Court Opinion

ID: 802864
Source: CourtListenerOpinion
Date Created: 2012-06-21 19:24:12+00
Date Added: 2024-06-11T18:00:05.729479
License: Public Domain

PUBLISHED

UNITED STATES COURT OF APPEALS
             FOR THE FOURTH CIRCUIT

WATERFORD INVESTMENT SERVICES,         
INCORPORATED,
                Plaintiff-Appellant,
                 v.
LOUIS BOSCO; ANNETTE BOSCO;
MARY BOROWIAK; MICHAEL
BOROWIAK; RICHARD RUBEL; DIANE
RUBEL; LOUIS AND ANNETTE BOSCO,
Trustees of the Bosco Family
Trust dated 7/31/96; LOUIS AND
                                       
ANNETTE BOSCO, Trustees of the
Bosco Family Trust dated 6/25/96;          No. 11-2103
MARY BOROWIAK, Trustee of the
Mary Borowiak Trust,
              Defendants-Appellees,
                and
WAYNE R. CROWLEY; SANDRA A.
CROWLEY; DALE L. RINDLISBACHER;
D-VIII FAMILY LLC; CARRINGTON
SQUARE LLC; FALLS LLC; JERRY S.
WONES; CAROL S. VANETTI,
                        Defendants.
                                       
       Appeal from the United States District Court
     for the Eastern District of Virginia, at Richmond.
           Robert E. Payne, Senior District Judge.
                (3:10-cv-00548-REP-DWD)
2                WATERFORD INVESTMENT v. BOSCO
                     Argued: May 16, 2012

                    Decided: June 21, 2012

        Before MOTZ, DAVIS, and WYNN, Circuit Judges.

Affirmed by published opinion. Judge Motz wrote the opin-
ion, in which Judge Davis and Judge Wynn joined.

                           COUNSEL

ARGUED: Steven Scott Biss, Charlottesville, Virginia, for
Appellant. W. Scott Greco, GRECO & GRECO, PC, McLean,
Virginia, for Appellees. ON BRIEF: Frederick D. Greco,
GRECO & GRECO, PC, McLean, Virginia, for Appellees.

                            OPINION

DIANA GRIBBON MOTZ, Circuit Judge:

   Waterford Investment Services, Inc. ("Waterford") appeals
the district court’s ruling that it must arbitrate certain claims
that a group of investors brought before the Financial Industry
Regulatory Authority ("FINRA").1 The investors allege in
their FINRA claims that they received bad advice from their
financial advisor, George Gilbert. The investors named Gil-
bert, his current investment firm, Waterford, and his prior
firm, Community Bankers Securities, LLC ("CBS"), among
others, as parties to the arbitration. In response, Waterford
filed this suit asking a federal district court to enjoin the arbi-
    1
  FINRA was formerly known as the National Association of Securities
Dealers, Inc. ("NASD").
               WATERFORD INVESTMENT v. BOSCO                  3
tration proceedings and enter a declaratory judgment that
Waterford need not arbitrate the investors’ claims. The district
court, adopting the recommendations of a magistrate judge,
concluded that because Gilbert was an "associated person" of
Waterford during the events in question, Waterford must arbi-
trate the investors’ claims. For the following reasons, we
affirm.

                               I.

                              A.

   Because the relationship between Gilbert’s current firm,
Waterford, and his prior firm, CBS, is critical to our holding
here, we begin with a discussion of these entities and their
relationship.

  Waterford, a Florida corporation, is a registered securities
broker-dealer with the Securities and Exchange Commission
("SEC") and has been a member of FINRA since March 1999.
CBS, a Virginia corporation, is also a registered broker-dealer
with the SEC, although it no longer conducts business, and
was a member of FINRA from July 1997 through February
2010. In 2005, AIC, Inc., a Virginia corporation, became the
majority owner of both CBS and Waterford; by 2009, AIC
owned approximately 90 percent of both firms. Through
2009, CBS and Waterford filed separate tax returns and made
separate disclosures and filings with FINRA and the SEC.

   Although separate corporate entities, CBS and Waterford
had in common, in addition to the same majority shareholder,
a significant number of directors and officers during the
events in question. Nicholas Skaltsounis, for example, was the
Chairman of the Board of Directors of Waterford and its Sec-
retary and Treasurer, President and Chief Executive Officer of
CBS, and a Director and President of AIC. Roger Leibowitz
was the Chief Operating Officer and Executive Vice President
of Waterford, a Vice President of CBS, and a Vice President
4               WATERFORD INVESTMENT v. BOSCO
of AIC. Paula Ann Collier was an Executive Vice President
of both Waterford and CBS and, along with Skaltsounis, one
of only three Directors of Waterford. Further, CBS and
Waterford had in common the same Chief Financial Officer,
Franklin Flanary; the same Vice President of Operations,
Richard Landi; and another Vice President, Lawrence Barnes.

   The two firms did have distinct Chief Compliance Officers.
Frank Wainscott served as the President and Chief Compli-
ance Officer of Waterford and worked out of Waterford’s
principal office in Clearwater, Florida; he had no position
with CBS. Similarly, CBS’s Chief Compliance Officer, James
Mitchell, had no position at Waterford. However, the two
firms had an overlapping compliance manager, Cindy Free-
land. In his sworn affidavit, Gilbert stated that during his ten-
ure at CBS he "reported exclusively" to Mitchell and
Freeland.

   Skaltsounis, Leibowitz, Collier, Flanary, Landi, Barnes,
Mitchell, and Freeland worked in a shared office suite located
in Richmond, Virginia. There was no division of the firms in
that office suite, which was home to CBS’s main office and
housed the majority of Waterford’s employees. The two firms
also had six common employees working in compliance,
operations, sales, and accounting.

   Within the shared office space, CBS and Waterford used
the same trading desk and shared various resources, for which
CBS paid, including Internet, phone service, postage, cable,
office supplies, and office casualty insurance, among others.
CBS also paid the rent for the office suite up until August
2009, at which time the rent was abated by lease. After CBS
ceased operations in December 2009, Waterford took over the
payments for the office supplies and the rent. At all relevant
times, the lease was in the name of both firms’ majority
owner, AIC.
                  WATERFORD INVESTMENT v. BOSCO                        5
                                   B.

   Beginning in 2005, Louis and Annette Bosco and various
members of their family (collectively "Investors") invested
large sums of money, assertedly their "life savings," through
Gilbert, their financial advisor. The Investors allege that the
two largest investments they made through Gilbert turned out
to be fraudulent Ponzi schemes.2 As a result, by 2009, the
Investors had lost over one million dollars in these two securi-
ties.

   During this time period, Gilbert sold securities exclusively
through CBS under an Independent Associate Agreement "to
sell . . . any and all securities approved for sale" by CBS.
Beginning in September 2009, CBS learned of various
FINRA arbitration claims that customers had filed against the
firm, at least some of which involved the same securities at
issue in the Investors’ claim. Shortly thereafter, in December
2009, CBS ceased operations.

   On December 23, 2009, Landi, the Vice President of Oper-
ations at both CBS and Waterford, contacted Gilbert by phone
to inform him that CBS was shutting its doors. During the
same call, Landi offered Gilbert a position with Waterford.
The following day, Gilbert sent emails to two of the Investors
informing them that CBS was "combining with their [sic] sis-
ter company and using the name of the sister company,
Waterford Investment Services," and asking them to sign an
attached account transfer form to change their accounts to
Waterford. Although Gilbert acknowledges sending the
emails, he now asserts that it was his own "personal belief"
that CBS and Waterford were "combining" and that he was
"wrong."
  2
   In 2009, the SEC filed complaints in federal court against both compa-
nies alleging they violated federal securities laws by committing fraud.
6              WATERFORD INVESTMENT v. BOSCO
   Waterford made transfer offers to approximately 30 of
CBS’s associates based, in part, on their revenue production.
Approximately 25 of those associates accepted the offers and
transferred to Waterford, as did seven CBS staff members. Of
CBS’s 1,700 customer accounts, 995 of them also transferred
to Waterford. Although several of the Investors transferred
their accounts to Waterford at that time, they have since
closed those accounts.

   On December 30, 2009, Freeland, as a representative of
CBS and on CBS letterhead, officially informed Gilbert of his
termination from CBS. Six days later, on January 5, 2010,
Freeland, as a representative of Waterford and on Waterford
letterhead, officially welcomed Gilbert to Waterford.

   In April 2010, Waterford learned that the Investors had
filed a FINRA arbitration claim against the firm. The Inves-
tors also named Gilbert, CBS, AIC, Skaltsounis, and Mitchell
in their statement of claim. The Investors contend that Gilbert
and the others failed to perform "proper due diligence" of the
alleged Ponzi scheme securities, that they made various mis-
representations and omissions with respect to these securities
and failed "to disclose the risks involved," and that they rec-
ommended "unsuitable investments" for the Investors’ partic-
ular needs.

   On August 4, 2010, Waterford filed this action seeking a
declaratory judgment that it was "not obligated to arbitrate
any claim with [the Investors], and injunctive relief to enjoin
certain arbitration proceedings commenced by [the Investors]
in which [they] have or seek to name Waterford as a party."
The parties filed cross motions for summary judgment and
stipulated to the material facts. Magistrate Judge Dennis W.
Dohnal, in an exceedingly thorough report and recommenda-
tion, concluded that Gilbert was an "associated person" of
Waterford during the events in question and, thus, pursuant to
FINRA rules, Waterford had to arbitrate the Investors’ claims.
Magistrate Judge Dohnal also concluded that, under Virginia
                  WATERFORD INVESTMENT v. BOSCO                          7
law, Waterford was a mere continuation of CBS and thus was
a successor-in-interest to CBS’s agreement to arbitrate its cus-
tomers’ claims. Over Waterford’s objections, the district court
adopted the magistrate judge’s report and recommendation in
its entirety and granted the Investors’ motion for summary
judgment, concluding the Investors’ dispute was arbitrable.3
Waterford timely filed this appeal.

                                    II.

  We review de novo the district court’s determination that
a dispute is arbitrable. Wash. Square Secs., Inc. v. Aune, 385
F.3d 432, 435 (4th Cir. 2004).

                                    A.

   The Supreme Court has held that "arbitration is a matter of
contract and a party cannot be required to submit to arbitra-
tion any dispute which he has not agreed so to submit." How-
sam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002)
(quoting United Steelworkers of Am. v. Warrior & Gulf Nav.
Co., 363 U.S. 574, 582 (1960)). When the parties have agreed
to an arbitration clause, however, courts apply "a presumption
of arbitrability," such that "an order to arbitrate the particular
grievance should not be denied unless it may be said with
positive assurance that the arbitration clause is not susceptible
of an interpretation that covers the asserted dispute." Aune,
385 F.3d at 436 (quoting AT&T Techs., Inc. v. Commc’ns
Workers of Am., 475 U.S. 643, 650 (1986)).

  The Investors point to the FINRA Code of Arbitration Pro-
cedure for Customer Disputes ("FINRA Code"),4 which gov-
  3
     Because the district court adopted the magistrate judge’s report and
recommendation in its entirety "on the basis of the [its] reasoning," we
hereafter refer to the report and recommendation as the opinion of the dis-
trict court.
   4
     The Code is available online at http://finra.org/arbitrationand
mediation/arbitration/rules/codeofarbitrationprocedure/.
8                 WATERFORD INVESTMENT v. BOSCO
erns arbitration of disputes involving FINRA members and
customers, as the source of Waterford’s agreement to arbitrate
the present dispute. The FINRA Code provides that a cus-
tomer can compel arbitration of a dispute "between a cus-
tomer and a member or associated person of a member" when
the dispute "arises in connection with the business activities
of the member or the associated person." FINRA Rule 12200.
This provision "constitutes an ‘agreement in writing’ under
the Federal Arbitration Act, 9 U.S.C. § 2, which binds . . . [a
FINRA] member, to submit an eligible dispute to arbitration
upon a customer’s demand." Aune, 385 F.3d at 435. Accord-
ingly, a court applies "the federal policy favoring arbitration"
when interpreting this provision, "generously constru[ing]
[the parties’ intentions] as to issues of arbitrability" and "[re-
solving] any ambiguities as to the scope of the arbitration
clause" in favor of arbitration. Id. at 435-36 (internal quota-
tion marks omitted).5

  The parties agree that the Investors are "customers" of Gil-
bert and that their claims arise out of Gilbert’s "business
activities." In Aune, 385 F.3d at 436-37, we determined that
a member must arbitrate the claims of its associated person’s
customers. The only issue in dispute, therefore, is whether
Gilbert was an "associated person" of Waterford during the
events in question such that the Investors—Gilbert’s
customers—can compel Waterford to arbitrate the dispute.

   FINRA Rule 12100(r) defines a "person associated with a
member," inter alia, as "a natural person engaged in the
investment banking or securities business who is directly or
indirectly controlling or controlled by a member." The Inves-
tors contend, and the district court found, that Waterford "in-
    5
   In Aune, we interpreted NASD Rule 10301, the predecessor to FINRA
Rule 12200. The two rules are substantively equivalent; thus our analysis
in Aune of NASD Rule 10301 applies equally to FINRA Rule 12200.
Accord In re Am. Express Fin. Advisors Secs. Litig., 672 F.3d 113, 128 (2d
Cir. 2011).
               WATERFORD INVESTMENT v. BOSCO                  9
directly" controlled Gilbert during the events in question.
Waterford argues that it never exercised any sort of control
over Gilbert before he signed his associate agreement with the
firm in 2010 and, thus, he was not an associated person of
Waterford prior to that time.

   Whether a person who is not in a contractual relationship
with a member firm nevertheless can be an "associated per-
son" of that firm for purposes of FINRA arbitration seems to
be a novel question. Aune involved a representative who did
have a contractual relationship with the member firm; how-
ever, we find guidance in the broad approach taken in Aune.
Resolving all ambiguities in favor of the presumption favor-
ing arbitration, we held in Aune that the member firm had to
arbitrate the claims of the representative’s customers even
though the member had no relationship with the customers
and had neither authorized nor had any knowledge of the rep-
resentative’s sale of the allegedly fraudulent securities. Aune,
385 F.3d at 436-37. We apply the same presumption in this
case and, thus, "must construe [Rule 12200] in favor of arbi-
tration" if it is "susceptible to a meaning which covers the
Investors’ dispute." Id. at 437. That means that in this case,
we ask whether Rule 12200 is "susceptible to a meaning" that
Gilbert was an "associated person" of Waterford during the
events in question, i.e., whether Waterford "indirectly con-
trolled" Gilbert.

   In making this determination, we look to analysis of what
constitutes a "control" person under another federal statute
governing sellers of securities, § 20(a) of the Securities and
Exchange Act. Section 20(a) makes every person "who,
directly or indirectly, controls any person" jointly and sever-
ally liable for violations of that Act. 15 U.S.C. § 78t(a). In
determining "whether a defendant possessed the requisite con-
trol," in that context, a court gives "‘heavy consideration to
the power or potential power to influence and control the
activities of a person, as opposed to the actual exercise
thereof.’" In re Mut. Funds Inv. Litig., 566 F.3d 111, 130 (4th
10              WATERFORD INVESTMENT v. BOSCO
Cir. 2009) (quoting Rochez Bros., Inc. v. Rhoades, 527 F.2d
880, 890–91 (3d Cir. 1975)), rev’d on other grounds, Janus
Capital Grp., Inc. v. First Derivative Traders, 131 S. Ct. 2296
(2011); see also 17 C.F.R. § 230.405 (defining "control" in
the governing regulations as the "possession, direct or indi-
rect, of the power to direct or cause the direction of the man-
agement and policies of a person").

   The district court adopted a similar definition in this case,
concluding that indirect control under the FINRA Code
required "the power and ability to exercise power" but not
"that the power actually be exercised." Waterford Inv. Servs.,
Inc. v. Bosco, 2011 WL 3820723, at *13 (E.D. Va. July 29,
2011). Waterford has not challenged this definition. Applying
the federal presumption in favor of arbitration, we agree that
to have indirect control of a person, such that he is an "associ-
ated person" under FINRA Rule 12200, a member firm need
only have the potential power to influence the person, rather
than exercise any actual control over him.

  Accordingly, we turn to the question of whether Waterford
had the potential power to control Gilbert.

                               B.

   The district court held that Waterford did have such power
over Gilbert. The court relied heavily on the "significant
degree of overlap in personnel and resource utilization"
between CBS and Waterford at the time of the events in ques-
tion, including that "[a] number of officers and employees of
CBS in 2009 were also officers and employees of Waterford
at the same time in 2009." Id. at *14. The court highlighted
Skaltsounis’s and Leibowitz’s high-level positions at CBS,
Waterford, and AIC. Moreover, the court noted that the firms
shared office space in Richmond, Virginia, with "no division
between the offices of the different firms," and also shared a
trading desk within the suite. Id. at *15. This high degree of
overlap in personnel and resources, the court held, "would
                WATERFORD INVESTMENT v. BOSCO                 11
have given rise to myriad opportunities for Waterford’s offi-
cers, directors, and managers to at least indirectly control Gil-
bert, thus making him an associated person of Waterford for
purposes of FINRA Rule 12200." Id. at *14.

   On appeal, Waterford does not deny the degree of overlap
between the two firms in regard to the common officers and
employees or the shared resources. Instead, Waterford con-
tends that the "unique and integral role" of the different Chief
Compliance Officers in the two firms rendered Waterford
without power to influence Gilbert, when he worked for CBS.
Appellant’s Br. at 16. Mitchell served as Chief Compliance
Officer at CBS; Wainscott carried out this role for Waterford.
Neither Mitchell nor Wainscott was affiliated with the other’s
firm. But Waterford’s focus on the separate role of one posi-
tion in the two firms, no matter how persistent that focus, sim-
ply does not eliminate the overlapping roles and actions of
numerous other high-level officers and directors with power-
ful positions in both firms.

    Further, Waterford offers no compelling rationale why we
should place such emphasis on the role of the compliance
officer. The definition of "associated person" is broad, allow-
ing for a representative, like Gilbert, to be an associated per-
son of a member firm whenever he is "directly or indirectly
. . . controlled by a member." See FINRA Rule 12100(r). The
definition’s own terms do not limit a member’s control of an
associated person to issues of FINRA compliance. Moreover,
Gilbert’s Independent Associate Agreement with CBS pro-
vided for Gilbert’s various duties and obligations, including
those related to compliance standards, but also requiring, for
example, that Gilbert use his "best efforts to sell or cause to
be sold any and all securities approved for sale by [CBS]."
There simply is no reasonable inference to be made that
CBS’s Chief Compliance Officer, who happened to be unaf-
filiated with Waterford, was the only CBS employee who
could exercise control over Gilbert’s activities.
12             WATERFORD INVESTMENT v. BOSCO
   To the contrary, the significant degree of overlap between
the two firms in terms of their majority owner, officers and
directors, and shared resources, establishes that various play-
ers at Waterford had the potential power to control Gilbert as
well. Indeed, substantial undisputed record evidence indicates
that these overlapping officers and directors took actions that
affected both companies, and their representatives, simulta-
neously. For example, when CBS ceased its operations in
2009, both Skaltsounis and Landi were involved in deciding
which CBS representatives should receive offers to transfer to
Waterford. Landi, who was being paid by CBS, made Gilbert
and the other high-earning representatives their offers to
transfer to Waterford. And Leibowitz, who along with Wain-
scott was responsible for Waterford’s day-to-day operations
in 2009, received his salary from CBS that year.

   Moreover, even if we were to confine our analysis to
whether Waterford could have exercised some power over
Gilbert’s compliance with the FINRA Rules, we would arrive
at the same conclusion. First, Waterford does not dispute that
Mitchell (CBS’s Chief Compliance Officer) was subordinate
to Skaltsounis, who was President and CEO of CBS and the
Chairman of the Board and an officer of Waterford. Second,
both firms shared the same majority shareholder, AIC, of
which Skaltsounis was a director and President. Third, Col-
lier, another of the three directors of Waterford, was also
Executive Vice President of CBS. Thus, as the district court
concluded, "the controlling members of Waterford were
vested with indirect control of Gilbert through Mitchell."
Waterford Inv. Servs., 2011 WL 3820723, at *15.

   Additionally, the firms had an overlapping compliance
manager, Freeland. The district court concluded that this dual
role gave Freeland’s "superiors at Waterford ample opportu-
nity to indirectly control Gilbert through Freeland." Id. Water-
ford attempts to downplay Freeland’s role by challenging the
court’s conclusion that she was one of Gilbert’s "immediate
supervisors." Appellant’s Br. at 21. However, Gilbert himself
                  WATERFORD INVESTMENT v. BOSCO                       13
acknowledged that he reported directly to just two persons:
Freeland and Mitchell. The mere fact that Mitchell was an
officer and Freeland a manager does not establish, as Water-
ford suggested at oral argument, that Freeland had no author-
ity or ability to influence Gilbert. Rather, the record contains
considerable uncontroverted contrary evidence. Namely,
Freeland made compliance requests of Gilbert that he duti-
fully fulfilled. And it was Freeland, as a representative of
CBS, who officially informed Gilbert of his termination from
CBS, and, as a representative of Waterford, officially wel-
comed Gilbert to Waterford less than a week later.

   In light of the undisputed evidence of the extensive overlap
in owners, directors, officers, and employees of Waterford
and CBS and their shared office space and other resources,
and given the federal presumption in favor of arbitration, we
agree with the district court that Waterford had the power to
influence Gilbert and, thus, "indirectly controlled" him.
Accordingly, we hold that FINRA Rule 12200 is "susceptible
to a meaning" that Gilbert was an "associated person" of
Waterford, and, consequently, that the arbitration clause in
Rule 12200 "covers the Investors’ dispute." Aune, 385 F.3d at
437. In short, the Investors can compel Waterford to arbitrate
their claims.6

                                  III.

     For the foregoing reasons, the judgment of the district court
is

                                                         AFFIRMED.
     6
    Given our holding that, because Gilbert was an "associated person" of
Waterford, the Investors were entitled to arbitrate their claims against
Waterford, we need not consider the district court’s alternative holding
that arbitration was appropriate because Waterford was a "mere continua-
tion" of CBS. See Waterford Inv. Servs., 2011 WL 3820723, at *17.