Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_07-cv-01599/USCOURTS-cand-3_07-cv-01599-5/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Injunctive &amp; Declaratory Relief

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United States District Court

For the Northern District of California

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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

GOLDMAN SACHS & CO. and GOLDMAN

SACHS EXECUTION & CLEARING, L.P.,

Plaintiffs,

 v.

ANTHONY J. BECKER and CECELIA

FÁBOS-BECKER,

Defendants. /

No. C 07-01599 WHA

ORDER GRANTING MOTION

FOR PRELIMINARY

INJUNCTION

INTRODUCTION

In this action under the Federal Arbitration Act, plaintiffs seek a preliminary injunction

against defendants to prevent them from pursuing claims alleged in an arbitration proceeding

before the National Association of Securities Dealers. Defendants present several theories of

why plaintiffs should be bound to arbitrate a dispute. Plaintiffs have made strong showing of a

likelihood of success on the merits by presenting evidence that there is no agreement or

relationship between plaintiffs and defendants that would require plaintiffs to arbitrate any

dispute between them. Plaintiffs have also shown a threat of irreparable injury should the

arbitration proceed. Accordingly, plaintiffs motion for a preliminary injunction is GRANTED. 

STATEMENT

Defendants pro se Anthony J. Becker and Cecelia L. Fábos-Becker are husband and

wife. In June 2006, they filed a statement of claims with National Association of Securities

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Dealers Dispute Resolution, Inc., to initiate arbitration proceedings against plaintiffs Goldman

Sachs & Co., and Goldman Sachs Execution and Clearing, L.P. A variety of other entities who

provide financial services were also named in the Beckers’ statement of claims including

Prudential Financial Services. Prudential is not a party to this action. The gravamen of the

Beckers’ NASD complaint appears to be that Prudential’s financial advisors gave them

investment advice ill-suited to their situation, failed to notify them of significant changes in

their accounts in a timely manner, failed to execute transactions as instructed, and

misrepresented features of investment products the Beckers purchased (Floren Decl. Exh. A,

5–11). Defendants also argue that plaintiffs own their mortgage and are responsible for secretly

denying them governmental mortgage relief. 

Defendants purchased investment products from Prudential at sometime before this

action commenced. Plaintiffs appear to be named in the arbitration claim by virtue of their

various alleged connections with Prudential. According to the vice president of the legal

department at Goldman Sachs, plaintiffs have never held any securities for the Beckers (Fryman

Decl. ¶ 5). Defendants’ arbitration claim against plaintiffs appears to be based, at least in part,

on plaintiffs’ underwriting an initial public offering of stock by Prudential, and Prudential’s

underwriting an initial public offering by Goldman Sachs (Floren Decl. Exh. A). Defendants

also allege that Goldman Sachs controls Prudential by owning some of its stock. 

In the arbitration proceeding, defendants also allege that plaintiffs own the mortgage on

their home in San Jose (id. at 14). Defendants claim to have written to their mortgage servicer,

Ocwen Federal Bank, FSB, asking for verification that plaintiffs owned the mortgage. The

letters were not answered (id. at 15). Because defendants did not get confirmation regarding

who owned their mortgage, they claim they were unable to get mortgage relief from the

government when their small business was destroyed by a natural disaster. The Beckers seem

to claim that plaintiffs somehow intentionally interfered with their ability to get mortgage relief. 

Plaintiffs declare that they have never owned the mortgage on defendants’ house

(Fryman Decl. ¶ 6). They explain that defendants’ original lender, who was unrelated to

plaintiffs, sold defendants’ mortgage as part of a portfolio of mortgages to GSMC, one of

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plaintiffs’ affiliates (id. at ¶ 7). The mortgage is now owned by MTGLQ Investors, L.P., a

subsidiary of GSMC (ibid.). 

Defendants commenced the arbitration proceeding, Anthony J. Becker, et al. v.

Prudential Securities Inc. nka Prudential Equity Group, et al., NASD-DR Arbitration Number

06-2947, in June 2006 (Fryman Decl. ¶ 9). Plaintiffs were served with the Beckers’ statement

of claim. On November 29, 2006, the date by which a response was due, plaintiffs filed an

objection to the NASD’s jurisdiction (Floren Decl. Exh. B). Defendants responded to plaintiffs’

objection using many of the arguments repeated herein on December 25, 2006 (Floren Decl.

Exh. C). Both parties filed another round of briefing. In a one-paragraph memorandum, the

NASD denied plaintiffs’ jurisdictional objection on February 14, 2007. The memorandum also

stated that “this case will proceed in this forum against all NASD member firms and their

associated persons” (Floren Decl. Exh. F). 

Goldman Sachs filed this action on March 27, 2007, for declaratory and injunctive

relief. Jurisdiction over this action is proper because of complete diversity of citizenship of

parties, and the amount in controversy exceeds $75,000 because defendants’ claims for

damages in arbitration exceed that amount. At the same time they filed a motion for relief in

the arbitration action (id. at Exh. G). The NASD held a preliminary arbitration hearing on

March 28, 2007 (id. at ¶ 12). At the hearing, the arbitration panel chair declined to rule on the

motion for relief from arbitration, encouraged plaintiffs and defendants to work toward an

expedited resolution, and asked them to report back to the arbitration panel by April 30, 2007

(ibid.). Briefing schedules were set for the other parties to the arbitration. 

Plaintiffs file this motion for a preliminary injunction on May 1, 2007. On June 5, 2007,

defendants filed an ex parte application for a temporary restraining order enjoining plaintiffs

from taking any action to foreclose on defendants’ house. Both the application for a temporary

restraining order and plaintiffs’ motion for a preliminary injunction were heard on June 7, 2007. 

Defendants’ application for a temporary restraining order was denied. The Court asked for a

statement of reasons from a staff attorney at NASD arbitration, Elaine Kohn, explaining why

plaintiffs’ motion to be excused from arbitration was denied. This was received on June 20,

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2007, and is discussed below. Plaintiffs filed an administrative motion to respond to the

NASD’s letter. The motion was granted, and defendants were also given an opportunity to

respond. They did so on June 28, 2007. 

ANALYSIS

To prevail on a motion for a preliminary injunction in the Ninth Circuit:

The moving party must show either (1) a combination of probable

success on the merits and the possibility of irreparable injury, or

(2) that serious questions are raised and the balance of hardships

tips sharply in favor of the moving party. 

Stuhlbarg Int’l Sales Co., Inc. v. John D. Brush and Co., Inc., 240 F.3d 832, 839–40 (9th Cir.

2001) (citation omitted); see also Arcamuzi v. Cont’l Air Lines, Inc., 819 F.2d 935, 937 (9th Cir.

1987). “These standards ‘are not separate tests but the outer reaches of a single continuum.’”

Stuhlbarg, 240 F.3d at 840 (internal citation omitted). 

1. PROBABLE SUCCESS ON THE MERITS.

“[T]he test for a preliminary injunction is ‘probable success on the merits’ or ‘fair chance

of success on the merits.’” Johnson v. Cal. State Bd. of Accountancy, 72 F.3d 1427, 1430 (9th

Cir. 1995) (internal citations omitted); see also Republic of the Philippines v. Marcos, 862 F.2d

1355, 1362 (9th Cir. 1988) (finding that probable success equates to a showing of “a fair chance

of success”). Plaintiffs argue that they are entitled to a preliminary injunction against their

participation in the NASD arbitration initiated by defendants. 

A. Arbitrability of Defendants’ Claims.

The arbitrability of disputes connected with transactions involving interstate commerce is

governed by the Federal Arbitration Act. 9 U.S.C. 2. “Unless the parties clearly and

unmistakably provided otherwise, the question of whether the parties agreed to arbitrate is to be

decided by the court, not the arbitrator.” AT&T Techs., Inc. v. Communications Workers of Am.,

475 U.S. 643, 649 (1986). The usual presumption in favor of arbitration is reversed when

deciding the issue of whether a particular dispute is arbitrable. Where parties did not agree to

submit the question of arbitrability to the arbitrator, the court should decide the question

independently. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943 (1995). “One

party’s membership in an exchange is insufficient, in and of itself, to evidence the parties’ clear

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and unmistakable intent to submit the ‘arbitrability’ question to the arbitrators.” John Hancock

Life Ins. v. Wilson, 254 F.3d 48, 57 (2d Cir. 2001). 

Here, plaintiffs argue that there is no indication that plaintiffs and defendants contracted

to have the question of arbitrability submitted to an arbitrator. Indeed, plaintiffs contend that

there never was a relationship of any kind between plaintiffs and defendants. The Beckers’

argument seems to be that they submitted the dispute to arbitration by the NASD, so it must be

arbitrable. Furthermore, they urge that the issue of arbitrability was “vetted” by various people

and organizations and that plaintiffs’ attempts to get out of arbitration were “denied” by various

government officials (Opp. 2). The NASD did deny plaintiffs’ motion to be excused from

arbitration, but it is far from clear from the NASD’s response that they closely considered the

question of arbitrability. Elaine Kohn stated that “[an NASD] Dispute Resolution [staff

attorney] performs a narrow, mechanical analysis of the claims . . .” (Kohn Letter at 1). That the

NASD looked at the claims and determined, in rather cursory fashion, that the dispute was

arbitrable, does not indicate that there was any intent by the parties to submit the question of

arbitrability to NASD Dispute Resolution. Defendants assertions to the contrary in their

response to the NASD’s letter are equally unavailing. There is little indication that the NASD

actually took a close look at the complaint to see if there was an agreement or relationship that

governed the question of arbitrability. 

“Merely arguing the arbitrability issue to an arbitrator does not indicated a clear

willingness to arbitrate that issue, i.e., a willingness to be effectively bound by the arbitrator’s

decision on that point.” First Options of Chicago, 514 U.S. at 946. Throughout this proceeding,

plaintiffs never evinced any intent to submit the question of arbitrability to the arbitrator. 

Defendants were the only willing party, so there was no agreement to be bound by the

arbitrator’s decision. Furthermore, there is no clear indication from the NASD’s responses that it

analyzed the question of whether it should decide whether the dispute is arbitrable. In

defendants’ response to the NASD’s letter, they state that the SEC recommended that they file a

claim in arbitration. These responses do not, as defendants argue, indicate that the dispute was

arbitrable. It appears that the SEC was merely directing defendants to a preferred method of

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dispute resolution. Accordingly, plaintiffs have shown that they did not intend to submit the

question of arbitrability to the arbitrator. Thus, they have shown that they have a reasonable

likelihood of success in proving that this Court should determine the question of arbitrability. 

B. Contract to Arbitrate.

This order now turns to whether there was an agreement to arbitrate between the parties. 

“[A]rbitration is a matter of contract and a party cannot be required to submit to arbitration any

dispute which he has not agreed so to submit.” United Steelworkers of America v. Warrior &

Gulf Nav. Co., 363 U.S. 574, 582 (1960). Plaintiffs present evidence that there was no

agreement of any kind between plaintiffs and defendants. Indeed, defendants seem to have

conceded that there was no explicit agreement to arbitrate between themselves and Goldman

Sachs. Defendants instead contend that their various agreements with other parties bind

plaintiffs to arbitrate disputes. 

Defendants first argue that their agreement with Prudential Securities is enforceable here

against plaintiffs because Goldman Sachs has an ownership stake in Prudential. It is well-settled

that a corporation and its shareholders are distinct legal entities. Dole Food Co. v. Patrickson,

538 U.S. 468, 474 (2003). Even if shareholders exercise control, they are not personally liable

for a corporation’s contracts. United States v. Best Foods, 524 U.S. 51, 61–62 (1998). Thus,

even if defendants had agreed by contract to arbitrate disputes with Prudential, as they contend,

this contract does not bind Goldman Sachs to participate in arbitration. Defendants also argue

that the arbitration clause in their mortgage with WMC Mortgage Corporation binds Goldman

Sachs to arbitration. Even assuming that the arbitration clause would bind the mortgage’s

current owner, plaintiffs have shown evidence that a subsidiary of an affiliate of Goldman Sachs

— MTGLQ Investors — and not Goldman Sachs itself, owns defendants’ mortgage. An

agreement with an affiliate is not enough to bind plaintiffs to arbitration. 

Defendants next argue that because Goldman Sachs acted as an underwriter in one of

Prudential’s initial public offerings, and Prudential acted as an underwriter in one of Goldman

Sachs’ initial public offerings, Goldman Sachs should be bound by Prudential’s arbitration

agreement. Defendants’ reliance on In re Initial Public Offering Sec. Litig., 227 F.R.D. 65 (S.D.

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N.Y. 2004) is misplaced. That decision did not hold that underwriters of initial public offerings

were liable for all subsequent acts by the company making the initial public offering. It

discussed holding underwriters liable for acts or omissions in connection with the initial public

offering itself. That decision does not justify extending an underwriter’s liability to all

subsequent transactions, as defendants here attempt to do. Id. at 105–06. Furthermore, this

decision is no longer good law. See In re Initial Public Offering Sec. Litig., 471 F.3d 24 (2d Cir.

2006) (vacating district court’s decision to certify class and remanding for further proceedings). 

In their response to the NASD’s letter, defendants also cite to Credit Suisse Securities

(USA) v. Billing, 127 S.Ct. 2383 (June 18, 2007), for the proposition that investors in a company

are the customers of that company’s underwriters. Defendants are correct that this decision

noted that the SEC has authority to supervise the activities of underwriters. Id. at 2392. The

Credit Suisse decision, however, dealt with whether the antitrust laws could be applied to

allegedly anticompetitive practices in underwriting initial public offerings. The Supreme Court

held that they could not. Id. at 2396. This decision simply does not address the question of

whether disputes are arbitrable. Additionally, there is no indication on these facts that the

Beckers participated in the initial public offering of Prudential itself. Defendants only allege that

they received financial advice and bought investment products from Prudential. Accordingly,

plaintiffs have shown that they have a substantial likelihood of success to show that they are not

bound by contract to arbitrate this dispute. 

C. NASD Arbitration Rules. 

 Defendants finally argue that plaintiffs are bound by the NASD’s arbitration rules to

arbitrate this dispute. Plaintiffs are NASD members (Fryman Decl. ¶¶ 4–5). For NASD

members, certain disputes are required to be submitted to arbitration. In their opposition,

defendants cite to Rule 10100 which governs those disputes which may be submitted for

arbitration. Rule 10301, which governs disputes that are required to be submitted for arbitration,

states (Floren Decl. Exh. H):

Any dispute, claim, or controversy eligible for submission under

Rule 10100 Series between a customer and a member and/or an

associated person arising in connection with the business of such

member or in connection with the activities of such associated

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persons shall be arbitrated under this Code, as provided by any

duly executed and enforceable written agreement or upon demand

of the customer. 

Plaintiffs first argue that defendants are not their “customers” within the definition of the

rules. The NASD rules define the term “customer” broadly, excluding only brokers and dealers. 

NASD Rule 0120(g). The Ninth Circuit has not interpreted the meaning of a customer under the

NASD rules. Other courts have held that a direct customer relationship between the member and

the purported customer is not necessary, i.e., that the Beckers never opened an account with

plaintiffs is not in itself fatal. John Hancock, 254 F.3d at 60. “In order for someone to be a

‘customer,’ there must be some nexus between the investor and the member or associated person

in order for a party to take advantage of the NASD arbitration provision.” Malak v. Bear Stearns

& Co., Inc., 2004 WL 213014, *4 (S.D. N.Y. 2004). Other courts have interpreted “customer” to

require the purchase of securities from that NASD member, or to require at least some informal

business relationship between parties. See Fleet Boston Robertson Stephens v. Innovex, Inc., 264

F.3d 770 (5th Cir. 1993); BMA Financial Servs., Inc. v. Guin, 164 F. Supp. 2d 813, 819 (W.D.

La. 2001).

As mentioned above, the Court asked for a statement of reasons from NASD Dispute

Resolution regarding why it denied plaintiffs’ objections to proceeding in arbitration. The

response stated that Dispute Resolution staff only determines whether claims fall within the

scope of disputes eligible for arbitration. “The decision not to deny the Dispute Resolution

forum in this case was a very narrow decision based solely upon definitions and provisions of the

Code of Arbitration Procedure and the NASD Manual” (NASD Letter at 1). Ms. Kohn went on

to explain that the NASD looked at the definitions and determined that the Beckers were a

customer of Goldman Sachs by taking the allegations in their claims as true. Specifically, the

NASD’s decision seemed to rely on the Beckers’ statement that the dispute arose out of

Goldman Sachs’ business. 

Here, it appears that the NASD assumed all of the Beckers’ allegations and statements in

their claims to be true, and then determined whether they were “customers” under the rule. On a

motion for preliminary injunction, however, this order may take into account evidence that

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directly contradicts the Beckers’ statement of claims. Closer consideration of any alleged

customer relationship between plaintiffs and defendants shows that such relationships are too

tenuous to drag plaintiffs into arbitration. 

Defendants seem to argue that they are customers of plaintiffs either through Goldman

Sachs’ having been an underwriter for Prudential Securities’ initial public offering or through

Goldman Sachs’ allegedly owning defendants’ mortgage. Just as these arguments do not support

a contractual relationship with plaintiffs, they do not support a customer relationship either. 

Defendants’ customer relationship, if any, was with Prudential Securities. Although defendants

purchased investment products from Prudential, they did not purchase stock in Prudential itself,

so they have no connection to plaintiffs through Prudential Securities’ initial public offering. As

to the mortgage, defendants’ customer relationship is more likely with MTGLQ Investors or

their mortgage servicer. 

Defendants also argue that plaintiffs are “associated persons” of Prudential subject to the

arbitration agreement. Under NASD bylaws, an “associated person” is intended to describe only

natural persons. NASD By-Law Art. I, § (cc). For instance, a natural person associated with an

investment bank who was authorized to sell securities on its behalf could be an associated person

under NASD rules. See, e.g., John Hancock, 254 F.3d at 60. Here, plaintiffs present evidence

that they are a corporation and a New York limited partnership, neither of which are natural

persons. N.Y. Partnership Law § 121-101. It appears that plaintiffs cannot be associated

persons under the NASD rules. Accordingly, plaintiffs have made a strong showing of

likelihood of success. Indeed, defendants have not presented any evidence of a relationship,

contractual or otherwise, between plaintiffs and themselves. 

2. BALANCE OF HARDSHIPS.

“Subjective apprehensions and unsupported predictions . . . are not sufficient to satisfy a

plaintiff’s burden of demonstrating an immediate threat of irreparable harm.” Carribean Marine

Serv. Co. v. Baldridge, 884 F.2d 668, 675–676 (9th Cir. 1988). Plaintiffs argue that they will be

irreparably harmed if they are required to expend time and resources in defending against

defendants’ claims in arbitration. Simply put, they never agreed to settle disputes with

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defendants in arbitration. See Merrill Lynch Inv. Managers v. Optibase, Ltd., 337 F.3d 125, 129

(2d Cir. 2003) (affirming grant of preliminary injunction in favor of a party resisting arbitration

because the dispute was outside the arbitration agreement). Plaintiffs contend that they would

lose money and their employees’ time if they had to defend these claims in arbitration. 

Additionally, plaintiffs did not delay in seeking this injunction. This motion was filed only a few

days after the initial arbitration hearing. Attorney’s fees could possibly compensate the expense,

but given defendants’ financial situation, it is not clear that plaintiffs could ever recover them

even if they were available. Accordingly, they have shown a threat of irreparable harm. 

Defendants argue that the balance of hardships should tip in their favor. This order need

not reach the balance of hardships because plaintiffs have shown a strong likelihood of success

on the merits and a threat of irreperable harm. Defendants contend, however, that plaintiffs have

much greater financial resources with which to pursue this action, and that defendants’ personal

situation shows that the hardships favor them. This is likely true. Shortly before this motion

was heard, defendants filed an application for a temporary restraining order seeking to enjoin

plaintiffs from taking action to foreclose on defendants’ home. This application was denied

because plaintiffs simply had no control over foreclosure on the property. In short, defendants

were going after the wrong parties because plaintiffs had no power to stop the foreclosure. 

Defendants’ situation is certainly unfortunate, but it does not compel the conclusion that

plaintiffs should have to defend against claims in arbitration where they had never agreed to do

so. Accordingly, plaintiffs motion for a preliminary injunction is GRANTED.

CONCLUSION

For all of the above-stated reasons, defendants are enjoined pending resolution of this

action from prosecuting the NASD arbitration against plaintiffs. This is without prejudice to

prosecution of the arbitration against all other parties and is without prejudice to any other party

to the arbitration seeking arbitration relief against plaintiffs. Since defendants are pro se parties,

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this order will alert them that they may be obligated under Rule 13 of the Federal Rules of Civil

Procedure to file a counterclaim (if it can be done in good faith) against plaintiffs as to any claim

arising out of the same transaction or occurrence, on pain of waiver. 

IT IS SO ORDERED.

Dated: July 2, 2007. WILLIAM ALSUP

UNITED STATES DISTRICT JUDGE

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