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The Fifth Circuit Court of Appeals held that an arbitration agreement between a client and an investment firm was sufficiently broad to cover private disputes between a client and a broker.
In Downer v. Siegel, No. 06-30159, 2007 WL 1696020 (5th Cir. June 13, 2007), the Downers opened a brokerage account with Dain Rauscher, Inc. (DR). A DR broker, Michael Siegel, allegedly recommended that the Downers invest $300,000 in World Environmental Technology (WET). The Downers were unhappy with the investment's performance and filed claims against Siegel alleging fraud and violations of securities regulations.
The Court granted Siegel's motion to stay the action pending arbitration pursuant to an arbitration agreement. The arbitrator ruled for Siegel and dismissed the Downers' claims. The Downers then moved to vacate the arbitration award. The trial court granted the vacatur motion, holding that the arbitration agreement did not cover the dispute because the WET investment was a private transaction between the Downers and Siegel. Siegel appealed the trial court's ruling.
The Court held that the arbitration agreement encompassed the parties' dispute. Although the arbitration agreement was between the Downers and DR, the arbitration clause covered "all controversies" including those between clients and DR employees. Moreover, the Downers used funds from the DR account to make the investments. Although the clause's scope could arguably exclude private disputes not involving DR as a party, the Federal Arbitration Act mandates that courts decide interpretive ambiguities in favor of arbitration.
Additionally, the Court rejected the Downers' assertion that the Court should invalidate the contract because of the alleged fraudulent inducement, as the Downers' fraud argument focused on the investment, rather than the making of the arbitration agreement.
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