Visconsi v. SG Cowen Securities ( 2003 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206 2 Fazio, et al. v. Nos. 02-3820/3821/3822/3823/
ELECTRONIC CITATION: 2003 FED App. 0284P (6th Cir.) Lehman Bros., 3824/3825/3826/3867/3868/3869/
File Name: 03a0284p.06 et al. 3870/3873/3874; 03-3041/3042/
3043/3045/3112/3113/3258
UNITED STATES COURT OF APPEALS
CORPORATION ; SOCIETE -
FOR THE SIXTH CIRCUIT -
_________________ GENERALE; HAMBRECHT &
QUIST , INC.; J.P. MORGAN -
-
CHASE & COMPANY , -
No. 02-3820 X
- Defendants. -
ROBERT FAZIO , et al.,
Plaintiffs-Appellees, - -
- Nos. 02-3820/ No. 02-3822 -
v. - 3821/3822/3823/ -
> ROBERT FAZIO , et al.,
LEHMAN BROTHERS , INC.; 3824/3825/3826/ -
, Plaintiffs-Appellees,
LEHMAN BROTHERS - 3867/3868/3869/ -
3870/3873/3874; v. -
HOLDINGS, INC., -
03-3041/3042/ LEHMAN BROTHERS , INC.; -
Defendants, -
S.G. COWEN SECURITIES - 3043/3045/3112/ LEHMAN BROTHERS -
- 3113/3258 HOLDINGS, INC.; S.G. COWEN -
CORPORATION ; SOCIETE -
- SECURITIES CORPORATION ;
GENERALE, -
- SOCIETE GENERALE,
Defendants-Appellants, - -
Defendants, -
HAMBRECHT & QUIST , INC.; -
- HAMBRECHT & QUIST , INC.; -
J.P. MORGAN CHASE &
- J.P. MORGAN CHASE & -
COMPANY , -
COMPANY ,
Defendants. - -
- Defendants-Appellants.
- -
No. 02-3821 - -
No. 02-3823 -
ROBERT FAZIO , et al., -
Plaintiffs-Appellees, -
ROBERT FAZIO , et al., -
- Plaintiffs, -
v. -
LEHMAN BROTHERS , INC.; - SAMUEL GLAZER,
- Plaintiff-Appellee, -
LEHMAN BROTHERS - -
v. -
HOLDINGS, INC., - LEHMAN BROTHERS , INC.; -
Defendants-Appellants, -
- LEHMAN BROTHERS -
S.G. COWEN SECURITIES
1
Nos. 02-3820/3821/3822/3823/ Fazio, et al. v. 3 4 Fazio, et al. v. Nos. 02-3820/3821/3822/3823/
3824/3825/3826/3867/3868/3869/ Lehman Bros., Lehman Bros., 3824/3825/3826/3867/3868/3869/
3870/3873/3874; 03-3041/3042/ et al. et al. 3870/3873/3874; 03-3041/3042/
3043/3045/3112/3113/3258 3043/3045/3112/3113/3258
HOLDINGS, INC., - Plaintiffs-Appellees, -
Defendants, - v. -
S.G. COWEN SECURITIES - LEHMAN BROTHERS , INC.; -
- -
CORPORATION ; SOCIETE - LEHMAN BROTHERS -
GENERALE, - HOLDINGS, INC., -
Defendants-Appellants. - Defendants, -
- S.G. COWEN SECURITIES -
No. 02-3824 - CORPORATION ; SOCIETE -
ROBERT FAZIO , et al., - GENERALE, -
- -
Plaintiffs, - Defendants-Appellants. -
SAMUEL GLAZER, - -
Plaintiff-Appellee, - No. 02-3826 -
v. - ROBERT FAZIO , et al., -
LEHMAN BROTHERS , INC.; - Plaintiffs, -
- -
LEHMAN BROTHERS DOMINIC A. VISCONSI, SR., et
- -
HOLDINGS, INC., - al., -
Defendants-Appellants, - Plaintiffs-Appellees, -
S.G. COWEN SECURITIES - v. -
CORPORATION ; SOCIETE - LEHMAN BROTHERS , INC.; -
GENERALE; HAMBRECHT & - LEHMAN BROTHERS -
- -
QUIST , INC.; J.P. MORGAN - HOLDINGS, INC., -
CHASE & COMPANY , - Defendants-Appellants, -
Defendants. - S.G. COWEN SECURITIES -
- CORPORATION ; SOCIETE -
No. 02-3825 - GENERALE, -
ROBERT FAZIO , et al., - Defendants. -
- -
Plaintiffs, - -
DOMINIC A. VISCONSI, SR., et - No. 02-3867 -
al., - PETER A. SPITALIERI, -
Nos. 02-3820/3821/3822/3823/ Fazio, et al. v. 5 6 Fazio, et al. v. Nos. 02-3820/3821/3822/3823/
3824/3825/3826/3867/3868/3869/ Lehman Bros., Lehman Bros., 3824/3825/3826/3867/3868/3869/
3870/3873/3874; 03-3041/3042/ et al. et al. 3870/3873/3874; 03-3041/3042/
3043/3045/3112/3113/3258 3043/3045/3112/3113/3258
Plaintiff-Appellee, - LEHMAN BROTHERS -
v. - HOLDINGS, INC., -
LEHMAN BROTHERS , INC.; - Defendants, -
- -
LEHMAN BROTHERS - S.G. COWEN SECURITIES -
HOLDINGS, INC., - CORPORATION , -
Defendants, - Defendant-Appellant. -
S.G. COWEN SECURITIES - -
CORPORATION ; SOCIETE - No. 02-3870 -
GENERALE, - RICHARD LOPARDO, et al., -
- -
Defendants-Appellants. - Plaintiffs-Appellees, -
- v. -
No. 02-3868 - LEHMAN BROTHERS , INC., -
PETER A. SPITALIERI, - Defendant-Appellant, -
Plaintiff-Appellee, - S.G. COWEN SECURITIES -
- -
v. CORPORATION ,
- -
LEHMAN BROTHERS , INC.; - Defendant. -
LEHMAN BROTHERS - -
HOLDINGS, INC., - No. 02-3873 -
Defendants-Appellants, - PETER M. BONUTTI, M.D., -
S.G. COWEN SECURITIES - Plaintiff-Appellee, -
- -
CORPORATION ; SOCIETE - v. -
GENERALE, - LEHMAN BROTHERS , INC., -
Defendants. - Defendant, -
- S.G. COWEN SECURITIES -
No. 02-3869 - CORPORATION , -
RICHARD LOPARDO, et al., - Defendant-Appellant. -
- -
Plaintiffs-Appellees, - -
v. - No. 02-3874 -
LEHMAN BROTHERS , INC.; - PETER M. BONUTTI, M.D., -
Nos. 02-3820/3821/3822/3823/ Fazio, et al. v. 7 8 Fazio, et al. v. Nos. 02-3820/3821/3822/3823/
3824/3825/3826/3867/3868/3869/ Lehman Bros., Lehman Bros., 3824/3825/3826/3867/3868/3869/
3870/3873/3874; 03-3041/3042/ et al. et al. 3870/3873/3874; 03-3041/3042/
3043/3045/3112/3113/3258 3043/3045/3112/3113/3258
Plaintiff-Appellee, - No. 03-3045 -
v. - PETER M. BONUTTI, M.D., et -
LEHMAN BROTHERS , INC., - al., -
- -
Defendant-Appellant, - Plaintiffs-Appellees, -
S.G. COWEN SECURITIES - v. -
CORPORATION , - COWEN & COMPANY , -
Defendant. - Defendant-Appellant. -
- -
No. 03-3041 - No. 03-3112 -
- -
ROBERT FAZIO , et al., - DOMINIC A. VISCONSI, SR., et -
Plaintiffs-Appellees, - al., -
v. - Plaintiffs-Appellees, -
COWEN & COMPANY , - v. -
Defendant-Appellant. - LEHMAN BROTHERS , INC.; -
- -
LEHMAN BROTHERS
- -
Nos. 03-3042/3258 - HOLDINGS, INC., -
DOMINIC A. VISCONSI, SR., et - Defendants-Appellants. -
al., - -
Plaintiffs-Appellees, - No. 03-3113 -
v. - DOMINIC A. VISCONSI, SR., et -
- -
COWEN & COMPANY , - al., -
Defendant-Appellant. - Plaintiffs-Appellees, -
- v. -
No. 03-3043 - S.G. COWEN SECURITIES -
RICHARD LOPARDO, et al., - CORPORATION ; SOCIETE -
Plaintiffs-Appellees, - GENERALE, -
- -
v. - Defendants-Appellants. -
COWEN & COMPANY , - N
Defendant-Appellant. -
Nos. 02-3820/3821/3822/3823/ Fazio, et al. v. 9 10 Fazio, et al. v. Nos. 02-3820/3821/3822/3823/
3824/3825/3826/3867/3868/3869/ Lehman Bros., Lehman Bros., 3824/3825/3826/3867/3868/3869/
3870/3873/3874; 03-3041/3042/ et al. et al. 3870/3873/3874; 03-3041/3042/
3043/3045/3112/3113/3258 3043/3045/3112/3113/3258
Appeal from the United States District Court Appellants. Ari H.Jaffe, KOHRMAN, JACKSON &
for the Northern District of Ohio at Cleveland. KRANTZ, Cleveland, Ohio, Robert P. Duvin, Kenneth D.
Nos. 02-00157; 02-00370; 02-00382; 02-00761; 02-00764; Schwartz, DUVIN, CAHN & HUTTON, Cleveland, Ohio,
02-01018—John M. Manos, District Judge. David C. Frederick, David E. Ross, Antonia Apps, K. Chris
Todd, KELLOGG, HUBER, HANSEN, TODD & EVANS,
Argued: June 17, 2003 Washington, D.C., Hugh E. McKay, PORTER, WRIGHT,
MORRIS & ARTHUR, Cleveland, Ohio, Robert B. Casarona,
Decided and Filed: August 13, 2003 Donald S. Scherzer, ROETZEL & ANDRESS, Cleveland,
Ohio, John T. Murray, Barbara Quinn Smith, MURRAY &
Before: NORRIS, DAUGHTREY, and ROGERS, Circuit MURRAY, Sandusky, Ohio, Daniel R. Warren, Melissa M.
Judges. Eckhause, BAKER & HOSTETLER, Cleveland, Ohio, for
Appellees.
_________________
_________________
COUNSEL
OPINION
ARGUED: Aaron R. Marcu, COVINGTON & BURLING, _________________
New York, New York, for Appellants. Ari H.Jaffe,
KOHRMAN, JACKSON & KRANTZ, Cleveland, Ohio, ALAN E. NORRIS, Circuit Judge. This dispute arises
Robert P. Duvin, DUVIN, CAHN & HUTTON, Cleveland, from a massive fraud in which Frank Gruttadauria, a
Ohio, David C. Frederick, KELLOGG, HUBER, HANSEN, Cleveland stockbroker, misappropriated at least $54 million
TODD & EVANS, Washington, D.C., Robert B. Casarona, of his clients’ money. The plaintiffs, all clients of
ROETZEL & ANDRESS, Cleveland, Ohio, John T. Murray, Gruttadauria, brought this action against the brokerage houses
MURRAY & MURRAY, Sandusky, Ohio, Daniel R. Warren, for which he worked over the course of his career. The
BAKER & HOSTETLER, Cleveland, Ohio, for Appellees. defendants moved to stay the proceedings and compel
ON BRIEF: Laurence A. Silverman, COVINGTON & arbitration pursuant to arbitration clauses in the account
BURLING, New York, New York, Mark O’Neil, Daniel A. agreements. The district court, relying largely on the gross
Richards, WESTON, HURD, FALLON, PAISLEY & nature of the fraud, ruled that the arbitration clauses in the
HOWLEY, Cleveland, Ohio, James Joseph Bartolozzi, agreements did not apply to the dispute and set the case for
KAHN, KLEINMAN, YANOWITZ & ARNSON, Cleveland, trial. The defendants appeal this decision. Thus, the only
Ohio, Michael N. Ungar, Marvin L. Karp, Elin B. Young, question of law in this interlocutory appeal is whether
Christopher P. Fisher, ULMER & BERNE, Cleveland, Ohio, similarly worded arbitration clauses in the plaintiffs’
David C. Weiner, Charna E. Sherman, SQUIRE, SANDERS brokerage account agreements mandate arbitration of their
& DEMPSEY, Cleveland, Ohio, Pierre H. Bergeron, claims.
SQUIRE, SANDERS & DEMPSEY, Cincinnati, Ohio, for
Nos. 02-3820/3821/3822/3823/ Fazio, et al. v. 11 12 Fazio, et al. v. Nos. 02-3820/3821/3822/3823/
3824/3825/3826/3867/3868/3869/ Lehman Bros., Lehman Bros., 3824/3825/3826/3867/3868/3869/
3870/3873/3874; 03-3041/3042/ et al. et al. 3870/3873/3874; 03-3041/3042/
3043/3045/3112/3113/3258 3043/3045/3112/3113/3258
I compel arbitration, the district court did not provide a
separate analysis for each arbitration agreement. However,
Frank Gruttadauria was a stockbroker for the defendant the parties agree that each contains roughly the same
brokerage houses or firms that were purchased by them. As language. The typical arbitration clause in the account
early as 1987, Gruttadauria began to send falsified statements agreements reads, “Any controversy arising out of or relating
to his clients that significantly overstated the value of their to any of my accounts, to transactions with you for me, or to
accounts. Gruttadauria had incurred significant losses in this or any other agreement or the construction, performance
some of these accounts, and he falsified statements to cover or breach thereof, shall be settled by arbitration.”
this up.
The district court held that the arbitration clauses were not
To make good when clients requested withdrawals from binding because, given the nature of the fraud, the agreements
their inflated accounts, Gruttaduaria either used new deposits were void ab intitio and there were effectively no accounts.
by other clients or withdrew funds from other clients’ In the alternative, the district court held that the fraud alleged
accounts to make payments. In a separate criminal here was not covered by the arbitration clauses. We reverse
proceeding against him, Gruttaduaria entered into a plea the district court and remand with instructions to consider the
agreement in which he admitted taking $54 million in particular claims of the parties regarding the validity of the
“unauthorized withdrawals” between 1996 and 2002 alone. arbitration clauses standing apart from the account
He also admitted that he gained at least $1 million personally agreements as a whole.
from the fraud.
II
Gruttaduaria’s scheme eventually collapsed. According to
the plea agreement, by 2001 Gruttadauria’s clients’ accounts We have jurisdiction over this interlocutory appeal under
had a paper value of $278 million, while their actual value 9 U.S.C. § 16(a)(1), which provides that an appeal may be
was only $1.8 million. Gruttadauria fled after leaving a letter taken from an order refusing to compel arbitration or refusing
of confession. In the letter, he claimed that he was the only to stay an action pending arbitration. We review a district
person involved in the scheme but implied that the brokerage court’s denial of these motions de novo. Burden v. Check
houses were grossly negligent for not monitoring his into Cash of Kentucky, L.L.C., 267 F.3d 483, 487 (6th Cir.
activities. He later surrendered to authorities and pleaded 2001); Stout v. J.D. Byrider, 228 F.3d 709, 714 (6th Cir.
guilty to a multi-count federal indictment. 2000).
Plaintiffs brought this action against defendants alleging A. Federal Arbitration Act
numerous securities law violations including outright theft
from their accounts. Most plaintiffs also allege churning, The Federal Arbitration Act (“FAA”) provides that
unauthorized trading, and excessive risk taking as well as a arbitration clauses in commercial contracts “shall be valid,
number of other common law and statutory claims. In irrevocable, and enforceable, save upon such grounds as exist
denying the defendants’ motions to stay the proceedings and at law or in equity for the revocation of any contract.”
Nos. 02-3820/3821/3822/3823/ Fazio, et al. v. 13 14 Fazio, et al. v. Nos. 02-3820/3821/3822/3823/
3824/3825/3826/3867/3868/3869/ Lehman Bros., Lehman Bros., 3824/3825/3826/3867/3868/3869/
3870/3873/3874; 03-3041/3042/ et al. et al. 3870/3873/3874; 03-3041/3042/
3043/3045/3112/3113/3258 3043/3045/3112/3113/3258
9 U.S.C. § 2. If a court determines that the cause of action is 24-25 (1983). In addition, the Supreme Court has held that
covered by an arbitration clause, it must stay the proceedings the FAA preempts state laws and policies regarding
until the arbitration process is complete. 9 U.S.C. § 3. In arbitration. Southland Corp. v. Keating, 465 U.S. 1, 10-11
order to compel arbitration, a court must conduct a hearing, (1984). State contract law, however, governs in determining
and: whether the arbitration clause itself was validly obtained,
provided the contract law applied is general and not specific
upon being satisfied that the making of the agreement for to arbitration clauses. Doctor’s Assoc., Inc. v. Casarotto, 517
arbitration or the failure to comply therewith is not in U.S. 681, 686-87 (1996); First Options of Chicago, Inc. v.
issue, the court shall make an order directing the parties Kaplan, 514 U.S. 938, 944 (1995); Great Earth Cos. v.
to proceed to arbitration in accordance with the terms of Simons, 288 F.3d 878, 889 (6th Cir. 2002).
the agreement. . . . If the making of the arbitration
agreement or the failure, neglect, or refusal to perform The leading Supreme Court case dealing with fraud and
the same be in issue, the court shall proceed summarily arbitration agreements is Prima Paint Corp. v. Flood &
to the trial thereof. Conklin Manufacturing Co., 388 U.S. 395 (1967). There, the
Supreme Court held that a “claim of fraud in the inducement
9 U.S.C. § 4. of the entire contract” is a matter to be resolved by the
arbitrators, not the federal courts. Id. at 402-04. However, if
Under the statute, a district court must make a number of there was a fraud that “goes to the ‘making’ of the agreement
threshold determinations before compelling arbitration: to arbitrate,” then a federal court may adjudicate. Id. at 403-
04. In so holding, the Court relied on the explicit statutory
When considering a motion to stay proceedings and language of section 4 of the FAA:
compel arbitration under the Act, a court has four tasks:
first, it must determine whether the parties agreed to Under [section] 4, with respect to a matter within the
arbitrate; second, it must determine the scope of that jurisdiction of the federal courts save for the existence of
agreement; third, if federal statutory claims are asserted, an arbitration clause, the federal court is instructed to
it must consider whether Congress intended those claims order arbitration to proceed once it is satisfied that ‘the
to be nonarbitrable; and fourth, if the court concludes making of the agreement for arbitration or the failure to
that some, but not all, of the claims in the action are comply (with the arbitration agreement) is not in issue.’
subject to arbitration, it must determine whether to stay Accordingly, if the claim is fraud in the inducement of
the remainder of the proceedings pending arbitration. the arbitration clause itself--an issue which goes to the
‘making’ of the agreement to arbitrate--the federal court
228 F.3d at 714. may proceed to adjudicate it. . . . We hold, therefore, that
in passing upon a [section] 3 application for a stay while
It is a well-established rule that any doubts regarding the parties arbitrate, a federal court may consider only
arbitrability should be resolved in favor of arbitration. Moses
H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1,
Nos. 02-3820/3821/3822/3823/ Fazio, et al. v. 15 16 Fazio, et al. v. Nos. 02-3820/3821/3822/3823/
3824/3825/3826/3867/3868/3869/ Lehman Bros., Lehman Bros., 3824/3825/3826/3867/3868/3869/
3870/3873/3874; 03-3041/3042/ et al. et al. 3870/3873/3874; 03-3041/3042/
3043/3045/3112/3113/3258 3043/3045/3112/3113/3258
issues relating to the making and performance of the The district court held that, because the money in the
agreement to arbitrate. accounts was largely stolen and Gruttadauria had no intention
of acting as a true broker for the plaintiffs, no account
Id. (footnotes omitted). Thus, even if there was fraudulent agreements really existed, thus making the agreements void
inducement to sign the contract as a whole, by the terms of ab initio and invalidating the arbitration clauses.
sections 3 and 4 of the FAA, the arbitration clause is Memorandum of Opinion, July 19, 2002 at 7. The district
severable and will only be voided for fraudulent inducement court distinguished Prima Paint, arguing that it was not
in its making. See also Ferro Corp. v. Garrison Indus., 142 applicable to “challenges to the very existence of the contract
F.3d 926, 933 (6th Cir. 1998) (“[T]he Supreme Court has held on the grounds that there was never an agreement at all.” Id.that once a court determines that the agreement to arbitrate In addition, the district court held that because of the theft
has not been fraudulently induced, all other issues falling there were no “accounts,” and hence the account agreements
within that agreement are to be sent to arbitration.”) (citing are unenforceable. Id. at 7-8.
Prima Paint at 403-04).
This reasoning is not consistent with two cases from this
This basic analysis does not change when applied to court that enforced arbitration clauses in securities fraud
securities fraud claims. In Shearson/American Express, Inc. cases. Arnold v. Arnold Corp.-Printed Communications For
v. McMahon, 482 U.S. 220 (1987), the Supreme Court Bus., 920 F.2d 1269 (6th Cir. 1990); C.B.S. Employees Fed.
rejected an attempt to carve out an exception for Securities Credit Union v. Donaldson, Lufkin and Jenrette Sec. Corp.,
and Exchange Act violations. In doing so, the Court 912 F.2d 1563 (6th Cir. 1990).
specifically approved the arbitration procedures of the New
York Stock Exchange, the American Stock Exchange, and the In Arnold, we held that, in order to void an arbitration
NASDAQ, which are the arbitration fora specified in the clause, the complaint must contain a “well-founded claim of
account agreements at issue here. Id. at 233-34. fraud in the inducement of the arbitration clause itself,
standing apart from the whole agreement, that would provide
B. Validity of the Arbitration Agreements in Light of the grounds for the revocation of the agreement to arbitrate.” Id.
Fraud at 1278; Great Earth, 288 F.3d at 890 (quoting Arnold). In
addition, we noted that, under Prima Paint, allegations of
Before a court can send a case to arbitration, it must first fraudulent schemes are “no longer sufficient to overcome the
determine that a valid agreement to arbitrate exists. 9 U.S.C. strong federal policy in favor of arbitration.” Arnold, 920
§ 2; Stout, 228 F.3d at 714. An arbitration agreement may be F.2d at 1281.
invalidated for the same reasons for which any contract may
be invalidated, including forgery, unconscionability, and lack In C.B.S. Employees, the defendant brokerage house
of consideration. Casarotto, 517 U.S. at 687. “[O]rdinary allegedly engaged in a large volume of unauthorized trades
state-law principles that govern the formation of contracts” that resulted in substantial losses to an employees’ credit
will apply to this analysis. First Options, 514 U.S. at 944. union. The credit union brought an action alleging violations
Nos. 02-3820/3821/3822/3823/ Fazio, et al. v. 17 18 Fazio, et al. v. Nos. 02-3820/3821/3822/3823/
3824/3825/3826/3867/3868/3869/ Lehman Bros., Lehman Bros., 3824/3825/3826/3867/3868/3869/
3870/3873/3874; 03-3041/3042/ et al. et al. 3870/3873/3874; 03-3041/3042/
3043/3045/3112/3113/3258 3043/3045/3112/3113/3258
of federal and state securities laws, as well as the Racketeer holding of an intervening case decided by this court. In
Influenced and Corrupt Organizations Act (“RICO”). We Javitch v. First Union Securities, Inc., 315 F.3d 619, 628 (6th
rejected the argument that the underlying fraud voided the Cir. 2003), we rejected the argument that arbitration clauses
arbitration agreements and held that “[t]he central issue, were void because of a fraudulent account and instead
reduced to its simplest, is whether [plaintiff’s] claim of fraud focused on the validity of the arbitration clauses standing
relates to the making of the arbitration agreement.” Id. at alone.
1566.
In sum, when claims involve “the validity of the contract as
This court reinforced these rules recently in Burden, a case a whole” and not just the arbitration agreement, “[s]uch
involving consumer fraud in a check cashing/loan scheme in claims are to be brought before the arbitrator, not the district
which the true interest rate was allegedly over 500% that court in deciding a petition to compel arbitration.” Great
which was stated in the loan agreements. Burden, 267 F.3d Earth, 288 F.3d at 892 (citing Prima Paint, 388 U.S. at 404);
at 486-87. In addition to the fraud, the defendants had also see also Burden, 267 F.3d at 491.
allegedly failed to obtain the proper state loan licenses. Id. at
489. Under the Kentucky law applied in Burden, loan C. Scope of the Arbitration Agreements
agreements made without a license or in violation of certain
other provisions of state law are void by statute. Id. at 490. District courts have the authority to decide, as a threshold
The court concluded that the contract may well be void and matter, whether an issue is within the scope of an arbitration
rife with fraud, but these facts do not void the arbitration agreement. Stout, 228 F.3d at 714. A proper method of
clause, which must be analyzed independently.1 Id. at 490, analysis here is to ask if an action could be maintained
492. without reference to the contract or relationship at issue. If it
could, it is likely outside the scope of the arbitration
The district court also found that, given the theft, no agreement. Ford v. NYLCare Health Plans of Gulf Coast,
accounts existed and that this invalidated the arbitration Inc., 141 F.3d 243, 250-51 (5th Cir. 1998) (applying Texas
clauses. This legal conclusion, however, conflicts with the arbitration law under a choice of law provision). Torts may
often fall into this category, but merely casting a complaint in
tort does not mean that the arbitration provision does not
1 apply. Fyrnetics (Hong Kong) Ltd. v. Quantum Group, Inc.,
Some of the plaintiffs assert that the criminal conduct alleged voids
the arbitration clau se. However, claims that, if true, amount to criminal 293 F.3d 1023, 1030 (7th Cir. 2002). Even real torts can be
behavior under RIC O and antitrust laws have be en held arbitrable by the covered by arbitration clauses “[i]f the allegations underlying
Supreme Court. See Shearson/American Exp., Inc. v. McMahon, 482 U.S. the claims ‘touch matters’ covered by the [agreement].”
at 239-240. In addition, all parties and the district court seem to agree that Genesco, Inc. v. T. Kakiuchi & Co., Ltd., 815 F.2d 840, 846
churning is arbitrable. Mem orandum of Opinion, July 19, 2002 at 12-13. (2d Cir. 1987). We are, however, aware of the Supreme
Churning, however, is a criminal act. See, e.g., United States v. Trask ,
143 F. Supp. 2d 88, 89 (D. Mass. 2001) (discussing a 15-month prison Court’s warning against “forc[ing] unwilling parties to
sentence for a conviction under Securities and Exchange Act based solely arbitrate a matter they reasonably would have thought a
on churning).
Nos. 02-3820/3821/3822/3823/ Fazio, et al. v. 19 20 Fazio, et al. v. Nos. 02-3820/3821/3822/3823/
3824/3825/3826/3867/3868/3869/ Lehman Bros., Lehman Bros., 3824/3825/3826/3867/3868/3869/
3870/3873/3874; 03-3041/3042/ et al. et al. 3870/3873/3874; 03-3041/3042/
3043/3045/3112/3113/3258 3043/3045/3112/3113/3258
judge, not an arbitrator, would decide.” First Options, 514 Furthermore, the arbitration agreements are quite broad:
U.S. at 945. “Any controversy arising out of or relating to any of my
accounts, to transactions with you for me, or to this or any
The district court held in the alternative that the allegations other agreement or the construction, performance or breach
of theft placed the dispute outside the scope of the arbitration thereof shall be settled by arbitration.” We take the
provision by reasoning as follows: arbitration agreements at their word, and hold that any dispute
arising out of (or that must make reference to) the agreements,
Generally, the underlying basis for the Plaintiffs’ accounts, or transactions conducted by the defendants is
claims is Gruttadauria’s alleged theft of their assets. . . . subject to arbitration.
Conduct amounting to theft is so beyond what is
expected from a broker that such conduct could not have The district court itself noted that churning, unauthorized
been within the reasonable contemplation of the trading, and excessive risk-taking are clearly foreseeable
Plaintiffs when they signed the alleged account problems in a brokerage account and are encompassed by the
agreements. arbitration agreement. Memorandum of Opinion, July 19,
2002 at 12-13. Most of the parties here allege churning,
Memorandum of Opinion, July 19, 2002 at 8-9. unauthorized trading, and excessive risk-taking in addition to
alleging outright theft, and all parties allege either negligent
However, it is evident that the fraudulent activities were a hiring or violation of explicit or implied contracts. Under the
violation of the account agreements and arose out of district court’s own analysis, those claims should have been
activities contemplated by those agreements–the sale and given to an arbitrator. See Stout, 228 F.3d at 714 (“[I]f the
purchase of securities and the management of accounts. The court concludes that some, but not all, of the claims in the
lawsuit by necessity must describe why Gruttadauria was in action are subject to arbitration, it must determine whether to
control of the plaintiffs’ money and what the brokerage stay the remainder of the proceedings pending arbitration.”)
houses’ obligations were. The plaintiffs therefore cannot In addition, the churning, excessive risk-taking, and
maintain their action without reference to the account unauthorized trading claims were part of the same fraudulent
agreements, and accordingly, this action is covered by the scheme and at the very least create doubts about the
arbitration clauses. arbitrability of the theft claims, which should have been
resolved in favor of arbitration as the Supreme Court directed
Plaintiffs claim that Gruttadauria’s outrageous conduct was in Cone Memorial Hospital.
unforeseeable, and hence they could not have anticipated
arbitrating such claims. However, it is far from clear that the D. Mutuality of Obligation
conduct here was unforeseeable. Aggregating the losses of all
the parties, as the plaintiffs frequently do, leads to a shocking The Supreme Court has held that, under the FAA, state law
total loss. But analyzed individually, it is foreseeable that contract defenses such as fraud, duress, and unconscionability
churning, unauthorized risk taking, and illegal transfers to may be applied by courts to invalidate arbitration agreements.
third parties could destroy the value of an individual account.
Nos. 02-3820/3821/3822/3823/ Fazio, et al. v. 21 22 Fazio, et al. v. Nos. 02-3820/3821/3822/3823/
3824/3825/3826/3867/3868/3869/ Lehman Bros., Lehman Bros., 3824/3825/3826/3867/3868/3869/
3870/3873/3874; 03-3041/3042/ et al. et al. 3870/3873/3874; 03-3041/3042/
3043/3045/3112/3113/3258 3043/3045/3112/3113/3258
Casarotto, 517 U.S. at 687. Mutuality has been included in 1999) (collecting cases and concluding that mutuality of
that list as well. Burden, 267 F.3d at 491 (quoting obligation is generally satisfied in arbitration agreements if
Matterhorn, Inc. v. NCR Corp., 763 F.2d 866, 868 (7th Cir. the underlying contract is supported by consideration). There
1985)). This circuit has previously refused to compel is no doubt here that the underlying contract was supported by
arbitration on the grounds that an arbitration clause lacked consideration.
mutuality when an arbitration service chosen by an employer
retained the right to modify its rules without the employee’s In addition, plaintiffs cannot rely on this court’s limited
consent. Floss v. Ryan’s Family Steak Houses, Inc., 211 F.3d holding in Floss. We distinguished Floss in Morrison v.
306, 315-16 (6th Cir. 2000) (applying Kentucky and Circuit City Stores, Inc., 317 F.3d 646 (6th Cir. 2003) (en
Tennessee law). banc), while applying Ohio law. The employment contract at
issue in Morrison provided that only the employee’s claims
Plaintiffs argue that the arbitration agreements here lack were subject to arbitration and that the employer, with thirty
mutuality because of the extensive self-help remedies in the days notice provided on a specified day, could alter the terms
account agreements that permit the defendants to seize the of the arbitration agreement. Id. at 667. While noting that the
accounts of the plaintiffs for basically any breach of the mutuality requirement of an arbitration clause is not settled
account agreement. They argue that the defendants would law in Ohio, Morrison held that the notice provision was
never have to arbitrate a claim given this self-help provision, sufficient consideration to preserve mutuality and upheld the
and therefore the clauses are unenforceable because there is arbitration clause. Id. at 668. The fact that only one party
no mutuality of obligation. The main case cited to support was bound by the arbitration agreement was not a concern.
this notion is a California case, Flores v. Transamerica
HomeFirst, Inc., 113 Cal. Rptr. 2d 376 (Ct. App. 2001). While it is true that the self-help provisions give the
There, a California appeals court held that the right of brokerage house an upper hand, the arbitration provisions
HomeFirst to foreclose prior to or during arbitration made the cover “any dispute,” not just disputes in which the brokerage
arbitration provisions “unconscionable.” Id. at 382. To be houses are defendants. Thus, by the contract’s terms, the
enforceable, the court held that the arbitration agreement must clients have as much a right to force arbitration as the
at least contain a “modicum of bilaterality.” Id. brokerage houses. The right of self help may make this
occurrence unlikely, but as Morrison and Joseph demonstrate,
Ohio law applies here, and there is no indication that Ohio the chance that it may happen is sufficient under Ohio law to
courts have adopted the California rule. On the contrary, an preserve mutuality. We therefore hold that, assuming
Ohio Appeals Court recently held that mutuality is not a mutuality of obligation in the arbitration clause is a
requirement of a valid arbitration clause if the underlying requirement under Ohio law, the arbitration clauses here
contract is supported by consideration. Joseph v. M.B.N.A. easily satisfy that requirement.
Am. Bank, N.A., 148 Ohio App. 3d 660, 664, 775 N.E.2d 550,
553 (2002). This appears to be the general trend. See Harris
v. Green Tree Fin. Corp., 183 F.3d 173, 179-80 (3rd Cir.
Nos. 02-3820/3821/3822/3823/ Fazio, et al. v. 23 24 Fazio, et al. v. Nos. 02-3820/3821/3822/3823/
3824/3825/3826/3867/3868/3869/ Lehman Bros., Lehman Bros., 3824/3825/3826/3867/3868/3869/
3870/3873/3874; 03-3041/3042/ et al. et al. 3870/3873/3874; 03-3041/3042/
3043/3045/3112/3113/3258 3043/3045/3112/3113/3258
E. Issues Specific to Individual Arbitration Agreements that a reasonable finder of fact could conclude that no valid
agreement to arbitrate exists.” 288 F.3d at 889. Javitch
Because some parties raise issues specific to their specifies that “[b]efore compelling an unwilling party to
arbitration agreements and because the record below is arbitrate, the court must engage in a limited review to
undeveloped in this regard, we are unable to conclude determine whether the dispute is arbitrable; meaning that a
whether the arbitration agreements here are valid. “[A] well- valid agreement to arbitrate exists between the parties.” 315
founded claim of fraud in the inducement of the arbitration F.3d at 624 (emphasis added).
clause itself, standing apart from the whole agreement” may
invalidate an arbitration clause, and district courts are III
authorized to make threshold rulings in this regard. Arnold,
920 F.2d at 1278. For the foregoing reasons, the judgment of the district court
is reversed, and this cause is remanded for a determination
It is firmly established that an arbitration clause obtained by of whether the arbitration clauses, analyzed independently
forgery is not valid. See, e.g., Burden, 267 F.3d at 488; from the account agreements, are valid.
Three Valleys Mun. Water Dist. v. E.F. Hutton & Co., 925
F.2d 1136, 1140 (9th Cir. 1991). Some plaintiffs have
claimed that signatures on account agreements were forged,
and Gruttadauria is a confessed forger. In addition, there are
other valid concerns, such as whether a trust was bound by
the signature of its trustee on separate accounts containing
arbitration agreements and signed in an individual capacity.
It is well-established that a lack of signatory power can
invalidate an arbitration clause. See, e.g., Burden, 267 F.3d
at 489-90.
We cannot reach these fact-intensive issues, and we
therefore “remand Plaintiffs’ allegations that the arbitration
agreements, separate from the loan agreements, are not
enforceable against them on ‘grounds as exist at law or in
equity for the revocation of any contract.’” Burden, 267 F.3d
at 493 (quoting 9 U.S.C. § 2 and Casarotto, 517 U.S. at 683.)
In making this determination, the district court is bound by
this court’s previous directives to district courts in Great
Earth and Javitch. Great Earth requires that, to invalidate the
arbitration clauses, “the evidence presented [must be] such