Doerge also did not transfer funds from another portfolio Tarrson held with Doerge Capital to her
Bear Stearns account until July 17, 2001. (Compl. { 87.) On or about October 9, 2001, Tarrson
filed her civil complaint in the Northern District of Illinois against defendants. Tarrson’s action
arises from defendants’ alleged misrepresentations and omissions to her in connection with her
investment in Partners, resulting in losses exceeding $1 million. Movant defendants BLC, Inc.,
Coleman and Doerge subsequently moved to compel Tarrson to arbitrate her claims according to
the Agreement’s arbitration clause? and to stay the instant litigation. On September 18, 2002, the
court denied movant defendants’ motion to compel because movant defendants sought to
arbitrate in New York, New York and the court determined, subject to the Agreement’s forum
selection clause, only a district court in New York could compel arbitration. The court, however,
stayed the instant litigation to allow movant defendants to pursue arbitration. Movant defendants
now renew their motion to compel arbitration and stay the instant litigation but seek arbitration
with NASD, presumably with a NASD office located in the Northern District of Illinois.
DISCUSSION

A. Petition to compel arbitration

The Federal Arbitration Act (“FAA”), 9 U.S.C. § 4, enables a party to invoke the
authority of a court to enforce an arbitration agreement by compelling the reluctant party to
arbitrate a dispute. Section 4 provides:

A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate
under a written agreement for arbitration may petition any United States district

Movant defendants also moved to arbitrate the claims according to the “BLC Partners, L.P. Subscription
Agreement and Suitability Statement” (‘the Subscription Agreement”). The court, however, disregards the
Subscription Agreement as further evidence of an agreement to arbitrate between the parties because there is no
evidence that Tarrson signed it and her complaint goes towards defendants’ failure to produce documents, including
the Subscription Agreement. (PI. Resp. at 4-5.)


only to the “introducing broker,” and (3) the anti-waiver provision of section 29(a) of the
Securities Exchange Act of 1934, 15 U.S.C. 78cc(a),° (and section 14 of the Securities Act of
1933, 15 U.S.C. § 77n’) renders the arbitration clause void. With respect to (1) and (2), the
movant defendants show that the non-movants defendants may arbitrate their dispute with
Tarrson before NASD, citing NASD Rule 10101° and 10314(d),° and by providing examples of
other arbitrations involving non-members. (Def. Resp. to Pl. Supp. Resp. at 1-2.)

With respect to (3), Tarrson’s assertions that arbitration is barred by the anti-waiver
provisions require a closer look. Tarrson argues that she is presenting an issue of first impression
that “the dramatically low customer recovery rates” in arbitration under self-regulatory
organizations (“SROs”) such as NASD violate the anti-waiver provisions of the securities laws.

(Pl. Supp. Resp. at 7.) Tarrson tracks the Supreme Court’s interpretation of how mandatory

*Section 29(a) of the Securities Exchange Act of 1934 provides:
Any condition, stipulation, or provision binding any person to waive compliance with any
provision of this chapter or any rule or regulation thereunder, or of any rule or an exchange
required thereby shall be void.

15 U.S.C. § 78cc(a).
7Section 14 of the Securities Act of 1933 provides:
Any condition, stipulation, or provision binding any person acquiring any security to waive
compliance with any provision of this subchapter or of the rules and regulations of the Commission
shall be void.

15 U.S.C. § 770,

NASD Rule 10101 provides that any matter “between or among members or associated persons and public
customers, or others” is eligible for submission to arbitration. (Emphasis added).

°NASD Rule 10314(4) provides, in relevant part, that:

.+» All persons may be joined in one action as respondents if there is asserted against them, jointly
or severally, any right to relief arising out of the same transaction, occurrence, or series of
transactions or occurrences and if any questions of law or fact common to all respondents will arise
in the action.


Court has explained that the FAA ‘established that, as a matter of federal law, any doubts
concerning the scope of arbitrable issues should be resolved in favor of arbitration.” Kiefer
Specialty Flooring, Inc. v. Tarkett, Inc., 174 F.3d 907, 909 (7" Cir. 1999), quoting Moses H.
Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983). “[The] plaintiff bears
the burden of establishing that the arbitration clause is unenforceable.” Stewart v. Molded
Plastic’s Research of Ill., Inc., No. 01 C 4232, 2001 WL 1607464, at *1 (N.D. Il. Dec. 17,
2001), citing Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220, 226-27 (1987) (“The
burden is on the party opposing arbitration, however, to show that Congress intended to preclude
a waiver of judicial remedies for the statutory rights at issue.”).

Defendants read the arbitration clause broadly such that the Agreement extends to “all
matters without exception” (Def. Mem. at 5; Reply at 4 (emphasis in original)) and cites
numerous cases where courts have granted motions to compel arbitration based on similar
arbitration clauses. See Cricchio v. Dyckman, 82 F. Supp. 2d 626, 629, 631 (E.D. Tex. 2000)
(compelling arbitration based on a clause pertaining to “all controversies” between the plaintiff
and Bear Stearns and “all matters” between the plaintiff and the defendant-brokers even though
monies for the investment leading to the litigation apparently came from “a different account”
(The facts do not indicate whether this account was maintained by Bear Stearns or whether
defencants were the brokers)); see also Konits v. Bear, Stearns Sec. Corp., No. 98 C 8364, 2000
WL 52521, at *3 (S.D.N.Y. Jan. 24, 2000) (compelling arbitration between Bear Steams and the

plaintiffs who had brokerage accounts with an independent broker-dealer that cleared its business

plaintiff's position “in 1995 would have [known] that she would be agreeing to arbitrate” but whether Tarrson would
have known. (PI. Resp. at 4.) There is no record evidence to support this position.

6



court that, save for such agreement, would have jurisdiction under Title 28, in a

civil action . . . of the subject matter of a suit arising out of the controversy

between the parties, for an order directing that such arbitration proceed in the

manner provided for in such agreement. ... The court shall hear the parties, and

upon being satisfied that the making of the agreement for arbitration or the failure

to comply therewith is not in issue, the court shall make an order directing the

parties to proceed to arbitration in accordance with the terms of the agreement.
9US.C. § 4. The court has jurisdiction of this matter since it would otherwise have jurisdiction
under 28 U.S.C. § 1331 (federal question).

The FAA provides that an arbitration clause in a “contract evidencing a transaction
involving commerce . . . shall be valid, irrevocable, and enforceable, save upon such grounds as
exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. “[W]hen a contract
contains an arbitration clause, a strong presumption in favor of arbitration exists and courts have
no choice but to order arbitration unless it may be said with positive assurance that the arbitration
clause is not susceptible of an interpretation that covers the asserted dispute.” CK Witco Corp. v.
Paper Allied Indus., Chem. & Energy Workers Int'l Union, 272 F.3d 419, 421-22 (7 Cir. 2001)
(internal citations and quotations omitted). The court will enforce an arbitration agreement if (1)
a valid agreement to arbitrate exists and (2) that agreement covers the underlying dispute. See
We Care Hair Dev., Inc. v. Engen, 180 F.3d 838, 844 (7" Cir. 1999).

With respect to the former, the parties do not dispute that a valid agreement

exists.’ They do disagree whether the Agreement covers the underlying dispute. “The Supreme

3Tarrson, however, does argue that the Agreement’s “adhesive nature . . . lends further support to [her]
interpretation of [the Agreement’s] intended scope{,]” which may possibly be construed as an argument that a valid
agreement does not exist. (Pl. Resp. at 3.) Tarrson cites Caldwell v. KFC Corp., 958 F. Supp. 962, 974-75 (D.N.J.
1997), where the court held that the parties’ employment agreement was a contract of adhesion because the plaintiff,
who had an 11" grade education and a criminal record, “would not have reasonably understood that in signing the
KFC employment application he was agreeing to arbitrate a future statutory civil rights claim for retaliatory
termination.” Jd. at 975. The standard, which was applied in Caldwell, is not whether “a reasonable person” in the

5


the undersigned to Judge St. Eve). The court determined that the scope of the arbitration
agreement did not include “disputes not involving Bear Stearns or disputes where Bear Stearns
did not maintain accounts and did not act as clearing agent,” but rather was limited to disputes
relating to accounts maintained by Bear Stearns. Jd. at *4. Bear Stearns did not serve as the
clearing agent for the sales to the plaintiff by the defendants (which did not appear to include
Partners according to the plaintiff's complaint) of private investments that gave rise to the
litigation. Jd. at *3-5. Relying in part on Coors, 51 F.3d at 1516,° Judge St. Eve concluded that
the arbitration agreement did not cover the sale of the private investments. Jd. at *4.

Here, BLC, Inc. introduced Tarrson to Bear Stearns, Bear Sterns maintained Tarrson’s
accounts and Tarrson’s monies for her investment in Partners came to Bear Stearns from her
account with Doerge Capital, a division of BLC, Inc. (For example, see Comp. §f 11, 59.)
While the complaint is painstaking not to mention Bear Stearns, the facts before the court unlike
the facts in Stone, point to the inference that Bear Stearns acted as a clearing agent for the monies
for Tarrson’s investments in Partners until the relationship deteriorated into the situation giving
ise to this law suit. Thus, the Bear Steams account is related to the underlying dispute.

Nevertheless, Tarrson makes additional arguments as to why this litigation is not subject
to arbitration, namely, (1) the NASD rules only allow arbitration between NASD members and

the non-movant defendants are not members (Pl. Supp. Resp. at 2), (2) the Agreement applies

“Remarkably, movant defendants, whose counsel also represent some of the defendants in Stone, did not
bring this case to the court’s attention.

5The court quoted the Coors court’s hypothetical, “[I}f two small business owners execute a sales contract
including a general arbitration clause, and one assaults the other, we would think it elementary that the sales contract
did not require the victim to arbitrate the tort claim because the tort claim is not related to the sales contract.” Stone,
2002 WL 31307422, at *4,


_

sate Order Form (06/97)
-
United States District Court, Northern District of Dlinois
Name of Assigned Jud; Judge if Oth
me ed ae Joan H. Lefkow pete
CASE NUMBER 0107761 DATE 2/13/2003
CASE Linda Tarrson vs. BLC Partners, et al.
TITLE
[In the following box (a) indicate the party filing the motion, e.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
MOTION: of the motion being presented.]
DOCKET ENTRY:
(1) q Filed motion of [ use listing in “Motion” box above.]
(2) o Brief in support of motion due
(3) oO Answer brief to motion due . Reply to answer brief due.
4 a Ruling/Hearing on set for at
(5) Oo Status hearing{held/continued to] [set for/re-set for] on set for at
(()) qg Pretrial conference[held/continued to] [set for/re-set for] on set for at
(7) a Trial[set for/re-set for] on at
(8) QO [Bench/Jury trial] [Hearing] held/continued to at
(9) o This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]
OOFRCP4(m) OLocal Rule 41.1 COFRCP41(a\(1) CFRCP41(a)(2).

do {Other docket entry) | Enter Memorandum Opinion and Order. Defendants’ renewed petition to

compel arbitration and to stay litigation [7-1] is granted. The case is stayed pending resolution of the

arbitration.
al) [For further detail see order attached to the original minute order.]

No notices required, advised in open court.

No notices required.

oa | Notices mailed by judge's staff,

Notified counsel by telephone.

Docketing to mail notices.

Mail AQ 450 form. yung Jomisia sn
Copy to judge/magistrate judge. !
courtroom 2221 ud EL da eu
MD deputy’s ; oa
inte Upatetimie recetted it
central Clerk's Office



with respect to all the parties under the doctrine of abstention. See Creative Foods of Ind., Inc. v.
My Favorite Muffin, Too, Inc., No. IP01-0228-C-T/G, 2002 WL 244577, at *4 (S.D. Ind. Jan. 14,
2002) (relying on IDS Life Ins. Co. v. Sunamerica Co., 103 F.3d 524, 529-30 (7" Cir. 1997), to
stay litigation against the defendants, including non-parties to the arbitration agreement).
Although Tarrson indicates that the liability of the non-movant defendants is “independent” of
the liability of the movant defendants (Pl. Supp. Resp. at 2), based on its review of Tarrson’s
counts in her complaint, the court finds otherwise. The court, therefore, proceeds to address the
petition to stay the litigation.

Under § 3 “‘a district court, when presented with an application for a stay of proceedings
pending arbitration, must grant the requested stay where two conditions are satisfied: (1) the
issue is one which is referable to arbitration under an agreement in writing for such arbitration,
and (2) the party applying for the stay is not in default in proceeding with such arbitration.”

C. Itoh & Co. (Am.) Inc. v. Jordan Int'l Co., 552 F.2d 1228, 1231 (7 Cir. 1977). The court will
stay an action in order to prevent duplicative proceedings where a party has already commenced
an arbitration. Briggs & Stratton Corp. v. Local 232, Int'l Union, Allied Indus. Workers of Am.
(AFL-CIO), 36 F.3d 712, 715 (7* Cir. 1994). For the same reasons why the Agreement covers
the underlying dispute, the instant case is referable to arbitration under the Agreement. Further,
there is no evidence that movant defendants are in default in proceeding with arbitration. The
court, therefore, will grant movant defendants’ petition to stay the instant litigation with respect

to all parties.

11



arbitration clauses comport with the anti-waiver provisions, citing Wilko v. Swan, 346 U.S. 427,
435 (1953) (determining enforcement of mandatory pre-dispute arbitration agreements weakened
the customers’ ability to recover under the Securities Act of 1933, 15 U.S.C. §§ 77a et seq., and
holding Congress intended that such agreements were violative of the anti-waiver provision),
McMahon, 482 U.S. at 238 (declining to extend Wilko to the Securities Exchange Act of 1934,
15 U.S.C. § 78j(b), and holding the Securities and Exchange Commission (“SEC”) had
“sufficient authority to ensure that arbitration is adequate to vindicate” the customers’ rights
under securities laws; therefore, the arbitration agreements did not violate the anti-waiver
provision), and Rodriguez De Quijas v. Shearson/Am. Express, Inc., 490 U.S. 477, 484-86
(1989) (overruling Wilko).. Tarrson derives from the cited cases that the SEC does not review the
results of SRO arbitration. Tarrson relies on “post-McMahon” data from the Securities
Arbitration Commentor, Inc. (“SAC”) and a General Accounting Office Report from 1992 on
securities arbitrations to argue that claimants fare better in courts than arbitration proceedings,
particularly with regards to claimants who sought over $1 million in compensatory damages. (P].
Supp. Resp. Exs. C and D.) Although customer recovery rates through arbitration, coupled with
lack of oversight by the SEC, may indicate that arbitration is not advantageous to investors, in the
end, Tarrson has not shown how this court may disregard well-established Supreme Court
precedent based on her data.

Accordingly, the court will grant defendants’ motion to compel arbitration.

B. Petition to stay litigation

Defendants also petition the court to stay the litigation. As a threshold matter, although

not all the parties in the instant case are parties to the Agreement, a court may stay the litigation

10



through Bear Stearns based on the broad language that the parties agreed to arbitrate all
“controversies” arising from transactions in the Bear Stearns accounts); R. Allen Fox, Ltd. v.
Stratton Oakmont, Inc., No. 93 C 2228, 1993 WL 433777, at *2-4 (N.D. Ill. Oct. 25, 1993)
(compelling arbitration between the plaintiffs and the defendants-brokers based on a similar
agreement with Bear Stearns).

Tarrson, however, argues that the instant case “does not relate in any way to the
[Agreement] or the account opened [with Bear Stearns under] that Agreement” (PI. Resp. at 1)
and that defendants do not show that her investment in Partners “cleared” through Bear Stearns
(PI. Resp. at 3). Tarrson relies on Coors Brewing Co. v. Molson Breweries, where the court
interpreted an arbitration agreement that extended only to matters “arising in connection with the
implementation, interpretation or enforcement of” the agreement or to matters “related to the
sales contract” and held that the plaintiff's antitrust claims related to the parties’ licensing
agreement concerning confidential and proprietary information were arbitrable whereas the
plaintiff's antitrust claims concerning matters outside of the parties’ licensing agreement such as
market concentration were not arbitrable. 51 F.3d 1511, 1515-18 (10" Cir. 1995); see also Hill’s
Pet Nutrition, Inc. v. Fru-Con Constr. Corp., 101 F.3d 63, 66 (7" Cir. 1996) (determining that
the arbitration clause extended to “any dispute, claim or action relating to this Agreement” but
finding that the dispute was not arbitrable because the dispute went to the interpretation of terms
that the parties left open and did not agree to pass onto an arbitrator).

Recently, Judge Amy St. Eve of this court denied some of the same defendants’ petition
for an order to compel arbitration based on virtually the same agreement. Stone v. Doerge, No.

02 C 1450, 2002 WL 31307422, at *5 (N.D. Ill. Oct. 15, 2002) (a case that was reassigned from



Bear[] Stearns . . . carries your account(s) as clearing agent for your broker.

Unless Bear[] Stearns . . . receives from you prior written notice to the contrary

[Bear Stearns] may accept from such other broker, without inquiry or

investigation: (a) orders for the purchase or sale of securities and other property in

your account(s) on margin or otherwise and (b) any other instructions concerning

your account(s) or the property therein. ... You agree that your broker [(BLC,

Inc.)] and its employees are third-party beneficiaries of this Agreement, and that

the terms and conditions hereof, including the arbitration provisions, shall be

applicable to ail matters between or among any of you, your broker and its

employees and Bear Stearns and its employees.
(Ex. B, | 8 (emphasis added).)

Throughout the next five to six years, defendants, mainly Doerge, persuaded Tarrson to
invest in Partners, to the tune of approximately $2 million of Tarrson’s assets from October 1997
to June 2000. (Compl. 431.) Tarrson’s monies in Partners came mainly from an account she
maintained with BLC, Inc. and Doerge Capital. (For example, see Comp. ff 11, 38(d), 59.) On
or about October 23, 2000, defendants informed Tarrson that Partners was liquidating. (Compl.
| 76.) Subsequently, Tarrson learned that her approximately $2 million investment in Partners
was worth $674,607.37. (Compl. ¢ 77.) On Partners’ liquidation, Tarrson instructed BLC, Inc.
and non-movant defendant Mathew Coleman, Jr. to transfer any and all of her assets held by
Partners, Doerge Capital, or BLC, Inc. to her brokerage account with Bear Stearns. (Compl.
783.) Coleman, non-movant Mathew Coleman, Jr. and/or Doerge, contrary to Tarrson’s
directions, opened a new account in Tarrson’s name with BLC, Inc. in December, 2000 and
placed $400,000 from Partners’ liquidation in that account. (Compl. J 84.) Not until on or about
July 17, 2001 did BLC, Inc. finally transfer monies from Partners’ liquidation to Tarrson’s Bear
Stearns account and they only transferred $374,716.93, approximately $300,000 less than what

Tarrson was entitled to receive from Partners’ liquidation. (Compl. {J 85-86.) BLC, Inc. and



BACKGROUND

BLC, Inc, is incorporated in New York with its principal place of business there as well.
It is a member of NASD and, along with non-movant defendant Balis, Lewittes & Coleman, LP
(‘BLC, LP”), held itself out as the Investment Manager of non-movant defendant BLC Partners
(“Partners”), a limited parmership. (Compl. { 11.) BLC, Inc. was responsible for making
investments for Partners and for establishing policies and procedures to achieve Partners’
business objectives. (/d.) Coleman was a Vice President of BLC, Inc. as well as the Fund
Manager and an advisor for Partners. (Compl. { 12.) Doerge is a registered
representative/investment advisory representative of BLC, Inc. and is responsible for the business
affairs of Doerge Capital, a division of BLC, Inc. (Compl. { 13.)

In early 1995, Doerge formed Doerge Capital as an investment business. (Compl. § 24.)
Doerge solicited Tarrson, a former client of his when he worked at Goldman Sachs & Co., to
invest with Doerge Capital. In March 1995, Tarrson moved almost $1 million dollars of her
assets from Goldman Sachs & Co. to Doerge Capital. (Compl. 25.) Around that same time, on
or about February 23, 1995, Tarrson also opened a brokerage account with Bear Stearns
Securities Corporation (“Bear Stearns”) through BLC, Inc., the introducing broker. (Pet. { 1.) In
opening her account, Tarrson signed a Customer Agreement (the “Agreement”) with Bear
Stearns. The Agreement provides, in relevant part, “YOU AGREE, AND BY MAINTAINING
AN ACCOUNT FOR YOU BEAR STEARNS AGREES, THAT CONTROVERSIES ARISING
BETWEEN YOU AND BEAR STEARNS, . .. SHALL BE DETERMINED BY

ARBITRATION[,]” (Def. Ex. B, § 21) and that:


UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
LINDA TARRSON,
Plaintiff

No. 01 C 7761
Judge Joan H. Lefkow

vs.

BLC PARTNERS, LP, BALIS, LEWITTES
& COLEMAN, INC., COLEMAN CAPITAL
MANAGEMENT LLC,

MATHEW COLEMAN, SR.,

MATHEW D. COLEMAN, JR., and

DAVID J. DOERGE,

Midian
Me Ps
FER 14 Hi

we ewww we Serer

Defendants.

MEM« D' PINION AND ORDE:

Before the court is the renewed petition of defendants, Balis, Lewittes & Coleman, Inc.
(“BLC, Inc.”), Mathew Coleman, Sr. (“Coleman”) and David Doerge (“Doerge”) (collectively,
“movant defendants”), for an order to compel plaintiff Linda C. Tarrson (“Tarrson”) to arbitrate
her claims before the National Association of Securities Dealers (“NASD”) and to stay the
instant litigation pursuant to 9 U.S.C. §§ 1 et seq.' The court’s jurisdiction rests in 28 U.S.C.

§ 1331 (federal question) and § 1367 (supplemental jurisdiction). For the reasons set forth

below, the court grants the petition.

‘Although movant defendants did not formally file a renewed petition, the defendants sought
reconsideration of their original petition after a petition to compel arbitration in New York was made, as this court

had directed, and denied. | gq



ORDER
Movant defendants’ renewed petition to compel arbitration and to stay the litigation is

granted [#7]. This case is stayed pending resolution of the arbitration.

ENTER:_ Geos i pega
AN HUMPHREY LEFKOW
United States District Judge

Date: February 13, 2003

12