Wilson-Davis & Co., Inc. v. Mirgliotta et al
Memorandum of Opinion and Order: The Court finds that the Mirgliottas' claims against Wilson-Davis regarding their investment losses in the stock of VGTL and New Market Enterprises are subject to FINRA arbitration. The parties shall proceed to arbitration on these claims, conducted in accordance with applicable FINRA rules. The Mirgliottas' claim against Wilson-Davis regarding their losses in the stock of Q Lotus, however, is not subject to arbitration, and arbitration regarding this claim is hereby permanently enjoined. Judge Patricia A. Gaughan on 4/28/17. (LC,S) re #11
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF OHIO
Wilson-Davis & Co., Inc.,
James Mirgliotta, et al,
1:16 CV 3056
JUDGE PATRICIA A. GAUGHAN
Memorandum of Opinion and Order
Plaintiff Wilson-Davis & Co., Inc. filed this action seeking a declaratory judgment that it
is not required to arbitrate claims that Defendants James Mirgliotta and James Mirgliotta, as
administrator of the Estate of Bette Mirgliotta, filed against it in an arbitration proceeding before
the Financial Industry Regulatory Authority (“FINRA”). Plaintiff’s Motion for Preliminary
Injunction (Doc. 11) is currently pending before the Court. At the case management conference
on March 20, 2017, the parties agreed that “the trial will be advanced and consolidated with the
preliminary injunction hearing and will be decided on briefs unless otherwise notified.” (Doc.
42). For the reasons that follow, the Court finds that the Mirgliottas’ claims against WilsonDavis regarding their investment losses in the stock of VgTel Inc. (“VGTL”) and New Market
Enterprises are subject to FINRA arbitration, but their claim against Wilson-Davis regarding
their losses in the stock of Q Lotus is not.
Wilson-Davis, a national securities clearing firm that operates an equity trade execution
desk, is a member of FINRA. On August 22, 2016, the Mirgliottas commenced FINRA
proceedings against various broker-dealers, including Wilson-Davis, in addition to individual
defendants, resulting from the Mirgliottas’ loss of over $700,000 in investments.1
During the relevant time period, Larry Werbel was the Mirgliottas’ financial advisor. On
July 12 and 19, 2013, respectively, Werbel opened IRA accounts for Jim and Bette Mirgliotta at
Wilson-Davis by transferring money from their IRA accounts at TD Ameritrade.2 See Statement
of Claim at ¶¶23-25, 49-52. At the time, Werbel was working for Summit Brokerage Services,
Inc. (First Am. St. of Claim ¶¶ 23, 50). Werbel discussed opening the accounts at Wilson-Davis
with Mr. Mirgliotta and had Mr. Mirgliotta’s authority to open them. (Jim Mirgliotta Dep., at 1114). Mr. Mirgliotta testified that he received monthly statements for the accounts and that he was
not surprised to receive documents from Wilson-Davis because Werbel had informed him that
his 401(k) money was being moved to Wilson-Davis. (Jim Mirgliotta Dep., at 23, 66).
The Mirgliottas allege, however, that Christopher Cervino, the Mirgliottas’ account
executive and registered representative at Wilson-Davis, opened the new IRA accounts using
Bette Mirgliotta is deceased. The Mirgliottas filed a First Amended Statement of
Claim on November 11, 2016, to properly identify the Estate of Bette Mirgliotta
as a claimant.
According to the First Amended Statement of claim, in December of 2012, Jim
Mirgliotta’s TD Ameritrade account had a balance of $202,816.90. When Bette’s
account was opened at Wilson-Davis, $496,075.12 was transferred into the
account from the TD Ameritrade account.
fraudulent signatures. (First Am. St. of Claim ¶¶ 24-25, 51-52). Mr. Mirgliotta testified that he
did not sign the account opening documents submitted to Wilson-Davis, that his signature on the
documents was forged, and that Werbel did not have the authority to create or sign the new
account documents and submit them to Wilson-Davis. (Jim Mirgliotta Dep., at 27-28). Similarly,
Mr. Mirgliotta testified that he did not sign the forms authorizing the transfer of securities from
the TD Ameritrade account to Wilson-Davis, that his signature on those documents was forged,
and that he did not authorize Werbel to create and submit the documents to Wilson-Davis. (Id. at
Lyle Davis, Chairman of the Board and Treasurer at Wilson-Davis, testified that the
Mirgliottas’ accounts were opened using the company’s normal procedures for opening a new
customer account. (Davis Dep. at 13). Davis testified that both Cervino, as the registered
representative, and Davis, as an authorized officer, reviewed the Mirgliottas’ New Account
Applications and Principal IRA Applications. (Id. at 28–29, 41). Wilson-Davis issued account
numbers for the Mirgliottas’ respective accounts, allowing the transfer of their funds from the
TD Ameritrade accounts.
From July 12th to July 18th, 2013, Cervino bought and sold a penny stock in VGTL
using the funds in Mr. Mirgliotta’s Wilson-Davis account. Wilson-Davis earned over $5,000 in
commissions for the purchases and sales of securities in Mr. Mirgliotta’s account. Other than the
opening and the closing of the account in Mrs. Mirgliotta’s name, there were no transactions in
her account, including for the sales or purchase of securities.
On July 19, 2013, Mr. Mirgliotta received an email from an individual named Efran
Eisenberg3 containing instructions regarding wiring money out of the Mirgliottas’ accounts at
Wilson-Davis. The email states that Wilson-Davis would be wiring a total of $565,000 out of the
Mirgliottas’ accounts ($75,000 from Jim’s account and $490,000 from Bette’s) to the
Mirgliottas’ joint account at Liberty Bank. The money was then to be transferred to New Market
Enterprises. (Jim Mirgliotta Dep., Ex. 13). Around this time, Mr. Mirgliotta remembers having a
conversation with Cervino or Werbel–he cannot recall which–regarding transferring money out
of his Wilson-Davis account into his bank account, and eventually to New Market Enterprises.
(Jim Mirgliotta Dep., at 33-34) (“A: I was instructed to [write a check to New Market
Enterprises]. Q: By Mr. Werbel? A: I’m not sure if it was Mr. Werbel or Mr. Cervino at this
time, I’m really not.”). Nevertheless, he testified that he believed Cervino, along with Werbel
and Durante, was responsible for instructing him to do so:
Q: But [Cervino] doesn’t appear on any of the documents when they’re sent off, it
looks like it’s Mr. Durante, and Efran Eisenberg, and Larry Werbel, and you.
A: I feel Mr. Cervino had something to do with this, because he’s part of that
whole group....It’s a fact. Mr. Cervino is part of this group that moved my money
out of Bette and our account into their pocket, that’s how I feel.
Q: I’m going to ask you to tell me everything you can remember that Mr. Cervino
told you on the telephone.
A: I don’t recall, that was four years ago, other than the instructions were clear
that I was getting a phone call from Mr. Cervino, okay, about the money transfer,
and the instructions were then to send it to New Market Enterprises. That’s all I
can tell you.
Q: Who told you that you were getting the phone call? Was that Mr. Werbel?
On January 6, 2016, Larry Werbel, Chris Cervino, and Edward Durante (who
went by a number of aliases, including Efran Eisenberg and Ted Wise) were
indicted for involvement in a scheme to defraud investors. They executed the
scheme through false and misleading representations about how the investors’
monies would be used, omissions in connection with the sale of VGTL securities,
and manipulation of the public market in VGTL’s stock. (Defs.’ Br. in Opp., Ex.
A: Mr. Werbel.
Q: And Mr. Werbel told you the instructions were to send it? I mean, we have
A: I don’t recall.
Q: You don’t remember.
Q: And on the basis of no recollection, you believe that Mr. Cervino and WilsonDavis caused you, personally, to send money to New Market Enterprises?
(Id. at 70-71, 74).
On July 22, 2013, $75,000.00 was wired out of Mr. Mirgliotta’s Wilson-Davis account to
his account at Liberty Bank. Similarly, on July 19, 2013, a wire funds request form was
completed requesting a wire transfer out of Bette Mirgliotta’s account in the amount of
$490,000.00 to the account at Liberty Bank. The wire funds requests were approved by WilsonDavis Chief Operating Officer, Bill Walker, and Wilson-Davis charged and received a fee for the
outgoing wires. Mr. Mirgliotta himself signed the form to transfer the funds from his and his
wife’s joint bank account to New Market Enterprises. (Jim Mirgliotta Dep., at 63).
At his deposition, Mr. Mirgliotta was asked if he was willing to accept all the
transactions contained on the Wilson-Davis monthly statements. He testified that he was because
he believed Werbel and Cervino were acting as his agents with respect to the transactions:
Q: So, were you prepared to accept these transactions because Mr. Werbel had
Q: And so he was your agent for purposes of these transactions?
A: Along with Mr. Cervino from Wilson-Davis.
Q: Well, tell me how you think Mr. Cervino was your agent.
A: Well, he’s the agent of record with the Wilson-Davis Company, who I thought
was all part of this....transaction.
Q: Tell me what you mean, it was all part of this transaction.
A: What can I tell you that I haven’t already told you? Money went from TD
Ameritrade, to Wilson-Davis, to Liberty Bank, to New Market Enterprises, all per
the instructions of Mr. Werbel, Mr. Durante, Mr. Cervino.
(Jim Mirgliotta Dep., April 12, 2017, at 68-69).
At some point in August 2013, Chris Cervino left Wilson-Davis. The Mirgliottas’
accounts at Wilson-Davis were closed on or about September 3, 2013, and any remaining funds
were transferred out of the accounts. Wilson-Davis has not refunded any of the fees that it
received from the Mirgliottas.
In their First Amended Statement of Claim in the FINRA proceedings, the Mirgliottas
claim that they ultimately lost $67,141.36 in investments in VGTL, $20,978.00 in investments in
a company called Q Lotus,4 and $690,000.00 in New Market Enterprises. The Mirgliottas allege
that Wilson-Davis (along with other broker respondents) was “negligent in [its] failure to adhere
to the opening, administering, and supervising of the Mirgliottas’ accounts and other indirect
accounts with the promotion of penny stocks to [its] investors.” They also claim that WilsonDavis is vicariously liable for its financial advisors’ misconduct and that it negligently failed to
monitor the Mirgliottas’ accounts or activity in those accounts, failed to monitor the purchase of
penny stocks in the accounts, and failed to properly train and supervise its advisors. (First Am.
St. of Claim ¶¶ 78, 87-97).
Wilson-Davis filed a two-count complaint with this Court on December 21, 2016,
seeking (1) a declaratory judgment that Wilson-Davis has no obligation to arbitrate the
Mirgliottas’ claims because the Mirgliottas were not its “customers,” and (2) a preliminary and
permanent injunction enjoining the Mirgliottas from further proceedings against Wilson-Davis in
The Mirgliottas allege that this money was lost on June 7, 2013, before their
accounts at Wilson-Davis were opened. (First Am. St. of Claim ¶ 22).
the arbitration. As noted, the parties have agreed that the trial will be advanced and consolidated
with the preliminary injunction hearing and will be decided on briefs.
In general, the standard for granting a permanent injunction is “essentially the same” as
that for a preliminary injunction, except that a plaintiff must demonstrate actual success on the
merits rather than likelihood of success. Amoco Prod. Co. v. Village of Gambell, 480 U.S. 531,
546 n.12 (1987). A plaintiff seeking a permanent injunction must demonstrate that it has suffered
irreparable injury, there is no adequate remedy at law, “that, considering the balance of hardships
between the plaintiff and defendant, a remedy in equity is warranted,” and that it is in the
public’s interest to issue the injunction. eBay Inc. v. MercExchange, LLC, 547 U.S. 388, 126 S.
Ct. 1837, 1839 (2006).
LAW AND ANALYSIS
The only issue in dispute is whether the Mirgliottas’ claims against Wilson-Davis are
subject to arbitration in the FINRA proceeding. “[A]rbitration is a matter of contract and a party
cannot be required to submit to arbitration any dispute which he has not agreed to submit.”
AT&T Techs. v. Communications Workers of Am., 475 U.S. 643, 648, 106 S. Ct. 1415 (1986).
FINRA’s arbitration rules are to be interpreted like contract terms; thus, the rules must be
“interpreted to give effect to the parties’ intent as expressed by the plain language of the
provision” at issue. Citigroup Global Mkts. Inc. v. Abbar, 761 F.3d 268, 274 (2d Cir. 2014)
Under the FINRA Code, members must submit to FINRA arbitration of a dispute if:
• Arbitration...is either:
(1) Required by a written agreement, or
(2) Requested by the customer;
• The dispute is between a customer and a member or associated person of a
• The dispute arises in connection with the business activities of the member or
the associated person....
FINRA Rule 12200. Here, there is no written agreement requiring arbitration. Thus, the
Mirgliottas must have been Wilson-Davis’s customers in order to trigger the FINRA arbitration
requirement. In addition, the dispute must arise in connection with the activities of the member
or in connection with the business activities of the associated person. Vestax Secs. Corp. v.
McWood, 280 F.3d 1078, 1081 (6th Cir. 2002). Both conditions are satisfied here with respect to
the Mirgliottas’ claims regarding their losses in VGTL stock and New Market Enterprises.
Other than stating that a “customer shall not include a broker or dealer,” the FINRA Code
does not define the term “customer.” Because Wilson-Davis disputes that it has an obligation to
arbitrate, the general presumption in favor of arbitration does not apply and the word
“‘customer’ must be construed in a manner consistent with the reasonable expectations of
FINRA members.” Abbar, 761 F.3d at 274-75 (quoting Wachovia Bank, Nat’l Ass’n v. VCG
Special Opportunities Master Fund, Ltd., 661 F.3d 164, 171 (2d Cir. 2011)). Both parties cite to
the Second Circuit’s definition of “customer” in Abbar. There, the court defined the term to
mean “one who, while not a broker or dealer, either (1) purchases a good or service from a
FINRA member, or (2) has an account with a FINRA member.” Id. at 275. Both Jim and Bette
Mirgliotta had accounts with Wilson-Davis; thus, they were its “customers.” As the court in
Abbar explained, “[a]n account holder has a reasonable expectation to be treated as a customer,
whether or not goods or services are purchased directly from the FINRA member. Likewise, the
FINRA member should anticipate that account-holders may avail themselves of the arbitration
forum to dispute transactions arising from the account.” Id.; see also Oppenheimer & Co., Inc. v.
Neidhardt, 56 F.3d 352, 357 (2d Cir. 1995) (holding that “placing funds with Oppenheimer for
investment” created a “customer” relationship under the predecessor rule to FINRA Rule
Wilson-Davis argues that Werbel, rather than the Mirgliottas, was Wilson-Davis’s
customer because the Mirgliottas claim that he and Cervino fraudulently opened the accounts
using forged signatures. Wilson-Davis cannot avoid arbitration by relying on its employee’s
fraud. See Oppenheimer, 56 F.3d at 357 (finding customer relationship with FINRA member,
despite the claimant’s lack of an account with the member, because the claimant would have had
an account with the member but for the alleged fraud of the member’s representative). WilsonDavis does not dispute that the Mirgliottas had accounts in their names at Wilson-Davis or that
they were aware of these accounts. Nor does it dispute that these accounts held their money–not
Werbel’s–or that Wilson-Davis charged the Mirgliottas–not Werbel–for fees associated with
transactions in the accounts. As such, the Mirgliottas had a reasonable expectation that they
would be treated as customers and that they could avail themselves of the arbitration forum to
dispute issues arising from the accounts.5
The dispute regarding VGTL and New Market Enterprises also arises in connection with
In addition, the Sixth Circuit has held that persons who conduct business with a
FINRA member’s registered representative become customers of the FINRA
member, even where they do not establish an account with the member. WMA
Secs. Inc. v. Wyn, 32 Fed. Appx. 726, 729 (6th Cir. 2002) (citing Vestax Secs.
Corp. v. McWood, 280 F.3d 1078 (6th Cir. 2002)). Mr. Mirgliotta testified that the
Mirgliottas’ money “went from TD Ameritrade, to Wilson-Davis, to Liberty
Bank, to New Market Enterprises, all per the instructions of Mr. Werbel, Mr.
Durante, [and] Mr. Cervino.” By conducting business with Cervino, a registered
representative of Wilson-Davis, the Mirgliottas became customers of WilsonDavis.
Wilson-Davis’s business activities or the business activities of its associated persons. WilsonDavis asserts that, at most, only the $67,141.36 in VGTL investments relates to activity that
occurred while the Mirgliottas were Wilson-Davis customers. It notes that the Mirgliottas did not
make any investments in Q Lotus while their accounts were at Wilson-Davis, that no
transactions occurred in Mrs. Mirgliotta’s account while it was at Wilson-Davis, and that the
monies sent to New Market Enterprises were sent from the Mirgliottas’ personal bank accounts
rather than Wilson-Davis. With the exception of Q Lotus, Wilson-Davis’s argument is not welltaken.
In their First Amended Statement of Claim, the Mirgliottas allege, in part, that WilsonDavis negligently “fail[ed] to adhere to the opening, administering, and supervising of the
Mirgliottas’ accounts,” negligently failed to monitor the Mirgliottas’ accounts or activity in those
accounts, and failed to properly train and supervise its advisors. The Sixth Circuit has held that
“[a] dispute that arises from a firm’s lack of supervision over its brokers arises in connection
with its business.” Vestax, 280 F.3d at 1082 (quotations omitted) (noting that the investors
intended to prove in arbitration that Vestax’s failure to properly supervise its registered
representatives led to the loss in question). The Mirgliottas’ claims regarding VGTL and New
Market Enterprise arise from Wilson-Davis’s alleged lack of supervision over Cervino. Indeed,
Wilson-Davis does not dispute that the loss in the VGTL investments relates to activity that
occurred while the Mirgliottas’ money was held in Wilson-Davis accounts. With respect to New
Market Enterprises, Wilson-Davis may be correct that the Mirgliottas’ money did not go directly
from Wilson-Davis to New Market. Nevertheless, Mr. Mirgliotta testified that he believed that
Cervino and Wilson-Davis caused him to send the money there. Thus, the Mirgliottas’ dispute
regarding these losses arises in connection with the business activities of Wilson-Davis and its
associated persons. Whether, in fact, the Mirgliottas are able to establish that their losses resulted
from Wilson-Davis’s lack of supervision is a matter for the arbitration panel to determine.
Because the dispute regarding VGTL and New Market Enterprises is subject to
arbitration, Wilson-Davis has not demonstrated that requiring it to arbitrate these claims will
cause irreparable injury. Considering the balance of hardships between Wilson-Davis and the
Mirgliottas, Wilson-Davis cannot show that it is entitled to a remedy in equity or that an
injunction regarding these claims would be in the public’s interest.
With respect to Q Lotus, however, the Mirgliottas’ losses occurred before they became
customers of Wilson-Davis. Thus, their dispute regarding this loss did not arise in connection
with Wilson-Davis’s business activities. Wilson-Davis, therefore, cannot be forced to arbitrate
any dispute regarding this loss.
For the foregoing reasons, the Court finds that the Mirgliottas’ claims against WilsonDavis regarding their investment losses in the stock of VGTL and New Market Enterprises are
subject to FINRA arbitration. The parties shall proceed to arbitration on these claims, conducted
in accordance with applicable FINRA rules. The Mirgliottas’ claim against Wilson-Davis
regarding their losses in the stock of Q Lotus, however, is not subject to arbitration, and
arbitration regarding this claim is hereby permanently enjoined.
IT IS SO ORDERED.
/s/ Patricia A. Gaughan
PATRICIA A. GAUGHAN
United States District Judge
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