Goldsmith v. Pinez

84 F.Supp.2d 228

Greg GOLDSMITH, Craig Anderson, Metropolis Trading Co., Timothy Werner and Lakota Trading, Inc., Plaintiffs, v. Emanuel PINEZ and Lehman Brothers Inc., Defendants.

No. CIV. A. 98-10242-PBS.

United States District Court, D. Massachusetts.

February 28, 2000.

Vincent M. Amoroso, Robert A. McCall, Peabody & Arnold LLP, Boston, Sarah R. Wolff, Sachnoff & Weaver, Marie R. Quinn, Sachnoff & Weaver, Ltd., Chicago, IL, for Greg Goldsmith, Craig Anderson, Metropolis Trading Company, Timothy Werner, Lakota Trading Inc., Plaintiffs.

John D. Donovan, Jr., Mark Szpak, Crystal D. Talley, Ropes & Gray, Boston, for Emanuel Pinez, Lehman Brothers Inc., Defendants.

MEMORANDUM AND ORDER

SARIS, District Judge.

INTRODUCTION

This case arises from a now-familiar set of facts involving alleged insider trading, the relationship between the two defendants, Lehman Brothers, Inc. ("Lehman") and Emanuel Pinez, the former C.E.O. of Centennial Technologies, Inc, ("Centennial") and a set of options trades entered into between the plaintiffs and Lehman just before Centennial's stock dropped dramatically. The plaintiffs, who are "market makers" at the Chicago Board of Options Exchange ("CBOE"), lost nearly $3.7 million as a result of options trades executed by Lehman, on behalf of Mr. Pinez, in February of 1997. They allege that Lehman violated federal securities laws, as well as Illinois state law, in making these trades.¹ Specifically, the market makers allege that Lehman made representations containing materially false and misleading information, and omitted to state material facts necessary to render such statements true at the time they were made. They further claim that Lehman's representations that it was trading on behalf of a customer were fraudulent and deceptive.

Lehman has moved to dismiss the complaint, asserting: 1) that plaintiffs' allegations fail to meet the heightened pleadings standards to establish scienter under the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-4; 2) that plaintiffs are attempting to impose primary liability on a secondary actor, contrary to the rule of Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 114 S.Ct. 1439, 128 L.Ed.2d 119 (1994); and 3) that plaintiffs' misrepresentation claim stemming from Lehman's assertions during trading that it was a customer should fail because the statements were entirely true and did not need to be supplemented. Plaintiffs have filed a motion to stay these proceedings to pursue a private arbitration claim before the CBOE. Lehman opposes the motion to stay, asserting that plaintiffs waived their right to arbitrate by filing in this Court in the first instance and by taking other actions that Lehman alleges are inconsistent with an intent to arbitrate.

Despite all that has now transpired involving these plaintiffs and Lehman, Lehman has not made a showing that it would be prejudiced by a stay in this matter. I therefore ALLOW plaintiffs' motion to stay these proceedings pending arbitration.

BACKGROUND FACTS

The complaint essentially tracks the factual summaries provided in the two previous decisions rendered in litigation brought by the SEC against Mr. Pinez and Lehman. See SEC v. Pinez, 989 F.Supp. 325 (D.Mass.1997), remanded by SEC v. Lehman Brothers, Inc., 157 F.3d 2 (1st Cir.1998). I incorporate those factual summaries here.

PROCEDURAL HISTORY

The legal fallout from the final days of Mr. Pinez's reign over Centennial has been substantial, and provides relevant context for consideration of the present dispute. On February 14, 1997, the SEC filed a civil action against Mr. Pinez, charging that he secured the options trades at issue though the use of insider knowledge about Centennial's true financial health. On March 14, 1997, the SEC added Lehman as a relief defendant, since the proceeds from the options trades remained in Mr. Pinez's margin account at Lehman. Plaintiffs participated in the SEC action as interested parties, filing notices of appearance, attending hearings, filing amicus briefs in March and September of 1997, and filing a memorandum in support of continuing the freeze order in September of 1997. On December 16, 1997, this Court issued a preliminary injunction, freezing the assets in the Lehman account. See Pinez, 989 F.Supp. at 345.

On February 6, 1998, the plaintiffs filed this action against Mr. Pinez and Lehman.² On March 31, 1998, after a status conference and upon agreement of the parties, this Court issued an order staying these proceedings. The purpose of that stay was to await the resolution of the SEC's action against Mr. Pinez and Lehman. If the SEC had been successful in its action against Lehman, that could have obviated plaintiffs' need to pursue this private action.

But that case did not prove successful. On October 5, 1998, the First Circuit remanded the preliminary injunction matter to this Court due to its interpretation of governing New York law. See Lehman, 157 F.3d at 9. Specifically, the court found that Lehman Brothers' conduct did not amount to subjective bad faith which would negate its status as a bona fide purchaser under New York law. See id. at 7. The court went on to find that the SEC had not shown that Lehman had "deliberately closed its eyes" to Pinez's misconduct, and that, from the perspective of Lehman, "misconduct was merely a possibility." Id. At a status conference on January 27, 1999, the SEC indicated that it would not likely continue its action against Lehman. The stay in this matter was also lifted at that time. On June 10, 1999, Lehman was formally dismissed as a defendant in the SEC action.

With the stay lifted, Lehman answered plaintiffs' complaint, and filed its motion to dismiss, on February 17, 1999. Plaintiffs filed, and Lehman assented to, a motion to extend time to respond to the motion to dismiss. Plaintiffs' response was due on March 23, 1999; on that date, plaintiffs filed their motion to stay, or, in the alternative, to extend time to respond to the motion to dismiss. They also filed a timely request to arbitrate and a statement of claim before the CBOE, which alleges violations of state and federal law as well as CBOE rules. Prior to that time, plaintiffs had not indicated that they would seek arbitration. This Court ordered plaintiffs to file a response to the motion to dismiss, and heard oral argument on all pending motions on August 3, 1999. There have been no pretrial proceedings other than the status conference in which the case was stayed, and no discovery in this case.

DISCUSSION

Plaintiffs seek a stay pursuant to Section 3 of the Federal Arbitration Act ("FAA")³ so that they may pursue arbitration of their claims before the CBOE.⁴ Lehman argues that by filing this action, and by participating actively in the SEC action, plaintiffs have waived their right to arbitrate. Because I conclude that the First Circuit requires that a party opposing a motion to compel arbitration must show prejudice, see Navieros Inter-Americanos v. M/V Vasilia Express, 120 F.3d 304, 316 (1st Cir.1997), Lehman's argument fails.

In considering whether a party has waived its arbitration right,⁵ courts are consistently mindful of the strong federal policy favoring arbitration. The Supreme Court has emphasized that any doubt concerning arbitrability "should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability." Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983). Waiver is not to be lightly inferred. See Page v. Moseley, Hallgarten, Estabrook & Weeden Inc., 806 F.2d 291, 293 (1st Cir.1986) (citing Rush v. Oppenheimer & Co., 779 F.2d 885 (2d Cir.1985)), overruled on other grounds sub nom. Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987). Nonetheless, courts have consistently held that a party may implicitly waive its right to arbitrate by engaging in litigation. See, e.g., Navieros Inter-Americanos, 120 F.3d at 316; Caribbean Ins. Servs., Inc. v. American Bankers Life Assurance Co., 715 F.2d 17, 19 (1st Cir.1983).

The First Circuit has laid out a set a factors for courts to consider in determining whether a party, by conduct in court, has waived arbitration rights:

In determining whether a party to an arbitration agreement, usually a defendant, has waived its arbitration right, federal courts typically have looked to whether the party has actually participated in the lawsuit or has taken other action inconsistent with his right, ... whether the litigation machinery has been substantially invoked and the parties were well into preparation of a lawsuit by the time an intention to arbitrate was communicated by the defendant to the plaintiff, ... whether there has been a long delay in seeking the stay or whether the enforcement of arbitration was brought up when trial was near at hand ... Other relevant factors are whether the defendants have invoked the jurisdiction of the court by filing a counterclaim without asking for a stay of the proceedings, ... whether important intervening steps (e.g. taking advantage of judicial discovery procedures not available in arbitration ...) had taken place ... and whether the other party was affected, misled, or prejudiced by the delay ....

Jones Motor Co., Inc. v. Chauffeurs, Teamsters, and Helpers Local Union No. 633, 671 F.2d 38, 44 (1st Cir.1982) (Breyer, J.) (quoting Reid Burton Constr., Inc. v. Carpenters Dist. Council, 614 F.2d 698, 702 (10th Cir.1980)).

Under the Jones Motor criteria, the most powerful factor pointing towards waiver is that the plaintiffs themselves filed this claim; they not only "participated" in the lawsuit, they initiated it, and in doing so most certainly invoked the jurisdiction of this Court. This is a relevant...