Tuesday, January 18, 2005
C.A. Will Not Compel Arbitration With Defunct Securities Firm
By KENNETH OFGANG, Staff Writer/Appellate Courts
A securities firm that has wound up its business and is no longer an active member of the National Association of Securities Dealers cannot compel an account holder to participate in an NASD arbitration, the Court of Appeal for this district ruled Friday.
Div. Eight affirmed an order by Los Angeles Superior Court Judge Leon Kaplan denying WMA Securities, Inc.’s petition to compel Linda Provencio and Lori Berke to arbitrate claims that the firm breached its fiduciary duties and committed fraud in connection with its handling of their Individual Retirement Accounts.
WMA sought to compel arbitration under the standard form agreements the two had signed when they opened their accounts. The plaintiffs, however, argued—among other things— that the agreement was unenforceable because NASD rules provide that claims against firms that are no longer members are “ineligible for submission to arbitration” absent the client’s written consent.
The trial judge was correct in denying the petition to compel, Justice Laurence Rubin concluded for the Court of Appeal.
The selection of the NASD as the forum for arbitration automatically incorporated all of that organization’s rules into the agreement, Rubin explained, and precludes enforcement of the agreement if that forum is unavailable.
The justice cited Alan v. Superior Court (2003) 111 Cal.App.4th 217, a case stemming from the refusal of the NASD to arbitrate cases under California’s ethical standards for contractual arbitrators, which are more stringent and give courts more control than the NASD standards.
Since the California standards were adopted under legislation passed in 2001, the NASD has insisted that parties either waive those standards or arbitrate in other states. (The issue of whether federal securities laws preempt application of the California standards to NASD arbitrations is pending before the state Supreme Court).
In Alan, this district’s Div. One remanded to the trial court to determine whether arbitration in another state was appropriate under choice-of-law principles. If not, the appellate panel said, the lack of an NASD forum would permit the plaintiff to proceed in state court.
Rubin Friday rejected WMA’s claim that the agreement was enforceable because the NASD was willing to arbitrate cases involving the company even though it was no longer a member, even without client consent.
Even if this is true, Rubin wrote, there is no authority for “the dubious contention that the NASD’s occasional disregard of its own rules in other cases somehow strips respondents of their contractual right to rely on and enforce those rules.”
Attorneys on appeal were Michael A. Firestein and Joshua J. Pollack of Proskauer Rose LLP for WMA and Glendale practitioner Jeffrey A. Kopczynski for the plaintiffs.
The case is Provencio v. WMA Securities, Inc., 05 S.O.S. 201
Copyright 2005, Metropolitan News Company