Driscoll v. Smith Barney, Harris, Upham & Co.

815 F.2d 655, Blue Sky L. Rep. P 72,606, Fed. Sec. L. Rep. P 93,246, RICO Bus.Disp.Guide 6621

United States Court of Appeals, Eleventh Circuit.

Richard D. DRISCOLL, Plaintiff-Appellant,
v.
SMITH BARNEY, HARRIS, UPHAM & CO., Richard Shalla, Defendants-Appellees.
Edward J. ADRIAN, Ruth C. Adrian, Plaintiffs-Appellants,
v.
SMITH BARNEY, HARRIS, UPHAM & CO., INC., a Delaware corporation, Morton L. Annis, Jr., Albert Roberts, III, Defendants-Appellees.

Nos. 85-5921, 85-3816 and 86-3009.

April 28, 1987.

Brokerage customers brought actions arising out of alleged mismanagement of securities accounts by firm and its employees. After the United States District Court for the Southern District of Florida, No. 84-8223 CIV-EBD, Edward B. Davis, J., 625 F.Supp. 25, and the United States District Court for the Middle District of Florida, No. 84-1652-CIV-T-13, George C. Carr, J., had granted firm's motions to compel arbitration on all claims, customers appealed. The Court of Appeals, Vance, Circuit Judge, held that: (1) claims under the federal Racketeer Influenced and Corrupt Organization Act based on violations of federal securities laws were not subject to compelled arbitration; (2) claims under Florida Racketeer Influenced and Corrupt Organization Act were subject to compelled arbitration; and (3) brokerage customers seeking to evade compelled arbitration of state law claims pursuant to arbitration agreements had failed to adequately allege invalidity of arbitration agreements.
Affirmed in part; reversed in part; and remanded with directions.

West Headnotes


[1] Headnote Citing References KeyCite Citing References for this Headnote

Key Number Symbol 25T Alternative Dispute Resolution
Key Number Symbol 25TII Arbitration
Key Number Symbol 25TII(I) Exchanges and Dealer Associations
Key Number Symbol 25Tk411 Relations Between Customer-Investors and Broker-Dealers
Key Number Symbol 25Tk412 k. In General. Most Cited Cases
(Formerly 33k91 Arbitration, 160k11(11.1), 160k11(11))

Federal securities law claims under § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 were not subject to compulsory arbitration based upon preclaim brokerage agreements. Securities Exchange Act of 1934, § 10(b), 15 U.S.C.A. § 78j(b).
[2] Headnote Citing References KeyCite Citing References for this Headnote

Key Number Symbol 319H Racketeer Influenced and Corrupt Organizations
Key Number Symbol 319HI Federal Regulation
Key Number Symbol 319HI(A) In General
Key Number Symbol 319Hk4 Racketeering or Criminal Activity
Key Number Symbol 319Hk5 k. Predicate Acts in General. Most Cited Cases
(Formerly 83k82.71)

Claim under the federal Racketeer Influenced and Corrupt Organization Act must be based on underlying, independently unlawful acts. 18 U.S.C.A. §§ 1961, 1962.
[3] Headnote Citing References KeyCite Citing References for this Headnote

Key Number Symbol 25T Alternative Dispute Resolution
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Key Number Symbol 25TII(I) Exchanges and Dealer Associations
Key Number Symbol 25Tk411 Relations Between Customer-Investors and Broker-Dealers
Key Number Symbol 25Tk412 k. In General. Most Cited Cases
(Formerly 33k91 Arbitration, 160k11(11.1), 160k11(11))

Claims under the federal Racketeer Influenced and Corrupt Organization Act based on violations of federal securities laws were not subject to compelled arbitration. 18 U.S.C.A. §§ 1961- 1968.
[4] Headnote Citing References KeyCite Citing References for this Headnote

Key Number Symbol 92 Constitutional Law
Key Number Symbol 92XX Separation of Powers
Key Number Symbol 92XX(C) Judicial Powers and Functions
Key Number Symbol 92XX(C)2 Encroachment on Legislature
Key Number Symbol 92k2499 Particular Issues and Applications
Key Number Symbol 92k2500 k. In General. Most Cited Cases
(Formerly 92k70.1(7.1), 92k70.1(7))

Court of Appeals cannot create exception to federal Arbitration Act absent some indication, whether express or implied, of congressional intent for such an exception. 9 U.S.C.A. §§ 1- 14.
[5] Headnote Citing References KeyCite Citing References for this Headnote

Key Number Symbol 25T Alternative Dispute Resolution
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Key Number Symbol 25TII(I) Exchanges and Dealer Associations
Key Number Symbol 25Tk411 Relations Between Customer-Investors and Broker-Dealers
Key Number Symbol 25Tk412 k. In General. Most Cited Cases
(Formerly 33k91 Arbitration, 160k11(11.1), 160k11(11))

Securities Act of 1933 and Securities Exchange Act of 1934 provide congressional intent to exclude claims under particular provisions of acts from mandate of federal Arbitration Act. 9 U.S.C.A. §§ 1- 14; Securities Act of 1933, § 12(2), 15 U.S.C.A. § 77 l (2) ; Securities Exchange Act of 1934, § 10(b), 15 U.S.C.A. § 78j(b).
[6] Headnote Citing References KeyCite Citing References for this Headnote

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Key Number Symbol 25Tk411 Relations Between Customer-Investors and Broker-Dealers
Key Number Symbol 25Tk414 k. Performance, Breach, Enforcement, and Contest of Agreement. Most Cited Cases
(Formerly 33k3.3 Arbitration)

Congressional intent that federal Racketeer Influenced and Corrupt Organization Act claims not be subjected to compelled arbitration is found by implication from unique structure of RICO statute which cross-references other predicate statutes. 9 U.S.C.A. §§ 1- 14; 18 U.S.C.A. §§ 1961- 1968.
[7] Headnote Citing References KeyCite Citing References for this Headnote

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Key Number Symbol 25Tk414 k. Performance, Breach, Enforcement, and Contest of Agreement. Most Cited Cases
(Formerly 33k3.3 Arbitration)

Claims under Florida Racketeer Influenced and Corrupt Organization Act were subject to compelled arbitration, even though predicate acts for Florida RICO claim were federal securities law violations that were not subject to compelled arbitration, given the federal Arbitration Act. 9 U.S.C.A. §§ 1- 14; West's F.S.A. § 895.011 et seq.
[8] Headnote Citing References KeyCite Citing References for this Headnote

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Key Number Symbol 25TII(I) Exchanges and Dealer Associations
Key Number Symbol 25Tk411 Relations Between Customer-Investors and Broker-Dealers
Key Number Symbol 25Tk413 k. Agreements to Arbitrate. Most Cited Cases
(Formerly 33k91 Arbitration, 160k11(11.1), 160k11(11))

Brokerage customers seeking to evade compelled arbitration pursuant to customer agreements on ground arbitration agreements were unconscionable adhesion contracts had produced no evidence indicating agreements were adhesion contracts, demonstrating neither lack of meaningful choice nor that arbitration clauses were inherently unfair or oppressive.
[9] Headnote Citing References KeyCite Citing References for this Headnote

Key Number Symbol 25T Alternative Dispute Resolution
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Key Number Symbol 25Tk411 Relations Between Customer-Investors and Broker-Dealers
Key Number Symbol 25Tk413 k. Agreements to Arbitrate. Most Cited Cases
(Formerly 33k91 Arbitration, 160k11(11.1), 160k11(11))

Brokerage customers seeking to evade compelled arbitration pursuant to customer agreements on ground agreements lacked mutuality of obligation had failed to show lack of mutuality of obligation, where in return for customers' assent to customer agreements, brokerage firm obligated itself to perform all necessary services in connection with maintenance of customers' accounts and to submit any controversy relating to accounts to arbitration.
[10] Headnote Citing References KeyCite Citing References for this Headnote

Key Number Symbol 25T Alternative Dispute Resolution
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Key Number Symbol 25TII(I) Exchanges and Dealer Associations
Key Number Symbol 25Tk411 Relations Between Customer-Investors and Broker-Dealers
Key Number Symbol 25Tk413 k. Agreements to Arbitrate. Most Cited Cases
(Formerly 33k91 Arbitration, 160k11(11.1), 160k11(11))

Absence of signature by brokerage firm's representative on customer agreement including arbitration provision did not prove lack of mutuality of obligation sufficient to permit customers to evade compelled arbitration.
[11] Headnote Citing References KeyCite Citing References for this Headnote

Key Number Symbol 25T Alternative Dispute Resolution
Key Number Symbol 25TII Arbitration
Key Number Symbol 25TII(I) Exchanges and Dealer Associations
Key Number Symbol 25Tk411 Relations Between Customer-Investors and Broker-Dealers
Key Number Symbol 25Tk413 k. Agreements to Arbitrate. Most Cited Cases
(Formerly 33k91 Arbitration, 160k11(11.1), 160k11(11))

Allegations of brokerage customers seeking to evade compelled arbitration pursuant to arbitration agreements on theory that arbitration agreements were fraudulently induced, that when customer agreements were signed, brokerage firm's agent indicated that consent to customer agreement was mere formality and did not inform customers about arbitration provision, went to formation of entire contract rather than to misrepresentation with respect to arbitration clause, and were thus allegations which should be heard by arbitrator rather than by district court.
[12] Headnote Citing References KeyCite Citing References for this Headnote

Key Number Symbol 25T Alternative Dispute Resolution
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Key Number Symbol 25Tk411 Relations Between Customer-Investors and Broker-Dealers
Key Number Symbol 25Tk413 k. Agreements to Arbitrate. Most Cited Cases
(Formerly 33k91 Arbitration, 160k11(11.1), 160k11(11))

Brokerage customers seeking to evade compelled arbitration of state law claims pursuant to customer agreements had failed to allege fraud in the "factum" through allegations that when customer agreements providing for arbitration were signed, brokerage firm's agent indicated consent to customer agreements was mere formality and did not inform customers about arbitration provision; claimed misrepresentation did not go to very character or essential terms of proposed contract.
[13] Headnote Citing References KeyCite Citing References for this Headnote

Key Number Symbol 25T Alternative Dispute Resolution
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Key Number Symbol 25Tk414 k. Performance, Breach, Enforcement, and Contest of Agreement. Most Cited Cases
(Formerly 33k91 Arbitration, 160k11(11.1), 160k11(11))

Brokerage firm had not waived its right to arbitration by failing to request arbitration within 30-day period called for by district court's order; brokerage firm's actions reflected persistent and zealous effort to secure arbitration of customers' claims, and any delay in request for arbitration was understandable, given that customers had immediately appealed order permitting arbitration.
[14] Headnote Citing References KeyCite Citing References for this Headnote

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Plaintiffs' right to amend their complaint once as matter of course remained unimpeded, where defendants' only filing prior to motion to amend was motion to dismiss and to compel arbitration. Fed.Rules Civ.Proc.Rule 15(a), 28 U.S.C.A.
*656 Russell L. Forkey, Layne Verebay, Ft. Lauderdale, Fla., for plaintiff-appellant in No. 85-5921.

Robert B. Goldman, Ruden, Barnett, McClosky, Schuster & Russell, P.A., Bennett Falk, Keith Olin, Miami, Fla., for defendants-appellees in No. 85-5921.

Kirk M. Gibbons, John B. Gibbons, Tampa, Fla., for plaintiff-appellants in Nos. 85-3816 and 86-3009.

Kathy M. Klock, Miami, Fla., for Annis.

O'Bannon M. Cook, Ruden, Barnett, McClosky, Bennett Falk, Robert B. Goldman, Tallahassee, Fla., Keith Olin, Miami, Fla., for Smith Barney, Inc. and Roberts.

Appeal from the United States District Court for the Southern District of Florida.
*657 Appeal from the United States District Court for the Middle District of Florida.

Before VANCE and ANDERSON, Circuit Judges, and ARONOVITZ, FN* District Judge.

FN* Honorable Sidney M. Aronovitz, U.S. District Judge for the Southern District of Florida, sitting by designation.

VANCE, Circuit Judge:


These separate suits arise out of the alleged mismanagement of securities accounts by Smith Barney, Harris, Upham & Co. (Smith Barney) and its employees. Richard Driscoll asserts claims against Smith Barney and Richard Shalla for violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 (the 1934 Act) and for breach of fiduciary duty under Florida law. Edward and Ruth Adrian also allege violations of Section 10(b) and Rule 10b-5 of the 1934 Act and breach of fiduciary duty, along with claims under the federal Racketeer Influenced and Corrupt Organization Act ( 18 U.S.C. §§ 1961-68), the Florida Racketeer Influenced and Corrupt Organization Act (Fla.Stat. Chap. 895), the Florida Securities and Investor Protection Act (Fla.Stat. Chap. 517), and state law negligence, gross negligence, fraud, conversion, and breach of contract. Upon setting up their accounts, the Adrians and Driscoll signed agreements which included clauses providing that disputes relating to these accounts would be subject to arbitration. Pursuant to these brokerage agreements, the district courts in these two cases granted Smith Barney's motions to compel arbitration on all claims. 625 F.Supp. 25 (S.D.Fla.1985). Plaintiffs now contend that the district courts erred in compelling arbitration. FN1

FN1. This court has jurisdiction under 28 U.S.C. § 1292(a)(1) to review a district court order compelling arbitration. See Miller v. Drexel Burnham Lambert, Inc., 791 F.2d 850, 853 (11th Cir.1986) .


A. Federal Securities Law Claims

[1] Headnote Citing References The first issue before this court is whether claims brought under Section 10(b) of the 1934 Act are subject to arbitration. This precise issue was recently taken up by this court sitting en banc. Wolfe v. E.F. Hutton & Co., 800 F.2d 1032 (11th Cir.1986) . In Wolfe, this court held that pre-claim agreements to arbitrate 10b-5 claims are not enforceable. In light of this recent decision, we reverse the portion of the district courts' orders compelling arbitration of plaintiffs' federal securities law claims. FN2

FN2. We note, however, that the Supreme Court has granted review to resolve a split among the circuit courts on this very issue. Shearson/American Express, Inc. v. McMahon, 479 U.S. 812, 107 S.Ct. 60, 93 L.Ed.2d 20 (1986) .


B. Federal RICO Claims

[2] Headnote Citing References [3] Headnote Citing References The Adrians allege violations of the federal RICO statute. Unlike the typical state or federal claim, a RICO claim must be based on underlying, independently unlawful acts. See 18 U.S.C. §§ 1961-62; Greenblatt v. Drexel Burnham Lambert, Inc., 763 F.2d 1352, 1361 (11th Cir.1985) . This unique feature of RICO presents special problems in determining whether RICO claims are subject to arbitration under a pre-claim agreement. In Tashea v. Bache, Halsey, Stuart, Shields, Inc., 802 F.2d 1337 (11th Cir.1986) , this court held that federal RICO claims based on violations of the federal securities laws are not subject to compelled arbitration. Since the underlying acts in the Adrians' federal RICO claim are federal securities law violations, Tashea mandates that the district court decide this claim.

C. State Law Claims

In concluding that federal RICO claims based on federal securities law violations are not arbitrable, the Tashea court relied on the fact that in this circuit, according to Wolfe v. E.F. Hutton & Co., 800 F.2d 1032 (11th Cir.1986) (en banc), the underlying predicate acts were not arbitrable. The Tashea court reasoned:
Consistency in the orderly adjudication of these claims would seem to require the RICO claim to be decided in the same *658 forum as the separate federal securities claims.

802 F.2d at 1338.

Along with enumerating a number of state law crimes as constituting "racketeering activity," the Florida statute incorporates "[a]ny conduct defined as 'racketeering activity' under 18 U.S.C. § 1961(1)(A), (B), (C), and (D)." Fla.Stat. § 895.02(1)(b). This statutory scheme permits the predicate acts for the Florida RICO claim to be federal securities law violations which are not arbitrable.
[4] Headnote Citing References In the interest of consistency, Tashea would seem to require that the Florida RICO claim be decided in the same forum-the federal courts-as the separate federal securities claims on which it is based. This conclusion, however, would be contrary to a fundamental precept of statutory interpretation. This court cannot create an exception to the Federal Arbitration Act, 9 U.S.C. §§ 1- 14, absent some indication, whether express or implied, of congressional intent for such an exception. As the Third Circuit recently commented in light of the Supreme Court's opinion in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985) , which held that antitrust claims against foreign corporations are arbitrable: "It would appear therefore that determining statutory claims to be nonarbitrable on the basis of some judicially recognized public policy rather than as a matter of statutory interpretation is no longer permissible." Jacobson v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 797 F.2d 1197, 1202 (3rd Cir.1986) .
[5] Headnote Citing References [6] Headnote Citing References [7] Headnote Citing References The Securities Act of 1933 and the Securities Exchange Act of 1934 provide the congressional intent to exclude claims under Sections 12(2) and 10(b) of those respective acts from the mandate of the Federal Arbitration Act. Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953) ; Wolfe v. E.F. Hutton & Co., 800 F.2d at 1032 . The congressional intent that federal RICO claims not be subjected to arbitration is found by more subtle implication: "the unique structure of the RICO statute which cross-references other predicate statutes," Jacobson v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 797 F.2d at 1202 . We have no indication by way of statutory enactment that Congress intended to likewise exclude state RICO claims. Indeed Congress could not have remotely foreseen the enactment by states of statutes patterned after its own. Nor can it be said that excluding state RICO claims from the mandate of the Federal Arbitration Act is necessary to effectuate some congressional purpose. We must therefore hold that the Adrians' Florida RICO claims are subject to arbitration.
Controlling authority requires that plaintiffs' other state law claims be arbitrated. In Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985) , the Supreme Court concluded that arbitration agreements are enforceable with respect to state law claims, even if the accompanying federal securities law claims proceed to trial. The Court's language in Byrd is unequivocal.
[T]he Arbitration Act requires district courts to compel arbitration of pendent arbitrable claims when one of the parties files a motion to compel, even where the result would be the possibly inefficient maintenance of separate proceedings in different forums.

105 S.Ct. at 1241. See also Coleman v. Prudential Bache Securities, Inc., 802 F.2d 1350 (11th Cir.1986) ; Wolfe v. E.F. Hutton & Co., 800 F.2d 1032 (11th Cir.1986) (en banc).

[8] Headnote Citing References [9] Headnote Citing References [10] Headnote Citing References In an attempt to evade Byrd, plaintiffs raise a number of challenges to the arbitration agreements employed by Smith Barney. Plaintiffs charge that these agreements to arbitrate are not valid contracts because they were fraudulently induced, were unconscionable adhesion contracts, and lacked mutuality of obligation. Plaintiffs are correct that a court may not order arbitration unless and "until it is satisfied that a valid arbitration agreement exists." Miller v. Drexel Burnham Lambert, Inc., 791 F.2d 850, 854 (11th Cir.1986) . Their attacks on these arbitration agreements, however, do not survive close scrutiny. Plaintiffs produce no evidence to indicate *659 that the arbitration agreements are adhesion contracts. They demonstrate neither a lack of "meaningful choice," Williams v. Walker-Thomas Furniture Co., 350 F.2d 445, 449 (D.C.Cir.1965) , nor that the arbitration clauses are inherently unfair or oppressive. See Coleman v. Prudential Bache Securities, Inc., 802 F.2d at 1352; Surman v. Merrill Lynch, Pierce, Fenner & Smith, 733 F.2d 59, 61 n. 2 (8th Cir.1984) . Similarly, plaintiffs fail to show a lack of mutuality of obligation. In return for plaintiffs' assent to the Customer Agreement, Smith Barney obligated itself to perform all the necessary services in connection with the maintenance of plaintiffs' accounts and, in particular, to submit any controversy relating to these accounts to arbitration. FN3

FN3. The Adrians also are incorrect in arguing that the absence of the Smith Barney representative's signature on the Customer Agreement proves a lack of mutuality of obligation. Cf. Associated Hardware Supply Co. v. Big Wheel Distributing Co., 355 F.2d 114 (3d Cir.1965) ; Starkman v. Seroussi, 377 F.Supp. 518 (S.D.N.Y.1974) .


[11] Headnote Citing References [12] Headnote Citing References Plaintiffs' chief argument is that the arbitration agreements were fraudulently induced. Driscoll and the Adrians independently submitted affidavits to buttress this contention. The sum of their affidavits is the same: when each signed the Customer Agreement, Smith Barney's agent indicated that the investor's consent to the Customer Agreement was a mere formality required to transact business with Smith Barney and never informed the investor about the arbitration provision. The allegations contained in the affidavits, however, go to the formation of the entire contract rather than to any misrepresentation with respect to the arbitration clause. Under Prima Paint Corp. v. Flood & Conklin Manufacturing Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967) , where the claims of confusion and fraud go to the circumstances surrounding the signing of the contract as a whole, these allegations should be heard by an arbitrator and not by the district court. See also Coleman v. Prudential Bache Securities, Inc., 802 F.2d at 1352; Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Haydu, 637 F.2d 391 (5th Cir. Unit B 1981) . FN4

FN4. Appellants also fail to allege fraud in the "factum" since the claimed misrepresentation by defendants does not go to the very character or essential terms of the proposed contract. See Cancanon v. Smith Barney, Harris, Upham & Co., 805 F.2d 998 (11th Cir.1986) .


Despite their best efforts, plaintiffs have failed to adequately allege the invalidity of the arbitration agreements. We therefore affirm the district courts' orders compelling arbitration of plaintiffs' breach of fiduciary duty and other state law claims.

D. Waiver

[13] Headnote Citing References The Adrians further contend that Smith Barney waived its right to arbitrate his claims by failing to request arbitration within the thirty day period called for by the district court's order. This argument is without merit. Smith Barney's actions reflect a persistent and zealous effort to secure arbitration of the Adrians' claims. Any delay in Smith Barney's request for arbitration was entirely understandable since the Adrians had immediately appealed the order permitting arbitration. Given that any doubts about a waiver of arbitration must be resolved in favor of arbitration, Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 941-942, 74 L.Ed.2d 765 (1983) , the Adrians clearly have not met their "heavy burden" of proving waiver. See Belke v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 693 F.2d 1023, 1025 (11th Cir.1982) .

E. Motion to Amend

[14] Headnote Citing References The district court also denied the Adrians' motion to amend their complaint. Federal Rule of Civil Procedure 15(a) provides that "[a] party may amend his pleadings once as a matter of course at any time before a responsive pleading is served...." Defendants' only filing prior to the motion to amend was their motion to dismiss and to compel arbitration. Such a motion to dismiss is not a "responsive pleading." See, e.g., *660 McGruder v. Phelps, 608 F.2d 1023, 1025 (5th Cir.1979) ; Barksdale v. King, 699 F.2d 744, 747 (5th Cir.1983) . Therefore, the Adrians' right to amend their complaint as a matter of course remained unimpeded. FN5

FN5. The decision to deny the motion to amend was also premised on the incorrect belief that all of the plaintiffs' claims were arbitrable.


F. Conclusion

The district court's judgment in No. 85-5921 is AFFIRMED as to the state claim and REVERSED as to the federal claims. That case is REMANDED with directions that the district court deny defendants' motion to arbitrate the federal securities law claims. The district court judgment in No. 85-3816 and No. 86-3009 is also AFFIRMED as to the state claims and REVERSED as to the federal claims. Those cases are REMANDED with directions that the district court deny defendants' motion to arbitrate the federal securities law claims and the federal RICO claims, and that the district court grant plaintiffs' motion to amend their complaint.
AFFIRMED in part. REVERSED in part and REMANDED with directions.
C.A.11 (Fla.),1987.
Driscoll v. Smith Barney, Harris, Upham & Co.
815 F.2d 655, Blue Sky L. Rep. P 72,606, Fed. Sec. L. Rep. P 93,246, RICO Bus.Disp.Guide 6621