In a MedCap case, N.J. Supremes say arbitration has limits

The Supreme Court of New Jersey yesterday reversed a lower state court’s ruling that would have forced an investor who sued an accounting firm and investment adviser over the sale of Medical Capital Holdings Inc. notes out of state court and into private securities arbitration.
The court, in a unanimous decision, ruled that the lower court should have denied an earlier motion to compel arbitration because “the strong preference to enforce arbitration agreements is not without limits,” according to a summary of the decision prepared by the clerk’s office.
The lawsuit by the MedCap investor, Michael E. Hirsch, initially was filed in 2010 against Amper Financial Services LLC, a registered investment adviser, and EisnerAmper LLP, a national certified public accountant firm with offices in New Jersey. The two companies are related.
Mr. Hirsch worked with an adviser formerly affiliated with EisnerAmper and Securities America Inc., which was owned by Ameriprise Financial Inc. at the time. He bought $550,000 of the MedCap notes in various tranches from 2004 to 2008.
MedCap started to default on the notes in 2008. In 2010, Mr. Hirsch instituted a Financial Industry Regulatory Authority Inc. arbitration against Securities America and the broker, alleging breach of contract, fraud and other complaints. Mr. Hirsch also then separately sued Amper Financial and EisnerAmper in state court in New Jersey, alleging similar violations.
“There is no express arbitration obligation with respect to” to Amper Financial or EisnerAmper, according to the summary of the court’s decision. The broker “signed the contract as an agent of [Securities America], not as an agent of [Amper Financial] or [EisnerAmper],” according to the summary.
A spokesman for EisnerAmper, Richard Shippe, declined to comment.
All investors currently sign mandatory-arbitration agreements when opening accounts with broker-dealers.
The New Jersey Supreme Court’s decision not to compel arbitration in the matter shows that “just because a complaint involves the same matter that is going to a Finra arbitration, it doesn’t mean that the investor is compelled to arbitrate” with other parties, said Mark D. Schwartz, the plaintiff’s attorney. Mr. Schwartz said he intends to seek triple damages against Amper Financial and EisnerAmper under a consumer fraud statute in New Jersey.
Ameriprise and Securities America two years ago agreed to a $150 million settlement with most investors who bought the MedCap notes. Mr. Hirsch opted out of the settlement. Ameriprise then sold Securities America to Ladenburg Thalmann Financial Services Inc.
The Securities and Exchange Commission charged Medical Capital and its two founders, chief executive Sidney Field and president Joseph Lampariello, with fraud in July 2009. Dozens of independent broker-dealers sold $2.2 billion of the MedCap notes, which were later revealed to be a Ponzi scheme. Securities America’s reps sold about $700 million of the notes. The firm was by far the largest underwriter of the product.