590 F.

2d 823

Fed. Sec. L. Rep. P 96,723

In the Matter of the Application of MERRILL LYNCH,
PIERCE,
FENNER & SMITH, INC. to Compel Arbitration,
pursuant to the United States
Arbitration Act, Title 9
U.S.C. 4, Petitioner,
v.
Milton M. MOORE and Sue Kendall Moore, Respondents.
Milton M. MOORE and Sue Kendall Moore, PlaintiffsAppellants,
v.
MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., a
corporation,
and Chuck Buland, an individual, Defendants-Appellees.
No 77-1887.

United States Court of Appeals,

Tenth Circuit.
Submitted Nov. 14, 1978.
Decided Dec. 29, 1978.
Rehearing Denied Jan. 24, 1979.

Frank Gregory and Benjamin P. Abney, of Chapel, Wilkinson, Riggs,

Abney & Keefer, Tulsa, Okl., for plaintiffs-appellants.
John S. Athens and Douglas L. Inhofe of Conner, Winters, Ballaine, Barry
& McGowen, Tulsa, Okl., for defendants-appellees.
Before McWILLIAMS, DOYLE and LOGAN, Circuit Judges.
WILLIAM E. DOYLE, Circuit Judge.

The question involved in this case is the enforceability of an arbitration clause

in an investment contract entered into by the plaintiffs-appellants, the Moores,
with Merrill Lynch, Pierce, Fenner & Smith, Inc. Named as a defendantappellee is one Chuck Buland, an account executive with the Merrill Lynch
organization. The particular stipulation provided that "(a)ny controversy
between us arising out of such option transactions of this agreement shall be
settled by arbitration before the National Association of Securities Dealers,
Incorporated, or the New York Stock Exchange, or the American Stock
Exchange * * *."

The suit filed by the appellants is alleged to arise under 15 U.S.C. 77q(a) and
10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b). However,
we need not determine whether the stipulation embraced this type of suit
sounding as it does in tort rather than in contract, because it turns on the related
question, that is, whether remedies arising under the Securities Act of 1933 and
the Securities Exchange Act of 1934 are waived as a result of the stipulation
providing for arbitration.

The action herein was originally brought in the State District Court at Tulsa,
Oklahoma. The complaint alleged negligence and breach of fiduciary duty by
Merrill Lynch in the handling of the plaintiffs' investments. Further allegations
were that the defendants had violated rules of the National Association of
Securities Dealers and the New York Stock Exchange. Merrill Lynch was a
member of both organizations. This original suit was started on January 19,
1976.

On April 2, 1976, Merrill Lynch brought the matter to a head by filing a

petition in the U.S. District Court, which sought an order which would have
required the plaintiffs to submit the controversy to arbitration pursuant to 4 of
the United States Arbitration Act, 9 U.S.C. 1, Et seq. This was a diversity
action.

The next move came from the Moores, who on April 29, 1976, dismissed their
claim in State Court and filed a new complaint in the United States District
Court. It was this complaint that alleged that the defendants had violated
17(a) of the Securities Act of 1933, 15 U.S.C. 77q(a); 10(b) of the
Securities Exchange Act of 1934, 15 U.S.C. 78j(b); and Rule 10b-5, 17
C.F.R. 240.10b-5.

The District Court described the complaint as alleging that the device, scheme
and artifice to defraud was employed toward plaintiffs, who were not

sophisticated business people.1

7

After a variety of hearings before the District Court an order was entered
directing the parties to proceed to arbitration before a National Association of
Securities Dealers tribunal. It is this judgment which the appellants seek to
reverse.

The position of the Moores on this appeal is that under the current case law
arbitration clauses such as this are not enforceable, but are void insofar as the
federal securities laws are concerned.2

I.
THE REMEDY UNDER THE 1933 ACT
9

There are a good many decisions which deal with the present question whether
securities claims are available to a plaintiff in the face of a waiver provision in
a contract calling for arbitration. The situation is also complicated by the
Arbitration Act, which itself is based on favorable policy considerations pitted
against the Securities Act of 1933, which on its part grants strong remedies to
an aggrieved person, See 22, and which contains also a provision, 14, which
in essence declares that an attempted waiver of the remedy under the Act is
void.

10

The leading authority on the question is that of the Supreme Court in Wilko v.
Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953). The difference
between Wilko and the case at bar is that the former considered a violation of
12(2) of the Securities Act of 1933. The case at bar is concerned with claims
allegedly arising under both the 1933 and 1934 Acts.

11

Merrill Lynch would have us limit the Wilko decision to the 12(2) case and
would have us hold that it does not apply to the Securities Exchange Act of
1934, 10(b), and Rule 10b-5. However, it is impossible to distinguish the
Wilko case in this manner, for, as will appear below, the parallel considerations
applicable to the two Acts make it impossible to draw such a distinction.

12

Merrill Lynch seeks to assert other contentions including, first, that the
plaintiffs' complaint fails to state a claim upon which relief may be granted
under 17 of the 1933 Act or 10(b) of the 1934 Act; second, that no relief
can be granted as to claims based on the rules of the National Association of
Securities Dealers or the New York Stock Exchange; third, that the trial should

be stayed pending the outcome of the arbitration proceeding. None of these

questions are before us at this time, and the only matter which we are reviewing
is the order of the trial court referring the case to arbitration.
13

The Wilko v. Swan opinion, Supra, written by Justice Reed, was concurred in
by six other Justices, with Justices Frankfurter and Minton dissenting, and
Justice Jackson filing a special concurring opinion. Involved in that case was a
12(2) violation of the Securities Act of 1933, which allows a recovery for
misrepresentation in the sale of stock. It differs from fraud at common law in
that the burden of proof as to lack of scienter is placed on the seller.

14

In Wilko, the action was by a customer against a securities firm seeking

damages for alleged misrepresentations in the sale of securities. As in the case
at bar there was an agreement for arbitration of any controversy arising in the
future between the parties. However, this was ruled to be void under 14 of the
Securities Act of 1933, which provides as follows:

Contrary Stipulations Void

15 14. Any condition, stipulation, or provision binding any person acquiring any
Sec.
security to waive compliance with any provision of this subchapter or of the rules
and regulations of the Commission shall be void.
16

The Supreme Court determined that 14 above rendered the stipulation for
arbitration void. It said that 22(a) of the 1933 Act could not be waived since it
gave the aggrieved person the right to select the judicial forum under the
Securities Act, and because attempts to circumvent 14 were void. The Second
Circuit ruling which had determined that the Securities Act did not prohibit the
agreement to refer future controversies to arbitration was set aside.

17

The Court reasoned (in Wilko ) that Congress intended to assure that sellers
could not maneuver buyers into a weakened position under the Securities Act.
The Court described the petitioner's position as being that arbitration lacks the
certainty of a suit under the Act to enforce his rights; that the arbitration
paragraph of the margin agreement constituted a stipulation that waives
"compliance with" the conditions of the Securities Act. The Court distinguished
fact situations in which payment for the commodity or disputes as to the
amount of money under a contract are involved. Clearly this was not the
situation at bar. This claim required findings on the purpose and knowledge of
the alleged violator of the law. Arbitrators are less capable of determining this
than judges. Furthermore, arbitration awards may be made without explaining
reasons, thereby limiting the power to vacate the award. Also, unrestricted

submission to an arbitrator does not provide complete review by the court of

appeals. Finally, the Court said that:
18 the protective provisions of the Securities Act require the exercise of judicial
As
direction to fairly assure their effectiveness, it seems to us that Congress must have
intended 14, note 6, Supra, to apply to waiver of judicial trial and review.
19

346 U.S. at 437, 74 S.Ct. at 188.

20

The Supreme Court did not overlook the policies that favor arbitration, but it
finally concluded that the Securities Act policies outweigh those favoring
arbitration so that the Securities Act had to prevail.

21

Section 14 was applied with full force to render the stipulation void.

22

The remaining question is whether Wilko v. Swan, supra, applies also to the
Securities Exchange Act of 1934, to 10(b) of that Act, and to Rule 10b-5
promulgated pursuant thereto.

23

The decision in Wilko is fully applicable to the 12(2) remedy under the 1933
Act contained in the case before us, because there is no difference between
Wilko and the 12(2) remedy here.

24

The decisions are virtually unanimous in following the Wilko opinion.

Weissbuch v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 558 F.2d 831 (7th
Cir. 1977);3 Sibley v. Tandy Corp., 543 F.2d 540, 543 (5th Cir.), Cert. denied,
434 U.S. 824, 98 S.Ct. 71, 54 L.Ed.2d 82 (1977); Ayres v. Merrill Lynch,
Pierce, Fenner & Smith, 538 F.2d 532 (3rd Cir.), Cert. denied, 429 U.S. 1010,
97 S.Ct. 542, 50 L.Ed.2d 619 (1976); Laupheimer v. McDonnell & Co., Inc.,
500 F.2d 21, 26 (2d Cir. 1974); Axelrod & Co. v. Kordich, Victor & Neufeld,
451 F.2d 838, 842-843 (2d Cir. 1971); Greater Continental Corporation v.
Schecter, 422 F.2d 1100 (2d Cir. 1970); Starkman v. Seroussi, 377 F.Supp. 518
(S.D.N.Y.1974); Reader v. Hirsch & Co., 197 F.Supp. 111 (S.D.N.Y.1961).

II.
THE REMEDY UNDER RULE 10b-5
25

Merrill Lynch maintains that if Wilko v. Swan, supra, has any application, it
must be limited to the remedy under the Securities Act of 1933; that it does not
therefore apply to the remedy that is alleged under the Securities Exchange Act

of 1934. On this it is necessary to recognize that the policy considerations in the

two instances with respect to the two remedies are not different. The purpose of
the Rule 10b-5 remedy is to protect the vulnerable purchasers of securities from
the aggressive and more sophisticated seller (or buyer). Even though the
arbitration proceeding may be faster and less costly to the public and, for that
matter, to the violator of the contract, the desirability of non-waiver of the
remedy would prevail.
26

The argument is made, however, that the source of the 10b-5 action is a
regulation and not directly derived from the 1934 Act. The answer to that is that
the non-waiver provision in the 1934 Act, 29(a), embraces a remedy under a
regulation. It provides:

Validity of Contracts
27
Section
29. (a) Any condition, stipulation, or provision binding any person to waive
compliance with any provision of this chapter or of any rule or regulation thereunder,
or of any rule of an exchange thereby shall be void.
28

Thus through 29(a), Congress carried the policy contained in 14 of the 1933
Act into the Securities Exchange Act of 1934. True it is not a word for word
replica, but it explicitly includes any Rule or Regulation thereunder which refers
to "any provision of this chapter." It also prohibits waiver of any rule of an
exchange required thereby. So Congress anticipated the present situation. The
cases have been unanimous in so holding. Greater Continental Corporation v.
Schecter, supra; Starkman v. Seroussi, supra; Reader v. Hirsch & Co., supra.

29

Merrill Lynch maintains, finally, that Wilko has been limited by the Supreme
Court in Scherk v. Alberto-Culver Co., 417 U.S. 506, 94 S.Ct. 2449, 41
L.Ed.2d 270 (1974). The issue in Scherk was the validity of an arbitration
agreement. Also, the complaint in that case arose under the 1934 Act and Rule
10b-5. The arbitration policies were allowed to prevail, but the Securities
remedies were being weighed against a different set of facts. Mr. Justice
Stewart, the author of the opinion, noted the difference between Wilko and
Scherk. The crucial factor in the decision was not the fact that it was a 10b-5
action. The Court was influenced instead by the Scherk facts. This was an
international transaction which was negotiated in the United States, England,
and Germany, signed in Austria, and closed in Switzerland. Many of the clauses
of the contract were in controversy. There was a stipulation for arbitration. It
was held that the arbitration clause was to be enforced by the federal courts in
accordance with the Arbitration Act. It was emphasized that to not give effect to
the arbitration clause would under these circumstances create uncertainty, since

there were substantial contracts in each of the two countries each on conflicts of
laws and also contractual provisions specifying in advance the forum in which
disputes shall be litigated together with the applicable law. Foreign contractors
were not conscious of the Securities remedies. The Court said:
30 a contract involves considerations and policies significantly different from
Such
those found controlling in Wilko. In Wilko, quite apart from the arbitration
provision, there was no question but that the laws of the United States generally, and
the federal securities laws in particular, would govern disputes arising out of the
stock-purchase agreement. The parties, the negotiations, and the subject matter of
the contract were all situated in this country, and no credible claim could have been
entertained that any international conflict-of-laws problems would arise. In this case,
by contrast, in the absence of the arbitration provision considerable uncertainty
existed at the time of the agreement, and still exists, concerning the law applicable to
the resolution of disputes arising out of the contract.
31

417 U.S. at 515-16, 94 S.Ct. at 2455.

32

In the case at bar, like the Wilko case which is distinguished in Scherk, there is
no question but that the laws of the United States generally, and the federal
securities laws in particular, would govern disputes arising out of stock
purchase agreements. The parties, the negotiations and the subject matter were
all within this country and no international conflicts of laws problem exists.
Scherk does not, therefore, apply to the instant case.

33

The conclusion we reach finds support in cases decided subsequent to Scherk.

There has been an almost universal tendency in these decisions to distinguish
Scherk. Thus in Sibley v. Tandy Corp., supra, it was held that the securities
agreement had to be stayed pending arbitration of the contract claims as "claims
under the Federal Securities Acts . . . are generally not subject to arbitration
under a preexisting arbitration clause, Wilko v. Swan, supra; Newman v.
Shearson, Hammill & Co., Inc., 383 F.Supp. 265 (W.D.Tex.1974)." Sibley v.
Tandy, supra, at 543.

34

The Sibley court observed that an argument based on Scherk could be

developed that would limit Wilko to claims brought pursuant to the 1933 Act,
but it refused to follow such a position. It claimed that the similarities
outweighed any differences which might exist and that the view that held
Wilko applicable to both the 1933 and 1934 Acts was correct.

35

Two other circuits have cases which are quite similar to our case. Merrill Lynch

was the party in both of these and both considered an arbitration agreement as
against the remedies in the 1933 and 1934 Acts. The Third Circuit in Ayres v.
Merrill Lynch, Pierce, Fenner & Smith, supra, perceived the "colorable"
contention made by Merrill Lynch that Wilko was inapplicable to judicially
implied causes of action under the Securities Exchange Act. It was not
"persuaded that either the differences between the rights granted in the 1933
and 1934 Acts or any consideration of policy warrant such a distinction." 538
F.2d at 536. In a footnote, the Third Circuit discussed the question raised in
Scherk, but dismissed it as a dictum which was not controlling.
36

The issue was tried again in the Seventh Circuit in Weissbuch v. Merrill Lynch,
Pierce, Fenner & Smith, Inc., 558 F.2d 831 (7th Cir. 1977). There Wilko and
Scherk were discussed in detail and it was determined that Scherk was limited
to situations involving international agreements, and the argument whether an
arbitration clause was valid in relation to Rule 10b-5 cases had not been
specifically dealt with by the Supreme Court. The Seventh Circuit concluded
that Wilko was the proper approach. It said that the significant difference was
that in Scherk, the parties were equals operating at arms length in protracted
and extensive negotiations prior to reaching the agreement. The bargaining
posture of the parties in Wilko and in Weissbuch was different. On this it was
said:

37 position of the plaintiff in the instant suit, however, can hardly be analogized to
The
the posture of the Alberto-Culver Company. The contract signed was the defendant's
"Standard Option Agreement" and there are no international considerations at play
as were present in Scherk.
38

558 F.2d at 835. Thus it was determined that notwithstanding the differences
between the two Acts, the reasoning of Wilko was applicable nevertheless.

39

We are convinced that the trial court was incorrect in its ruling that this case
was within the sweep of Scherk. The explicit provisions of the two Acts have
strong similarities. Unquestionably these are sales which were made in the
United States and were to be governed by United States laws, including the
Securities Acts and including the non-waiver provisions of those laws. To say
that the 10b-5 action is a federal common law remedy which is to be relegated
to some inferior position and not to be regarded as having been in the
contemplation of the parties does not make sense. Rule 10b-5 is, after all, the
most important remedy in both Acts. Besides that, 29(a) declares that
stipulations which would jettison actions arising under rules promulgated
pursuant to the statute are void, so we see no legal support for Merrill Lynch's
position.

40

Accordingly, the judgment of the district court is reversed, and the cause is
remanded with directions to that court to proceed in accordance with the views
expressed herein.

The words of the trial court describing the claim are as follows:
the defendant, Bulland (sic), was the agent and representative of Merrill Lynch
and through acts and practices, which constituted a device, scheme and artifice
to defraud plaintiffs (using instrumentalities of interstate commerce), plaintiffs,
although not sophisticated businessmen nor knowledgeable investors familiar
with the stock market nor with options, were involved, at the instance of
defendants in what they alleged was represented to them as being a
"conservative plan" to sell options on certain Dow Chemical Company stock
owned by plaintiffs. Needless to say, it is plaintiffs' contention that the account
was not handled properly and that they sustained losses and are entitled to
recover the sum of $30,000 with interest from the date of judgment.

On December 24, 1974, Milton Moore signed a "Standard Option Agreement"

prepared by Merrill Lynch. Paragraph five of that Agreement provides:
Any controversy between us arising out of such option transactions or this
agreement shall be settled by arbitration before the National Association of
Securities Dealers, Incorporated, or the New York Stock Exchange, or the
American Stock Exchange, only. I shall have the right of election as to which of
the foregoing tribunals shall conduct the arbitration. Such election is to be by
registered mail, addressed to Merrill Lynch's head office at 165 Broadway, New
York, N.Y. 10006, attention of the Law Department. The notice of election is to
be postmarked within five days after the date of demand to make such election.
At the expiration of the five days I hereby authorize Merrill Lynch to make
such election on my behalf.
On March 12, 1975, Moore signed an additional agreement. This agreement
states:
It is agreed that any controversy between us arising out of your business or this
agreement, shall be submitted to arbitration conducted under the provisions of
the Constitution and Rules of the Board of Governors of the New York Stock
Exchange, except however if the controversy involves any security or
commodity transaction or contract relating thereto executed on an exchange
located outside of the United States then such controversy, at the election of
either of us, shall be submitted to arbitration conducted under the Constitution
and rules of such exchange (and if neither of us so elects, arbitration shall be

conducted under the provisions of the Constitution and Rules of the Board of
Governors of the New York Stock Exchange). Arbitration must be commenced
within one year after the cause of action accrued by service upon the other of a
written notice of intention to arbitrate, naming therein the arbitration tribunal.
3

Some of the above-cited cases approve the doctrine of the Wilko decision and
apply it to the 1934 as well as the 1933 Act