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Singh v. Interactive Brokers, LLC

United States District Court, E.D. Virginia, Norfolk Division

November 30, 2016

CHARANJIT AND PARBHUR SINGH, Plaintiff,
v.
INTERACTIVE BROKERS LLC, BRAR CAPITAL LLC, and VIKAS BRAR, Defendants. BRAR FAMILY PARTNERSHIP L.P., Plaintiffs,
v.
INTERACTIVE BROKERS LLC, BRAR CAPITAL LLC, and VIKAS BRAR, Defendants.

          OPINION AND ORDER

          Robert G. Doumar Senior United States Judge.

         This matter comes before the Court on Defendant Interactive Brokers LLC's Motions to Compel Arbitration ("Motions to Compel") filed in the above-captioned cases on August 23, 2016. See Civil No. 2:16cv276 ("Singh Case"), ECF No. 5; Civil No. 2:16cv277 ("BFP Case"), ECF No. 6. In these motions, Interactive Brokers LLC ("IB") requests that, pursuant to the Federal Arbitration Act, 9 U.S.C. §§ 3 and 4, the Court compel arbitration of all claims brought against IB in each case and stay the actions pending completion of arbitration.[1] For the reasons stated herein, IB's Motions to Compel are GRANTED, and the instant action (Lead Case No. 2:16cv276) is STAYED for the shorter of five (5) months or when arbitration is completed.

         I. PROCEDURAL AND FACTUAL BACKGROUND

         On June 8, 2016, Charanjit and Parbhur Singh ("the Singhs") and Brar Family Partnership L.P. ("BFP")[2] (collectively, "Plaintiffs"), filed lawsuits against the Singhs' nephew, Vikas Brar; his financial advising firm, Brar Capital LLC (collectively, "Brar Defendants"); and IB, a broker-dealer and securities investment firm. Singh Case, ECF No. 1; BFP Case, ECF No. 1. These lawsuits stem from two IB investment accounts held by Plaintiffs: the Singhs' joint account established in August 2011 ("Joint Account") and BFP's account established in March 2012 ("Partnership Account"). See Amended Compl., Singh Case, ECF No. 2 ¶ 21; BFP Case, ECF No. 3 ¶ 21. The Joint Account was created by means of a document entitled "Interactive Brokers LLC Account Application for Financial Advisor Clients for Individual or Joint Account Holders" (hereinafter "Joint Account Application"), and the Partnership Account was created by means of a document entitled "Interactive Brokers LLC Account Application for Financial Advisor Clients for Trust Accounts" (hereinafter "Partnership Account Application"). Id. Both applications name Vikas Brar as the "Financial Advisor" for the accounts and Brar Capital LLC as the "Name of Advisor's Firm." Id., While the Singhs admit that the Joint Account Application contains signatures bearing their names, they claim that these signatures were not authored by either Charanjit or Parbhur Singh. Singh Case, ECF No. 2 ¶ 21. The Singhs do not deny that they signed the Partnership Account Application. BFP Case, ECF No. 3.

         According to the Amended Complaints, by August 2015, both the Joint Account and the Partnership Account consisted almost entirely of options on the VXX, which is an exchange-traded note designed to expose options positions to the CBOE Volatility Index ("VIX"). See Singh Case, ECF No. 2 ¶ 30; BFP Case, ECF No. 3 ¶ 31. On August 20, 2015, the Joint Account was worth $406, 794.04 and the Partnership Account was worth $1.8M. See Singh Case, ECF No. 2 ¶ 30; BFP Case, ECF No. 3 ¶ 33. Shortly thereafter, the stock market plunged, and by August 21, 2015, the value of the Joint Account dropped to a value of -$409, 565.95, with a margin deficit of approximately $1.2M. Singh Case, ECF No. 2 ¶ 32. By August 24, 2015, the value of the Partnership Account dropped to a value of $651, 811.26, with a margin deficit of approximately $1.79M. BFP Case, ECF No. 3 ¶¶ 35-38. To cover these significant margin deficits, IB liquidated the positions in both accounts using what Plaintiffs refer to as IB's "proprietary 'autoliquidation' program." See Singh Case, ECF No. 2 ¶¶ 32-33; BFP Case, ECF No. 3 ¶¶ 39, 42. After liquidation, both the Joint Account and the Partnership Account had insufficient funds to satisfy their margin debts, so IB demanded approximately $461, 000 from the Singhs and $1.72M from BFP to cover their respective debts. See Singh Case, ECF No. 2 ¶¶ 32-33; BFP Case, ECF No. 3 ¶¶ 39, 42. When Plaintiffs failed to pay, IB commenced arbitration proceedings against Plaintiffs at the Financial Industry Regulatory Authority ("FINRA") in November 2015. See Mem. in Support of Mot. to Compel ("IB Mem."), Singh Case, ECF No. 6 at 8; BFP Case, ECF No. 7 at 8; see also Declaration of John Nielands ("Nielands Declaration" or "Nielands Decl"), Singh Case, ECF No. 7, Exs. G & H; BFP Case, ECF No. 8, Exs. G & H.

         On June 14, 2016, the Singhs and BFP filed Amended Complaints, both of which bring the following six counts against IB: "Violations of § 10(b) of the Securities Exchange Act, 15 U.S.C. 78j, and Rule 10b-5 promulgated thereunder" for unlawful liquidation of Plaintiffs' accounts (Count I); "Registration Violations of Florida Blue Sky Laws, " Fla. Stat. §§ 517.12 & 517.211, and "Registration Violations of Virginia Blue Sky Laws, " Va. Code §§ 13.1-501, 522, for facilitating and aiding unregistered investment activity by the Brar Defendants (Counts II and III); "Wrongful Liquidation Under Contract" for breach of IB's "standard form of contract" governing its liquidation procedures (Count IV); "Failure to Liquidate in a Commercially Reasonable Manner" relating to IB's liquidation of Plaintiffs' accounts (Count V); and "Negligence" relating to IB's facilitation of unregistered investment activity by the Brar Defendants (Count VI). See Singh Case, ECF No. 2 at 8-11; BFP Case, ECF No. 3 at 9-12.

         On August 23, 2016, IB filed the instant Motions to Compel Arbitration and supporting memoranda. See Singh Case, ECF No. 5 and 6; BFP Case, ECF No. 6 and 7. On September 6, 2016, Plaintiffs filed their respective memoranda in opposition ("Resp.") to IB's Motions to Compel. See Singh Case, ECF No. 11; BFP Case, ECF No. 12. On September 9, 2016, IB filed reply briefs. See Singh Case, ECF No. 14; BFP Case, ECF No. 16. On October 24, 2016, counsel for Plaintiffs and IB appeared before the Court and presented oral argument on IB's Motions to Compel. See Singh Case, ECF No. 22; BFP Case, ECF No. 23.

         II. APPLICABLE LAW

         IB argues that the Singhs and BFP entered into mandatory arbitration agreements with IB when they opened the Joint Account and Partnership Account, respectively, and that the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1, et seq., requires the Court to enforce these agreements as written and compel Plaintiffs to arbitrate.

         The FAA states:

A written provision in any . . . contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . .. 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. The FAA further mandates that, in the event of an alleged failure, neglect, or refusal to arbitrate, the court must compel arbitration if it is satisfied that "the making of the agreement for arbitration ... is not in issue." Id. § 4. If, however, the court determines that the making of the agreement is at issue, the court must proceed to trial on that issue. Id.; Gibbs v. PFS Investments. Inc.. 209 F.Supp.2d 620, 624 (E.D. Va. 2002) (citing A/S Custodia v. Lessin Intern. Inc., 503 F.2d 318 (2d Cir. 1974)).

         The FAA applies to contracts "evidencing a transaction involving commerce, " 9 U.S.C. § 2, and it defines "commerce" as "commerce among the several States, " Id. § 1. A sufficient interstate nexus is established for purposes of this section where "the contracting parties were located in different states and performance was to occur across state lines." Gibbs. 209 F.Supp.2d at 625. It is well-established that transactions involving the purchase and sale of securities on a national exchange involve "commerce" under this definition. See, e.g.. Shearson/Am. Exp. Inc. v. McMahon, 482 U.S. 220, 226 (1987) (customer agreement between customer and securities broker was a transaction involving commerce under the FAA).

         Once a court determines that the contract containing the arbitration agreement falls under the FAA, "arbitration may only be judicially compelled when the parties have agreed to it, and then only for those kinds of disputes that the parties have agreed to submit to arbitration." Zandford v. Prudential-Bache Sec. Inc., 112 F.3d 723, 727 (4th Cir. 1997). In other words, there is a two-step inquiry when deciding whether to compel arbitration under the FAA: the court must (1) determine whether a binding arbitration agreement exists between the parties and then (2) determine whether the dispute falls within the parameters of the arbitration agreement. Hightower v. GMRI. Inc., 272 F.3d 239, 242 (4th Cir. 2001).

         HI. PLAINTIFFS ENTERED INTO VALID AND BINDING ARBITRATION AGREEMENTS WITH IB.

         A. The Joint Account Application and the Partnership Account Application Contain a Mandatory Arbitration Clause.

         To conduct the first stage of this inquiry, the Court reviewed the relevant documents in the case. In support of its Motions to Compel, IB filed the Nielands Declaration, which attaches several documents as exhibits. See Singh Case, ECF No. 7; BFP Case, ECF No. 8. In the Singh Case, Exhibit B purports to be a copy of the Joint Account Application that was used to set up the Singh's Joint Account in August 2011. ECF No. 7 ¶ 12. The Singhs do not dispute this. See Singh Case, ECF No. 2 ¶ 21; Resp., ECF No. 11 at 3-4. In the BFP Case, Exhibit B purports to be a copy of the Partnership Account Application that was used to set up the Partnership Account in March 2012. ECF No. 8 ¶ 12. It contains the signatures of Parbhur and Charanjit Singh, BFP's general partners, throughout the document. Id. Ex. B at 26, 28, 29, 32, 33, 39, 40, 45. BFP does not dispute that Exhibit B is the Partnership Account Application or that it was signed by the Singhs. See BFP Case, Resp., ECF No. 12 at 4, 10.

         Section IV of both the Joint Account Application and the Partnership Account Application incorporates by reference a document entitled "The Interactive Brokers Customer Agreement":

The Interactive Brokers Customer Agreement governs the relationship between Customer and Interactive Brokers and sets forth the terms and conditions governing Customer's IB account. The Customer Agreement has been provided separately to Customer as a part of a package of documents labeled: Interactive Brokers LLC Agreements and Disclosure Documents.

         Singh Case, Nielands Decl., Ex. B at 17; BFP Case, Nielands Decl., Ex. B at 27. In both the Singh Case and the BFP Case, the Interactive Brokers Customer Agreement ("Customer Agreement") is purportedly attached to the Nieland's Declaration as Exhibit F. While Plaintiffs do not admit either the authenticity of this document or the fact that they received it, both the Joint Account Application and the Partnership Account Application specifically identify the Customer Agreement and clearly state above the signature line that the "CUSTOMER REPRESENTS THAT CUSTOMER HAS RECEIVED [THE CUSTOMER AGREEMENT) . . . AND HAS READ AND UNDERSTOOD AND INTENDS TO BE BOUND BY THE . . . CUSTOMER AGREEMENT." Singh Case, Nielands Decl., Ex. B at 20 (emphasis in original); BFP Case, Nielands Decl., Ex. B at 31 (emphasis in original).

         Section 33 of the Customer Agreement is entitled "Mandatory Arbitration, " which states in bold, all-capitalized text:

• ALL PARTIES TO THIS AGREEMENT ARE GIVING UP THE RIGHT TO SUE EACH OTHER IN COURT, INCLUDING THE RIGHT TO A TRIAL BY JURY, EXCEPT AS PROVIDED BY THE RULES OF THE ARBITRATION FORUM IN WHICH A CLAIM IS FILED...

         See Singh and BFP Cases, Nielands Decl., Ex. F § 33. Section 33A continues:

Customer agrees that any controversy, dispute, claim or grievance between IB .. . and Customer . .. arising out of, relating to, this Agreement, or any account(s) established hereunder in which securities may be traded; any transactions therein; any transactions between IB and Customer; any provision of the Customer Agreement or any other agreement between IB and Customer; or any breach of such transactions or agreements, shall be resolved by arbitration...

Id. Section 33 also includes various other warnings related to arbitration, and subsection B contains a class-action exception to ...


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