Originally from Dispute Resolution Journal

SECURITIES-ARBITRABILITY-SECURITIES EXCHANGE ACT OF 1934-RULE 10(B)-5-RICO

The district court properly denied arbitration of RICO claims, but erred in ordering arbitration of claims raised under the 1934 Securities Exchange Act and SEC Rule lO(b)-5, in light of precedent in the Second Circuit. The McMahons, as trustees for several pension- and profit-sharing plans, entered into a customer agreement with Shearson that provided for arbitration of disputes. A suit was subsequently filed by the McMahons, alleging churning of the accounts and violations of the Securities Exchange Act of 1934, 15 U.S.C. § 78 et seq.; Securities Exchange Commission (SEC) Rule 10(b)-5; and the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1961 et seq. The plaintiffs further alleged violations of state law for fraud and breach of fiduciary duties. Shearson moved to compel arbitration of the dispute. The district court ruled that the RICO claims were not arbitrable, but ordered arbitration of the federal securities claims and the state law claims, relying on the strong national policy favoring arbitration and on the United States Supreme Court's recent decision in Dean Witter Reynolds, Inc. v. Byrd, _u.s._, 105 S. Ct. 1238 (1985). The McMahons appealed, contending that the district court erred in ordering arbitration of the federal securities claims in light of established precedent in the Second Circuit. The court agreed and reversed that part of the judgment ordering arbitration of federal securities claims: