Singh et al v. Interactive Brokers, LLC et al
Filing
24
OPINION AND ORDER Granting (5) Motion to Compel in case 2:16-cv-00276- RGD-DEM; Granting (6) Motion to Compel in case 2:16-cv-00277-RGD-DEM. Accordingly, IB's Motions to Compel Arbitration (ECF No. 5 in Civil No. 2:16cv276 and ECF No. 6 in C ivil No. 2:16cv277), are hereby GRANTED, and the instant action is STAYED for the shorter of five (5) months or until completion of arbitration, or until such further order that this Court may enter. IT IS SO ORDERED. Signed by District Judge Robert G. Doumar and filed on 11/30/16. Copies distributed to all parties 11/30/16. Associated Cases: 2:16-cv-00276-RGD-DEM, 2:16-cv-00277-RGD-DEM(ldab, )
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF VIRGINIA
NORFOLK DIVISION
CHARANJIT AND PARBHUR SINGH,
Plaintiff,
LEAD CASE:
V.
CIVIL NO. 2:16cv276
INTERACTIVE BROKERS LLC,
BRAR CAPITAL LLC, and
VIKAS BRAR,
Defendants.
BRAR FAMILY PARTNERSHIP L.P.,
Plaintiffs,
CIVIL NO. 2:16cv277
V.
INTERACTIVE BROKERS LLC,
BRAR CAPITAL LLC, and
VIKAS BRAR,
Defendants.
OPINION AND ORDER
This matter comes before the Court on Defendant Interactive Brokers LLC's Motions to
Compel Arbitration ("Motions to Compel") filed in the above-captioned cases on August 23,
2016. ^
Civil No. 2:16cv276 ("Singh Case"), ECF No. 5; Civil No. 2:16cv277 ("BP? Case"),
ECF No. 6. In these motions, Interactive Brokers LLC ("IB") requests that, pursuant to the
Federal Arbitration Act, 9 U.S.C. §§ 3 and 4, the Court compel arbitration of all claims brought
against IB in each case and stay the actions pending completion of arbitration.' For the reasons
stated herein, IB's Motions to Compel are GRANTED, and the instant action (Lead Case No.
2:16cv276) is STAVED for the shorter of five (5) months or when arbitration is completed.
' On November 23, 2016, the Court consolidated these two actions pursuant to Rule 42(a) of the Federal
Rules of Civil Procedure. See Singh Case, ECF No. 23; BFP Case, ECF No. 25.
1
I.
PROCEDURAL AND FACTUAL BACKGROUND
On June 8, 2016, Charanjit and Parbhur Singh ("the Singhs") and Brar Family
Partnership L.P. ("BFP")^ (collectively, "Plaintiffs"), filed lawsuits against the Singhs' nephew,
Vikas Brar; his financial advising firm, Brar Capital LLC (collectively, "Brar Defendants"); and
IB, a broker-dealer and securities investment firm. Singh Case, ECF No. 1; BFP Case, ECF No.
1. These lawsuits stem from two IB investment accounts held by Plaintiffs: the Singhs' joint
account established in August 2011 ("Joint Account") and BFP's account established in March
2012 ("Partnership Account"). ^
Amended Compl., Singh Case, ECF No. 2
21; BFP Case,
ECF No. 3 H21. The Joint Account was created by means of a document entitled "Interactive
Brokers LLC Account Application for Financial Advisor Clients for Individual or Joint Account
Holders" (hereinafter "Joint Account Application"), and the Partnership Account was created by
means of a document entitled "Interactive Brokers LLC Account Application for Financial
Advisor Clients for Trust Accounts" (hereinafter "Partnership Account Application"). Id Both
applications name Vikas Brar as the "Financial Advisor" for the accounts and Brar Capital LLC
as the "Name of Advisor's Firm."
Id
While the Singhs admit that the Joint Account
Application contains signatures bearing their names, they claim that these signatures were not
authored by either Charanjit or Parbhur Singh. Singh Case, ECF No. 2 f 21. The Singhs do not
deny that they signed the Partnership Account Application. BFP Case, ECF No. 3.
According to the Amended Complaints, by August 2015, both the Joint Account and the
Partnership Account consisted almost entirely of options on the VXX, which is an exchangetraded note designed to expose options positions to the CBOE Volatility Index ("VIX"). S^
Singh Case, ECF No. 2 ^ 30; BFP Case, ECF No. 3 H31. On August 20,2015, the Joint Account
was worth $406,794.04 and the Partnership Account was worth $1.8M. See Singh Case, ECF
^The Singhs are the general partners of BFP. Amended Compl., BFP Case, ECF No. 3^3.
2
No. 2 ^ 30; BFP Case, ECF No. 3 f 33. Shortly thereafter, the stock market plunged, and by
August 21, 2015, the value of the Joint Account dropped to a value of -$409,565.95, with a
margin deficit of approximately $1.2M. Singh Case, ECF No. 2
32. By August 24, 2015, the
value of the Partnership Account dropped to a value of $651,811.26, with a margin deficit of
approximately $1.79M. BFP Case, ECF No. 3
35-38. To cover these significant margin
deficits, IB liquidated the positions in both accounts using what Plaintiffs refer to as IB's
"proprietary 'autoliquidation' program." See Singh Case, ECF No. 2
32-33; BFP Case, ECF
No. 3 Till 39, 42. After liquidation, both the Joint Account and the Partnership Account had
insufficient funds to satisfy their margin debts, so IB demanded approximately $461,000 fi-om
the Singhs and $1.72M from BFP to cover their respective debts. ^
32-33; BFP Case, ECF No. 3 11139, 42.
Singh Case, ECF No. 2
When Plaintiffs failed to pay, IB commenced
arbitration proceedings against Plaintiffs at the Financial Industry Regulatory Authority
("FINRA") in November 2015.
Mem. in Support of Mot. to Compel ("IB Mem."), Singh
Case, ECF No. 6 at 8; BFP Case, ECF No. 7 at 8; see also Declaration of John Nielands
("Nielands Declaration" or "Nielands Decl."), Singh Case, ECF No. 7, Exs. G & H; BFP Case,
ECF No. 8, Exs. G & H.
On June 14, 2016, the Singhs and BFP filed Amended Complaints, both of which bring
the following six counts against IB: "Violations of § 10(b) of the Securities Exchange Act, 15
U.S.C. 78j, and Rule lOb-5 promulgated thereunder" for unlawful liquidation of Plaintiffs'
accounts (Count I); "Registration Violations of Florida Blue Sky Laws," Fla. Stat. §§ 517.12 &
517.211, and "Registration Violations of Virginia Blue Sky Laws," Va. Code §§ 13.1-501, 522,
for facilitating and aiding unregistered investment activity by the Brar Defendants (Counts II and
III); "Wrongful Liquidation Under Contract" for breach of IB's "standard form of contract"
governing its liquidation procedures (Count IV); "Failure to Liquidate in a Commercially
Reasonable Manner" relating to IB's liquidation of Plaintiffs' accounts (Count V); and
"Negligence" relating to IB's facilitation of unregistered investment activity by the Brar
Defendants (Count VI). ^
Singh Case, ECF No. 2 at 8-11; BFP Case, ECF No. 3 at 9-12.
On August 23, 2016, IB filed the instant Motions to Compel Arbitration and supporting
memoranda.
Singh Case, ECF No. 5 and 6; BFP Case, ECF No. 6 and 7. On September 6,
2016, Plaintiffs filed their respective memoranda in opposition ("Resp.") to IB's Motions to
Compel. ^
Singh Case, ECF No. 11; BFP Case, ECF No. 12. On September 9, 2016, IB filed
reply briefs. ^
Singh Case, ECF No. 14; BFP Case, ECF No. 16. On October 24, 2016,
counsel for Plaintiffs and IB appeared before the Court and presented oral argument on IB's
Motions to Compel. ^
II.
Singh Case, ECF No. 22; BFP Case, ECF No. 23.
APPLICABLE LAW
IB argues that the Singhs and BFP entered into mandatory arbitration agreements with IB
when they opened the Joint Account and Partnership Account, respectively, and that the Federal
Arbitration Act ("FAA"), 9 U.S.C. § 1, et sea., requires the Court to enforce these agreements as
vwitten and compel Plaintiffs to arbitrate.
The FAA states:
A witten provision in any . . . contract evidencing a transaction involving
commerce to settle by arbitration a controversy thereafter arising out of such
contract or transaction . .. shall be valid, irrevocable, and enforceable, save upon
such grounds as exist at law or in equity for the revocation of any contract.
9 U.S.C. § 2. The FAA further mandates that, in the event of an alleged failure, neglect, or
refusal to arbitrate, the court must compel arbitration if it is satisfied that "the making of the
agreement for arbitration ... is not in issue." Id. § 4. If, however, the court determines that the
making of the agreement is at issue, the court must proceed to trial on that issue. Id; Gibbs v.
PFS Investments. Inc.. 209 F. Supp. 2d 620, 624 (E.D. Va. 2002) (citing A/S Custodia v. Lessin
Intern.. Inc.. 503 F.2d 318 (2d Cir. 1974)).
The FAA applies to contracts "evidencing a transaction involving commerce," 9 U.S.C.
§ 2, and it defines "commerce" as "commerce among the several States," id § 1. A sufficient
interstate nexus is established for purposes of this section where "the contracting parties were
located in different states and performance was to occur across state lines." Gibbs. 209 F. Supp.
2d at 625. It is well-established that transactions involving the purchase and sale of securities on
a national exchange involve "commerce" under this definition. See, e.g.. Shearson/Am. Exp..
Inc. V. McMahon. 482 U.S. 220, 226 (1987) (customer agreement between customer and
securities broker was a transaction involving commerce under the FAA).
Once a court determines that the contract containing the arbitration agreement falls under
the FAA, "arbitration may only be judicially compelled when the parties have agreed to it, and
then only for those kinds of disputes that the parties have agreed to submit to arbitration."
Zandford v. Prudential-Bache Sec.. Inc.. 112 F.3d 723, 727 (4th Cir. 1997). In other words, there
is a two-step inquiry when deciding whether to compel arbitration under the FAA: the court must
(1) determine whether a binding arbitration agreement exists between the parties and then
(2) determine whether the dispute falls within the parameters of the arbitration agreement.
Hiehtower v. GMRI. Inc.. 272 F.3d 239, 242 (4th Cir. 2001).
III.
PLAINTIFFS ENTERED
AGREEMENTS WITH IB.
A.
The
Joint
INTO
Account
VALID
Application
AND
and
BINDING
the
ARBITRATION
Partnership
Account
Application Contain a Mandatory Arbitration Clause.
To conduct the first stage of this inquiry, the Court reviewed the relevant documents in
the case. In support of its Motions to Compel, IB filed the Nielands Declaration, which attaches
several documents as exhibits. ^
Singh Case, ECF No. 7; BFP Case, ECF No. 8. In the Singh
Case, Exhibit B purports to be a copy of the Joint Account Application that was used to set up
the Singh's Joint Account in August 2011. ECF No. 7 ^ 12. The Singhs do not dispute this.
Singh Case, ECF No. 2 ][ 21; Resp., ECF No. 11 at 3-4. In the BFP Case, Exhibit B purports to
be a copy of the Partnership Account Application that was used to set up the Partnership Account
in March 2012. ECF No. 8 1 12. It contains the signatures of Parbhur and Charanjit Singh,
BFP's general partners, throughout the document. Id, Ex. B at 26, 28, 29, 32, 33, 39, 40, 45.
BFP does not dispute that Exhibit B is the Partnership Account Application or that it was signed
by the Singhs. Sm BFP Case, Resp., ECF No. 12 at 4, 10.
Section IV of both the Joint Account Application and the Partnership Account
Application incorporates by reference a document entitled "The Interactive Brokers Customer
Agreement":
The Interactive Brokers Customer Agreement governs the relationship between
Customer and Interactive Brokers and sets forth the terms and conditions
governing Customer's IB account. The Customer Agreement has been provided
separately to Customer as a part of a package of documents labeled: Interactive
Brokers LLC Agreements and Disclosure Documents.
Singh Case, Nielands Decl., Ex. B at 17; BFP Case, Nielands Decl., Ex. B at 27. In both the
Singh Case and the BFP Case, the Interactive Brokers Customer Agreement ("Customer
Agreement") is purportedly attached to the Nieland's Declaration as Exhibit F. While Plaintiffs
do not admit either the authenticity of this document or the fact that they received it, both the
Joint Account Application and the Partnership Account Application specifically identify the
Customer Agreement and clearly state above the signature line that the "CUSTOMER
REPRESENTS THAT CUSTOMER HAS RECEIVED [THE CUSTOMER AGREEMENT) . . .
AND HAS READ AND UNDERSTOOD AND INTENDS TO BE BOUND BY THE .
. .
CUSTOMER AGREEMENT." Singh Case, Nielands Decl., Ex. B at 20 (emphasis in original);
BFP Case, Nielands Decl., Ex. B at 31 (emphasis in original).
6
Section 33 of the Customer Agreement is entitled "Mandatory Arbitration," which states
in bold, all-capitalized text:
•
ALL PARTIES TO THIS AGREEMENT ARE GIVING UP THE RIGHT
TO SUE EACH OTHER IN COURT, INCLUDING THE RIGHT TO A TRIAL
BY JURY, EXCEPT AS PROVIDED BY THE RULES OF THE ARBITRATION
FORUM IN WHICH A CLAIM IS FILED...
See Singh and BFP Cases, Nielands Decl., Ex. F § 33. Section 33A continues:
Customer agrees that any controversy, dispute, claim or grievance between
IB .. . and Customer . .. arising out of, relating to, this Agreement, or any
account(s) established hereunder in which securities may be traded; any
transactions therein; any transactions between IB and Customer; any
provision of the Customer Agreement or any other agreement between IB
and Customer; or any breach of such transactions or agreements, shall be
resolved by arbitration...
Id. Section 33 also includes various other warnings related to arbitration, and subsection B
contains a class-action exception to mandatory arbitration. Id
The mandatory arbitration agreement contained in Section 33 of the Customer Agreement
is binding on Plaintiffs and IB. The Singhs and BFP agreed to the terms of the Joint Account
Application and the Partnership Account Application, respectively, when they agreed to establish
accounts with IB. Both the Joint Account Application and the Partnership Account Application
clearly identify the Customer Agreement and incorporate it by reference as the contract that
"governs the relationship between Customer and IB." Singh Case, Nielands Decl., Ex. B at 22;
BFP Case, Nielands Decl., Ex. B at 27. S^ Jefferson Hotel Associates Ltd. P'ship v. Algernon
Blair. Inc.. 836 F.2d 546, *2 (4th Cir. 1987) (unpublished) ("This circuit has rigorously enforced
agreements to arbitrate, including those incorporated into the contract by reference.").
Furthermore, the arbitration agreements between IB and Plaintiffs are governed by the
FAA. The Customer Agreement is a "contract evidencing a transaction involving commerce" as
defined by Section 2 of the FAA. ^
McMahon. 482 U.S. at 226. And such commerce is
clearly "among the several States." S^ Gibbs. 209 F. Supp. 2d at 625. The Singhs, Virginia
residents, and BFP, a Virginia limited partnership, opened accounts with IB, a Connecticut LLC,
while the Brar Defendants, a Florida resident and a Florida LLC, allegedly conducted the trades
and investments for the accounts. Amended Compl., Singh Case, ECF No. 2
3-7; BFP Case,
ECF No. 3 nil 3-6. Therefore, the Singhs and BFP have binding arbitration agreements with IB,
and these agreements fall under the statutory mandate of the FAA.
B.
The Singhs' Failure to Sign the Joint Account Application Does Not
Invalidate the Contract.
The Singhs briefly argue in their opposition brief that the question of whether they have
an enforceable contract with IB cannot be resolved without discovery because their signatures on
the Joint Account Application were forged. Resp., ECF No. 11 at 13. But the Singhs are
equitably estopped from making this claim. Critically, they are suing on the very contract that
they are trying to repudiate for purposes of avoiding arbitration. In their Amended Complaint,
Count IV for "Wrongful Liquidation Under Contract" alleges that IB breached its contract with
the Singhs, and it identifies the relevant contract as "Interactive's standard form of contract."
Singh Case, ECF No. 2 ^ 56. The Singhs then purport to quote from this contract, stating that IB
has the authority under this contract "to liquidate account positions in order to satisfy Margin
Requirements without prior notice." Id Though the Singhs do not provide a citation, this exact
language is found in Section 1IC of the Customer Agreement. Nielands Decl., Ex. F § 11(C).
Furthermore, the Nielands Declaration presents evidence that the Singhs actively used
and benefitted from the Joint Account after it was created. ^
Nielands Decl. 122, Ex. L (April
2014 account activity statement showing the Singhs' withdrawal of $150,000); id
23, Ex. M
(form signed by Parbhur Singh on December 29, 2011, and sent to IB in order to revise
information on the Joint Account Application). Plaintiffs do not dispute these claims.
8
This Court has already found in a similar context that, under the doctrine of equitable
estoppel, a party may not "rely on the contract when it works to its advantage, and repudiate it
when it works to its disadvantage." Jackson v. Iris.com. 524 F. Supp. 2d 742, 749 (E.D. Va.
2007) (internal citation omitted) (compelling arbitration despite lack of signature on contract
containing arbitration agreement where non-signatory directly benefitted from other provisions
of the contract); see also Int'l Paper Co. v. Schwabedissen Maschinen & Anlaeen GMBH. 206
F.3d 411,418 (4th Cir. 2000) (asserting same). Therefore, notwithstanding the Singhs' lack of
signature on the Joint Account Application, their reliance on and receipt of benefits from their
contract with IB estops them from repudiating the arbitration clause contained in that contract.
C.
IB's Failure to Comply with FINRA Rule 2268 Does Not Invalidate Its
Arbitration Agreements with Plaintiffs.
Despite the mandatory arbitration provision contained in Section 33A of the Customer
Agreement, Plaintiffs nonetheless argue that no valid arbitration agreement exists in this case.
This argument rests on a two-part premise: (1) that arbitration agreements must comply with
FINRA Rules to be valid and enforceable under the FAA, and (2) that the arbitration clause in
this case is invalid because it violates FINRA Rule 2268 in multiple respects. For the reasons
that follow, the Court finds Plaintiffs' argument to be without merit.
1.
FINRA Rule 2268
FINRA Rule 2268 ("Rule 2268") is entitled "Requirements When Using Predispute
Arbitration Agreements for Customer Accounts." Sm Singh Case, Resp., ECF No. 11-3. It
provides, in relevant part:
(a) Any predispute arbitration clause shall be highlighted and shall be
immediately preceded bv the following language in outline form.
This agreement contains a predispute arbitration clause. By signing an arbitration
agreement the parties agree as follows:
(1) All parties to this agreement are giving up the right to sue each other in
court, including the right to a trial by jury, except as provided by the rules of the
arbitration forum in which a claim is filed.
(2) Arbitration awards are generally final and binding; a party's ability to
have a court reverse or modify an arbitration award is very limited.
(3) The ability of the parties to obtain documents, witness statements and
other discovery is generally more limited in arbitration than in court proceedings.
(4) The arbitrators do not have to explain the reason(s) for their award
unless, in an eligible case, a joint request for an explained decision has been
submitted by all parties to the panel at least 20 days prior to the first scheduled
hearing date.
(5) The panel of arbitrators may include a minority of arbitrators who were
or are affiliated with the securities industry.
(6) The rules of some arbitration forums may impose time limits for
bringing a claim in arbitration. In some cases, a claim that is ineligible for
arbitration may be brought in court.
(7) The rules of the arbitration forum in which the claim is filed, and any
amendments thereto, shall be incorporated into this agreement.
(b)
(1) In any agreement containing a predispute arbitration agreement, there
shall be a highlighted statement immediately preceding any signature line or other
place for indicating agreement that states that the agreement contains a predispute
arbitration clause. The statement shall also indicate at what page and paragraph
the arbitration clause is located.
(2) Within thirty days of signing, a copy of the agreement containing any
such clause shall be given to the customer who shall acknowledge receipt thereof
on the agreement or on a separate document
(f) All agreements shall include a statement that "No person shall bring a putative
or certified class action to arbitration, nor seek to enforce any pre-dispute
arbitration agreement against any person who has initiated in court a putative
class action; or who is a member of a putative class who has not opted out of the
class with respect to any claims encompassed by the putative class action until: (i)
the class certification is denied; or (ii) the class is decertified; or (iii) the customer
is excluded from the class by the court. Such forbearance to enforce an agreement
to arbitrate shall not constitute a waiver of any rights under this agreement except
to the extent stated herein."
Id. (emphasis added). Plaintiffs claim that the arbitration clause in the Joint Account Application
and the Partnership Account Application violates sections (a)(l)-(7), (b)(l)-(2) and (f) of this
rule. Resp., Singh Case, ECF No. 11 at 11; BFP Case, ECF No. 12 at 11. While Plaintiffs admit
that the Customer Agreement "has at ^ 33 language tracking Rule 2268," they claim that
10
reference to the Customer Agreement is "buried in the middle" of the application and "does not
even mention an arbitration clause."
Id at 12.
Plaintiffs also argue that they never
acknowledged receipt of the Customer Agreement on the agreement or on a separate document
as required under section (b)(2) of the rule. Id.
As a threshold matter, the Joint Account Application and the Partnership Account
Application contain highly conspicuous warnings about the incorporated Customer Agreement in
all-capitalized and bolded text. See supra Part III.A; Singh Case, Nielands Decl., Ex. B at 20;
BFP Case, Nielands Decl., Ex. B at 31. Moreover, by entering into these agreements with IB,
Plaintiffs expressly represented, as stated in the bold, all-capitalized language above the
signature line, that they received the package of disclosure documents containing the Customer
Agreement. Id Thus, Plaintiffs acknowledged receipt as required by Rule 2268 § (b)(2).^ The
Joint Account Application and the Partnership Account Application also contain separate
conspicuous warnings about the existence of the mandatory arbitration clause, which Plaintiffs
admit in their briefs. Singh Case, ECF No. 11 at 10 (citing Nielands Decl., Ex. B at 20-21); BFP
Case, ECF No. 12 at 10 (citing Nielands Decl., Ex. B at 31).
Furthermore, Section 33 of the Customer Agreement contains the exact language required
under subsections (a)(l)-(3), (a)(6)-(7), and (f) of Rule 2268.
See Singh and BFP Cases,
Nielands Decl., Ex. F § 33. As for subsections (a)(4) and (a)(5), the discrepancies between the
language required by these subsections and Section 33 are minor. First, Section 33 includes the
first part of subsection (a)(4) but eliminates the qualifying phrase at the end: "unless, in an
eligible case, a joint request for an explained decision has been submitted by all parties to the
panel at least 20 days prior to the first scheduled hearing date." See id Second, instead of
^The Singhs are equitably estopped from denying this acknowledgment on the grounds that they did not
sign the Joint Account Application. See discussion supra Part III.B.
11
stating that "[t]he panels of arbitrators may include a minority of arbitrators who were or are
affiliated with the securities industry," see Rule 2268 (a)(5) (emphasis added), Section 33 of the
Customer Agreement states "the panel of arbitrators will typically include a minority of
arbitrators who were or are affiliated with the securities industry," Nielands Decl., Ex. F § 33
(emphasis added). Finally, Section 33 also deviates, in part, from subsection (b)(1) of Rule
2268. Even though the Joint Account Application and the Partnership Account Application
include a "highlighted statement immediately preceding [the] signature line . . . that states that
the agreement contains a predispute arbitration clause," the warnings fail to "indicate at what
page and paragraph the arbitration clause is located" as required under the rule. See Singh Case,
Nielands Decl., Ex. B at 20; BFP Case, Nielands Decl., Ex. B at 31.
In summary, the Court finds that Section 33 of the Customer Agreement violates
subsections (a)(4), (a)(5), and (b)(1) of Rule 2268.
2.
FINRA Rules Do Not Trump the Clear Mandate of the FAA.
The next issue before the Court is what impact, if any, such violations have on an
otherwise valid and enforceable arbitration agreement under the FAA. Plaintiffs argue that the
issue of whether there is a valid arbitration agreement between parties "is not governed by the
FAA ... but by whether IB complied with FINRA Rules." Resp., Singh Case, ECF No. 11 at 8;
BFP Case, ECF No. 12 at 8. In other words, if an arbitration agreement violates Rule 2268, it is
null and void.
Plaintiffs' purported support for this claim is a single FINRA Board of
Governors' decision issued in 2014, In the Matter of Department of Enforcement v. Charles
Schwab
Co.. Inc. (""Schwab"') (No. 2011029760201) (hereinafter "Schwab Decision"), which
held that the FAA did not preempt the FINRA rule requiring arbitration clauses to contain a
class-action exception and thus held that FINRA could enforce its class-action rule against
Schwab despite Schwab's argument that the FAA requires enforcement of arbitration agreements
12
as written even if the terms deviate from FINRA rules. Singh Case, ECF No. 11-2 at 16; BFP
Case, ECF No. 12, Ex. 2 at 16. However, for the reasons that follow, the Schwab Decision is of
no avail here.
First, although the decision affirms that "FINRA's arbitration rules apply to Schwab," it
also concedes that the FAA still "appl[ies] to this case because it governs virtually every
arbitration agreement arising out of a commercial transaction." Id This is directly contrary to
Plaintiffs' assertion that the instant case "is not governed by the FAA." Resp., Singh Case, ECF
No. 11 at 8; BFP Case, ECF No. 12 at 8. Indeed, the issue in the Schwab Decision was not
whether the FAA applied, but whether its mandate was "overridden by a contrary congressional
command." Singh Case, ECF No. 11-2 at 18 and BFP Case, ECF No. 12, Ex. 2 at 18 (quoting
CompuCredit Corp. v. Greenwood. 132 S. Ct. 665, 669 (2012) (internal citation omitted)).
Disagreeing with the finding of the Hearing Panel below, the Board of Governors in the Schwab
Decision found that "FINRA Rule 2268 and Rule 12204 of the Customer Code demonstrate a
statutorily authorized intent to overcome the FAA." Id But the Board's ultimate holding was
much narrower than Plaintiffs suggest. It held that FINRA was empowered to "enforce its
existing rules ... even when there is a valid predispute arbitration agreement between a firm and
its customers." Id. at 28 (emphasis added). Nowhere does the Board state that an otherwise
valid arbitration agreement under the FAA becomes null and void if it violates FINRA Rule
2268 or any other FINRA rule.
Second, even if it did, the Schwab Decision has little persuasive value here. The decision
was not handed down by a court of law but by FINRA's Board of Governors, an administrative
body with an obvious interest in the outcome of the decision. Furthermore, rather than appealing
the decision after remand to the Hearing Panel, Schwab chose to resolve the matter by entering
13
into a settlement agreement to pay a $500,000 fine, remove its class-action waiver from all
customer agreements, and waive its right to appeal.''
Therefore, the controlling precedent before this Court is the Supreme Court's directive
that only Congress may enact exceptions to the FAA in order to invalidate otherwise valid
arbitration agreements. See Shearson/Am. Exp.. Inc. v. McMahon. 482 U.S. 220, 226 (1987)
(The FAA "mandates enforcement of agreements to arbitrate statutory claims. Like any statutory
directive, the [FAA's] mandate may be overridden by a contrary congressional command.");
AT&T Mobility LLC v. Concepcion. 563 U.S. 333, 352 (2011) (holding that a California law
requiring classwide arbitration was preempted by the FAA because it "stands as an obstacle to
the accomplishment and execution of the full purposes and objectives of Congress," which is to
promote arbitration and enforce arbitration agreements according to their terms); Am. Exp. Co.
V. Italian Colors Rest.. 133 S. Ct. 2304, 2309 (2013) (finding no congressional intent in federal
antitrust laws to override FAA's mandate by precluding a waiver of class arbitration).
FINRA Rules do not qualify as a "contrary congressional command" for these purposes.
See, e.g.. UBS Fin. Servs.. Inc. v. Carilion Clinic. 706 F.3d 319, 328 (4th Cir. 2013) (holding
that "different or additional contractual arrangements for arbitration can supersede the rights
conferred on [a] customer by virtue of [a] broker's membership in a self-regulating organization
such as [FINRA]") (quoting Kidder. Peabodv & Co. v. Zinsmever Trusts P'ship. 41 F.3d 861,
864 (2d Cir. 1994)).
" Board Decision Finds Charles Schwab & Co. Violated FINRA Rules bv Adding Waiver Provisions in
Customer Agreements Prohibiting Customers From Participating in Class Actions: Reverses FINRA
Hearing
Panel
Decision.
FINRA
News
Release
(April
24,
2014),
http://www.finra.org/newsroom/2014/board-decision-finds-charles-schwab-co-violated-finra-rulesadd ing-waiver-provisions.
14
Finally, the Court is not persuaded by Plaintiffs' policy arguments that it should advance
the law in this area or otherwise find the arbitration agreement in this case to be unconscionable
Resp., Singh Case, ECF No. 11 at 14; BFP
due to its noncompliance with FINRA rules.
Case, ECF No. 12 at 13.^ In the instant case, IB's very minor deviations from FINRA Rule 2268
do not implicate FlNRA's fundamental purposes of ensuring investor protection and market
fairness. Plaintiffs cannot reasonably argue that, by changing a few words of Section 33A of the
Customer Agreement to align more precisely with Rule 2268 §§ (a)(4) and (a)(5), or by
including a page and paragraph citation to an already obvious warning clause pursuant to
§ (b)(1), Plaintiffs would have received more effective notice of their waiver of rights to a jury
trial. Instead, Plaintiffs hint at a much broader argument that predispute arbitration agreements
in broker-dealer customer contracts like IB's are per se unconscionable and should not be
enforced in any context. ^
supra note 3. But, as notedabove, such a position is contrary to the
statutory mandateof the FAA and Supreme Court precedent and thus cannot prevail here.
IV.
THE
MANDATORY ARBITRATION
CLAUSE
ENCOMPASSES ALL
OF
PLAINTIFFS' CLAIMS AGAINST IB.
Having determined that a valid and binding arbitration agreement exists between
Plaintiffs and IB, the second stage of the Court's inquiry is to determine whether the parties
actually agreed to arbitrate the types of claims that Plaintiffs have alleged against IB in their
Amended Complaints. Section 33A of the Customer Agreement, which contains the mandatory
^At the hearing on IB's Motions to Compel, counsel for Plaintiffs also cited two law review articles to
support these propositions: William Alan Nelson, II, Take It or Leave It: Unconscionabilitv of Mandatorv
Pre-Dispute Arbitration Agreements in the Securities Industry. 17 U. Pa. J. Bus. L. 573, 575 (2015)
(arguing that mandatory predispute arbitration agreements are "Eer se unconscionable because they
require investors to involuntarily waive certain constitutional rights and provide narrow appellate avenues
that effectively preclude judicial review of arbitral awards"), and Barbara Black & Jill I. Gross, Investor
Protection Meets the Federal Arbitration Act. 1 Stan. J. Complex Litig. I, 48 (2013) (analyzing the
Schwab class-action waiver and arguing that courts should apply the Exchange Act and SRO rules over
the FAA for purposes of investor protection).
15
arbitration provision at issue, is very broad. It requires that
any controversv. dispute, claim, or grievance between IB . . . and Customer . . .
arising out of. or relating to this Agreement, or any accounts(s') established
hereunder in which securities may be traded; any transactions therein, any
transactions between IB and Customer; any provision of the Customer Agreement
or any other agreement between IB and Customer; or any breach of such
transactions or agreements, shall be resolved by arbitration ...
Singh and BFP Cases, Nielands DecL, Ex. F § 33A (emphasis added). Here, all of Plaintiffs'
claims—including the claims regarding IB's auto-liquidation system (Coimt I and V), IB's
alleged failure to verify and regulate the registration status of Plaintiffs' named financial advisors
for the accounts (Counts II, III and VI), and IB's alleged breach of contract by wrongful
liquidation (Count IV)—clearly fall under the arbitration provision because they are all disputes
relating to the agreement between IB and Plaintiffs and/or Plaintiffs' accounts.
Notably,
Plaintiffs do not dispute this in their opposition briefs. Resp., Singh Case, ECF No. 11; BFP
Case, ECF No. 12.
Because this Court has determined (1) that binding arbitration agreements exist between
Plaintiffs and IB, and (2) their scope encompasses all of Plaintiffs' claims against IB, the Court
FINDS that the FAA requires the Court to enforce the agreements and compel arbitration,
V.
THE LIKELIHOOD OF PIECEMEAL LITIGATION DOES NOT PREVENT
ENFORCEMENT OF THE ARBITRATION AGREEMENTS.
As a last resort, Plaintiffs argue that compelling arbitration is not permitted here because
the Brar Defendants are "necessary parties" who are not subject to the arbitration agreements at
issue. Resp., Singh Case, ECF No. 11 at 14; BFP Case, ECF No. 12 at 5, 13. Plaintiffs reason
that, because arbitration is only appropriate for "bilateral disputes" between the parties with the
arbitration agreement, arbitration is not favored here. Id. Notably, Plaintiffs do not cite any
authority for this proposition or explain why the Brar Defendants are necessary parties.
16
In any event, case law clearly refutes Plaintiffs' argument. In Moses H. Cone Memorial
Hospital V. Mercury Construction Corp.. the Supreme Court held that "[the FAA] requires
piecemeal resolution when necessary to give effect to an arbitration agreement." 460 U.S. 1, 3
(1983).
The court then specified that "an arbitration agreement must be enforced
notwithstanding the presence of other persons who are parties to the underlying dispute but not
to the arbitration agreement." Id. at 20; see also Dean Witter Revnolds. Inc. v. Bvrd. 470 U.S.
213, 213 (1985) ("[T]he [FAA] requires district courts to compel arbitration of pendent arbitrable
claims when one of the parties files a motion to compel, even when the result would be the
possibly inefficient maintenance of separate proceedings in different forums."). Therefore, the
allegedly "trilateral" nature of Plaintiffs' lawsuit does not impact this Court's decision to compel
arbitration.
VI.
ID'S REQUEST FOR A STAY OF PROCEEDINGS
IB also requests in its Motions to Compel that the Court stay the instant action pending
completion of arbitration pursuant to Section 3 of the FAA. Singh Case, IB Mem., ECF No. 6 at
25; BFP Case, ECF No. 7 at 19. Section 3 states:
If any suit or proceeding be brought in any of the courts of the United States upon
any issue referable to arbitration under an agreement in writing for such
arbitration, the court in which such suit is pending, upon being satisfied that the
issue involved in such suit or proceeding is referable to arbitration under such an
agreement, shall on application of one of the parties stay the trial of the action
until such arbitration has been had in accordance with the terms of the agreement,
providing the applicant for the stay is not in default in proceeding with such
arbitration.
9 U.S.C. § 3. The directive of the FAA in this section, that the Court "shall.. . stay the trial of
the action until such arbitration has been had," id (emphasis added), has been interpreted by the
Supreme Court to be mandatory, not discretionary. Sm Bvrd. 470 U.S. at 218. Therefore,
having found that all of Plaintiffs' claims against IB are "issues referable to arbitration under an
17
agreement in writing for such arbitration," this Court must stay the trial of these claims pending
completion of arbitration pursuant to 9 U.S.C. § 3.
But the question remains whether Plaintiffs' claims against the Brar Defendants, which
are not subject to an arbitration agreement, should also be stayed pending the completion of
arbitration. IB suggests that that these claims are not subject to the FAA's mandatory stay and
should "remain in this Court" as a parallel proceeding. Singh Case, IB Mem., ECF No. 6 at 25
n.l9 (citing Bvrd. 470 U.S. at 218). However, a district court may, in its discretion, stay the
litigation of non-arbitrable claims like those against the Brar Defendants if the court deems it
necessary or advisable. Summer Rain v. Donning Company/Publishers. Inc.. 964 F.2d 1455,
1461 (4th Cir. 1992) (citing Moses H. Cone. 460 U.S. at 20 n.23). Where arbitrable and nonarbitrable issues are so intertwined that the resolution of the former directly impacts the
resolution of the latter, a stay of the non-arbitrable issues pending completion of arbitration may
be appropriate. Summer Rain. 964 F.2d at 1461.
In the instant case, Plaintiffs bring Counts I, II, and III of the Amended Complaints
against IB and the Brar Defendants. These counts allege that the Brar Defendants, acting as the
financial advisor for the Joint Account and Partnership Account, caused Plaintiffs significant
financial losses by unlawfully trading in securities and failing to register as investment advisors
as required by Florida and Virginia Blue Sky Laws. Singh Case, ECF No. 2 at 8-9; BFP Case,
ECF No. 3 at 9-10.
These counts further allege that IB facilitated and aided the Brar
Defendants' unlawful and unregistered investment activity.
Id
The Court finds that these
claims are sufficiently interrelated such that staying Plaintiffs' claims against the Brar
Defendants pending the compelled arbitration is appropriate here.
Cf Summer Rain. 964 F.2d
at 1461 (staying non-arbitrable issue of what monies were owed because it depended on the
18
resolution of the arbitrable issue of whether the defendants breached the contract at issue).
Accordingly, this action is STAYED for the shorter of five (5) months or until arbitration is
completed.
VII.
CONCLUSION
Accordingly, IB's Motions to Compel Arbitration (ECF No. 5 in CivilNo. 2:16cv276 and
ECF No. 6 in Civil No. 2:16cv277), are hereby GRANTED, and the instant action is STAYED
for the shorter of five (5) months or until completion of arbitration, or until such further order
that this Court may enter.
The Clerk is DIRECTED to forward a copy of this Order to all Counsel of Record.
IT IS SO ORDERED.
kf
imar
;iat^j!)istrict Judge
ITED
Norfolk, VA
November
2016
19
TES DISTRICT JUDGE
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