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GOODWIN v. ELKINS & CO.

March 25, 1983

J. DONALD GOODWIN
v.
ELKINS & CO., et al.



The opinion of the court was delivered by: FULLAM

 FULLAM, District Judge.

 The defendants have filed a Motion to Dismiss all of plaintiff's claims under the federal securities laws, pursuant to F.R.C.P. 12(b)(6), and a Motion to Stay and Compel Arbitration of all other claims asserted in the Complaint. The relevant facts are gleaned from the pleadings.

 Plaintiff was a general partner in the brokerage firm of Elkins & Company, and a registered representative. He had been associated with that firm for more than 20 years when, in 1981, he became dissatisfied with the management policies of the firm, and announced his resignation as of October 1981. He was prevailed upon to withdraw his resignation and continue with the firm until at least March 31, 1982, so as to avoid undue prejudice to the firm. In February 1982, plaintiff was advised that it would be more convenient if his withdrawal from the firm were to take effect as of January 1, 1982. Plaintiff acquiesced in that suggestion, and his withdrawal from the firm was effectuated as if it had occurred on January 1, 1982. Plaintiff asserts that, in connection with the February agreement, plaintiff was falsely and fraudulently advised that no sale or merger of the firm was in contemplation; and that the defendants fraudulently concealed from plaintiff the fact that such negotiations were then actively being pursued. On March 17, 1982, the Elkins firm was purchased by and merged into Bache, Halsey, Stewart, in a transaction which was financially advantageous to the general partners of the Elkins firm. Plaintiff seeks to recover the difference between the amount paid to him upon his withdrawal (representing the value of his interest calculated as of January 1, 1982) and the amount which would have been paid to him had his interest been valued as of the date originally agreed upon, March 31, 1982. Plaintiff also seeks punitive damages.

 Plaintiff asserts violations of § 10(b) of the Securities Exchange Act of 1934, as amended, 15 U.S.C. § 78j(b) and Rule 10b-5 promulgated thereunder, and, under state law, breaches of fiduciary duty and common law fraud. In addition to invoking federal-question jurisdiction under the Securities Exchange Act, 15 U.S.C. § 78aa and 28 U.S.C. § 1331, plaintiff asserts that the parties are of diverse citizenship and that the amount in controversy exceeds $10,000, so that 28 U.S.C. § 1332(a) also establishes jurisdiction.

 Paragraph 31 of the partnership agreement provides:

 
"Any controversy arising hereunder will be determined by arbitration pursuant to the Constitution and Rules of the Board of Governors of the New York Stock Exchange."

 In addition, it is undisputed that, in his application to the New York Stock Exchange for allied membership, plaintiff agreed to abide by the constitution and rules of the Exchange, which require that "any controversy" between allied members is to be resolved by arbitration. New York Stock Exchange Constitution Article VIII, Section 1.

 It is clear that, with the possible exception of plaintiff's 10(b) claims, all of plaintiff's claims fall within the arbitration provision. As stated by the Pennsylvania Supreme Court in Waddell v. Shriber, 465 Pa. 20, 30, 348 A.2d 96 (1975):

 
"When parties create a contractual relationship which includes a broad arbitration agreement, they intend to include within the scope of arbitration any dispute arising from the termination of that contractual relationship unless they clearly evidence a purpose to exclude such disputes."

 On the other hand, claims of violation of the federal securities laws may be pursued in federal court irrespective of contractual provisions which would otherwise require arbitration, Wilko v. Swan, 346 U.S. 427, 98 L. Ed. 168, 74 S. Ct. 182 (1953); and there is authority for the proposition that if there is substantial overlap and duplication between arbitrable and non-arbitrable claims, it is inappropriate to sever the arbitrable claims and require their submission to an arbitration which would be largely duplicative of the judicial proceeding. See, Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Haydu, 675 F.2d 1169 (11th Cir. 1982); Sawyer v. Raymond James & Associates, Inc., 642 F.2d 791 (5th Cir. 1981). The crucial question, therefore, is whether, on the facts pleaded, plaintiff can establish liability under the federal securities laws.

 Accepting as true the averments in plaintiff's Complaint, it is clear that material misrepresentations and concealment of material facts occurred. The question is whether these were "in connection with" the purchase or sale of a "security".

 The seminal definition of a "security" is set forth in SEC v. W.J. Howey Co., 328 U.S. 293, 298-99, 90 L. Ed. 1244, 66 S. Ct. 1100 (1946), namely, "a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of a promoter or third party." Plainly, the interest of a general partner in the partnership would not ordinarily fit within that definition, in view of the control and participation of the partner, and the expectation of profit generated in part by his own efforts. As the parties recognize, however, there is authority for the conclusion that, in some circumstances, "the mere fact that an investment takes the form of a general partnership or joint venture does not inevitably insulate it from the reach of the federal securities laws." Williamson v. Tucker, 645 F.2d 404, 422 (5th Cir.), cert. denied, 454 U.S. 897, 70 L. Ed. 2d 212, 102 S. Ct. 396 (1981). The Williamson court expressed the view that

 
"[if a partner has] irrevocably delegated his powers, or is incapable of exercising them, or is so dependent on the particular expertise of the promoter or manager that he has no reasonable alternative to reliance on that person, then his partnership power may be inadequate to protect him from the ...

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