The question on lawyer William Wynder’s mind these days is a simple one: Will a jury ever hear Lawndale’s allegations that the small South Bay city was bamboozled out of more than a million dollars by a big-time brokerage firm?
For weeks now, U.S. District Judge Pamela Ann Rymer has kept Wynder in suspense as she has mulled over a motion made by the city’s opponent, defendant Shearson Lehman Hutton, to keep the highly publicized case out of court. Rymer has not indicated when she might issue a ruling.
The brokerage firm, which is being sued for $24.4 million, argues that Lawndale, as well as three other municipalities, forfeited their right to a trial because their investment agreements called for disputes to be settled out of court through arbitration.
Although Hutton attorneys assert that arbitration is a fair and quick way to settle the municipalities’ claims, Wynder contends it would be akin to forcing his clients to play with a stacked deck of cards.
“It’s a lot like (the brokerage firm) saying, ‘We are going to play football now, but we are going to play by the rules established by our league,’ ” Wynder said.
Under arbitration, the case would be heard by five people, three from the public and two with some connection to the brokerage community.
Unlike a regular court decision, the arbitration panel’s decision could not be appealed on issues of fact, and there would be no written record of the proceeding. Moreover, the fact-finding process under arbitration rules is more limited than in a court proceeding. For instance, an attorney cannot take depositions from his opponent’s witnesses.
“These arbitration rules may be OK for small-investor claims, but they are woefully inadequate to handle large disputes,” Wynder said, adding that he considers arbitration “trial by trick.”
Stung by millions of dollars in losses of investments placed through Hutton, Lawndale, San Marino, Palmdale and its redevelopment agency, and the Three Valleys Municipal Water District in the San Gabriel Valley filed suit last January in federal court. Lawndale alleges it lost $1.6 million.
The lawsuit, which seeks $8.4 million in compensatory damages and $16 million in punitive damages, accuses Hutton, a brokerage firm named First Investment Securities Inc., and six individuals of violating federal and state securities laws.
In addition to the civil case, attorneys for the cities say that the FBI is investigating the case. The FBI declined to comment.
The investments that led to the losses were placed by Ray Wood, who served as treasurer for Lawndale and San Marino and as finance director for Palmdale and its redevelopment agency.
After the losses were discovered, Wood, who has said only that he made an “error in judgment,” was fired from his posts in Lawndale and San Marino. He resigned from his Palmdale jobs. He is not a defendant in the lawsuit.
(Maywood’s redevelopment agency, which has joined with the municipalities in their lawsuit, is not affected by the motion, filed in federal court by Hutton, because the Maywood investments were placed with First Investment Securities, Wynder said.)
Hutton has declined to comment on the allegations, except to say that the municipalities’ losses were caused by the decline in the bond market in 1987. In its motion in federal court, Hutton contends that the municipalities signed agreements with clauses requiring disputes to be settled out of court through arbitration. Such arbitration clauses are common in broker-client agreements and are favored by the securities industry because arbitration is faster and less costly than litigation.
Mitchell Albert, a Long Beach attorney who represents Hutton, said courts have consistently upheld arbitration agreements between brokers and their clients. He pointed to a 1987 U.S. Supreme Court ruling that stated investors may not sue their brokers in federal court if they signed an arbitration agreement.
‘More Efficient Forum’
“Both parties entered into an agreement when the account was opened which provides for arbitration of disputes such as this one,” Albert said. “The company has sought to have the matter arbitrated because arbitration is a less expensive and more efficient forum for dispute resolution.”
Wynder, however, maintains that the arbitration clause is invalid because the investments placed by Ray Wood did not have approval from the cities’ council members or, in the case of Palmdale’s redevelopment agency, its board of directors. State law requires binding agreements to be authorized by legislative bodies such as a city council, he said.
Wood by himself “had no power to bind the cities” to arbitration agreements, Wynder asserted.
But Albert said Wood did have the authority to make the investments. The attorney pointed to hundreds of thousands of municipal dollars that Wood wired to Hutton as proof that he had been vested with broad authority by the municipalities. Hutton also contends the Supreme Court ruling upholding arbitration applies to the case, not an earlier federal court ruling, Albert said.
Wynder maintains that a decision handed down by the U.S. 9th Circuit Court of Appeals before the 1987 Supreme Court ruling should take precedence. That decision prohibited a broker from forcing his client to arbitrate disputes, he said.
In the lawsuit, the Three Valleys Municipal Water District is treated separately because its board of directors did approve the investment with Hutton.