Disputes With Former Brokerage Firms and Brokers Must be Arbitrated

In two related decisions the a New York U.S. Bankruptcy Court determined that a failed broker-dealer must arbitrate (under the NASD Code of Arbitration) its differences with a former registered representative and the firm that hired him — even though the defunct firm is no longer is an NASD member — and that an arbitration agreement is even enforced when the party seeking recovery is in bankruptcy.

According court records, in 2000, M. Carleton Boothe went to work for NASD member firm Continental Broker-Dealer Corp. and received $300,000 he was to repay if he left the firm within five years other than through death or disability. Boothe resigned in 2004 and joined Gunnallen Financial Inc. Continental soon closed and was expelled from the securities industry.

After Continental was then thrown into bankruptcy, the bankruptcy court trustee for Continental sought to recover the unpaid balance of the note from Boothe and to obtain damages from Gunnallen Financial for claims including “raiding” its brokers and stealing its clients. Boothe and Gunnallen then sought to enforce certain arbitration agreements to move these actions from bankruptcy court to NASD arbitration. The bankrultcy court agreed.

Claims against brokerage firms and/or their representatives virtually always be determined in securities arbitration, not in court. This is because investors almost universally execute agreements containing agreements to arbitrate. Meanwhile, in their licensing agreements, all NASD member firms and registered representatives also agree to arbitrate any and all disputes with other member firms or registered representatives. (Such agreements do not cover disputes totally unrelated to the securities industry.)

Prior to these decisions, it was uncertain as to whether arbitration agreements could be enforced by defendants seeking to avoid being taken into a bankruptcy court by a bankruptcy trustee, in a suit for damages or to collect a debt alegedly owed to the bankrupt person or entity. (Parties being sued in bankruptcy court by a bankruptcy trustee often feel they can not get a favorable outcome and may prefer to have claims against them determined in arbitration.)

Furthermore, these decisions hold that, even if a brokerage firm or broker is no longer in the securities industry, an arbitration agreement in place at the time of the wrongdoing and/or when the claim arose is enforceable by either party to the agreement to keep the claim from going to court, even bankruptcy court.

While the facts of any matter can result in a different outcome, these decisions likely mean an investor must arbitrate with, and can not sue, a former securities broker, securities firm or those who controlled that firm, for claims which arose when those parties were in the securities industry. As well, if an individual or institution investor is in bankruptcy, the investor’s claim against either a current or former broker or firm will likely not be determined in bankruptcy court but instead in arbitration, with any funds awarded then turned over to the bankruptcy trustee.

In re Continental Broker-Dealer Corp. (Stern v. Boothe), Bankr. E.D.N.Y., Case No.: 04-85318-JBR; Adv. Pro. No.:806-08370-JBR, 5/9/07; In re Continental Broker-Dealer Corp. (Stern v. Gunnallen Financial Inc.), Bankr. E.D.N.Y., Case No.: 04-85318-JBR; Adv. Pro. No.: 807-08003-JBR.

Over the past 17 years, Shepherd Smith and Edwards has represented institutional and individual investors in more than 1,000 claims in securities arbitration. Less than a handful of other law firms can claim such experience in this field. If you or your company has sustained significant investment losses, contact Shepherd Smith and Edwards to schedule a free conficential consultation with one of our attorneys.