involved with the brokerage firm”). The answer is that she had no way of knowing that Smith

"was allegedly dealing with her in a special and limited role as agent of one particular entity. To
the contrary, any person in this situation would have been reasonable in believing that Smith was
working at least in part on behalf of WSI.

This case does not present any legitimate concem about remote liability to a member firm
similar to the concern that motivated the Brown court. In such cases, the member firm came to
court and contested jurisdiction on the ground that it had no connection with or close relationship
to the agent and did not profit in any way from the agent’s activities. See, e.g., Mony Sec. Corp.
v. Vasquez, 238 F.Supp.2d 1304, 1307 (M.D. Fla. 2002) (securities firm did not receive any
profits or commissions from the transactions at issue). In contrast here, WSI has settled with
Bartolini and is not contesting the claim that she was its customer. We therefore have the odd
scenario of Smith arguing that Bartolini was not WSI’s customer even though WS itself is not
here making the argument. Moreover, it is clear that WSI was closely involved in this matter and
that it benefitted from Bartolini’s investments in a direct way in the form of large commissions

on trades made for World Capital.

-13-



On March 26, 2001, the arbitrators ordered WSI and Smith, jointly and severally, to pay
Bartolini $401,111.95 in out-of-pocket losses, $100,000 in punitive damages, $75,000 in
attorneys’ fees, and $15,000 for witness and other fees for a total of $591,111.95. The arbitrators
specifically concluded that Smith and WSI (i) “committed fraud while acting in a fiduciary
capacity;” (ii) “obtained [Bartolini’s] money under false pretenses;” and (iii) engaged in a
“malicious and willful violation of trust and confidence placed in them by [Bartolini].” The
panel awarded Bartolini $100,000 in punitive damages to “punish [Smith and WST] and deter
them [] from similar treatment of public customers.” (Arb. Award at 4.)

Smith and WSI filed this action seeking to vacate the arbitration award. Subsequently,
WSI settled with Bartolini and is no longer a part of this action. Bartolini filed a counter petition
to confirm the arbitration award. The parties agreed to file simultaneous cross-motions for
summary judgment. We have reviewed these briefs as well as the supporting exhibits and
affidavits.

DISCUSSION

Smith argues that this dispute is not arbitrable under Section 10301 of the NASD Code of
Arbitration Procedure because (i) Bartolini was not a “customer” and (ii) she did not purchase a
“security.” Neither argument has merit. See Sections I & I. Even if there were some doubt
about whether this dispute were arbitrable based on the NASD Code, we would still find it
arbitrable under the Uniform Submission Agreement executed by Smith. See Section II.

L Was Bartolini A “Customer” Under NASD Section 10301?
Both sides agree that the general question of whether this dispute is arbitrable is governed

by NASD Code Section 10301(a), which states as follows:

4



(CLUSION

For the reasons set forth above, Bartolini’s motion for summary judgment is granted;
Smith’s motion is denied; and summary judgment is awarded in favor of Bartolini. The NASD
arbitration award is hereby confirmed in all respects. In her counter petition, Bartolini has also
requested interest at the statutory rate from March 26, 2001, plus costs and disbursements. If
Smith wishes to oppose these requests, he must file a brief within three weeks from the date of
this opinion. Bartolini shall have two weeks thereafter to file a reply. The court will rule by

mail.

ENTER:

. NORDBERG
r United States District Cow

-17-



falls within the scope of Rule 10301, and is subject to the mandatory arbitration
procedure. See, e.g., John Hancock Life Ins. Co., 254 F.3d at 59-60 (expressly
rejecting holding of [Brown] as contrary to plain language of Rule 10301); see
also Vestax Sec. Corp., 280 F.3d at 1081-1082 (customers of an associated person
entitled to arbitration); BMA Fin. Servs., Inc. v. Guin, 164 F.Supp.2d 813, 820
(W.D. La. 2001) (“‘customer’ plainly refers to either the member’s or the
associated person’s customer”); Vestax Sec. Corp. v. Skillman, 117 F.Supp.2d
654, 657 (N.D. Ohio 2000) (“The fact that defendants never opened accounts with
plaintiff is irrelevant. By conducting business with plaintiff's registered
Tepresentative, defendants conducted business with plaintiff and became its
customers.”) (citing WMA Sec., Inc. v. Ruppert, 80 F.Supp.2d 786, 789 (S.D. Ohio
1999); First Montauk Sec. Corp. v. Four Mile Ranch Dev. Co., 65 F.Supp.2d.
1371, 1381-82 (S.D. Fla. 1999) (NASD member forced to arbitrate a claim
brought by a customer of an associated person, even when the account was held at
another brokerage firm).

Id, 1376-77 (footnote omitted).?

In sum, we do not agree with the first prong of Smith’s argument and find that Bartolini
need only show that she was Smith’s customer (not WSI’s customer) and that her dispute arose
out of his activities. She can easily meet this burden. No one would dispute that she was
Smith’s customer. She met with him face-to-face. He gave her investment advice. She followed

that advice. It is that simple. Therefore, arbitration is warranted on this ground alone.

?To be fair, we note that — a week after Hornor — one district court did rely on the
reasoning of Brown. See Mony Sec. Corp. v. Vasquez, 238 F.Supp.2d 1304, 1307-08 (M.D. Fla.
2002). However, this decision does not change our conclusion because, like Brown, it addressed
amore compelling factual scenario.

-9-



Interpreting this language in a straightforward and commonsense manner, we think it is clear that
this dispute is arbitrable regardless of whether or not (as discussed in Section LB) there was any
connection to WSI.

First, it is undisputed that Smith was an associated person. Second, there can be no
dispute that Bartolini’s claims arose out of the “activities” of Smith — specifically, his investment
advice and his actions in carrying out this advice. Third, the only remaining point even arguably
in dispute is whether Bartolini was a “customer.” Smith focuses heavily on the word “customer”
and believes that it carries with it an implied requirement that Bartolini must have been a
customer of the member firm or that the associated person must have been acting in his role as
an associated person at the time of the dispute.

We are not persuaded by either assertion. Section 10301 contains no language explicitly
imposing any such requirements. Moreover, the first assertion — that Bartolini must show that
she was a customer of WSI — makes no sense as a matter of logic. As noted above, Section 10301
contains two separate pathways to arbitration — one involving disputes with a member firm and a
separate one involving disputes with an associated person. Under Smith’s interpretation, the
second pathway would be redundant and would collapse into the first.

The second assertion — that Bartolini must show that Smith was acting in his role as an
associated person of WSI — has no merit as well. Again, there is no such requirement in the text
of 10301, which merely refers to the fact that one party to the dispute must have the general
status of an “associated person.” Moreover, Section 10301 does not require (as it could have)
that the dispute with the associated person be related to the business of the member firm.

Instead, it adopted much broader language, merely requiring that the dispute “arise[] in

6-



Any dispute, claim, or controversy eligible for submission under the Rule 10100

Series between a customer and a member and/or associated person arising in

connection with the business of such member or in connection with the activities

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

duly executed and enforceable written agreement or upon the demand of the

customer.

Smith argues that Bartolini cannot show that she was a “customer” under this section. This
argument contains two parts. First, he asserts that the above language contains an implied
requirement that Bartolini must show either that she was a direct customer of the member firm
(ie. WSI) or that Smith dealt with her while he was acting solely in his role as an associated
person of WSI. Second, he asserts that Bartolini cannot meet this implied requirement. As set
forth below, neither the legal premise nor the factual support is persuasive.

A

The parties argue over the meaning of the term “customer” in Section 10301. To
understand these arguments, it is important to consider this section from a broader perspective
rather than trying to define one word in isolation.

Section 10301 contains several pathways to arbitration, as reflected by the use of the
word “or” in lines two and three of the above quotation. In line two, the Section refers toa
dispute between a “customer” and either (i) a “member” or (ii) an “associated person.” In lines
three and four, the Section imposes the additional requirement that the dispute must arise in
connection with either (i) “the business of such member” or (ii) “the activities of such associated
person.”

Applying the latter half of the two clauses, arbitration is required if the dispute is between

a customer and an associated person arising out of the activities of the associated person.



Third, the majority of courts have not interpreted the language of Section 10301 in the
way the Brown court did. This point was documented by the district court in Hornor, Townsend
& Kent, Inc. v. Hamilton, 218 F.Supp.2d 1369 (N.D. Ga. 2002). In Hornor, a brokerage firm
sought to avoid NASD arbitration, claiming that the investors were never “customers” of the firm
because they did not open an account with the firm, did not receive any account statements from
the firm, and did not otherwise have any direct relationship with the firm and because they never
purchased any securities from the firm. Jd. at 1376. (Smith makes many of the same arguments
here.) The court conceded that the firm was correct in its factual assertions but nonetheless
concluded that they were “irrelevant” because, under the “plain language of Rule 10301,” a
claimant is not required to show that he was a customer of the brokerage firm but only that he
was a customer of the associated person. Jd.

The brokerage firm in Hornor, like Smith here, cited to Brown as authority for the
proposition that a claimant must show something more than that he was a customer of the
associated person. After reviewing the existing case law, the Hornor court concluded that the
holding in Brown was “contrary to the plain language of Rule 10301.” Jd. The court’s analysis
is thorough and worth quoting at some length:

The Court rejects th{e] holding by the court in [Brown] because it is contrary to

the plain language of 10301. Rule 10301 states that any dispute “between a

customer and a member and/or associated person” that arises “in connection with

the business of such member or in connection with the activities of such

associated persons shall be arbitrated under this Code.” NASD Code § 10301.

The Court has reviewed the cases cited by the parties, and has conducted a

thorough review of other cases that have addressed this issue, and has been unable

to uncover any other decision other than [Brown], holding that a NASD member

is not required to arbitrate claims brought by the customer of an “associated

person.” Indeed, every other court that has addressed this issue has reached a
contrary result; i.e., a claim brought by a customer of an associated person plainly



Minute Order Form (06/97)

meu, United States District Court, Northern District of linois
Motor Magistrate Judge John A. Nordberg “hun Asiged Suge
CASE NUMBER 01C 4311 DATE 35/12/2003
CASE Martin W. Smith vs. Elizabeth A. Bartolini
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:
qd) oO Filed motion of [ use listing in “Motion” box above.]
(2) a Brief in support ofmotiondue
(3) a Answer brief to motion due___. Reply to answer briefdue__.
(4) Oo Ruling/Hearingon__——_—ssetfor__—s att
(5) a Status hearing[held/continued to] [set for/re-set for]on_ ss set for at
(6) o Pretrial conference[held/continued to} [set for/re-set for]}on____setfor_ at
(7) oO Trial[set for/re-set for]on_ at
(8) o {Bench/Jury trial] [Hearing] held/continuedto__at
(9) o This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]

OFRCP4(m) COlLocal Rule 41.1 CIFRCP41(a)(1) OO FRCP41(a)(2).

(10) MH [Otherdocketentry) .Enter Memorandum Opinion and Order. For the reasons set forth, Bartolini’s
motion for summary judgment is granted; Smith’s motion is denied; and summary judgment is awarded
in favor of Bartolini. The NASD arbitration award is hereby confirmed in all respects. In her counter
petition, Bartolini has also requested interest at the statutory rate from March 26, 2001, plus costs and
disbursements. If Smith wishes to oppose these requests, he must file a brief within three weeks from the
date of this opinion. Bartolini shall have two weeks thereafter to file a reply. The court will rule by mail

(il) 8 [For further detail see order attached to the original minute order.]

No notices required, advised in open court.
No notices required. number of notices
Notices mailed by judge's staff. MAY 1 4 2003
wo | Notified counsel by telephone. date docketed
ov | Docketing to mail notices,
av | Mail AO 450 form. ing deputy inital
Copy to judge/magistrate judge. [| Soy et
courwomO SAY ES eck 35's need te
TP deputy’s
initials f
2+ of Date/time received in
eee ee central Clerk's Office alive deme iitle



its knowledge or permission, there is no such claim here. In fact, for all practical purposes,
Smith and WSI were inseparable as the following undisputed facts illustrate.

Smith was president, chairman of the board, and a 50% shareholder of WSI. He worked
out of WSI’s offices. WSI was a full-service broker-dealer with an emphasis on retail sales,
which included giving investment advice to individuals. Smith gave Bartolini investment advice.
In doing so, he consulted with (among others) attorneys for WSI. Bartolini’s money was
ultimately put into the World Capital, which was an investment vehicle created for Smith’s
clients and which shared the same offices and employees with WSI. WSI was trading manager
for World Capital and received $2.2 million in revenue during the same time that the partnership
lost $20 million in investors’ money. WSI passed these profits along to Smith in the form of a
salary (ranging between $200,000 and $500,000) and other substantial benefits. At one point,
Bartolini was given a booklet with materials about her investment, which had a sticker on it that
said World Securities, Inc. (Arb. Tr. 43.)

If these facts were not enough, Smith directly conceded in the arbitration hearing that
Smith would have been reasonable under the circumstances in believing that he was dealing with
her in some capacity as a representative of WSI. (Arb. Tr. 222.) Why did he make such a
concession? Obviously because he knew that there was an objective basis for her to believe that
he was working for WSI. In addition, Bartolini’s expert witness in the arbitration hearing
testified that, based on industry practice, Bartolini was a customer of WSI. (Arb. Tr. 484-85.)

In this litigation, Smith argues that, despite the abundance of facts suggesting that he was
working for WSI and suggesting that Bartolini had reasonable grounds to believe that he was

working for WSI, he was really working solely for IFI at the time that he gave her investment

-11-



B.

Even if we were to proceed on the assumption that Bartolini must establish some
connection or customer relationship with WSI, we would still find in her favor given that Smith
and WSI were so closely intertwined and given the broad scope of the arbitration provision.

To the extent that a “customer” relationship or connection is required, most courts have
only required that there be “some” connection between the claimant and the member firm.
Consistent with a broad and non-technical understanding of the term customer, courts have not
required that a claimant open a formal account or establish a traditional business relationship in
order to be a customer. For example, in the Brown case discussed above, the court made it clear
that the claimant merely has to show some kind of “informal relationship.” 145 F.Supp.2d at
1308. Similarly, in Lehman Brothers Inc. v. Certified Reporting Co., 939 F.Supp. 1333 (N.D. Ill.
1996), the court came to the same conclusion in interpreting a similar NYSE arbitration rule.
“Defining customers to include not only those who executed purchases with member firms, but
also those who maintained a less formal business relationship at the time of the alleged
misconduct, furthers NYSE policy and recognizes market reality.” Jd. at 1340.?

Applying this broad definition here, we find that there is sufficient evidence to show that
Bartolini was a customer of WSI. It is important to put this case into perspective. Unlike most

cases in this area, which involve a claim by a securities firm that an agent did something without

Accord WMA Sec., Inc. v. Ruppert, 80 F.Supp.2d 786, 789 (S.D. Ohio 1999) (investors
were “customers” of the member firm even though they that had no formal account with the firm
and even though their investments were not approved by the member firm); First Montauk Sec.
Corp. v. Four Mile Ranch Dev. Co., 65 F.Supp.3d 1371, 1380-82 (S.D. Fla. 1999) (investors
were “customers” even though they did not have any account with the brokerage firm).

-10-



connection” with the “activities” of that person. As the Seventh Circuit has noted, this language
is “quite broad.” Miller v. Flume, 139 F.3d 1130, 1136 (7th Cir. 1998).

Smith does point to one district court decision — Jnvestors Capital Corp. v. Brown, 145
F.Supp.2d 1302 (M.D. Fla. 2001) — to support his claim that there must be some additional link
to amember firm. In Brown, the court stated that “being a customer of an associated person is
not, in itself, a sufficient basis for compelling [NASD] arbitration.” Jd. at 1307. We are not
inclined to follow Brown in this case for several reasons.

First, Brown dealt with a different (and more compelling) issue than the one here. The
investors in that case sought to compel a securities firm to arbitrate investment losses that arose
from purchases they made from two men who, at the time of purchase, were not yet associated
with the securities firm but who were later hired by the firm. The issue was thus akin to
successor liability. Believing that it would “do significant injustice to the reasonable
expectations of NASD members,” the court concluded that arbitration was not required under
Section 10301 when the dispute arose before the person became associated with the member
firm. Jd. at 1308. The court’s decision was not based on any specific language in 10301 but was
more of a policy decision. In fact, the court admitted that its assertion that a customer of an
associated person is not by itself enough to warrant arbitration was based merely on dicta from
another case. Jd. at 1307.

Second, this case raises no such concern about remote successor liability, as Smith clearly
gave Bartolini investment advice during the same time period that he was working as an

associated person for WSI.

-7-



made a loan to Jazzy for $300,000. Jazzy used the money to purchase a limited partnership
interest in World Capital. In return, Jazzy executed a promissory note back to the trust. In short,
as Smith describes the investment, it was “twice removed” in that Bartolini was a beneficiary of a
trust that owned the shares of a corporation that became a limited partner of World Capital.

Bartolini’s “twice removed” investment in World Capital eventually declined to virtually
nothing. Smith was the trading manager for World Capital and he made the trading decisions
that resulted in more than a thousand trades, eventually leading to the loss of around $20 million
of investors’ money. However, during this time, WSI made approximately $2.2 million in
commissions from World Capital.

On November 26, 1999, Bartolini filed a statement of claim with the NASD alleging that
the World Capital investment was unsuitable because it involved speculative and high volume
trading. On February 2, 2000, Smith executed a Uniform Submission Agreement in which he
agreed to “submit the present matter in controversy [to arbitration], as set forth in [Bartolini’s]
statement of claim” and “to abide by and perform any [arbitration] award(s) rendered pursuant to
this Submission Agreement.” In the arbitration, Smith and WSI raised the same arguments they
are making here; namely, that the arbitrators had no jurisdiction. The arbitrators twice rejected
this argument — first on September 15, 2000 and again later at the hearing. Before the arbitration
hearing began, Smith and WSI did not — as they had a right to do — bring this issue to federal
court for a ruling on whether the dispute was arbitrable. A four-day hearing was held beginning
in late January 2001. Smith participated in the hearing through his attorney and raised various

defenses and arguments.



I. Whether There Was A “Security”

In addition to arguing that Bartolini was not a customer, Smith very briefly makes a
second argument that this dispute was not arbitrable because the trust created for Bartolini to
invest in supposedly was not a security. Smith relies on the definition of a “security” applied in
the Securities Act of 1933 and the Securities Exchange Act of 1934 and also on the Supreme
Court’s ruling in SEC v. W.J. Howey & Co., 328 U.S. 293 (1946). He argues that Bartolini, by
investing in the trust, was not making an “investment of money” in any traditional sense and that
there was no “horizontal commonality” in a common enterprise.

We find this argument unconvincing. Smith has not cited to any case indicating that the
NASD Code contains any requirement that the investor must have purchased a security as
defined by the 1933 or 1934 Acts. The pertinent sections of the Code — 10101 and 10301 — do
not tie arbitrability to the presence of a “security” but instead refer to a “dispute,” “claim,” or
“controversy.” Moreover, as Bartolini points out, the Seventh Circuit in Miller rejected a similar
argument, holding that an investor’s fraudulent conveyance claim was arbitrable despite the fact
that it did not involve the buying or selling of securities. 139 F.3d at 1136. Finally, Smith’s
technical argument that there was no security would be contrary to the spirit and structure of the
Code.

IM. The Uniform Submission Agreement.

Even if we somehow concluded that this dispute were not arbitrable under the NASD
Code, we would still find it arbitrable under a separate agreement to arbitrate. On February 2,
2000, after Bartolini filed her statement of claim, Smith executed a Uniform Submission

Agreement in which he agreed (without reserving any rights to contest jurisdiction) to “submit

-14-



the NASD panel would never have considered the motion to dismiss for lack or

arbitrability had First Montauk not first expressly acknowledged the panel’s

authority to resolve the motion conclusively. Having purposefully misled the

NASD arbitrators as to its intent to submit to a binding ruling on arbitrability,

First Montauk may not now seek refuge in the argument that it was only

pretending to be bound.

Id.

We find this reasoning and conclusion persuasive. Smith tries to avoid the clear language
of the Uniform Submission Agreement by making an argument similar to the one rejected in
First Montauk. In his Application To Vacate Arbitration Award, Smith claims that he executed
the Uniform Submission Agreement because there is no real “motion practice” under the NASD
Code and because he “must” submit to an arbitration demand made by a customer. (§ 10.) We
fail to see why he was required to submit to arbitration if there was no jurisdiction. Like the

district court in New York, we cannot simply ignore clear and unequivocal language indicating

that Smith agreed to arbitrate all the claims set forth in Bartolini’s Statement of Claim.

-16-



Smith is a man who — as the business expression goes — wore several hats. In addition to
being Bartolini’s brother-in-law, he was president, 50% shareholder, and chairman of the board
of World Securities, Inc. (“WSTI’). At the same time, he was president of Investors Financial,
Inc. (“IFT”). During the relevant time period, WSI was registered as an SEC broker-dealer while
IFI was an SEC registered investment adviser. Both WSI and IFI were Missouri corporations,
both were located at the same address, and both used the same employees. However, for
purposes of this case, they differed in one key respect - WSI was a member of NASD but IFI was
not. As will be discussed below, this fact underlies Smith’s central argument against arbitration.

When Bartolini approached Smith for investment advice, it is undisputed that she was
emotionally fragile (due to the recent death of her husband) and was an inexperienced investor.

It is also undisputed that Smith provided her investment advice, which she followed.
Specifically, Smith advised Bartolini to put all her money into a single investment — World
Capital Management, L.P. (“World Capital”), which operated a high-risk hedge fund that Smith
created and managed. Both WSI and IFI were involved in its operation. IFI was the general
partner and WSI provided brokerage services.'

Although Smith advised Bartolini to invest in World Capital, he advised her to do so
indirectly through a complicated series of business entities. After consulting with attorneys for
WSI, Smith established an irrevocable trust that was funded by the $300,000 of the life insurance
proceeds. The trust in turn acquired all the outstanding stock of a shell corporation known as

Jazzy Internet Services, Inc., a Nevada corporation (“Jazzy”), for a nominal amount and then

‘World Capital also had the same address, shared the same office space, and had the same
employees as WSI and JFI.

2-



IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION DOCKE TED

MARTIN W. SMITH MAY 1 4 2003

Applicant.
v. No. 01 C 4311

ELIZABETH A. (nee Sipe) BARTOLINI, Judge John A. Nordberg

Respondent.

MEMORANDUM OPINION AND ORDER

After a four-day hearing, a panel of NASD arbitrators found that Martin W. Smith
committed fraud against Elizabeth Bartolini and ordered him to pay an award of more than a half
million dollars including $100,000 in punitive damages. Smith filed this action seeking to vacate
that award on the ground that the NASD arbitrators lacked jurisdiction to hear the dispute
because Bartolini was not technically a “customer” under the Code of Arbitration Procedure and
because the investment vehicle was not a “security.” Bartolini filed a counter petition to confirm
the award. See Federal Arbitration Act, 9 U.S.C. §§ 9, 10. Both sides have moved for summary
judgment.

BA Ri

The essential facts are undisputed. In 1997, Elizabeth Bartolini’s husband died of cancer,
leaving her with approximately $400,000 in life insurance proceeds, which then constituted the
bulk of her net worth. Soon after her husband’s death, she went to Martin W. Smith for advice

on how to invest the proceeds. Smith was married to Bartolini’s deceased husband’s sister.



advice. This is the argument that he was not wearing his WSI hat at the time. The sole basis for
this argument is the fact that WSI was registered with the SEC as a broker-dealer at the time and
that IFI was a registered investment adviser. Smith argues that the “only logical conclusion to
draw” is that Bartolini must have dealt with him only in his role as a agent for IFI.

This argument-from-logic ignores the facts and strains credibility. First, the argument is
directly contradicted by the undisputed fact that WSI could give investment advice incidental to
its business. Second, even if there were some regulatory requirement preventing Smith from
giving investment advice, this does not automatically mean that he followed it. After all, the
arbitrators found that he committed fraud in his dealings with Bartolini. Third, as also noted
above, Smith testified that Bartolini would have been reasonable in believing that he was
working for WSI. Fourth, not only has Smith ignored these undermining his argument, he also
has failed to pointed to any facts supporting his argument.

Moreover, given the close interrelationship of these entities, we think that the burden
should be on Smith (not the customer) to provide clear evidence that he was not acting for WSI.
It is undisputed that WSI, World Capital, and IFI were thoroughly intertwined. They shared the
same offices and employees. There is no evidence to suggest that Smith ever took steps to keep
these roles separate or to alert Bartolini (or others) of his revolving allegiances. Smith apparently
believes that he was free to put on his metaphorical WSI hat one minute of the day and then put
on his IFI the next minute and that his customers should somehow know the difference. Yet,
how was Bartolini to know that he was “switching hats” at various times? See Washington
Square Sec., Inc. v. Sowers, 218 F.Supp.2d 1108, 1117 (D. Minn. 2002) (“The customers are not

the ones who will usually know the vagaries of the mechanism by which a person becomes

-12-



the present matter in controversy [to arbitration], as set forth in [Bartolini’s] statement of claim”
and “to abide by and perform any [arbitration] award(s) rendered pursuant to this Submission
Agreement.” On its face, this language constitutes a clear and unqualified agreement to arbitrate
the disputes contained in the Statement of Claim.

In First Montauk Sec. Corp. v. Menter, 26 F.Supp.2d 688 (S.D.N.Y. 1998), the district
court concluded that, when a securities firm executed a Uniform Submission Agreement, it
entered into “a valid, binding agreement to submit ail issues, including the threshold issue of
arbitrability, to the [NASD] arbitration panel.” Id. at 689 (emphasis added). In that case, the
securities firm, like Smith here, submitted a Uniform Submission Agreement along with a
motion to dismiss the arbitration based on lack of jurisdiction. As here, the NASD arbitrators
twice denied the motion. Thereafter, unlike this case, the securities firm filed a claim in federal
court seeking to enjoin the arbitration before a hearing on the merits began. The court dismissed
the action, finding that the language of the Uniform Submission Agreement was “clear” that
there was an agreement to arbitrate and that the arbitration therefore should go forward. Id.

The securities firm (First Montauk) sought to get around this clear language by arguing
that it tendered the Uniform Submission Agreement “solely for administrative purposes [based
on] experience that without the form submission agreement, the NASD staff would not process
[the] motion to dismiss.” Jd. The court rejected the argument for two reasons. First, relying on
hornbook law, it noted that “an uncommunicated subjective intent” is irrelevant in interpreting a
contract. Id. Therefore, it did not matter that First Montauk (allegedly) believed that the
language of the agreement meant something other than what it said. Second, the court concluded

that First Montauk “purposefully misled” the arbitrators by proceeding in this manner:

-15-