TD Ameritrade is required to deliver. TD Ameritrade requested a correction

8

from FINRA on March 20, 2015, to clarify the appropriate class of stock. (Doc. 16 at 3-

9

4.) But the time for a ruling from the arbitrator lapsed without any response, and so TD

10

Ameritrade’s request was deemed “considered and denied” under FINRA rules on April

11

9, 2015. (Doc. 14-2 at 6.) That same day, TD Ameritrade paid Haviland the monetary

12

portion of the Award. (Id.)

13

Haviland, a resident of Scottsdale, Arizona, moved to confirm the arbitrator’s

14

award in this court on April 6, 2015. (Doc. 1.) TD Ameritrade filed the present Motion

15

on May 15, 2015, asking the court to set aside the arbitrator’s Award on the grounds that

16

1) the Global Lock made it impossible to transfer X106 shares to Haviland and 2) transfer

17

of unregistered X205 shares would violate the Securities Act of 1933.

18

II.

LEGAL ANALYSIS

19

If an arbitration agreement does not specify the court in which a party may apply

20

to confirm the award, “then such application may be made to the United States court in

21

and for the district within which such award was made.” 9 U.S.C. § 9. A motion to

22

confirm may also be brought “in any district proper under the general venue statute.”

23

Cortez Byrd Chips v. Bill Harbert Constr. Co., 529 U.S. 193, 195 (2000). At “any time

24

within one year after the award is made any party to the arbitration may apply to the court

25

. . . for an order confirming the award, and thereupon the court must grant such an order

26

unless the award is vacated, modified, or corrected as prescribed in sections 10 and 11 of

27

this title.” See § 9. The district court may entertain the application as long as subject

28

matter jurisdiction exists, which is not disputed in this case.

-4-

1

Ordinarily, the court’s power to vacate, modify, or correct is narrowly

2

circumscribed. Under § 10, “arbitrators ‘exceed their powers’ . . . not when they merely

3

interpret or apply the governing law incorrectly, but when the award is ‘completely

4

irrational’ or exhibits a ‘manifest disregard of law.’” Kyocera Corp. v. Prudential-Bache

5

T Servs., 341 F.3d 987, 997 (9th Cir. 2003) (en banc) (citations omitted). Section 11

6

similarly “afford[s] an extremely limited review authority.” See id. at 998. “In sum, the

7

Federal Arbitration Act allows a federal court to correct a technical error, to strike all or a

8

portion of an award pertaining to an issue not at all subject to arbitration, and to vacate an

9

award that evidences affirmative misconduct in the arbitral process or the final result or

10

that is completely irrational or exhibits a manifest disregard for the law.” Id. at 997-98.

11

“Nevertheless, the purpose of federal arbitration law is ‘to make arbitration

12

agreements as enforceable as other contracts, but not more so.’” Am. Postal Workers

13

Union v. U.S. Postal Serv., 682 F.2d 1280, 1286 (9th Cir. 1982). “It is a general principle

14

of contract law that courts will not enforce contracts requiring the performance of an

15

illegal act.” Id. Accordingly, although § 9 makes no mention of illegality as a basis for

16

vacatur, modification, or correction, “the courts cannot enforce an arbitrator’s award if it

17

requires the performance of an illegal act.” Id.

18

Were TD Ameritrade to deliver to Haviland a certificate for 75,000 Bancorp

19

shares, that certificate would have to reflect stock with either CUSIP No. X106 or CUSIP

20

No. X205. Section 5 of the Securities Act of 1933 makes it unlawful to “offer to sell or

21

offer to buy . . . any security, unless a registration statement has been filed as to such

22

security.” 15 U.S.C. § 77e(c). It also prohibits selling, or delivering after sale, any

23

unregistered security. Id. § 77e(a). Because the X205 shares are not registered with the

24

SEC, and because TD Ameritrade does not have any of those shares in its possession,

25

acquiring X205 shares to transfer to Haviland would require TD Ameritrade to “offer to

26

buy” and then to deliver a security for which no “registration statement has been filed.”

27

That is, delivery of a certificate for X205 shares would require “the performance of an

28

-5-

1

illegal act.” Am. Postal Workers Union, 682 F.2d at 1286. To the extent the arbitrator’s

2

Award requires delivery of a certificate for X205 shares, it is unenforceable.

3

TD Ameritrade acknowledges in its Reply (Doc. 24) that the ban on offering to

4

buy unregistered securities does not apply to “any security which is issued in exchange

5

for one or more bona fide outstanding securities, claims or property interests, or partly in

6

such exchange and partly for cash, where the terms and conditions of such issuance and

7

exchange are approved, after a hearing upon the fairness of such terms and conditions at

8

which all persons to whom it is proposed to issue securities in such exchange shall have

9

the right to appear, by any court, or by any official or agency of the United States, or by

10

any State or Territorial banking or insurance commission or other governmental authority

11

expressly authorized by law to grant such approval.” 15 U.S.C. § 77c(a)(10). If this

12

court determined after a hearing that the exchange of X205 shares for “bona fide

13

outstanding securities, claims or property interests” were “fair,” then TD Ameritrade’s

14

acquisition of those shares would not qualify as illegal, and the arbitrator’s Award could

15

be confirmed.

16

Response, and he has not moved for a § 77c(a)(10) fairness hearing. Indeed, other than

17

his suggestion in the arbitration complaint that TD Ameritrade “buy-in” shares from

18

Bancorp—i.e., apparently a cash transfer, which is not permitted by the plain language of

19

§ 77c(a)(10)—Haviland has not even proposed an “exchange” on which this court could

20

conduct a hearing. Section 77c(a)(10) therefore cannot render an otherwise illegal act

21

valid.

But Haviland does not mention this provision in his Motion or his

22

Given the holding in American Postal Workers Union, the court can confirm the

23

Award only if it is construed to require TD Ameritrade to deliver a certificate for X106

24

shares. TD Ameritrade has already done everything in its power to grant Haviland this

25

portion of the relief awarded by the arbitrator. Namely, TD Ameritrade has directed the

26

Depository Trust Company to transfer to Haviland a certificate reflecting 75,000 X106

27

shares in Haviland’s name, but the Depository Trust Company has declined to do so. TD

28

Ameritrade has no power to force such a transfer, and courts cannot order performance of

-6-

1

a condition with which it is impossible to comply. See Taylor-Edwards Warehouse &

2

Transfer Co. v. Burlington N., Inc., 715 F.2d 1330, 1336 (9th Cir. 1983) (recognizing

3

defense to breach of contract where “the thing cannot by any means be effected”). The

4

court will therefore confirm the arbitrator’s Award, but only to the extent that TD

5

Ameritrade must continue to make good faith efforts to transfer to Haviland a certificate

6

recognizing ownership in his name of the 75,000 Bancorp X106 shares currently held by

7

the Depository Trust Company. While the Global Lock remains in place, there is nothing

8

more TD Ameritrade can do to effect this transfer. If and when the Global Lock is lifted,

9

however, TD Ameritrade will be required by the Award, and by this Order, to request the

10

transfer of Haviland’s X106 shares by the Depository Trust Company. TD Ameritrade is

11

otherwise excused from attempts to comply with the arbitrator’s Award.

12
13

IT IS THEREFORE ORDERED that Defendant TD Ameritrade Inc.’s Motion to
Vacate the FINRA Arbitration Award (Doc. 14) is denied.

14

IT IS FURTHER ORDERED that Plaintiff Douglas A. Haviland’s Motion to

15

Confirm FINRA Arbitration Award (Doc. 1) is granted to the extent, and only to the

16

extent, that TD Ameritrade must continue to make good faith efforts to transfer to

17

Haviland a certificate recognizing ownership in his name of the 75,000 Bancorp X106

18

shares currently held by the Depository Trust Company.

19

IT IS FURTHER ORDERED that the Clerk shall enter judgment in favor of

20

Haviland and against TD Ameritrade, confirming the Award to the extent, and only to the

21
22
23
24
25
26

/ / /

27

/ / /

28

/ / /

-7-

1

extent, that TD Ameritrade must continue to make good faith efforts to transfer to

2

Haviland a certificate recognizing ownership in his name of the 75,000 Bancorp X106

3

shares currently held by the Depository Trust Company. The Clerk shall terminate this

4

case.

5

Dated this 25th day of June, 2015.

6
7
8

Neil V. Wake
United States District Judge

9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

-8-