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41 of 47
DOCUMENTS
Fernando
S. G. Frota and Maria Carmen Frota, Plaintiffs, v. Prudential-Bache Securities,
Inc., et al., Defendants
No.
85 Civ. 9698 (WCC)
UNITED
STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK
1987
U.S. Dist. LEXIS 3916; Fed. Sec. L. Rep. (CCH) P93,253
May
14, 1987, Decided; May 15, 1987, Filed
CASE
SUMMARY:
PROCEDURAL POSTURE:
Defendants, a brokerage and a broker, filed a motion for summary judgment
in an action brought by plaintiff customers alleging violations of § 10(b) of
the Securities Exchange Act of 1934, 15 U.S.C.S. § 78j(b), rule 10b-5 of the
Securities and Exchange Commission, 17 C.F.R. § 240.10b-5 (1985), the Racketeer
Influenced and Corrupt Organizations Act, 18 U.S.C.S. §§ 1961-1968, and state
law.
OVERVIEW:
During a period of approximately 920 trading days, the broker made 1,224
purchases and sales of securities for the customers' account thereby generating
$ 1,900,000 in commissions and more than $ 2,000,000 in margin charges. The
broker also purchased $ 7,204,506 worth of certificates of accrued Treasury
securities. When the account was finally liquidated, only $ 69,000 remained of
the original $ 2,424,635. The brokerage argued that any claim for fraud was
barred by the doctrines of ratification, waiver, and estoppel because the
customers had not made timely objections after receiving account statements and
had authorized the broker's activities. The customers, who lived in Brazil,
alleged that they did not regularly receive account statements, and that in
opening the account they had signed blank papers presented by the broker. In
denying defendants' summary judgment motion, the court held that material issues
of fact existed concerning the customers' trading objectives and the particular
representations made to them by their broker. While the Treasury securities were
exempt from regulation, a question existed whether they were suitable
investments for the customers' account.
OUTCOME: The court denied
defendants' motion for summary judgment.
CORE TERMS: trading, customer,
broker's, summary judgment, material facts, confirmation, unsuitable, estoppel,
churning, matter of law, unsuitability, ratification, traded, cover letter,
fails to state, cause of action, discretionary account, government securities,
secondary market, misrepresentation, speculation, excessive, disputed, exempted,
monthly, dealer, handled, opened, margin, fully disclosed
LexisNexis(R)
Headnotes
Civil
Procedure > Summary Judgment > Standards > Genuine
Disputes
Civil
Procedure > Summary Judgment > Standards > Materiality
[HN1] A
court may grant a motion for summary judgment only if it determines that there
is no genuine issue as to any material fact and that the moving party is
entitled to a judgment as a matter of law. The court's responsibility is to
assess whether there are any factual issues to be tried, while resolving
ambiguities and drawing inferences against the moving party.
Securities
Law > Liability > Advisers, Brokers & Dealers >
Churning
Securities
Law > U.S. Securities & Exchange Commission > Penalties & Unlawful
Representations
Page
2
1987 U.S.
Dist. LEXIS 3916, *; Fed. Sec. L. Rep. (CCH) P93,253
[HN2]
Churning occurs in a securities account when a broker or dealer, acting in his
own interests and against those of his customer, engages in trading that is
disproportionate to the size and character of the account traded.
Evidence
> Procedural Considerations > Burdens of Proof > General
Overview
Securities
Law > Liability > Advisers, Brokers & Dealers >
Churning
Securities
Law > U.S. Securities & Exchange Commission > Penalties & Unlawful
Representations
[HN3] To
establish a cause of action for churning, plaintiffs must show that (1) the
broker or dealer exercised control over the account, and (2) the broker or
dealer traded the account excessively, considering the investment objectives of
his customer and the size of the account.
Securities
Law > U.S. Securities & Exchange Commission > Penalties & Unlawful
Representations
[HN4] To
establish churning, more must be shown than merely an abnormal number of trades.
In a churning case the independent objectives of a customer are an important
standard against which to measure claimed excessiveness.
Civil
Procedure > Pleading & Practice > Defenses, Demurrers, &
Objections > Waiver & Preservation
Securities
Law > U.S. Securities & Exchange Commission > Necessity for
Regulation
[HN5] The
purpose of the Securities and Exchange Act is to protect the innocent investor,
not one who loses his innocence and then waits to see how his investment turns
out before he decides to invoke the provisions of the Act.
Civil
Procedure > Pleading & Practice > Defenses, Demurrers, &
Objections > Waiver & Preservation
Securities
Law > Liability > Securities Exchange Act of 1934 Actions > Implied
Private Rights of Action > Deceptive & Manipulative Devices
[HN6] Even
express consent to churning does not raise a defense of waiver or estoppel if
the consent is induced by undue influence over the customer, or results from the
customer's trust and confidence in the broker.
Securities
Law > Blue Sky Laws > Exempted Issuers
Securities
Law > Exemptions From Registration > Exempt Classes of
Securities
Securities
Law > Liability > Securities Exchange Act of 1934 Actions > Implied
Private Rights of Action > Deceptive & Manipulative Devices
[HN7]
While government bonds may be exempt from certain section of the Securities
Exchange Act of 1934, any manipulative or deceptive device used in connection
with the sale of even exempted securities is clearly within the reach of §
10(b). 15 U.S.C.S. § 78j(b), 17 C.F.R. § 240.10b-5 (1985).
Securities
Law > Liability > Securities Exchange Act of 1934 Actions > Implied
Private Rights of Action > Deceptive & Manipulative Devices
[HN8] The
knowing or intentional recommendation of an unsuitable security states a cause
of action for fraud under § 10(b) of the Securities Exchange Act of 1934, 15
U.S.C.S. § 78j(b), and rule 10b-5 of the Securities and Exchange Commission, 17
C.F.R. § 240.10b-5 (1985).
COUNSEL: [*1] EDUARDO F.
LOPEZ, ESQ., P.C., Attorney for Plaintiffs.
CAHILL
GORDON & REINDEL, ESQS., Attorneys for Defendants, THOMAS J. KAVALER, ESQ.,
LISA PEARSON, ESQ., Of Counsel.
OPINION BY:
CONNER
OPINION
OPINION
AND ORDER
CONNER, D. J.:
Plaintiffs
Fernando S.G. Frota and Maria Carmen Frota ("the Frotas") brought this action
against Prudential-Bache Securities, Incorporated ("Prudential-Bache") and Ahmed
Hussein ("Hussein"), their broker at Prudential-Bache, alleging violations of
section 10(b) of the Securities Exchange Act of 1934 ("the '34 Act"), 15 U.S.C.
§ 78j(b) (1982); Securities and Exchange Commission rule 10b-5, 17 C.F.R. §
240.10b-5 (1985); the Racketeer Influenced and Corrupt Organizations Act
("RICO"), 18 U.S.C. §§ 1961-1968 (1982); and the laws of the state of New York.
Subject matter jurisdiction
Page
3
1987 U.S.
Dist. LEXIS 3916, *; Fed. Sec. L. Rep. (CCH) P93,253
is
predicated upon section 27 of the '34 Act, 15 U.S.C. § 78aa (1982), section 1964
of RICO, 18 U.S.C. § 1964 (1982), the diversity of citizenship of the parties,
and the doctrine of pendent jurisdiction.
This
matter is now before the Court on defendants' motion for summary judgment
pursuant to rule 56 of the Federal Rules of Civil Procedure on the grounds that
(1) plaintiffs' complaint is barred [*2] by the
doctrines of ratification, waiver and estoppel; (2) plaintiffs' unsuitability
claim fails to state a cause of action as a matter of law; and (3) any claims
predicated on a misrepresentation theory must be dismissed because the material
facts allegedly withheld from plaintiffs were fully disclosed by their account
statements. Because defendants fail to establish that no genuine issue of
material fact exists, their motion for summary judgment must be
denied.
BACKGROUND
In
November 1981, the Frotas opened a "discretionary account" at Prudential-Bache,
over which Hussein, their broker, exercised complete control. Between November
1981 and January 1982, the Frotas transferred a portfolio valued at $ 2,771,635
from the Chase Manhattan Bank in Switzerland to the Prudential-Bache account.
The Frotas withdrew $ 347,000 for their own use; the remaining $ 2,424,635 was
managed and invested solely by Hussein. At the time of opening their account,
the Frotas executed a Customer's Agreement, a Joint Account Agreement, an Option
Agreement and a Power of Attorney (Bialow Affidavit Exhibits 1-3 and 5,
respectively).
During the
time the account was open, the confirmations and monthly statements
[*3] issued by Prudential-Bache on the account were not delivered to
the Frotas either in Brazil or at their New York apartment. Up until June of
1982, they were delivered to Hussein, and thereafter to John F. Rasweiler, the
supervisor of the Wall Street Branch where the account was located. At various
times during the period in which the account was open, Frota met with Hussein
and on each occasion he was given a few account statements.
Between
November 1981 and June 1985, a period of approximately 920 trading days, Hussein
made 1,224 purchases and sales of securities for the Frota's account. Hussein
generated $ 1,900,000 in commissions and more than $ 2,000,000 in margin
charges. when the account was finally liquidated in July 1985, only $ 69,000
remained. Of the 1,224 transactions for the Frotas' account, 200 were purchases
and sales of the same security in a single day; 700 were purchases and sales of
the same security within a 30-day period; 165 were purchases and sales of
securities for which Prudential-Bache was the sole market-maker.
Hussein
also purchased, for the Frota's account, $ 7,204,506 worth of Certificates of
Accrued Treasury Securities ("CATS bonds"), a type of treasury
[*4] bond issued by the U.S. government which has all of its interest
coupons previously removed by the original purchaser. Although there is a
secondary market for the bonds, appreciation depends upon downward fluctuations
in interest rates. Hussein purchased the bonds by margining the Frotas'
account.
Defendants
argue that plaintiffs' complaint is barred by the doctrines of ratification,
waiver and estoppel because plaintiffs did not object upon receipt of
confirmations and account statements and because they signed a Prudential-Bache
letter approving the way their account was being handled. Defendants further
claim that the Frotas have waived their right to complain about transactions in
their account by failing to make timely objections thereto, as required by the
Customer Agreement they signed when the account was opened. That agreement
states in part:
"Reports
of the executions of orders and statements of my account shall be deemed
conclusive if not objected to in writing within five days or ten days
respectively, after transmittal to me by mail or otherwise." (Bialow Affidavit
Exhibit 1, para. 10)
Since the
Frotas apparently made no such objections to any transactions, defendants
[*5] urge they are entitled to summary judgment.
DISCUSSION
[HN1]
A court may grant a motion for summary judgment only if it determines that there
is no genuine issue as to any material fact and that the moving party is
entitled to a judgment as a matter of law. The court's responsibility is to
assess whether there are any factual issues to be tried, while resolving
ambiguities and drawing inferences against the moving party. Anderson v. Liberty Lobby,
Inc., 106 S. Ct. 2505, 2509-11 (1986).
[HN2]
Churning occurs in a securities account when a broker or dealer, acting in his
own interests and against those of his customer, engages in trading that is
disproportionate to the size and character of the account traded. Landry v.
Hemphill, Noyes & Co., 473 F.2d 365, 368 n.1 (1st Cir. 1973), cert. denied,
414 U.S. 1002 (1973). [HN3] To establish
Page
4
1987 U.S.
Dist. LEXIS 3916, *; Fed. Sec. L. Rep. (CCH) P93,253
a cause of
action for churning, plaintiffs must show that (1) the broker or dealer
exercised control over the account, and (2) the broker or dealer traded the
account excessively, considering the investment objectives of his customer and
the size of the account. Kravitz v. Pressman, Frohlich & Frost,
Inc., 447 F. Supp. 203, 211. (D. Mass. 1978).
[*6] The
Frotas' discretionary account named, Hussein as the trader and it is not
disputed that Hussein exercised effective control over the account. Whether the
account was traded excessively, however, is more difficult to
determine. [HN4] To establish churning, more must be shown than
merely an abnormal number of trades. "In a churning case the independent
objectives of a customer are an important standard against which to measure
claimed excessiveness." Fey v. Walston & Co., Inc., 493 F.2d 1036, 1045 (7th
Cir. 1974).
The
parties dispute the facts regarding the stated investment objectives of the
Frotas. An Option Form and Agreement, signed by the Frotas, contains
information, filled in by hand, representing the Frotas as having two years
investment experience actively trading options both in cash and on margin. The
form lists their investment objectives as income and speculation (Defendants'
Exhibit 3). The Frotas claim they signed the Option Agreement, along with the
numerous other documents required to open the account, when it was blank (Frota
Affidavit para. 6). They claim Hussein later
filled in the information that appears, completely misrepresenting the Frotas'
investment experience [*7] (Frota
Affidavit para. 7). The Frotas further claim that they told Hussein their
investment objectives were conservative; they wanted "to apply the money in good
investments, without speculations." (Frota Affidavit para. 6) Defendants claim
the FrOtas were wealthy speculators interested in high yields and argue that
they are bound by the documents signed when the account was opened.
Since the
question of whether trading is excessive must be examined in light of the
trading objectives of the customer and since the Frotas' trading objectives
cannot be established as a matter of law, a material question of fact remains
unresolved. The nature of the plaintiffs' account and any possible
misrepresentation by Hussein, therefore, remain open questions and must be
resolved at trial. See Moscarelli v. Stamm, 288 F. Supp. 453 (E.D.N.Y.
1968).
Defendants
argue that the circumstances surrounding the signing of the agreements are not
material since plaintiffs received monthly statements and did not object to the
management of the account. They assert the equitable defenses of ratification,
waiver and estoppel, well-recognized defenses to securities fraud
claims. [HN5] "The purpose of the Securities [*8] and
Exchange Act is to protect the innocent investor, not one who loses his
innocence and then waits to see how his investment turns out before he decides
to invoke the provisions of the Act." Royal Air Properties, Inc. v. Smith, 312
F.2d 210, 213-214 (9th Cir. 1962).
The
establishment of the defense of ratification and waiver depends upon the trading
experience of the plaintiffs and whether plaintiffs knowledgeably consented to
the acts of defendants. In Hecht v. Harris, Upham & Co., 430 F.2d 1202 (9th
Cir. 1970), the Ninth Circuit affirmed a finding by the District Court barring,
on the basis of estoppel, laches and waiver, the plaintiff's claim under section
10(b) that defendant traded in securities and commodities unsuitable for
plaintiffs' needs and objectives and contrary to her instructions. In Hecht, the
plaintiff spoke with her broker every day. She organized her confirmation slips
in order to discuss them with her broker, in person, at least once a week. Her
trading activities were also independently examined by her tax accountants and
she was occasionally represented by an attorney. Id. at 1208; see
also Landry v. Hempill, Noyes & Co., 473 F.2d 365 (1st [*9] Cir.
1973) (where Court found that plaintiff's "obvious experience" and failure to
object to trades done over a twenty-two month period failed to support a claim
for churning).
In
addition to the added experience or knowledge necessary to ascertain a pattern
of churing, [HN6] "[e]ven express consent to churning does not raise
a defense of waiver or estoppel if the consent is induced by undue influence
over the customer, or results from the customer's trust and confidence in the
broker." Kravitz v. Pressman, Frohlich & Frost, Inc., 447 F. Supp. at 211
(citing Fey v. Walston & Co., Inc., 493 F.2d at 1050).
The facts
supporting the defense of estoppel and waiver are much less clear here than they
were in Hecht. The Frotas live in Brazil and made visits to New York, during
which Mr. Frota would meet with Hussein, only every three to four months.
Whether the Frotas received all their confirmation slips is disputed. Also, the
sporadic manner in which they received confirmation slips and statements raises
question about whether plaintiffs were aware of specific purchases or understood
the significance of the overall pattern of trading. Frota claims he found the
statements incomprehensible [*10] and that he was encouraged by
Hussein not to attempt to understand the statements (Frota Affidavit para. 13).
Ratification of Hussein's actions would require that the Frotas received the
trading confirmations, had the stock market experience and knowledge to
comprehend those actions and then failed, within a reasonable time, to object.
See Jaksich v. Thomson McKinnon Securities, Inc., 582 F. Supp. 485 (S.D.N.Y.
1984).
Page
5
1987 U.S.
Dist. LEXIS 3916, *; Fed. Sec. L. Rep. (CCH) P93,253
Defendants
point to a form sent to the Frotas by the Prudential-Bache compliance department
under a cover letter dated September 8, 1983. The cover letter states that the
compliance department had noticed substantial trading in their account and asks
that the Frotas reexamine their customer statements and sign the enclosed
statement approving the way their account was being handled. The Frotas signed
the form on October 10, 1983. Defendants claim that the fact the Frotas signed
the form is further support for their argument that the Frotas ratified
Hussein's actions. Plaintiffs dispute this and claim that Hussein brought the
form to them without the cover letter, stating that it had to be signed "for his
files" so he could "continue to supervise [the Frotas']
investments." [*11] (Frota Affidavit para. 15). Plaintiffs
claim that if they had seen the September 8, 1983 cover letter they would have
been alerted to the alleged misconduct.
The text
and the tone of the letter could have put the Frotas on notice of the importance
of the otherwise routine approval form. Whether the Frotas received all of the
confirmations and statements and whether they received the September 8th letter
are material facts, as they bear upon whether the Frotas knowingly consented to
the way Hussein handled their investments. Additionally, the disputed facts as
to the Frotas' investment objectives, their investment experience and consequent
ability to understand either that the securities purchased were unsuitable that
the level of trading was excessive are issues of material fact that must be
resolved at trial.
Plaintiffs'
unsuitability claim involves Hussein's purchase of the CATS Bonds. Plaintiffs
allege that defendant Hussein failed to explain the nature of the CATS Bonds to
Frota. Plaintiffs claim that Hussein knew that the Frotas were ignorant of the
mark-up in the CATS bonds, the speculative nature of the securities and the
risks of heavy trading on margin. Finally, plaintiffs [*12] contend
that defendants purchased the bonds for the Frotas with the sole purpose of
generating for themselves an enormous and unreasonable profit in commissions or
mark-ups.
Defendants
argue that they are entitled to summary judgment on this issue because
plaintiffs' unsuitability theory fails to state a claim as a matter of law. It
is defendants' argument that a case for unsuitability under 10b-5 is "informed"
by the NASD rules of fair practice. Plaintiffs fail to state a claim, defendants
argue, because government securities are exempted under NASD rules and so, as a
matter of law, a broker's recommendation cannot violate 10(b)5. Further, they
argue that even if government securities do fall within the unsuitability rule,
they are not liable because plaintiffs cannot show the CATS bonds were
unsuitable or that defendants acted with the requisite scienter.
The fact
that CATS bonds are "exempted securities" under the 34 Act is not relevant
here. [HN7] While government bonds may be exempt from certain section
of the 34 Act, any manipulative or deceptive device used in connection with the
sale of even exempted securities is clearly within the reach of section
10(b). 15 U.S.C. § 78j(b) (1982), [*13] 17 C.F.R. §
240.10b-5 (1985). The enormous volume of trading in CATS bonds for the Frotas'
account clearly indicates that these obligations were not purchased for
long-term investment, but for rapid turnover speculation in interest rate
fluctuations, a type of trading which may be unsuitable for many customers even
if the underlying securities represent the ultimate in safety. Further, the fact
that the NASD Rules of Fair Trading do not apply to transactions in government
securities is also irrelevant. Plaintiffs have not based their 10b-5 claim on
the NASD rules as it is clear that no private right of action exists under the
NASD rules. Frota
v. Prudential-Bache Securities, Inc., 639 F. Supp. 1186, 1190 (S.D.N.Y.
1986).
In this
circuit, [HN8] the knowing or intentional recommendation of an
unsuitable security states a cause of action for fraud under section 10(b) and
rule 10b-5. Clark v. John Lamula Investors, Inc., 583 F.2d 594, 600
(2d Cir. 1978); Clark v. Kidder, Peabody & Co., Inc., 636 F. Supp. 195, 198
(S.D.N.Y. 1986); Leone v. Advest, Inc., 624 F. Supp. 297, 304 (S.D.N.Y. 1985).
In order to prevail upon their claim, plaintiffs only have to show that
defendants, knowing [*14] the CATS bond trading to be unsuitable in
light of the Frota's stated investment objectives, purchased them for their
discretionary account. See Clark v. Kidder, Peabody & Co., Inc., supra. at
198 . . .
As I have
indicated above, the Frota's investment objectives are unclear. It is also
unclear what Hussein's purpose in purchasing the CATS Bonds might have been. It
is undisputed that Prudential-Bache was a market maker for the bonds. Defendants
claim, however, that the bonds had an active secondary market and that there may
have been attractive tax advantages to nonresidents if the bonds were sold on
the secondary market before maturity. Plaintiffs claim that the excessive
mark-up taken by defendants made it unlikely that they would realize a profit on
resale. The question of Hussein's intent regarding the purchase of the bonds is
a question of fact and should be determined by the jury at trial where his
credibility can be assessed. See S. E. C. v. Research Automation Corp., 585 F.2d
31, 33 (2d Cir. 1978) (Summary judgment likely to be inappropriate when the
issues concern intent).
Defendants'
basis for summary judgment on the state law claims echoes their federal
arguments. [*15] They argue that plaintiffs' claims of
misrepresentation and breach of fiduciary duty must be dismissed because the
material facts allegedly withheld were fully disclosed in the monthly account
statements. As discussed above, it is unclear how many
Page
6
1987 U.S.
Dist. LEXIS 3916, *; Fed. Sec. L. Rep. (CCH) P93,253
account
statements the Frotas received, how much they understood about what was being
done for their account and what Hussein represented to them was being
done.
CONCLUSION
After a
careful examination of the affidavits and exhibits submitted to the Court by
both parties, I have concluded that there are material facts in dispute.
Accordingly, for the reasons stated above, defendants' motion for summary
judgment is denied.
SO
ORDERED.
This
proceeding was instituted by the American Stock Exchange, Inc., (the “Exchange”)
by means of a Statement of Charges dated April 16, 1990, preferred against Ahmed
D. Hussein (“Hussein”), a former registered employee of Prudential-Bache
Securities, Inc. (“Prudential-Bache”), a regular member organization of the
Exchange. This Stipulation of Facts and Consent to Penalty is entered into
pursuant to Rule 345(c) of the American Stock Exchange, sole1y for the purpose
of this proceeding, in order to settle and conclude all disciplinary actions by
the Exchange against Hussein based upon and arising out of the facts hereinafter
stipulated and set forth in the Statement of Charges. Hussein, without admitting
or denying the allegations contained in the Statement of Charges or in this
Stipulation of Facts and Consent to Penalty, hereby consents to the findings of
violations of Exchange rules and to the imposition of the penalties hereinafter
provided. Hussein also agrees that this settlement is subject to approval by an
Exchange Disciplinary Panel and by the Exchange’s Board of Governors and that,
if so approved, it shall constitute a final decision which may not be appealed
by said Respondent.
STATEMENT
OF FACTS:
|
1.0
|
During
all relevant periods, Hussein was a registered employee at
Prudential-Bache’s Manhattan branch office, and was certified to handle
public customer options accounts. On May 1, 1986 Hussein resigned from
Prudential-Bache. He is currently employed with another Exchange member
organization.
|
|
1.2
|
The
Exchange retained jurisdiction over Hussein by letter dated October 13,
1986; receipt acknowledged.
|
|
2.0
|
On
November 5, 1981, Customer A opened an options account with Hussein at
Prudential-Bache. To open the account, Customer A transferred securities
that had a market value at the time of transfer of $2,700.00 to Hussein at
Prudential-Bache from a foreign bank
account.
|
|
2.1
|
An
Options New Account Form (“ONAF”), Customer Agreement, and Power of
Attorney dated November 5, 1981 granting Hussein discretion to effect
trades in the account, were, according to Customer A, signed in blank by
Customer A and subsequently completed by
Hussein.
|
|
2.2
|
The
ONAF, prepared by Hussein, reported the following information for the
Customer A:
|
|
Date
of Birth:
|
5/21/1915
|
|
Employment:
|
Retired
|
|
Annual
Income:
|
“Over
$10,000”
|
|
Liquid
Net Worth:
|
“Over
$10,000”
|
|
Estimated
New Worth:
|
“Over
$10,000”
|
|
Investment
Experience:
|
2
years-Stocks, Bonds & Options
|
|
Investment
Objectives:
|
Income
and Speculation
|
|
Trading:
|
Actively
|
|
2.3
|
According
to Customer A at the time the options account was opened, Customer A had
no direct stock, bond or options trading experience, and had previously
invested his funds through a bank primarily in blue chip stocks and
certificates of deposit with one year maturities. In addition, according
to Customer A, at the time the account was opened, Customer A advised
Hussein that he was looking for a reasonable return on his investments
without great risks.
|
|
2.4
|
From
the opening of the account in November 1981 and until in or about January
of 1982, confirmations and monthly statements for the Customer A account
were sent to the New York address of Customer A’s former shipping company.
Thereafter, pursuant to written instructions from Customer A dated January
7, 1982, these documents were sent directly to the branch office manager.
At no time did Customer A directly receive confirmations and monthly
statements for transactions effected in his
account.
|
|
2.5
|
As
stated in paragraph 2.1 above, Customer A granted Hussein discretionary
authority over his account. Hussein made investment decisions for the
account and effected all purchases and
sales.
|
|
2.6
|
During
the life of the account, Customer A made periodic trips to New York; he
met with Hussein and/or the branch office manager who reviewed the account
statements and
|
| |
confirmations
with him. According to Customer A, on these occasions, Hussein assured
Customer A that his account was performing well and that he had nothing to
worry about.
|
| |
|
|
2.7
|
According
to Customer A, Customer A also advised Hussein that he was unable to
monitor activities in his account because he did not understand the
monthly statements. According to Customer A, Hussein told Customer A the
statements were decipherable only to industry professionals, and that he
should not try to comprehend them.
|
|
2.8
|
Between
November 1981 and June 1985, purchases in the Customer A account totaled
over $72,000,000 on an average monthly net equity of approximately
$2,600,000; margin charges totaled over $2,100,000. The account suffered a
net loss of nearly $1 million during the above
period.
|
|
3.0
|
During
the account’s history, the turnover ratio (purchases divided by average
monthly equity) was 27, annualized to 7.2. A return of 93.47% of the net
investment value of the account was needed to pay for the commissions
generated. A total of 24.79% of the investment value of the account was
needed to pay annual commissions which totaled approximately $2.8 million
over the life of the account.
|
|
3.1
|
In
approximately 920 trading days from 1981 to 1985, Hussein effected 1,224
trades in the Customer A account, including purchases and sales. Of these
trades, about
|
|
|
200
were simultaneous purchases and sales of the same securities within the
same day; nearly 700 were purchases and sales of the same securities
within a 30 day period. Many of these trades were in new
issues.
|
|
4.0
|
Under
Hussein’s discretion, the Customer A account traded common stocks, equity
options, zero coupon bonds and new issues in contrast to Customer A’s
previous portfolio at another financial institution which consisted of
blue chip stocks, Eurobonds, cash, and certificates of
deposit.
|
|
4.1
|
Over
the life of the account, Hussein purchased approximately $7 million in
Certificates of Accrued Treasury Securities (“CATS”) for the Customer A
account, generating approximately $250,000 in commissions. These bonds
paid no interest and, if held until maturity in the years 2007, 2011 and
2014, Customer A would be over 100 years
old.
|
|
4.2
|
Between
September 1982 through March 1984, Hussein effected 155 corporate bond
trades for the Customer A account, engaging in multiple trading (buying
and selling the same bonds) and switching within the account (selling
bonds and replacing them with the purchase of the same or another bond of
the same value). See Attachments A and
B.
|
|
4.3
|
As a
result of the multiple trading in National Steel Corp. bonds between
September 1982 and January 1983, Hussein earned over $91,000 in
commissions, and made a profit for the Customer A account of $83,500. As a
|
|
|
result
of multiple trading between September and November 1982, in Bethlehem
Steel Corp. bonds maturing on March 1, 2005, Hussein caused the Customer A
account to sustain a loss of $18,500 while generating $61,800 in
commissions. (See Attachment B).
|
|
4.4
|
As a
result of switching in National Steel Corp. and Bethlehem Steel Corp.
bonds in the Customer A account, Hussein earned over $100,000 in
commissions. (See Attachment A).
|
|
4.5
|
According
to Customer A, by letter dated October 13, 1983 Customer A requested that
the account be transferred from Prudential-Bache to Chase Manhattan Bank
because of the costs associated with trading in the account. Hussein,
according to Customer A, informed Customer A on this date for the first
time that his account was margined for approximately $5 million and could
not be transferred. According to Customer A, prior to this time, Hussein
told Customer A that his account was doing well and that he had nothing to
worry about. According to Customer A, in October 1984 and April 1985,
Customer A again wrote to Hussein in an attempt to transfer his account.
The account was transferred in the summer of 1985 to Shearson Lehman
Hutton.
|
CONCLUSION:
By reason
of the above stipulated facts a Disciplinary Panel may conclude
that:
|
5.0
|
Hussein
violated Exchange Rules 924(c) and 422 by
|
|
|
abusing
his discretionary authority in the Customer A account in that he effected
excessive transactions as described in paragraph 2.0 through 4.5
above.
|
|
5.1
|
Hussein
engaged in conduct inconsistent with just and equitable principal of trade
in violation of Exchange Rule 345 by misrepresenting the status of the
account to Customer A and failing to follow specific customer instructions
to close the account as described in paragraphs 2.2 through 2.7 and 4.5
above.
|
|
5.2
|
Hussein
violated Article V, Section 4(i) made applicable to employees of member
organizations by Exchange Rule 345(a)(1), in that he willfully engaged in
a course of fraudulent conduct in violation of Section 10(b) of the
Securities Exchange Act of 1934, and Rule 10(b)-5 thereunder
by:
|
|
|
(a)
|
excessively
trading and churning the Customer A account, while vested with
discretionary authority, for the purpose of generating commission income,
as set forth in paragraphs 2.8, 3.0, 3.1 and 4.0 through 4.5
above,
|
|
|
(b)
|
misrepresenting
the status of the account to Customer A, as set forth in paragraphs 2.2
through 2.8, above, and
|
|
|
(c)
|
providing
Customer A with materially false and misleading information about the
status of his account as set forth in paragraphs 2.6, 2.7 and 4.5
above.
|
DISCIPLINARY
ACTION:
A
Disciplinary Panel may impose the following penalties upon Hussein:
|
|
b)
|
a
fine of $25,000; and
|
|
|
c)
|
a
three months suspension from servicing any new discretionary
accounts.
|
| |
AMERICAN
STOCK EXCHANGE, INC.
|
|
| |
|
|
| |
Stephen
L. Lister
Senior
Vice President
|
|
Agreed to
this 7th
day
of March,
1991.
Ahmed D.
Hussein
JOHN
J. PHELAN, III, P.C.
ATTORNEY
AT LAW
1414
AVENUE OF THE AMERICAS
NEW YORK,
NEW YORK 10019
______
(212)
688-8088
Telecopier: (212)
838-9534
December
18, 1996
Director
of Arbitration
National
Association of Securities Dealers, Inc.
33
Whitehall Street
New York,
NY 10004
Re: Ahmed
Dia Hussein v. Dean Witter Reynolds, Inc.
Dear
Madame:
Claim
and Demand for Arbitration
This is a
Statement of Claim in Arbitration, a Demand for Arbitration and a Notice of
Intention to Arbitrate. It is a claim by Mr. Ahmed Dia Hussein
(“Claimant”) arising out of his employment with Dean Witter Reynolds, Inc.
(“DWR”), the termination of that employment and the actions of DWR following the
termination. DWR is a member organization of the Association and
Claimant is a former registered representative of that firm. DWR is
obligated to arbitrate the controversies set forth herein pursuant to Section
1(2) and Section 8(a)(2) of the Association’s Code of Arbitration Procedure
which rules require arbitration of disputes between member organizations and
their employees or former employees regarding their employment or the
termination thereof.
This
arbitration is a public arbitration under the Rules of the Association and
Claimant seeks a hearing before a mixed panel of three arbitrators in the City
of New York. Enclosed are six copies of this Statement of Claim and
exhibits together with a check payable to the Association to cover filing and
the deposit on forum fees in the amount of $1,000. Also enclosed is
an executed and acknowledged Uniform Submission agreement and six copies
thereof.
UNLESS DWR
APPLIES TO A COURT OF COMPETENT JURISDICTION TO STAY THE ARBITRATION WITHIN
TWENTY DAYS OF SERVICE OF A COPY OF THIS CLAIM, IT SHALL THEREAFTER BE PRECLUDED
FROM OBJECTING THAT A VALID AGREEMENT TO ARBITRATE WAS NOT MADE OR HAS NOT BEEN
COMPLIED WITH AND FROM ASSERTING IN COURT THE BAR OF A LIMITATION OF
TIME.
JOHN J.
PHELAN, III, P.C.
Claimant
seeks damages for (i) the compensation for the balance of the fourth year of his
employment, in the amount of approximately $500,000 to $800,000; (ii) the
productivity bonus in the amount of approximately $200,000 already earned by
Claimant over the contract period from 1992 through January 9, 1996, plus the
productivity bonus he would have earned had he been allowed to stay and retire
at the end of 1996 or early 1997; (iii) the incentive and deferred compensation
to which he would have become entitled had he not been terminated, in the amount
of approximately $70,000 had he remained employed until the end of his fourth
contract year on September 9, 1996; (iv) forgiveness of the balance claimed due
under the final segment of a promissory note executed by Claimant in DWR’s favor
at the time of his employment, amounting to approximately 2/3rds of the final
$108,958.50 after adjustment for the period worked or approximately $72,639, (v)
the stock options and other executive compensation benefits to which Claimant
would have been entitled had his employment not been terminated in an amount to
be ascertained at trial; (vi) 401(k) benefits in an amount to be determined upon
the hearing of this matter; (vii) a direction to file a true and accurate Form
U-5 Termination Notice in the event one has not been filed or, if one has, to
correct any false and damaging characterizations placed by DWR on Claimant’s
Form U-5 regarding the reasons stated for his termination; (viii) damages for
defamation arising out of statements made to the industry regarding Claimant’s
character, including by way of any transmittal of information set forth on his
proposed Form U-5 in the amount of $1,000,000; (ix) punitive damages in the
amount of $1,000,000; and attorneys’ fees and the costs of this
proceeding.
Claimant’s
legal theories include breach of contract, wrongful termination, age
discrimination in employment, termination of employment in violation of the
Americans With Disabilities Act and defamation, all of which were carried out in
wilful, wanton and gross disregard of the rights of Claimant and entitle him to
an award of punitive damages.
Background
Claimant
is an experienced and highly successful securities broker. He has
been employed as a broker since at least 1981, at all times with large New York
Stock Exchange wire houses, including Prudential Bache, Oppenheimer, Smith
Barney, Shearson and, finally Dean Witter. Claimant is married and is
approximately 55 years of age. He was born in Egypt and educated
there and in the United States. Dr. Hussein holds numerous graduate
degrees from Universities both in Egypt and in the United States in multiple
disciplines including scientific disciplines, mathematics, engineering and
business, was a Fulbright scholar and has served as a University professor in
both Egypt and the U.S.
Claimant’s
business as an account executive during the 17 years he has been a broker, both
at DWR and at other firms, has come principally from large clients in the Middle
East, Europe and other foreign countries. His business practices have
historically, up to and including his employment with DWR, been marked by
considerable business travel and large transactions involving significant
commission income to himself and his employer. His clients are
principally wealthy individuals or institutions.
JOHN J.
PHELAN, III, P.C.
DWR
Employment and Terms
Claimant
was employed by DWR from approximately September 9, 1992 until he was wrongfully
terminated on January 9, 1996 as a pretext to avoid paying the compensation to
which he was entitled to receive on the fourth anniversary of his
employment. He has been unemployed since January 9,
1996.
Annexed
hereto as Exhibit A is a copy of the DWR Account Executive Compensation,
Benefits and Recognition Programs, described by DWR as a part of DWR’s program
entitled “Our ‘Sacred Trust.’” This document sets out the formulae
for the calculation of compensation for Account Executives based upon the amount
of commission and other business generated by them. Page 4 of Exhibit
1 sets out the standard “payout grid” for account executives which grid
increases the portion of the commissions generated by the account executive as
the total gross commissions increase. In other words, the more
business brought in, the higher the payout on those commissions. The
term “payout” refers to the percentage of the total gross commission paid by the
customer to DWR which is “paid out” to the account executive. Page 9 of the
Manual sets out the “Account Executive Productivity Compensation Plan” which is
also graduated and becomes higher as the account executive’s production
increases. These productivity bonuses are in addition to the
commissions paid to the account executives under the above payout grid and are
treated as “deferred compensation” paid approximately five years after they are
earned. After 1999, these bonuses are to be pauid in the publicly
traded stock of DWR’s parent company.
As
Claimant was a highly desireable candidate at the time DWR hired him, DWR agreed
to give him certain additional payments, perquisites and benefits. The Exhibit A
Agreement was modified by an Addendum to Account Executive Compensation
Agreement. This document provides for incentive compensation to
Claimant over and above that provided generally to its account executives under
the payout grid and productivity compensation plan. Under this
agreement, Claimant was to be paid on a payout plan which exceeded the payout
grid payable to other account executives. These additional payments were to be
treated as “incentive compensation” and were to have been paid to Claimant in
the 49th month following his employment, or during October, 1996. These sums
have not been paid to date. Claimant estimates they amount to no less
than $48,000.
Annexed as
Exhibit B is a copy of a Promissory Note from Claimant to DWR under which DWR
advanced to Claimant 30% of his prior year’s production, $1,614,200, equal to
$484,260, after deducting 10% (payable to him under Exhibit 4 below), leaving a
net advance of $435,834. Claimant was obligated to repay this over a
four year period with four payments of $108,958.50 each due on the anniversary
date. These four payments were, however, under the terms of the
Exhibit 3 Note to be forgiven in annual installments of the same amount,
provided that Claimant remained employed, unless his employment was terminated
without cause. Claimant expressly negotiated for and obtained the agreement of
DWR to the “for cause” language inserted in hand on the second page of the Note
and initialled by the parties. The first three installments have been
forgiven under the terms of the Note but DWR contends that the final installmant
of $108,958.50
JOHN J. PHELAN, III, P.C.
is due to
them from Claimant. In view of the unjustified tiring of Claimant,
this must be treated as forgiven as well. At the very least, Claimant
is entitled to a pro
rata adjustment of the final segment of the note in his favor for the
portion of the 1995-1996 year during which he worked for DWR.
Annexed hereto as Exhibit C
is a one paragraph letter dated September 9, 1992 which agrees to pay to
Claimant the additional $48,426 withheld under the above Promissory Note on
September 9,1996, provided that Claimant remained employed on that date. DWR’s
wrongful and unjustified termination of Claimant’s employment has prevented him
from obtaining this payment as well.
Termination
of Employment and Pretextual Reasons
On January
9, 1996, DWR terminated Claimant’s employment. Normally, promptly following
termination, DWR and any other industry employer is required to file a Form U-5
with the Central Registration Depository which provided copies to the
Association, all exchanges and State regulators with which Claimant was
registered or licensed. DWR, for reasons which are unexplained, has
failed or neglected to do so. Instead, it has prepared a draft U-5
which it sent to Claimant’s former counsel and which threatened to state as the
reason for termination that “Mr. Hussein’s response to an internal questionnaire
did not identify a Dean Witter account containing Mr. Hussein’s funds which
account was carried on the firm’s books and records in the name of a financial
institution”. Claimant believed until recently that the proposed Form U-5 had
indeed been filed as DWR was obliged to do.
As the
Form U-5 is necessarily read by any employer considering hiring Claimant and by
any regulator considering his application for registration, such statements on
this critical document accusing him of lying to his firm, concealing his
interest in a customer account and, perhaps, somehow contributing to the
falsification of the firm’s books and records; in other words, of extremely
dishonest conduct, would be extremely damaging and, indeed, devasting
documents. Because of his belief that the U-5 had been filed and due
to his forthright approach to business dealings and his wish not to be seen by
any business associate to be concealing any information, he made disclosure of
the fact that a damaging Form U-5 was filed against his record. These
disclosures have cost him numerous business opportunities. Even the
absence of a filed U-5 is damaging to Claimant sice it clearly raises the
spectre of an ongoing investigation in the minds of anyone to whose attention
this failure comes and places Claimant in potential regulatory difficulties with
sever possible consequences.
Statements
in any Form U-5 alleging what the draft U-5 stated would be absolutely false and
would be known to DWR to be absolutely false. As DWR knows, Mr.
Hussein had discussed the account in question many times with his supervisors
and they knew he had opened an account for that institutional customer and that
he maintained an account with that institution. Nothing was concealed
and was, indeed, affirmatively disclosed. Regular requests were made
of Claimant by his supervisors for copies of the account statements of the
institution in question. They were always promptly provided and were
reviewed by management. He had even discussed the very answer to the
questionnaire item with them and had sought their advice as to the proper answer
given the
JOHN J. PHELAN, III, P.C.
circumstances. At
all times, Claimant made full disclosure and had answered all questionnaire
items fully and accurately, as he understood their requirements after discussing
them with supervisors. Claims made at termination and thereafter of
other supposed facts are fabrications made for the illegitimate purposes
discussed below.
Actual
Reason for Termination
Contrary
to the reasons stated for termination, the real reason is the exact opposite, a
reason which demonstrates both Claimant’s honesty and DWR’s improper
motives. In late 1995, Claimant discussed with his superios at DWR
his thoughts concerning his career plans. He advised them that, as he
was getting older and because of his health conditions (severe and acute
bronchitis and severe sleep apnea), he would likely not continue to work for DWR
for much longer after he had completed the four years in September, 1996 and
that he planned to retire as a registered representative. Indeed,
Claimant’s physicians were advising him to retire. Shortly thereafter, despite
very substantial commission production, he was terminated. Since he had
substantial benefits coming to him under the various agreements annexed hereto
as Exhibits 1 through 4 provided only that he survive as an employee and be
allowed to retire at the end of 1996 or early 1997 or, alternatively, that his
employment was terminated prior thereto without cause, DWR determined
to terminate Claimant and to create a false “cause” for the
termination. In other words, Claimant’s only fault was in being too
honest. He shared with his employer his ruminations regarding his
future plans. They decided that they had no need to try to keep him
happy any longer, they had a short term financial advantage to be gained by
terminating him and that they needed a reason, a “cause” to do so.
This
shoddy and immoral employment termination and grab for Mr. Hussein’s well earned
compensation benefits is bad enough. To go beyond that and to scar
his name for the rest of his life by placing the false accusations on the Form
U-5 would place this matter into the area of defamation and punitive
damages.
Since
January 9, 1996, Claimant has been unable to secure employment in the
industry. He has been informed by at least one major client that any
accusation on his proposed Form U-5 alleging dishonest conduct would prevent
them from dealing with him any further. Claimant believes that by
word of mouth or otherwise, he has been damaged in his business
life.
Demand
Claimant
seeks damages in the amount of $1,020,000 or such amount as is established at
trial, for his lost compenstion, amounts due him under the firm’s 401(k) and
other benefit plans, the foregiveness of any balance claimed due on his note,
$1,000,000 for the defamation claim; and a direction to DWR to file a true and
accurate Form U-5 or, in the event one has not been filed, to amend his U-5
regarding the reason for termination. Claimant also seeks punitive damages in
the amount of $1,000,000 and his attorneys’ fees and the costs of this
proceeding.
JOHN J. PHELAN, III, P.C.
Claimant
requests the appointment of a panel of arbitrators and the convening of hearings
at the earliest possible dates.
|
|
Edward
W. Larkin, Esq.
Dean
Witter Reynolds, Inc.
|
AHMED
[ILLEGIBLE] HUSSEIN,
Claimant,
v.
DEAN
WITTER REYNOLDS INC.,
Respondent.
_____________________________________/
DEAN
WITTER REYNOLDS INC.’S
ANSWER, AFFIRMATIVE DEFENSES
AND COUNTERCLAIM
Respondent,
Dean Witter Reynolds Inc. (“Dean Witter”) through its undersigned attorneys,
submits its Answer, Affirmative Defenses and Counterclaim to Claimant Ahmed
Hussein’s (“Hussein”) Statement of Claim (“Claim”) and states:
Introduction
In January
1996, Dean Witter terminated account executive Ahmed Hussein (“Hussein”) for
violating company policy. In October 1995, Hussein answered “none” on
a compliance questionnaire to a question which asked Hussein to list any
“employee account” Hussein maintained at Dean Witter. Hussein later
admitted, however, that a request submitted by Hussein’s sales assistant in
November 1995 to wire one million dollars from a Dean Witter account to a Swiss
bank account was actually a transaction involving Hussein’s own
money. In addition to failing to disclose the true nature of
this account to Dean Witter, Hussein continued to spend long periods of time
outside the office and outside the United States after being warned by his
branch manager that Hussein’s regular attendance in the branch office was a
condition of his employment. Hussein was terminated by his branch
manager for these violations.
STEEL
HECTOR & DAVIS LLP
[ILLEGIBLE
TEXT]
Equally as
frivolous, Hussein also states that Dean Witter “defamed” Hussein in a draft
regulatory filing which, remarkably, was shown to no one other than Hussein and
his attorneys.
Hussein’s
Claim is nothing more than an attempt to circumvent New York’s long standing
“employment-at-will” rule by couching what would otherwise be “wrongful
discharge” claims as claims sounding in tort and
discrimination. Under the law of New York, absent a statutory or
contractual restriction, an employee is deemed to be employed “at will” by his
employer, and may be terminated at any time, for any reason,
provided it is not an unlawful reason. See, e.g., Murphy v. American Home
Products Corp., 58 N.Y. 2d 293, 461 N.Y.S. 232 (N.Y.
1983). Thus, under the “at will” doctrine followed by New York, an
action for “wrongful termination” does not exist. Id.
Indeed,
Hussein’s own Dean Witter employment application specifically acknowledged Dean
Witter’s right to terminate Hussein with or without cause. Hussein’s
employment application discloses above his signature:
I also
agree that my employment and
compensation can be terminated with or without cause and with or without
notice, at any time, at the option of either Dean Witter Reynolds, Inc. or
myself.
See Employment
Application, Exhibit A, p.4, (emphasis added).
Hussein’s
Claim appears to be nothing more that an attempt to coerce Dean Witter from
pursuing an arbitration claim against Hussein for the
unpaid balance of a Promissory Note
[ILLEGIBLE
TEXT].
A. Hussein Was Terminated for
Violating Company Policy
Hussein
was terminated because he violated company policy, not because of his age, his
alleged “disability” or because Dean Witter wanted to retain Hussein’s deferred
compensation. As set forth below, Hussein improperly responded to a
compliance inquiry, and his lack of attendance in the office was
unacceptable.
In 1995,
Dean Witter’s World Trade Center branch office circulated an internal
questionnaire to be completed by all brokers. One of the questions
asked whether the account executive maintained any “employee”
accounts. Hussein answered “none.” See Exhibit “B.” The
firm later discovered that Hussein’s answer was not true when Hussein attempted
to transfer one million dollars $1,000,000 out of a Dean Witter account to a
Swiss bank account for his own benefit, and admitted that the funds in the Dean
Witter account were his own.
Pursuant
to Dean Witter policy, an account executive who opens a Dean Witter account in
which he or any member of his family has an interest must disclose such interest
to the firm. The Dean Witter New Account Form asks whether each
account opened is an “employee” or “employee related” account. An
“employee account” includes every account in which an employee of Dean Witter
has an interest. In addition, Dean Witter policy prohibits an account
executive from maintaining a securities account at another brokerage firm or
bank in which the account executive has any direct or indirect interest without
prior written approval from Dean Witter’s Compliance Department.
[ILLEGIBLE
TEXT]
employees’
accounts in order to assure compliance with employee trading regulations
set by the various securities regulators. For example, the NASD Rules
of Fair Practice prohibit an account executive from purchasing what is known as
a “hot issue” for his own account. Likewise, employees are restricted
from engaging in transactions for their own accounts involving certain
securities which Dean Witter acts as a member of an underwriting
syndicate. Dean Witter’s own policies and procedures restrict
additional securities transactions by its employees to avoid potential conflicts
of interest between the employee and the firm’s clients. Quite
simply, Dean Witter cannot adequately supervise its employees’ securities
transactions and insure compliance with these rules, regulations and policies
unless the firm is aware of its employees’
accounts.
In
Hussein’s case, an additional reason existed. In January 1994, the
firm received a Notice of Levy from the IRS stating that Hussein was the subject
of a federal tax lien in the amount of $727,148.48. As required by
the Notice of Levy, Dean Witter “froze” Hussein’s regular Dean Witter account,
as well as his IRA account, pending their liquidation to satisfy the
levy. Curiously, however, Hussein had already liquidated his Dean
Witter personal account only
days before Dean Witter received the Notice of Levy, transferring
personal assets in excess of a half a million dollars out of Dean Witter and
leaving less than $2,000 in Hussein’s regular account to satisfy the IRS
lien.1
1 Hussein
did not liquidate his IRA account prior to Dean Witter’s receipt of the Notice
of Levy.
[MISSING
TEXT]
the
balance of his IRA account in response to the Levy. During that time,
however, the firm was placed in a precarious position in that the IRS commanded
compliance with the terms of the Levy, while Hussein’s attorneys wrote his
branch office manager and threatened to take legal action against the firm if
Dean Witter liquidated Hussein’s IRA account.2
Given the
existing tax lien and Dean Witter’s obligation to abide by the terms of the
Levy, the firm in Hussein’s case had an even greater need to ensure that the
account executive was being forthright with respect to disclosure of those
accounts which contained Hussein’s personal funds.
In July
1995, Hussein submitted paperwork, as an account executive, to open a Dean
Witter account for the “Arab Bank (Switzerland) Ltd.” The account was assigned
number 601- 20931-070. Hussein did not advise his branch office
manager or the office compliance manager that he had an interest in the
account. Nor did Hussein designate the Arab Bank account as a Dean
Witter “employee account.” In fact, the space on the Arab Bank account’s New
Account Form which asks whether the account is for a Dean Witter employee is
marked “no.” See Exhibit “C.”
The firm,
however, began to have concerns regarding this account. Prior to
being served with notice of the tax levy, Dean Witter had approved Hussein’s
maintenance of a personal account at another Swiss bank, “Banque Alliance.” Bank
Alliance had also opened a Dean Witter account with
Hussein acting as account executive. The approval of Hussein’s
personal
2 In fact,
this was not the only time Hussein and/or his attorneys threatened to sue his
employer. While he was an account executive, Hussein on several occasions
boasted to his branch manager that he eventually would sue the
firm.
[ILLEGIBLE
TEXT].
Witter
Exhibit “E.” In July 1995, Hussein’s branch manager wrote Hussein a memo
reminding him that an account executive cannot be continuously absent from the
office and asking Hussein to give the firm a definitive date in August 1995 for
his return to the United States. See Exhibit
“F.”
In October
1995, Hussein completed an internal questionnaire regarding various compliance
issues. In response to a question requesting that the broker disclose
all “employee accounts,” Hussein wrote “none.” See Exhibit “B.” In
November 1995, however, Hussein instructed his sales assistant to submit a Wire
Request Form to Dean Witter. The wire request instructed that one
million dollars ($1,000,000) was to be wired from the Arab Bank’s Dean Witter
account to a Swiss bank account. Because of the curious nature of the
request and the lack of an authorized signature from an agent of the Arab Bank
authorizing the transfer, the branch operations manager would not process the
wire request. Over the next few days, Hussein’s sales assistant
submitted subsequent, similar wire requests, one of which stated that the “final
beneficiary” of the one million dollars was “Ahemd Hussein” while others stated
that the final beneficiary was simply the Swiss bank. See Composite Exhibit
“G.”
An
investigation of the proposed transaction and the Arab Bank’s account followed,
to determine both the true nature of the account and whether the assets in the
account were subject to the IRS lien. Dean Witter spoke to Hussein
(who was again out of the country) by telephone with Hussein’s attorney on the
line. Although he was vague, Hussein ultimately admitted that the
Arab Bank’s Dean Witter account contained Hussein’s own funds. He
nevertheless argued
[ILLEGIBLE
TEXT].
Dean
Witter ultimately concluded that the funds in the Arab Bank account were
acquired after service of the Notice of Levy, and therefore, were not subject to
the Levy. As such, Dean Witter wired the funds out according to
Hussein’s instructions. Nevertheless, Dean Witter as a result of the
foregoing reasonably concluded that Hussein incorrectly answered the compliance
questionnaire, incorrectly filled out the Arab Bank account’s New Account Form,
and concealed from Dean Witter the true nature of the account.
Contrary
to what is alleged in the Claim, although Dean Witter became increasingly
suspicious about the Arab Bank account, the firm did not know that the funds
were Hussein’s until Hussein ultimately admitted as such in November or December
1995. Likewise, Hussein did not seek advice from the firm on how to
answer the questionnaire item at issue. Had he disclosed that the
funds were his own, the firm would have required him to disclose on the
questionnaire that the Arab Bank account was a Dean Witter “employee
account.”
As a
result of this incident, and based on Hussein’s continued absence from the
office, Hussein’s branch manager on January 9, 1995 called Hussein and told him
he was being discharged for cause for the reasons outlined
above. Significantly, in response to being terminated, Hussein simply
said “ok” and hung up the phone. He did not argue, as he does now,
that his manager’s stated reasons were false, that medical problems or his age
caused his termination, or that his termination was a ruse to retain Hussein’s
deferred compensation.
Hussein
was well aware that Dean Witter could legally terminate his employment with or
without cause. Hussein’s claim that his discharge was an attempt to
avoid payment of his
[ILLEGIBLE
TEXT].
$435,834. That
Dean Witter would expend significant money recruiting Hussein to join the firm
only to terminate him three years later is nonsensical. To be blunt,
if Dean Witter’s decision to retain or discharge Hussein was exclusively a
financial one, the firm surely would have kept Hussein and benefited from the
commissions he generated. Hussein’s violation of Dean Witter’s
policies, not his terms of compensation, necessitated his
discharge.
B. Hussein’s Charge of Age
Discrimination (ADEA) is Frivolous
To deflect
attention away from the true reasons for Hussein’s termination, Hussein alleges
(without any supporting facts) that his discharge was motivated by
discrimination based on Hussein’s age, assumably in violation of the Age
Discrimination in Employment Act of 1967 (“ADEA”). This is simply
untrue. Hussein was hired by Dean Witter in 1992 and was discharged
three years later in 1995. Hussein was approximately fifty years old at the time
Dean Witter hired him. If Dean Witter sought to discriminate
against older account executives, why would the firm hire Mr. Hussein, who at
the time they hired him was already within the ADEA’s protected class
(individuals over forty)? Hussein expects this Panel to believe that Dean Witter
fired Hussein because he was fifty-three, yet the firm
hired Hussein when he was fifty!
C. Hussein’s ADA Claim is
Equally Without Merit
Equally as
frivolous as his ADEA claim, Hussein also alleges that Dean Witter’s decision to
terminate him was motivated by discrimination based on Hussein’s purported
“bronchitis” or “sleep apnea” in violation of the Americans with Disabilities
Act (“ADA”). Hussein’s ADA allegations are completely false. During
his employment and at the time of the decision to
[ILLEGIBLE
TEXT].
was within
the protected group as a “qualified individual with a disability” (i.e., that
Hussein experiences a physical or mental impairment that substantially limits
one or more of the major life activities of such individual”) as required to
state a claim under the ADA. Regardless, regular, predictable
attendance at the firm is an essential function of a Dean Witter account
executive. Account executives cannot properly service clients and
their accounts, and the firm cannot perform its required supervisory
responsibilities of its registered representatives if they are
unavailable.
Finally,
Hussein’s ADA claim also fails because, at the time of his discharge, Hussein
was not performing his job at a level
that met Dean Witter’s legitimate expectations, given Hussein’s failure to
properly disclose the true nature of the Arab Bank account and Hussein’s
irregular attendance. Quite simply, Dean Witter had a legitimate
non-discriminatory reason for discharging Hussein.
In short,
simply establishing that Hussein is fifty-five and has bronchitis or sleep apnea
does not subject Dean
Witter to liability for employment discrimination. Federal courts
consistently dismiss lawsuits under anti-discrimination statutes where no
evidence of an employer’s discriminatory intent exists. Likewise, the
Panel here should dismiss the unsupported, frivolous allegations of employment
discrimination in Hussein’s Claim.
D. Dean Witter Did Not Defame
Hussein
Finally,
Hussein also alleges that Dean Witter and its in-house attorney, Mr. Edward
Larkin, defamed Hussein by submitting false information to the National
Association of Securities Dealers, Inc. (“NASD”) regarding the reasons for
Hussein’s termination. Quite the
[ILLEGIBLE
TEXT]
language
Dean Witter ultimately reported to the NASD. The fact that the
document Hussein is complaining about was a “draft” version of his U-5 which was
never submitted to the NASD or “published” to third parties other than Hussein
and his attorneys drives home the frivolousness of Hussein’s “defamation”
claim!
a. The U-5 Reporting
Requirement
One of the
self-regulatory functions undertaken by the NASD is the investigation of
terminations for cause. Accordingly, the NASD requires member firms
such as Dean Witter to notify the association of the circumstances surrounding
an account executive’s discharge. See NASD Bylaws,
Article IV § 3(a), NASD Manual at 1050 (1996). The required
disclosure form, known as a Uniform Termination Notice for Securities Industry
Registration, or “Form U-5,” contains questions concerning the individual’s
termination date, the reason for his termination, and requests other information
concerning the broker while employed with the firm. See Form U-5 for
Hussein, attached as Exhibit “H.”
b. The Reported Reason for
Hussein’s Termination is True
After
Hussein’s discharge, Dean Witter submitted a U-5 to the NASD that stated that
Hussein was “discharged.” As for the section that asks for the “reason for
termination,” Dean Witter left that section blank except for the words
“amendment to follow.” See Exhibit H. Mr.
Larkin also wrote to the NASD and explained that he had requested input from
Hussein and his counsel with respect to the “reason for discharge” section and
would submit an amendment. On
[ILLEGIBLE
TEXT].
To state a
defamation claim against Dean Witter arising out of Dean Witter’s statements on
his U-5, Hussein must show that the information Dean Witter reported was maliciously false. Stated
succinctly, there is nothing false about the statement that Dean Witter
discharged Hussein for “policy reasons unrelated to transactions in customer
accounts.” Likewise, rather than acting with malice, Mr. Larkin went out of his
way to solicit Hussein’s own input as to the language submitted to the
NASD.
In an act
of desperation, Hussein references in his Claim language from a previous “draft”
U-5 proposed by Mr. Larkin and submitted to Hussein and his attorney for
review. As Hussein states in his Claim, the draft U-5 proposed that
the stated reason for Hussein’s discharge would read: “Mr. Hussein’s response to
an internal questionnaire did not identify a Dean Witter account containing Mr.
Hussein’s funds which account was carried on the firm’s books and records in the
name of a financial institution.” Claim, p. 4. Again, there is nothing false or malicious
about this statement. Moreover, the draft U-5 in question cannot as a
matter of law form the basis of a defamation claim against Dean Witter as the
firm did not publish this document to third parties. Rather, Mr.
Larkin only provided the document to Hussein and his counsel.
Furthermore,
Hussein’s claim that he essentially “defamed himself’ by disclosing to
prospective employers the language of the draft U-5 is not
credible. Hussein and his counsel knew quite well that Dean Witter
had not submitted the draft U-5 to the NASD, and that the only U-5 filed by Dean
Witter prior to the April 4 amendment listed the reason for Hussein’s
termination as “amendment to follow.” In short, Hussein’s defamation claims are
spurious.
1. [ILLEGIBLE
TEXT] and, therefore must be dismissed.
2. Hussein’s
Claim is barred by the doctrine of unclean hands.
3. Hussein
cannot recover on his defamation claims based on the truth of the statements
upon which his claims are based.
4. Hussein
cannot recover on his defamation claims because the statements about which he
complains are privileged.
5. Hussein
cannot recover on his defamation claims because the statements about which he
complains were made in good faith without malice.
6. Hussein
cannot recover on his wrongful termination claim because such a claim is not
recognized by the state of New York.
7. Hussein’s
damages, if any, are the result of Hussein’s own conduct and not that of the
respondent.
8. Hussein’s
breach of contract claims, if any, are barred by the doctrine of merger and by
the parole evidence rule.
9. Without
conceding that Hussein has suffered any damages as a result of any purported
wrongdoing by Dean Witter, Hussein has failed to mitigate his
damages.
10 All
employment decisions regarding or affecting Hussein were based on legitimate
business decisions and were in no way related to Hussein’s age or purported
disability, or any discriminatory motive on the part of Dean
Witter.
[ILLEGIBLE
TEXT]
12. Hussein
failed to take proper advantage of the internal grievance procedures
established by Dean Witter with respect to employment
discrimination. Such procedures were provided to Hussein in writing,
and Dean Witter expressly encouraged its employees to utilize such
procedures.
13. To
the extent that Hussein alleges intentional unlawful discrimination by Dean
Witter employees, any such conduct would have been contrary to Dean Witter’s
express written policy against discrimination and thus would be beyond the scope
of any actual or apparent authority possessed by such employees.
14. Dean
Witter is entitled to set-off in the amount of the balance of the promissory
note and incentive compensation payable by Claimant to Dean Witter.
15. Dean
Witter reserves the right to assert additional affirmative defenses that may
become appropriate as the discovery in this case develops.
COUNTERCLAIM
COUNT I - BREACH OF
EMPLOYMENT CONTRACT
1. For
value received, on September 9, 1992 Hussein executed and delivered to Dean
Witter a Promissory Note (the “Note”) in the principal amount of $435,834,
payable in four (4) installments. A copy of the Note is attached as
Exhibit “J”. At the time of execution of the Note, Hussein also executed and
delivered to Dean Witter a Promissory Note Acknowledgment Form (the
“Acknowledgment”), a copy of which is attached as Exhibit “K”.
[ILLEGIBLE
TEXT]
due and
payable, without notice or demand, if the employee is terminated for cause prior
to the due date of the Note. See Exhibit “J”, page 2. The
terms of the Note also state that a default in payment of the Note occurs “upon
the employee’s termination of employment for any reason prior to repayment in
full of the Note.” See Exhibit “J”, page 2.
3 Likewise,
the Acknowledgment signed by Hussein provides, inter alia, that “if I
terminate or am terminated for any reason, all outstanding principal and
interest under the Note will become immediately due and payable to Dean Witter.”
See Exhibit “K”, ¶ 1.
4. Hussein
was terminated for cause from Dean Witter effective January 9, 1995 at which
time all outstanding amounts of principal under the Note, plus accrued interest
at the contract rate, become immediately due and payable to Dean
Witter.
5. By
executing the Note, Hussein further agreed to reimburse Dean Witter for any and
all damages, losses, costs and expenses (including attorney’s fees and court
costs) incurred or sustained by Dean Witter as a result of the breach of the
terms of the Note. See Exhibit “J”, page 2.
6. As
of the date of filing this claim, Hussein has not reimbursed Dean Witter for the
balance due.
WHEREFORE,
Dean Witter respectfully requests that it be awarded the following
damages:
(a) The
amount of principal and interest due and owing under the Note, to be
established
at the arbitration.
[ILLEGIBLE
TEXT]
(c) The
costs of this arbitration, including attorney’s fees.
(d) Any
other relief deemed appropriate by the Panel.
COUNT II - BREACH OF
INCENTIVE COMPENSATION AGREEMENT
7. Hussein
on September 9, 1992 executed an Incentive Compensation Agreement with Dean
Witter, attached as Exhibit “E.” As consideration for Dean Witter’s employment
and compensation, Hussein agreed to the following liquidated damages
provision:
Termination and Damage for
Breach. Employee recognizes that Dean Witter may expend
substantial amounts in connection with employee’s employment hereunder and that
it will be difficult to ascertain with precision the amount of damages Dean
Witter will incur if employee voluntarily leaves his employment, or is
terminated for cause. Therefore, if employee voluntarily leaves his
employment with Dean Witter, or is terminated for cause, Dean Witter shall be
entitled to recover, and employee shall pay Dean Witter as liquidated damages,
an amount equal to the incentive compensation paid to employees pursuant to
paragraph 2 and the Addendum hereto, said amount to be reduced by 1/48th for
each month employee was employed by Dean Witter. The above liquidated
damages shall not constitute liquidated damages to Dean Witter for other
breaches of this Agreement.
Exhibit
“E”, page 2, ¶ 7.
8. Pursuant
to the Addendum to Hussein’s Incentive Compensation Agreement, attached as
Exhibit “L”, any amount of compensation received by Hussein in excess of Dean
Witter’s prevailing compensations rates for Dean Witter account executives
constituted premium payment deemed “incentive compensation.”
[ILLEGIBLE
TEXT]
Witter is
entitled to an award of liquidated damages against Hussein as set forth in his
Incentive Compensation Agreement.
10. The
liquid damages provision contained in the contract is reasonable.
WHEREFORE,
Dean Witter respectfully requests that the arbitrators enter an award of
liquidated damages in accordance with the formula set forth in ¶ 7 of Hussein’s
Incentive Compensation Agreement in favor of Dean Witter, the amount to be
established at arbitration.
| |
__________________________________
Bradford
D. Kaufman, Fla Bar #655465
Anne
Tennant Cooney, Fla Bar #986852
STEEL
HECTOR & DAVIS LLP
777
South Flagler Drive, Suite 1900
West
Palm Beach, FL 33401-6198
Phone
(407) 650-7200; Fax 655-1509
Attorneys
for Dean Witter Reynolds Inc.
|
CERTIFICATE OF
SERVICE
I certify
that a copy hereof was served by U.S. Mail on May 29, 1997 on:
John J.
Phelan III, Esq.
1414
Avenue of the Americas
New York,
New York 10019
original & 3 copies by
Fedex to:
James C.
Madan, Legal Assistant
National
Association of Securities Dealers, Inc.
125 Broad
Street, 36th Floor
New York,
New York 10004
| |
/s/
Bradford D. Kaufman
|
|
| |
Bradford
D. Kaufman
|
|
18
Award
NASD
Regulation, Inc.
In the
Matter of the Arbitration Between:
Ahmed Dia
Hussein, (Claimant) vs. Dean Witter Reynolds, Inc., (Respondent)
|
Case Number:
96-05764
|
Hearing Site:
New York, NY
|
REPRESENTATION OF
PARTIES
Claimant,
Ahmed Dia Hussein, hereinafter “Claimant”: John J. Phelan, Esq., New York,
NY.
Respondent,
Dean Witter Reynolds, Inc., hereinafter referred to as “Respondent”: Bradford D.
Kaufman, Esq., Greenberg Traurig, P.A., West Palm Beach, FL.
CASE
INFORMATION
Statement
of Claim filed on or about: December 18, 1996.
Claimant
signed the Uniform Submission Agreement: March 24, 1997.
Reply
filed on or about: June 23, 1997.
Statement
of Answer and Counterclaim filed by Respondent on or about: May 29,
1997.
Respondent
did not sign the Uniform Submission Agreement.
CASE
SUMMARY
Claimant
asserted the following causes of action: breach of contract; wrongful
termination; age discrimination in employment; termination of employment in
violation of the Americans with Disabilities Act; and defamation.
Unless
specifically admitted in its Answer, Respondent denied the allegations made in
the Statement of Claim and asserted the following defenses: Claimant failed to
state a claim upon which relief can be granted; doctrine of unclean hands;
information contained in Claimant’s Form U-5 is true; information contained in
Claimant’s Form U-5 is privileged; statements contained in Claimant’s Form U-5
were made in good faith without malice; wrongful termination is not recognized
by New York law; Claimant is the sole cause of any damages he suffered;
Claimant’s breach of contract claims are barred by the doctrine of merger and
the parole evidence rule; failure to mitigate damages; Claimant was terminated
for legitimate business reasons that were not related to age, disability,
or discrimination; Claimant failed to exhaust all administrative
remedies prior to instituting this arbitration, as required by the ADA and ADEA;
Claimant failed to take proper advantage of Respondent’s internal grievance
procedures; and, any unlawful discrimination alleged to have been
NASD
Regulation, Inc. Office of Dispute Resolution
Arbitration
No. 96-05764
Award Page
2
perpetrated
by Dean Witter Reynolds’ employees would have been contrary to Respondent’s
express written policy, and therefore, would be beyond the scope of such
employees’ actual or apparent authority.
In its
Counterclaim, Respondent alleged breach of an employment agreement; and breach
of an incentive compensation agreement.
RELIEF
REQUESTED
Claimant
requested an award granting him damages in the amount of $1,020,000.00, or such
amount as is established during the proceedings, for his lost compensation,
amounts due him under Respondent’s 401(k) and other benefit plans; the
forgiveness of any balance claimed due on the note; $1,000,000.00 for the
defamation claim; a direction to Respondent to file a true and accurate form U-5
or, in the event that one has not been filed, to amend Claimant’s U-5 regarding
the reason for his termination; punitive damages in the amount of $1,000,000.00;
and attorneys’ fees and the costs of this proceeding.
Respondent
requested a judgment dismissing the Statement of Claim in its entirety; the
amount of principle and interest due and owing under the promissory note;
accrued interest at the contract rate from the date of Claimant’s termination
through the date of the award; liquidated damages; the costs of this proceeding,
including attorneys’ fees; and, any other and further relief as the Panel may
deem just and proper.
OTHER ISSUES CONSIDERED AND
DECIDED
During the
hearings conducted in this matter, Claimant made a Motion to Preclude
Respondent’s Motion to Dismiss which was denied by the Panel.
During the
hearings conducted in this matter, Respondent made a Motion to Dismiss which was
granted by the Panel.
The Panel
denied Claimant’s Motion to Recuse.
Respondent
did not file with the NASD Regulation, Inc. Office of Dispute Resolution a
properly executed submission to arbitration but is required to submit to
arbitration pursuant to the Code and, having answered the claim, appeared and
testified at the hearing, is bound by the determination of the Panel on all
issues submitted.
The
parties have agreed that the Award in this matter may be executed in counterpart
copies or that a handwritten, signed Award may be entered.
NASD
Regulation, Inc. Office of Dispute Resolution
Arbitration
No. 96-05764
Award Page
3
AWARD
After
considering the pleadings, the testimony and evidence presented at the hearing,
the Panel has decided in full and final resolution of the issues submitted for
determination as follows:
|
1.
|
Claimant’s
claims are hereby dismissed in their
entirety.
|
|
2.
|
Respondent’s
Counterclaim is hereby dismissed in its
entirety.
|
|
3.
|
Respondent
must re-draft Claimant’s Form U-5, Section 12 to read “Mr. Hussein’s
initial response to an internal questionnaire was not satisfactory to Dean
Witter Reynolds and Dean Witter Reynolds failed to request clarification
from Mr. Hussein.”
|
|
4.
|
All
other requests for relief are hereby
denied.
|
FEES
Pursuant
to the Code, the following fees are assessed:
Filing
Fees
NASD
Regulation, Inc. will retain or collect the non-refundable filing fees for each
claim:
|
Initial
claim filing fee
|
= $
500.00
|
|
Counter
claim filing fee
|
= $
500.00
|
Member
Fees
Member
fees are assessed to each member firm that is a party in these proceedings or to
the member firm that employed the associated person at the time of the events
giving rise to the dispute. In this matter, Dean Witter Reynolds is a
party.
|
Member
surcharge
|
= $
500.00
|
Adjournment
Fees
Adjournments
requested during these proceedings:
|
April
9, 1999
|
= $
1,000.00
|
The Panel
assessed this entire adjournment fee
against Respondent.
|
August
10, 11, 17 and 18, 1999
|
=
waived
|
NASD
Regulation, Inc. Office of Dispute Resolution
Arbitration
No. 96-05764
Award
Page 4
Forum Fees and
Assessments
The Panel
assesses forum fees for each hearing session conducted. A hearing
session is any meeting between the parties and the arbitrators, including a
pre-hearing conference with the arbitrators, that lasts four (4) hours or
less. Fees associated with these proceedings are:
| Three
(3) Pre-hearing sessions with a single arbitrator x
$300.00 |
=
$900.00 |
|
Pre-hearing
conferences:
|
March
23, 1999
|
1
session
|
|
|
|
April
9, 1999
|
1
session
|
|
|
|
August
23, 1999
|
1
session
|
|
| Four
(4) Pre-hearing sessions with Panel x
$1,000.00 |
=
$4,000.00 |
|
Pre-hearing
conferences:
|
August
11, 1998
|
1
session
|
|
|
|
April
9, 1999
|
1
session
|
|
|
|
November
5, 1999
|
1
session
|
|
|
|
February
10, 2000
|
1
session
|
|
| Five
(5) Hearing sessions x $1,000.00 |
=
$5,000.00 |
|
Hearing
Dates:
|
September
8, 1999
|
2
sessions
|
|
|
|
September
9, 1999
|
2
sessions
|
|
|
|
November
16, 1999
|
1
session
|
|
| Total Forum Fees |
|
|
=
$9,900.00 |
1. The
Panel has assessed $4,950.00 of the forum fees against Claimant.
2. The
Panel has assessed $4,950.00 of the forum fees against Respondent.
Fee
Summary
1. Claimant
be and hereby is solely liable for:
|
Initial
Filing Fee
|
=
$500.00
|
|
|
Forum
Fees
|
=
$4,950.00
|
|
|
Total
Fees
|
=
$5,450.00
|
|
|
Less
payments
|
=
$1,500.00
|
|
|
Balance
Due NASD Regulation, Inc.
|
=
$3,950.00
|
|
NASD
Regulation, Inc. Office of Dispute Resolution
Arbitration
No. 96-05764
Award
Page 5
2. Respondent
be and hereby is solely liable for:
|
Counterclaim
Filing Fee
|
=
$500.00
|
|
|
Member
Fees
|
=
$500.00
|
|
|
Adjournment
Fee
|
=
$1,000.00
|
|
|
Forum
Fees
|
=
$4,950.00
|
|
|
Total
Fees
|
=
$6,950.00
|
|
|
Less
payments
|
=
$3,500.00
|
|
|
Balance
Due NASD Regulation, Inc.
|
=
$3,450.00
|
|
All
balances are due and payable to NASD Regulation, Inc.
NASD
Regulation, Inc. Office of Dispute Resolution
Arbitration
No. 96-05764
Award
Page 7
Concurring Arbitrators’
Signatures
I, the
undersigned arbitrator, do hereby affirm, pursuant to Article 7507 of the Civil
Practice Law and Rules, that I am the individual described herein and who
executed this instrument which is my award.
|
/s/
Michael Forster Pisapia
|
|
|
|
|
Michael
Forster Pisapia, Esq.
|
|
Signature
Date
|
|
|
Public
Arbitrator, Presiding Chair
|
|
|
|
|
|
|
|
|
|
Howard
D. Jacob
|
|
Signature
Date
|
|
|
Public
Arbitrator
|
|
|
|
|
|
|
|
|
|
Theodore
Brown
|
|
Signature
Date
|
|
|
Industry
Arbitrator
|
|
|
|
|
March
16, 2000
|
|
|
|
Date
of Service (For NASD office use only)
|
|
|
|
|
|
|
NASD
Regulation, Inc. Office of Dispute Resolution
Arbitration
No. 96-05764
Award
Page 8
Concurring Arbitrators’
Signatures
I, the
undersigned arbitrator, do hereby affirm, pursuant to Article 7507 of the Civil
Practice Law and Rules, that I am the individual described herein and who
executed this instrument which is my award.
|
|
|
|
|
|
Michael
Forster Pisapia, Esq.
|
|
Signature
Date
|
|
|
Public
Arbitrator, Presiding Chair
|
|
|
|
|
/s/
Howard D. Jacob
|
|
3/“illegible”/2000
|
|
|
Howard
D. Jacob
|
|
Signature
Date
|
|
|
Public
Arbitrator
|
|
|
|
|
|
|
|
|
|
Theodore
Brown
|
|
Signature
Date
|
|
|
Industry
Arbitrator
|
|
|
|
|
March
16, 2000
|
|
|
Date
of Service (For NASD office use only)
|
|
|
|
|
|
|
HUSSEIN
IN SUPPORT
OF A
MOTION FOR A
TEMPORARY
RESTRAINING
ORDER
AND A PRELIMINARY
INJUNCTION
|
|
|
|
-
against -
|
| |
|
COMMISSIONER
OF INTERNAL
REVENUE
and REVENUE OFFICER
PHILLIP
GRANITE,
|
| |
|
|
|
STATE
OF NEW YORK
|
)
|
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:
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ss
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COUNTY
OF NEW YORK
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AHMED
HUSSEIN, being duly sworn, deposes and says:
1. I
am the plaintiff in the above-captioned action. I am employed as a stock broker
with Dean, Witter, Reynolds, Inc. (“Dean Witter”) .
2. In
1983, while I was with another brokerage firm, my salary increased dramatically
over what I earned in 1982 and my employer failed to withhold enough taxes,
leaving me with a large tax bill due on April 15, 1984. Although I
thought that I had enough money in my account to pay the taxes, I suffered a
huge loss on a bond transaction in the beginning of 1984 that completely
eliminated my net worth. Unfortunately, the tax law required me to
report the money I had earned as ordinary income while the loss was treated as a
capital loss that could not be offset against the ordinary income. As
a result, I had a large tax liability for 1983 but no money with which to pay
it.
3. I
filed my tax return for 1983 showing an unpaid tax liability of approximately
$400,000. This 1983 tax liability was assessed against me on May 28,
1984.
4. Over
the following years, I paid more than $300,000 against the 1983 assessment and I
worked closely with the Internal Revenue Service (“IRS”) to satisfy the
remainder. In 1985, the revenue officer assigned to my case suggested
that I make an offer in compromise to settle the assessment. The
revenue officer, who was familiar with my finances, recommended an amount for
the offer in compromise that he thought would be acceptable to the
IRS.
5. On
May 6, 1985, I submitted the offer. The form given to me by the
revenue officer contained a provision waiving the running of the statute of
limitations for the period that the offer in compromise was being considered by
the IRS plus one year. Because I followed the directions of the
revenue officer, I thought that the offer would be accepted quickly and that I
was extending the statute of limitations for only a reasonable period of
time. I never thought that I was subjecting myself to collection
activity for the next ten years! I would not have signed the offer if
I had known that this could happen.
6. Much
to my surprise, the IRS sat on the offer for more than a year before they
rejected it on September 4, 1986. The offer was under consideration
from May 6, 1985 to September 4, 1986, or a period of one year, three months and
twenty-nine days. Thus, the offer in compromise effectively
extended
the statute of limitations during this period plus one year.
7. On
May 28, 1990, the normal six year statute of limitations for collection of the
1983 taxes expired. However, the offer in compromise effectively
extended the statute by two years, three months and twenty-nine days, so that it
expired on September 27, 1992.
8. Although
the statute of limitations for collection of the 1983 taxes has expired, the
Internal Revenue Service has continued to send me letters demanding payment of
these taxes. I have always responded to each of these letters and I
have advised the IRS that the statute of limitations has expired.
9. The
IRS never responded to any of my communications until I received a letter dated
January 10, 1994 from Revenue Officer Phillip Granite (Exhibit A attached
hereto). The letter was encaptioned “FINAL NOTICE (NOTICE OF
INTENTION TO LEVY).” The Notice Of Intention To Levy demanded payment
of $707,122 for 1983 taxes and $20,026 for 1984 taxes. The notice
indicated that, if I didn’t pay the taxes for 1983 and 1984 within ten days, the
IRS would levy on my assets. My lawyers advise me that the letter was
written on an out-dated IRS form and that the law has since changed to require a
thirty-day notice before a levy can be issued.
10. On
or about January 12, 1994, I spoke to Revenue Officer Granite by telephone and
he told me that he
was going
to do whatever was necessary to collect the taxes from me. Mr.
Granite later told my attorney that he intended to levy my salary if I did not
provide him with a financial statement and a waiver of the statute of
limitations immediately.
11. On
or about January 14, 1994, I learned that my checking account at Chemical Bank,
which contained over $20,000, was frozen because the IRS had issued a levy to
the bank. A few days latter, I received a copy of the levy (Exhibit B
attached hereto) and I noticed that it was dated January 11, 1994, only one day
after the ten-day notice of intention to levy was dated. The bank has
informed me that it intends to transfer all of the money in my checking account
to the IRS on February 10, 1994.
12. On
January 25, 1993, I was notified by Dean Witter that approximately $100,000 of
cash and securities had been levied by the Internal Revenue
Service. Nearly all of the money levied on was contained in my
Individual Retirement Account. I immediately obtained a copy of the
levy (Exhibit C attached hereto) and I noticed that it was dated January 18,
1994, only eight days after the ten-day notice of intention to levy was
dated. Dean Witter is prepared to transfer all of the money in my
Individual Retirement Account and my stock account to the Internal Revenue
Service on February 8, 1994.
13. I
will suffer irreparable harm if the Internal Revenue Service is permitted to
continue with its
illegal
collection activity because I cannot afford to pay the Internal Revenue Service
all of the money they say I owe. It appears that the Internal Revenue
Service has no regard for the statute of limitations or for proper
administrative procedures and that they are prepared to take everything that I
own, including my retirement savings, and put me on the street. There
is no way that I can continue to generate business as a stock broker if I am
destitute. Indeed, because of the sensitive financial and fiduciary
nature of my position at Dean Witter, I would probably be forced to leave the
firm if Mr. Granite carries through on his threat to levy my
salary. If I were forced to leave Dean Witter, I would loose almost
all of my customers and my reputation within the industry would be tarnished
beyond repair. My ability to earn a living and support my family
(including my handicapped son) would be severely damaged.
14. In
addition, my lawyers advise me that the levy against my Individual Retirement
Account constitutes a withdraw from my account that will trigger income taxes
and early withdraw penalties. Thus, if the Internal Revenue Service
is permitted to take the balance of the account to pay 1983 and 1984 taxes
without allocating any portion of the account to current taxes and penalties,
the levy will simply create a new debt to the Internal Revenue
Service.
15. I
respectfully request that the Court stop the Internal Revenue Service from using
its enormous powers to enforce the unlawful collection of the 1983 and 1984
taxes and from ruining my life.
Sworn to
before me on this
1st day of
February, 1994.
/s/ Rebecca
Caravaglio
NOTARY
PUBLIC
REBECCA
CARAVAGLIO
Notary
Public, State of New York
No.
43-4993626
Qualified
in Richmond County
Commission
Expires March 23, 1994
ORIGINAL
72741
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AND
ORDER
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-
against -
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COMMISSIONER
OF INTERNAL REVENUE,
and
REVENUE OFFICER PHILLIP GRANITE,
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JOHN
F. KEENAN, United States District Judge:
Before the
Court is the motion of plaintiff, Ahmed Hussein, seeking a preliminary
injunction to enjoin defendants from encumbering or collecting any of
plaintiff’s property pending resolution of this suit. Hussein, a stock broker at
Dean, Witter, Reynolds, Inc., owes $707,122.22 in taxes and interest arising
from the tax year of 1983 and $20,026.00 in taxes and interest from the tax year
of 1984. Defendants seek to collect these taxes by placing liens on Hussein’s
bank accounts, as well as his accounts at Dean Witter, which he claims will
ultimately result in his loss of employment. Defendants have already notified
Dean Witter of their intent to levy upon Hussein’s salary.
Defendants
argue that the Anti-Injunction Act, see 26 U.S.C. § 7421,
prohibits persons from bringing suits “for the purpose of restraining the
assessment or collection of any tax [to] be maintained in any court by any
person, whether or not such person is the person against whom such tax was
assessed.” 26 U.S.C. § 7421(a). This Act embodies Congress’s
long-standing
policy
against premature interference with the orderly administrative process by which
taxes are determined, assessed and collected. Given that “taxes are the
life-blood of government,” Bull v. United
States, 295 U.S. 247, 259 (1935), it is necessary for the administrative
collection process to proceed “without judicial intervention, and . . . legal
right to disputed sums [is to] be determined in a suit for refund.” Enochs v. Williams Packing
& Navigation Co., 370 U.S. 1, 7 (1962). Plaintiff may only receive an
exception from the Act if he can show that (1) under no circumstances can the
government prevail and (2) he has no other remedy at law. See id. at
7.
Hussein
contends that the government cannot prevail because the statute of limitations
on the portion of this action concerning the 1983 taxes has already run.1 Prior
to November 5, 1990, the statute of limitations on collection of any tax was six
years after the assessment of the tax, unless the IRS and the taxpayer otherwise
agreed in writing to extend the period. See 26 U.S.C. §
6502(a). On November 5, 1990, Congress extended the statute of limitations on
the collection of taxes from six years to ten years. The Act applies a new
ten-year period to taxes assessed after November 5, 1990 and to taxes assessed
before that date, if the period for collection had not yet expired as of
November 5, 1990. See Act of 1990, 1990
U.S.C.C.A.N. (104 Stat.) 1388-458, Pub. L. No. 101-508 § 11317.
1
Plaintiff apparently concedes that defendants’ collection of his 1984 taxes are
within the statute of limitations period. See Plaintiff’s
Memorandum of Law at 2.
In the
present case, Hussein’s 1983 taxes were assessed on May 28, 1984. On May 6,
1985, Hussein submitted an “Offer in Compromise,” which the IRS rejected on
September 4, 1986. The effect of Hussein’s Offer in Compromise was to toll the
running of the statute of limitation for the period during which the offer was
pending (one year, three months and 29 days) and for one year thereafter. Thus,
had Hussein not submitted an offer, the statute of limitations would have
expired on May 28, 1990; instead, however, the offer tolled the six-year statute
of limitations until September 27, 1992. Because Congress’s amendment to the
limitations period occurred prior to September 27, 1992, the new ten-year period
applies to Hussein’s case and the government is entitled to collect from
plaintiff until September 27, 1996.
Hussein
asserts that his Offer of Compromise was a collateral written agreement between
him and the government to extend the limitations period to a date certain,
without regard to 26 U.S.C § 6502(a). The Offer in Compromise states in relevant
part:
The
taxpayer-proponents agree to the waiver and suspension of any statutory periods
of limitations for assessment and collection of the tax liability described in
paragraph (1) while the offer is pending, during the time any amount offered
remains unpaid and for one (1) year after the satisfaction of the terms of the
offer.
IRS Offer
to Compromise ¶ 8 (attached to Defendants’ Memorandum of Law). This waiver is
not
a contract
to set a date certain for the expiration of the limitations period because
waivers are not considered contracts. See Stanger v. United
States, 282 U.S. 270, 276 (1931). In addition, even if contract
principles were applied, plaintiff’s assertion would still fail because the
language in the Offer of Compromise clearly suggests that the applicable
statutory limitations period was merely tolled and not disregarded.
The Court
finds no merit in plaintiff’s claim that he did not receive timely notice of the
IRS’s intention to levy. Therefore, plaintiff’s application for a preliminary
injunction is denied. Concerning defendants’ motion to dismiss, plaintiff is
directed to submit his opposition to the motion by February 16, 1994.
Defendants’ reply papers will be due on February 23, 1994.
SO
ORDERED.
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Dated:
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New
York, New York
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/s/ John
F. Keenan
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JOHN
F. KEENAN
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United
States District Judge
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UNITED
STATES COURT OF APPEALS
FOR THE
SECOND CIRCUIT
August
Term, 1998
(Argued:
May 3, 1999 Decided:
May 28, 1999)
Docket No.
98-6180
UNITED
STATES OF AMERICA,
Plaintiff-Appellee,
—v.—
AHMED
HUSSEIN,
Defendant-Appellant.
Before:
CABRANES
and SACK, Circuit
Judges,
and
SHADUR,* District
Judge.
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*
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The
Honorable Milton I. Shadur of the United States District Court for the
Northern District of Illinois, sitting by
designation.
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3707
Appeal
from a judgment of the United States District Court for the Southern District of
New York (John F. Keenan, Judge) ordering the defendant
to pay outstanding liabilities for tax years 1983 and 1984. On appeal, the
defendant principally claims that the district court improperly invoked
collateral estoppel, the law of the case doctrine, and principles of equity and
fairness to preclude him from challenging the timeliness of the instant action
as it pertains to his 1983 taxes. We agree, principally on the ground that the
relevant finding by the district court in the earlier action was unnecessary to
its ruling, and, accordingly, could not properly be given preclusive
effect.
Judgment
vacated in part (as to tax year 1983), affirmed in part (as to tax year 1984),
and remanded.
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BRUCE
LOCKE, Sacramento, CA (Bruce A. Burns, Burns Handler & Burns LLP, New
York, NY, of
counsel) for
Appellant.
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GLENN
C. COLTON, Assistant United States Attorney, Southern District of New York
(Mary Jo White, United States Attorney, Gideon A. Schor, Assistant United
States Attorney, of
counsel) for
Appellee.
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JOSÉ A.
CABRANES, Circuit Judge:
Ahmed
Hussein appeals from a July 21, 1998 consent judgment entered by the United
States District Court for the Southern District of New York (John F. Keenan,
Judge) ordering him to
pay the government $675,183.88 in outstanding
liabilities
for tax years 1983 and 1984.1
Hussein’s principal contention on appeal is that the district court improperly
invoked collateral estoppel, the law of the case doctrine, and principles of
equity and fairness to preclude him from challenging the timeliness of the
instant action as it pertains to his liability for tax year 1983. On other
grounds described in detail below, Hussein also contends that the instant action
is untimely as it pertains to his 1984 taxes. For the reasons that follow, we
vacate the judgment in part (as to Hussein’s 1983 taxes), affirm the judgment in
part (as to Hussein’s 1984 taxes), and remand the cause for proceedings
consistent with this opinion.
The
government filed the instant action on September 27, 1996. Hussein contends that
the limitations period for collecting his 1983 taxes expired one day earlier, on
September 26, 1996. In this appeal, the government does not challenge Hussein’s
calculation of the limitations period. Instead, it contends—and the district
court agreed—that the district court had ruled in prior litigation between the
parties that the limitations period would run until September 27, 1996 and that
Hussein is barred from relitigating the expiration date in the action before us
now. Because of its significance to the issues presented in this appeal, we set
forth the procedural history of the litigation between the parties in some
detail.
Hussein’s
1983 taxes were assessed on May 28, 1984. On May 6, 1985, he submitted to the
Internal Revenue Service (“I.R.S.”) an “Offer in Compromise” to settle his
outstanding
1 The
consent judgment preserved Hussein’s right to bring this limited
appeal.
2 For the
sake of simplicity, this background section deals primarily with Hussein’s 1983
taxes. We set forth the facts necessary to understand Hussein’s claims regarding
his 1984 taxes separately, infra.
liabilities
for those taxes. The I.R.S. received Hussein’s offer the following day and
eventually rejected it on September 4, 1986. Hussein asserts—and the government
does not dispute—that, pursuant to the terms set forth on the mandatory I.R.S.
form embodying the Offer in Compromise, the limitations period for the
collection of Hussein’s 1983 taxes was tolled for a period of two years, three
months, and twenty-nine days, i.e., the pendency of
Hussein’s offer, plus one year.
In January
1994, in an attempt to collect his still-unpaid 1983 taxes, the government
levied Hussein’s checking and individual retirement accounts. Hussein responded
by filing an action before Judge Keenan to enjoin the government’s collection
efforts; soon thereafter, Hussein sought a preliminary injunction, on the ground
that the statute of limitations had expired with respect to the collection of
the 1983 taxes.3
The government, in turn, filed a motion to dismiss Hussein’s lawsuit in its
entirety.
The
district court denied Hussein’s request for a preliminary injunction in a
Memorandum Opinion and Order dated February 10, 1994. The court first explained
that, at the time the I.R.S. assessed Hussein’s 1983 taxes, a six-year
limitations period applied to the government’s collection efforts. It then
observed that a new law took effect on November 5, 1990 that (1) extended the
relevant limitations period to ten years and (2) applied the new rule to any
taxes for which the collection period had not expired as of the law’s effective
date. See 26 U.S.C. §
6502(a); Omnibus Budget Reconciliation Act of 1990, Pub. L. No. 101-508 §
11317(c), 104 Stat. 1388 (1990). Turning to the specifics of Hussein’s case, the
court noted that, absent any tolling, the limitations period for
3 Hussein
conceded in the 1994 action that the limitations period governing the collection
of his 1984 taxes had not yet expired.
the
collection of his 1983 taxes would have expired on May 28, 1990. However, the
court determined that the tolling caused by Hussein’s filing of the Offer in
Compromise extended the expiration of the limitations period beyond November 5,
1990, thereby triggering the new, ten-year rule.
Applying
the ten-year rule to Hussein’s 1983 taxes, the court concluded that “the
government is entitled to collect from [Hussein] until September 27, 1996,” a
date that included the tolling period caused by Hussein’s Offer in Compromise.
The court derived that specific expiration date from an affidavit that Hussein
had submitted in support of his motion for a preliminary injunction. In the
affidavit, Hussein had stated that “the offer in compromise effectively extended
the statute [of limitations] by two years, three months and twenty-nine days, so
that it expired on September 27, 1992.” Hussein’s affidavit assumed that a
six-year limitations period applied. Accordingly, to arrive at an expiration
date based on a ten-year limitations period, the court simply added four years
to the date calculated by Hussein.
After
setting forth its conclusion as to the expiration date for the limitations
period governing the collection of Hussein’s 1983 taxes, the district court
explained that it was Hussein’s contention that his Offer in Compromise was an
agreement to “extend the limitations period to a date certain,” without regard
for any limitations period imposed by law. In other words, as it was
characterized by the district court, Hussein’s argument was that he and the
I.R.S. had contracted for a fixed expiration date of September 27, 1992, and
that, accordingly, the new ten-year limitations rule was inapplicable. The court
rejected this argument, however, finding that Hussein and the I.R.S. had no such
agreement. Having disposed of Hussein’s only argument, the court concluded that
the government’s levies were timely and, accordingly, denied Hussein’s motion
for a preliminary injunction. Before the
court
ruled on the government’s cross-motion to dismiss, the parties agreed to a
stipulated dismissal of Hussein’s lawsuit, without prejudice, and returned to
the administrative process.
On
September 27, 1996, the government filed the instant action, pursuant to 26
U.S.C. § 7403,4
to reduce to judgment assessments of Hussein’s liabilities for tax years 1983
and 1984. In response, Hussein filed a motion to dismiss arguing, inter alia, that the action
was untimely. Specifically, Hussein maintained that the limitations period for
collecting the 1983 taxes expired on September 26, 1996, one day before the
instant action was filed. The district court denied Hussein’s motion, holding
that it had determined in the 1994 litigation that the expiration date of the
limitations period for collecting the 1983 taxes was September 27, 1996 and
that, accordingly, collateral estoppel, the law of the case doctrine, and
principles of equity and fairness precluded Hussein from challenging the
timeliness of the instant action on the basis of a different expiration
date.
Following
the district court’s ruling, the parties entered into a consent judgment that
ordered Hussein to pay $675,183.88 in outstanding liabilities for tax years 1983
and 1984, but preserved Hussein’s right to appeal the court’s ruling on the
statute of limitations issue. This timely appeal followed.
4 This
statute provides, in pertinent part, that “[i]n any case where there has been a
refusal or neglect to pay any tax … the Attorney General or his delegate … may
direct a civil action to be filed in a district court of the United States to
enforce the lien of the United States … with respect to such tax or
liability.”
ANALYSIS
On appeal,
Hussein reasserts his argument that the government’s action was untimely as to
the collection of his 1983 taxes and contends that the district court improperly
precluded him from litigating that issue below. The government does not
challenge Hussein’s calculation of the limitations period as having expired on
September 26, 1996. Instead, it adopts the district court’s conclusions that (1)
the identical limitations issue was litigated in the 1994 action, (2) the court
found in that action that the limitations period would expire on September 27,
1996, the day the instant lawsuit was filed, and (3) collateral estoppel, the
law of the case doctrine, and principles of equity and fairness bar Hussein from
relitigating the expiration date. Moreover, in addition to adopting the district
court’s reasoning, the government argues that we should affirm on the basis of
judicial estoppel, a ground not relied on by the district court. For the reasons
that follow, we conclude that none of the grounds asserted by the government
bars Hussein from challenging the timeliness of the instant action as it
pertains to his 1983 taxes.
Collateral
estoppel, or issue preclusion, applies when “(1) the issues in both proceedings
are identical, (2) the issue in the prior proceeding was actually litigated and
actually decided, (3) there was full and fair opportunity to litigate in the
prior proceeding, and (4) the issue previously litigated was necessary to
support a valid and final judgment on the merits.” In re PCH Assocs., 949 F.2d
585, 593 (2d Cir. 1991).
Collateral
estoppel is inapplicable here for the fundamental reason that the district
court’s earlier finding that the limitations period would expire on September
27, 1996 was not necessary to the denial of Hussein’s motion for a preliminary
injunction
in the 1994 action; in other words, the court’s finding was dictum.5
As it was presented to the district court, the merits of Hussein’s request for a
preliminary injunction in the 1994 action turned simply on Hussein’s argument
that the Offer in Compromise called for the limitations period to expire on a
date certain, September 27, 1992, without regard for the new, ten-year rule.
There was no dispute that the tolling caused by the Offer in Compromise meant
that the imitations period had not expired as of November 5, 1990, the effective
date of the law that mandated the ten-year rule. Nor was there any dispute that,
if a ten-year limitations period applied, then the government’s January 1994
levies were timely. Accordingly, once the district court rejected Hussein’s
contention that the ten-year rule was inapplicable, it was unnecessary for the
court to conclusively determine the exact date on which the limitations period
would expire.
The
rationale for the principle that preclusive effect will be given only to those
findings that are necessary to a prior judgment is that “a collateral issue,
although it may be the subject of a finding, is less likely to receive close
judicial attention and the parties may well have only limited incentive to
litigate the issue fully since it is not determinative.” Commercial Assocs. v. Tilcon
Gammino, Inc., 998 F.2d 1092,
5 Our
conclusion that the court’s finding was not necessary to its denial of the
preliminary injunction might also be thought to implicate certain of the other
criteria for the application of collateral estoppel, particularly the questions
of whether the issue in both proceedings is identical and whether Hussein had a
fair opportunity to litigate the issue. However, in light of our conclusion that
the “necessarily decided” element of collateral estoppel has not been met, we
need not specifically address the other elements. Nor is there any need for us
to determine whether the district court’s 1994 ruling had the requisite finality
to permit the application of collateral estoppel. See generally Metromedia Co. v.
Fugazy, 983 F.2d 350, 366 (2d Cir. 1992) (noting that “the concept of
finality for collateral estoppel purposes includes many dispositions which,
though not final [for the purposes of appeal pursuant to 28 U.S.C. § 1291], have
nevertheless been fully litigated”) (internal quotation marks
omitted).
1097 (1st
Cir. 1993) (emphasis suppressed). It is clear that this rationale is applicable
to the case before us. Because of the particular argument asserted by Hussein in
the 1994 litigation, there was no need for the court or the parties to focus on
the precise expiration date of the limitations period. Presumably, once the
district court rejected Hussein’s contract-based argument, no one involved in
the proceedings gave any attention to whether the limitations period ran until
September 26, as opposed to September 27, 1996. Under these circumstances,
collateral estoppel does not preclude Hussein from challenging the timeliness of
the instant action.
The
government’s remaining contentions require little discussion. As noted above,
the government asserts that the law of the case doctrine also precludes
Hussein’s challenge to the timeliness of the government’s action. Under the
particular formulation relevant to this appeal, the law of the case doctrine
holds that “a legal decision made at one stage of litigation, unchallenged in a subsequent appeal
when the opportunity to do so existed, becomes the law of the case for
future stages of the same litigation, and the parties are deemed to have waived
the right to challenge that decision at a later time.” North River Ins. Co. v. Philadelphia
Reinsurance Corp., 63 F.3d 160, 164 (2d Cir. 1995) (internal quotation
marks omitted) (emphasis added).6
The government contends that Hussein waived his opportunity for appellate review
of the district court’s finding on the limitations issue by agreeing to a
stipulated dismissal of the 1994 action and urges that Hussein is therefore
bound by the court’s finding that the limitations period expired on September
27, 1996.
6 The
government correctly notes that we have previously held that, “[w]hile the
doctrine is ordinarily applied in later stages of the same lawsuit, it also has
application to different lawsuits between the same parties.” PCH Assocs., 949 F.2d at
592.
Regardless
of his agreement to a stipulated dismissal of the 1994 action, however, Hussein
did not have a reasonable opportunity to obtain appellate review of the district
court’s finding regarding the expiration of the limitations period. For the
reasons that we have already set forth, that finding was mere dictum and, as such, could
not have been appealed by Hussein. Accordingly, the law of the case doctrine has
no application here.
We are
similarly unpersuaded by the government’s invocation of the doctrine of judicial
estoppel. A party invoking that doctrine “must show that (l)
the party against whom judicial estoppel is being asserted advanced an
inconsistent factual position in a prior proceeding, and (2) the prior
inconsistent position was adopted by the first court in some manner.” AKA Marine & Aviation Ins.
(U.K.) Ltd. v. Seajet Indus. Inc., 84 F.3d 622,628 (2d Cir. 1996). The
purposes of the doctrine are to “preserve the sanctity of the oath” and to “protect judicial
integrity by avoiding the risk of inconsistent results in two proceedings.”
Simon v. Safelite Glass Corp., 128 F.3d 68, 71 (2d Cir. 1997) (internal
quotation marks omitted). The government notes that the district court derived
its finding as to the expiration of the limitations period from Hussein’s own
affidavit, which had stated that the six-year imitations period
had expired on September 27, 1992. On that basis, the government contends that
Hussein may not now claim that the ten-year limitations period expired on
September 26, 1996.
Even assuming, for the argument, that
Hussein’s initial calculation of the expiration of the limitations period was a
factual position, judicial estoppel is
inapplicable under the circumstances presented here. We have previously observed
that judicial estoppel does not apply “when the first statement was the result
of a good faith mistake or an unintentional error.” Id. at 73 (citations omitted). In our view,
this
3716
exception
to the general rule clearly
governs the case before us. The miscalculation in Hussein’s affidavit was
undoubtedly the result of an unintentional error. Hussein had absolutely no
incentive in the 1994 proceeding to persuade the court that the limitations
period expired on September 27, as opposed to September 26, 1996. Accordingly,
we will not invoke the doctrine of judicial estoppel to preclude Hussein from
challenging the timeliness of the instant action.
Finally,
we turn to the government’s contention that principles of equity and fairness
also preclude Hussein from challenging the timeliness of the instant action.
Specifically, the government points out that Hussein has long been on notice of
his tax liabilities and of the district court’s finding that the limitations
period expired on September 27, 1996, that the parties’ consent judgment has
eliminated any uncertainty as to the amount of taxes that Hussein owes, and that
the government itself relied on the district court’s finding.
The government has not brought to our
attention any precedent in which, under circumstances remotely analogous to
those presented here, a court has set aside a limitations period on the basis of
principles of equity and fairness, and we are unwilling to set such a precedent
here. Moreover, even if we were inclined to consider such principles as a basis
for setting aside the limitations period, the government’s case is hardly
compelling. The government obviously had the means to perform its own
calculation of the limitations period, and we question the wisdom of its
asserted reliance on the district court’s finding — one that was based on the
taxpayer’s calculation and made by the court in dictum.
3717
As noted
at the outset, Hussein also challenges the timeliness of this action as it
pertains to the collection of his 1984 taxes. Conceding, as he must, that a
ten-year limitations period applies to the collection of those taxes, Hussein
maintains that the limitations period expired on June 24, 1995, ten years after
the taxes were assessed. The district court rejected Hussein’s contention,
concluding that his May 6, 1985 Offer in Compromise tolled the limitations
period for the collection of his 1984 taxes and that the government’s lawsuit
was therefore timely as to those taxes. Although the
district court did not specify an expiration date for the applicable limitations
period, Hussein conceded at oral argument before this Court that if the district
court’s holding regarding tolling was correct, then this action was timely as to
the 1984 taxes.
Hussein
argues at the threshold that no tolling was possible because his Offer in
Compromise did not include his 1984 taxes. But Hussein concedes that he did not
present this argument to the district court. Nor does he dispute the
government’s contention that he in fact argued to the district court the
contrary position—that is, that his offer did include the 1984 taxes.
Under these circumstances, Hussein is precluded from arguing on appeal that the
offer did not include the 1984 taxes.
In any
event, Hussein maintains that any tolling caused by his Offer in Compromise
applied only to the six-year limitations period in effect at the time the offer
was submitted, not to the ten-year limitations period that took effect in
November 1990. On this theory, Hussein contends that the limitations period for
the collection of his 1984 taxes expired on June 24, 1995, well before the
instant action was filed. As support for his argument, Hussein asserts only that
26 U.S.C. § 6502(a), which sets forth the applicable limitations period,
does not
specifically provide for “the tacking on of a suspension period agreed to under
the former six-year statutory period, to further extend the new ten-year
period.”
We are
unpersuaded by Hussein’s contention that the ten-year limitations period now
governing the collection of his 1984 taxes was not tolled by his submission of
an Offer in Compromise. The I.R.S. form that Hussein submitted in connection
with that offer unequivocally provided that Hussein agreed to the “suspension of
any statutory periods of limitations for assessment and collection of the tax
liability” that was the subject of the offer. Thus, Hussein’s agreement with the
I.R.S. placed no restriction on the limitations period to which the tolling
would apply. And Hussein has not identified any statutory provision that would
preclude us from giving effect to the explicit terms of that
agreement.
Accordingly,
in light of Hussein’s concession that our resolution of the tolling issue is
dispositive, we conclude that the instant action is timely as to the collection
of Hussein’s 1984 taxes.
CONCLUSION
Based on
the foregoing analysis, we vacate the judgment in part (as to tax year 1983),
affirm it in part (as to tax year 1984), and remand the cause for proceedings
consistent with this opinion.
No
costs.
Quality
Systems, Inc.’s Response
to
Ahmed Hussein’s Proxy Materials, including Shareholder Letters
Filed
With the Securities and Exchange Commission
on
August 14, 2008
(Supplemental
information to the document filed on August 21, 2008)
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Mr. Hussein falsely claims that
Mr. Razin controls the nominating process. This is not
correct. The nominating process is conducted through a duly
constituted nominating committee, which makes recommendations for
consideration by the full Board. All of the committee members
have input in the nominating process and each member exercises his own
judgment in selecting nominees. Notwithstanding his conviction
that he does not “control” the nominating process – and to further
underscore the point that he has no agenda to “control” the nominating
process – Mr. Razin resigned from the nominating committee on August 21,
2008.
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