Webb et al v. Frawley et al

Filing 69

MEMORANDUM OPINION Signed by the Honorable Samuel Der-Yeghiayan on 8/3/2016: Mailed notice (mw, )

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
NICHOLAS WEBB and
THAD BEVERSDORF,

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Plaintiffs,
v.
MICHAEL FRAWLEY,
Defendant.

No. 15 C 6406

MEMORANDUM OPINION
SAMUEL DER-YEGHIAYAN, District Judge
This matter is before the court on Defendant Michael Frawley’s (Frawley)
motion to compel arbitration. For the reasons stated below, the motion to compel
arbitration is granted.

BACKGROUND
Plaintiff Nicholas Webb (Webb) and Plaintiff Thad Beversdorf (Beversdorf)
were allegedly recruited by Defendant Michael Frawley (Frawley) to work for
Jefferies LLC (Jefferies), an independent securities and investment banking firm.
Plaintiffs claim that they left their former employer in the securities industry to work
for Jefferies in June of 2012 and that Frawley was their supervisor. Plaintiffs
contend that Frawley instructed Plaintiffs to conduct transactions which were not
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approved by Jefferies and that when Plaintiffs followed such instructions, their
employment was terminated. On June 16, 2015, Plaintiffs filed the instant action
against Frawley in the Circuit Court of Cook County, Illinois, including in their
complaint claims against Frawley alleging tortious interference with contract and
fraud. Frawley then removed the state action to federal court. Frawley now moves
to compel arbitration.

LEGAL STANDARD
The Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq., provides “that a
written provision in any contract evidencing an intent to settle by arbitration any
future controversy arising out of such contract shall be valid, irrevocable, and
enforceable, save upon such grounds as exist at law or in equity for the revocation of
any contract.” French v. Wachovia Bank, 574 F.3d 830, 834 (7th Cir. 2009)(internal
quotations omitted)(quoting Livingston v. Assocs. Fin., Inc., 339 F.3d 553, 556 (7th
Cir. 2003) and 9 U.S.C. § 2). A court “will compel arbitration unless it may be said

with positive assurance that the arbitration clause is not susceptible of an
interpretation that covers the asserted dispute.” United Steel, Paper and Forestry,
Rubber, Mfg., Energy, Allied Indus. and Service Workers Intern. Union v. TriMas
Corp., 531 F.3d 531, 536 (7th Cir. 2008)(internal quotations omitted)(quoting
United Steelworkers of America v. Warrior & Gulf, 363 U.S. 574, 582-83 (1960)).

When an arbitration agreement contains a broad arbitration provision, “there is a
presumption in favor of arbitrability,” and “[a]ny ambiguities as to the scope of the
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arbitration clause are resolved in favor of arbitration.” Id. (internal quotations
omitted)(quoting AT& T Techs., Inc. v. Communc’ns Workers of America, 475 U.S.
643, 650 (1986) and Volt Info. Sci., Inc. v. Board of Trs. of Leland Stanford, Jr.
Univ., 489 U.S. 468, 475-76 (1989)); see also Sweet Dreams Unlimited, Inc. v. DialA-Mattress Intern., Ltd., 1 F.3d 639, 642 (7th Cir. 1993)(stating that the Court should
“[b]ear[] in mind the Supreme Court’s instruction that ‘any doubt concerning the
scope of arbitrable issues should be resolved in favor of arbitration’”)(quoting in part
Moses H. Cone Mem. Hosp. v. Mercury Construction Corp., 460 U.S. 1, 24-25
(1985)); Miller v. Flume, 139 F.3d 1130, 1136 (7th Cir. 1998)(stating that “once it is
clear the parties have a contract that provides for arbitration of some issues between
them, any doubts concerning the scope of the arbitration clause are resolved in favor
of arbitration”); see also Gore v. Alltel Communications, LLC, 666 F.3d 1027, 1032
(7th Cir. 2012)(stating that “because arbitration is a matter of contract, ‘a party
cannot be required to submit to arbitration any dispute which he has not agreed so to
submit’”)(quoting Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002)).

DISCUSSION
Frawley contends that the claims presented in this case are subject to
mandatory arbitration under the rules of the Financial Industry Regulatory Authority
(FINRA).

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I. Associated Persons and Agency
Frawley argues that the parties in this case are subject to FINRA arbitration
provisions as Associated Persons under FINRA Rules and that he acted as an agent
for Jefferies. Pursuant to FINRA Rule 13200 (Rule 13200), “a dispute must be
arbitrated under the Code if the dispute arises out of the business activities of a
member or an associated person and is between or among: Members; Members and
Associated Persons; or Associated Persons.” Id. Frawley contends, and Plaintiffs do
not dispute that Jefferies was a member of FINRA. Frawley further argues that he
and Plaintiffs are Associated Persons under Rule 13200. An Associated Person is
defined as “a person associated with a member, as that term is defined in paragraph
(r).” FINRA Rule 13100(a). The term “person associated with a member” is defined
as the following:
(1) A natural person who is registered or has applied for registration under the
Rules of FINRA; or
(2) A sole proprietor, partner, officer, director, or branch manager of a
member, or other natural person occupying a similar status or performing
similar functions, or a natural person engaged in the investment banking or
securities business who is directly or indirectly controlling or controlled by a
member, whether or not any such person is registered or exempt from
registration with FINRA under the By-Laws or the Rules of FINRA.
FINRA Rule 13100(r)(emphasis added). The record reflects that all the parties, by
virtue of their employment relationship with Jefferies, were controlled by Jefferies, a
FINRA member, while they worked in a securities business. Frawley has also
produced copies of Plaintiffs’ employment agreements, referencing FINRA and

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Jefferies’ connection to FINRA and arbitration in accordance with FINRA. (D Ex. 2). Thus, all three parties in this action all qualify as associated persons under Rule
13200. Rule 13200 also makes clear that such arbitration applies to disputes between
associated person by including the phrase “or among . . . associated members.” Id.
Frawley has also pointed to evidence showing that Beversdorf was a FINRA
Registered Representative and signed a FINRA Form U-4, which provided the
following:
I agree to arbitrate any dispute, claim or controversies that may arise between
me and my firm, or a customer, or any other person, that is required to be
arbitrated under the rules, constitutions, or by-laws of the SROs indicated in
Section 4. . . as may be amended from time to time and that any arbitration
award rendered against me may be entered as a judgment in any court of
competent jurisdiction.
Id. The record thus reflects that the parties are Associated Persons under FINRA
Rules and a dispute between such persons is subject to mandatory arbitration.
The record also reflects that Plaintiffs signed employment agreements with
arbitration clauses and that Frawley acted as the agent of Jefferies, when engaging in
his role as Plaintiffs’ supervisor at Jefferies. Even if as Plaintiffs contend, in
retrospect that Jefferies may not have agreed with all of Frawley’s decisions relating
to Plaintiffs, Frawley would still have retained the agency authority to bind Jefferies
and would have been Jefferies’ agent. Midwest Trading Grp., Inc. v. GlobalTranz
Enterprises, Inc., 59 F. Supp. 3d 887, 892 (N.D. Ill. 2014)(stating that “an agent may
bind a principal to a contract while acting within the scope of its authority”). Thus,

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Frawley can also seek to enforce such employment agreements as an agent of
Jefferies.

II. Termination of Employment
Plaintiffs also argue that FINRA does not provide a basis to compel arbitration
because the employment relationship of all three parties in this action has already
been terminated by Jefferies. Plaintiffs contend that they therefore are not bound by
FINRA Rules. However, the FINRA Rules specifically provide that “a person
formerly associated with a member is a person associated with a member.” FINRA
Rule 13100(r). Thus, the mere fact that the parties are not currently associated with
Jefferies is not dispositive. Plaintiffs’ assertion that FINRA can no longer provide
jurisdiction in this matter is without merit. (Resp. 2). FINRA is merely a means by
which contractual obligations are defined. It is not a basis for jurisdiction in this
federal court and jurisdiction is not lost once the parties no longer associate with a
FINRA member.

III. Business Activity
Plaintiffs also argue that the dispute in this matter does not fall within the
scope of Rule 13200, arguing that the dispute does not arise out of a business
activity. Plaintiffs argue that their claims do not relate to the securities industry or
the business activities of Jefferies. The phrase “business activities” in the FINRA
Rules is interpreted broadly. Griffis v. Wells Fargo Advisors, LLC, 2014 WL
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3027683, at *4 (N.D. Ill. 2014). Plaintiffs’ own allegations indicate that they are
premised upon Plaintiffs’ attempts to obtain a metals trading business, Frawley’s
alleged representations regarding the aim of Jefferies’ trading activities, and
Plaintiffs’ alleged poor performance in their trading activities. Plaintiffs also, for
example, specifically seek damages for commissions that might have been earned if
certain transactions were pursued by Jefferies in its trading activities. (Compl. Par.
61-62, 69, 72). Such facts relate to trading decisions and to employment decisions
by a FINRA Member and the quality of performance by employees. Such decisions
are related to the operation of Jefferies in the securities industry. Plaintiffs attempt to
characterize their claims so as to avoid falling under the business activities as defined
in FINRA Rules, but Plaintiffs cannot avoid the essence of such claims. Even if
Plaintiffs can show that they were ultimately engaging in trading activity that was no
longer desired by Jefferies, that would not alter the fact that they were still engaging
in such activity on behalf of Jefferies at the direction of a supervisor working for
Jefferies and were engaged in business activities for Jefferies. Thus, the claims in
this matter fall within the scope of a business activity under Rule 13200.

IV. Exemption
Plaintiffs also argue that they are exempt from arbitration because they were
engaged in commodity futures trading instead of securities trading. Plaintiffs
provide no citation to a case in which a court held that the FINRA Rules were of
such a limited scope. (Resp. 4). The non-controlling precedent cited by Plaintiffs
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held that business activities subject to arbitration under FINRA might not extend to
activities pursued by a person such as acting “as a freelance photographer, coin
collector, novelist, real estate agent, auto mechanic, or the like,” but the court did not
hold that a trader in commodities was exempt. Valentine Capital Asset Mgmt., Inc. v.
Agahi, 174 Cal. App. 4th 606, 615-16 (Cal. Ct. App. 2009). Frawley is not seeking
to hold Plaintiffs subject to FINRA Rules based on tangential activities such as coin
collecting. The activities in question involved the securities industry and interaction
with a FINRA member. Plaintiffs have specifically pled in their complaint that they
were employed in the securities industry. (Compl. Par. 2). Plaintiffs have not
provided a valid basis to exempt them from arbitration in this matter. Based on the
above, Frawley’s motion to compel arbitration is granted.

CONCLUSION
Based on the foregoing analysis, Frawley’s motion to compel arbitration is
granted. The request to stay this action pending the outcome of the arbitration is
denied. The instant action is dismissed with leave to reinstate within one year if the
parties believe that the instant action should proceed further after the arbitration is
concluded.

___________________________________
Samuel Der-Yeghiayan
United States District Court Judge
Dated: August 3, 2016
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