Societe Generale (SG) and SG Structured Products, Inc. (SGSP) (together, SG appellants), appeal from the trial court's order denying their petition to compel arbitration of all claims asserted against them in the civil action of Charles E. Jones and Judith W. Jones (the Joneses). Also parties in this appeal are Ivor J. Jacobson (Jacobson), Santa Fe Investment Advisors Ltd. (SFIA), Anglo African Shipping Co. of New York
None of the SG (and Jacobson)
On appeal, the SG appellants argue the trial court erred in denying their motion to compel arbitration because (i) the Joneses agreed to arbitrate "any controversy" arising out of the subject matter of the agreement, and the Joneses' claims against them arise out of that agreement; (ii) the arbitration provision applies to any "agent" or "employee" of SGAS and the Joneses' amended complaint includes myriad allegations of wrongdoing by two alleged employees of SGAS, neither of whom, however, are seeking to enforce the arbitration provision; and (iii) the Joneses' claims against them are "intimately founded in and intertwined" with the underlying obligations arising under the agreement between SGAS and the Joneses, and thus the Joneses are estopped from repudiating the arbitration provision in that agreement.
The Jacobson appellants alone argue they are entitled to enforce the arbitration provision under a third party beneficiary theory.
The Joneses' amended complaint alleges as follows:
In late 2004, the Joneses became acquainted with Jacobson. Jacobson lived in the same general area as the Joneses and actively courted the Joneses' friendship. Jacobson then represented to the Joneses that he had 40 years of experience as an investment adviser in large, complex securities transactions across multiple continents, that he owned various entities through which he channeled investments and that he had accumulated substantial wealth by investing in "`fund of funds' hedge fund vehicles."
In November 2004, Jacobson solicited the Joneses to invest money with him. The Joneses explained to Jacobson that any money they would be investing was from their retirement savings and that they wanted to avoid unnecessary risk and invest only in securities with low risk and relatively high liquidity.
During a meeting between the Joneses and Jacobson in December 2004, Jacobson presented the Joneses with a "performance history of investments" he had made over the previous several years and represented the Joneses could obtain stable returns on their investment by purchasing funds of hedge funds. Jacobson also represented he had relationships with many top-tier hedge fund managers that would enable Jacobson to make investments that would not otherwise be available to the Joneses.
Initially, Jacobson asked the Joneses to wire the $2.5 million into one of his offshore accounts. When the Joneses expressed some concern about that arrangement, Jacobson proposed, and the Joneses agreed, that each of them would fund the joint venture through an account with SG.
Prior to the formation of the joint venture, Jacobson met with several financial institutions, including SG, in search of an institutional partner that would enhance Jacobson's credibility with potential investors. During one such meeting with SG, Jacobson presented the same investment return information, and made many of the same representations, he had given potential investors like the Joneses. Jacobson also met with representatives of appellants Lyxor Asset Management, S.A. (Lyxor), and SG Hambros Trust Company Ltd. (SG Hambros). Both Lyxor and SG Hambros were wholly owned subsidiaries of SG.
The Santa Fe Fund was organized by SG as a subfund of the Lyxor Master Fund Trust (the Lyxor Trust). SG Hambros was the trustee of the Lyxor Trust and, as trustee, it delegated to Lyxor certain investment advisory functions related to the Santa Fe Fund. Lyxor, in turn, delegated certain of those investment advisory functions to Jacobson. Investors such as the Joneses invested in the Santa Fe Fund through the purchase of "warrants" linked to that fund. Each warrant represented a quantum investment in the Santa Fe Fund and a payment obligation of SGSP, with SG guaranteeing the warrant investments.
SGSP issued the warrants pursuant to an offering circular dated April 20, 2005. The warrants were leveraged with millions of dollars borrowed from SG, which in turn created a "secondary market" for the warrants to allow investors to sell back or "redeem" the warrants. Money raised from the sale of the warrants, along with the money borrowed from SG, was invested in the Santa Fe Fund.
SG, SGSP, Lyxor and SG Hambros (together, SG parties) did not perform proper due diligence on Jacobson, despite having ample opportunity to investigate his investment experience and background (or lack thereof) and despite various "red flags" with regard to Jacobson and his myriad representations. It was only after the Joneses and other investors sustained significant losses in the Santa Fe Fund that the SG parties investigated Jacobson and took steps to prevent him from continuing to act as the manager of that fund.
The SG parties and Jacobson began working together in late 2005 to accomplish various common goals, including bringing new investors into the Santa Fe Fund to increase the size of its portfolio. The SG parties prepared a presentation for Jacobson entitled the "Q1 2006 Business Plan." The presentation was made to Jacobson by Stanislas Debreu and Guillaume Auvray, who were both "senior employees of one or all of the SG [parties]." The Q1 2006 Business Plan recommended as a long-term objective "hav[ing] an investment advisor charge a fee for investment advisory services," which was in contradiction to the terms of the joint venture agreement between Jacobson and one or more of his entities, on the one hand, and the Joneses, on the other hand. Until this litigation, the Joneses were unaware of the Q1 2006 Business Plan and its proposal they pay fees for investment advisory services. This proposal contradicted what Jacobson had promised the Joneses and was in addition to the fees the Joneses already were obligated to pay under the joint venture agreement.
The SG parties and Jacobson also sought to amend the overall investment strategy of the Santa Fe Fund by way of a supplemental prospectus. Their plan was to convert the structure of the Santa Fe Fund into what they called a "master-feeder" fund structure. Under such a structure, the Santa Fe Fund would invest in the "Santa Fe Master Fund," which would then invest in "a wide range of trading opportunities." The supplemental prospectus issued by the SG parties indicated that Lyxor was responsible for managing the amount by which the warrants were leveraged and that SG Hambros and Lyxor were responsible for handling the liquidation of any assets required to satisfy any warrant redemption request.
The SG parties also developed a Web site for the Santa Fe Fund, which provided information to warrantholders and to potential investors, and which listed both Jacobson and Auvray of SG as contacts for additional information.
Jacobson, in cooperation with the SG parties, prepared a 29-page "information memorandum" in June 2006 setting out the details and features of the Santa Fe Fund. The information memorandum specifically mentioned SG, Lyxor and SG Hambros, and stated that Lyxor, as part of the "team," set the Santa Fe Fund apart from other funds: "`Lyxor has a relationship with about 650 asset managers, 140 of which fund separate accounts for Lyxor, and [Lyxor] possesses, in many cases, a great deal of insight and information
The information memorandum also stated that Lyxor would perform "due diligence review" for the Santa Fe Fund, that this Fund "features a `low risk portfolio [that] allows for 2-3x leverage designed to protect capital'" and that "[e]nhanced [r]eturns" are "`achieved through 2-3x leverage on a highly conservative portfolio.'" The SG parties assisted in the preparation of the information memorandum.
Seeking to further their common goals, Jacobson, with the backing of the SG parties, solicited the Joneses to make additional investments in the Santa Fe Fund. The Joneses purchased 73 additional warrants in late March 2006, at a price of $33,100 per warrant, for a total purchase price of $2,416,300. When they purchased the additional warrants, the Joneses were unaware of the plan of the SG parties and Jacobson to amend the investment strategy of the Santa Fe Fund.
Jacobson represented to the Joneses that converting the Santa Fe Fund from its initial structure to the proposed master-feeder structure would not affect the Joneses. Jacobson also represented the change would allow him to charge others a fee for managing the Santa Fe Fund, that it would bring more investors into the fund and that the fund would become more profitable, as it would give Jacobson the opportunity to invest in a greater variety of hedge funds and obtain better returns. The SG parties sponsored the conversion to the master-feeder structure, as they too would realize more profits by adding more investors to, and permitting larger investments in, the Santa Fe Fund. Relying on Jacobson and the SG parties, the Joneses agreed to a reorganization of the Santa Fe Fund into a master-feeder structure.
In early 2007, Jacobson offered to sell 50 shares, or 5 percent of his investment company, SFIA, to the Joneses for $140 per share. The sale was memorialized by a "Securities Purchase Agreement" dated May 1, 2007 (SPA). Under the SPA, the Joneses also agreed to purchase 50 additional warrants at a purchase price of $43,710 per warrant, for a total purchase price of $2,185,500. The SPA contained a purported "lockup" provision that sought to preclude the Joneses from transferring some warrants through 2010. The Joneses never received any SFIA shares in exchange for their $7,000 payment.
After the SPA, Jacobson became "increasingly distant and inaccessible" to the Joneses, who began to express concern that the Santa Fe Fund was overleveraged. Jacobson on at least three occasions also sought to increase
In early 2008, Jacobson sought to enter into an investment advisory agreement with a third party at a cost of $200,000 per year. Jacobson asked the Joneses to split this expense, but the Joneses refused, believing it unnecessary for Jacobson to hire a third party to manage the Santa Fe Fund when Jacobson allegedly was a qualified, experienced investment adviser and the SG parties were overseeing the proper and prudent management of the Santa Fe Fund.
Jacobson promised the Joneses in February and March 2008 that they could redeem their investment in the warrants without any problems. In April 2008, another warrantholder redeemed a portion of his warrant holdings in the Santa Fe Fund. That same warrantholder redeemed the balance of his warrants in October 2008. In both instances, neither the Jacobson appellants nor the SG parties sought to prevent that warrantholder from redeeming his warrants in the Santa Fe Fund.
That was not the case for the Joneses, however. Although Stanislas Debreu of SG remained optimistic about the Santa Fe Fund in May 2008, as evidenced by his e-mail to the Joneses that "[a]ll in all . . . the Santa Fe warrant[s remain] a good investment," the Joneses nonetheless decided to redeem their 250 warrants in the Santa Fe Fund. Initially, when the Joneses told Jacobson they wanted to redeem all their warrants, Jacobson responded he would oppose that request because of the "lockup" provision in the SPA.
The Joneses next turned to the SG parties. On May 26, 2008, the Joneses discussed with Auvray their desire to redeem their warrants. Auvray instructed the Joneses to e-mail that request. The next day, the Joneses sent Debreu a letter notifying the SG parties of their intention to redeem their warrants. The Joneses purposely submitted their notice 35 days prior to the end of the next month, pursuant to the terms explicitly stated on the monthly reports sent to warrantholders of the Santa Fe Fund. The SG parties responded that the Joneses' request would not be a problem, but that it was made too late to be honored that month.
Because neither Jacobson nor the SG parties wanted the Joneses to redeem their warrants, and despite then rapidly deteriorating market conditions, Jacobson, with the support of the SG parties, invested virtually all of the Santa Fe Fund's available cash and borrowing capacity in hedge funds with lockup periods of up to two years or more or in funds with severe redemption penalties. Jacobson and Debreu actively conspired to commit all assets of the Santa Fe Fund that otherwise could have been used to satisfy in full the Joneses' redemption request.
After several months passed, the SG parties offered to redeem a small percentage of the Joneses' warrants. The Joneses rejected this offer, however, because the value of the warrants had plummeted. In addition, the SG parties' offer involved only a small fraction of the Joneses' warrants and was conditioned on the Joneses executing a release of all claims in favor of the SG parties.
In early October 2008, Debreu e-mailed Jacobson that the Santa Fe Fund was in "total liquidation mode" and was no longer being risk managed by the SG parties. That e-mail also stated that every dollar obtained from the liquidation would first go to pay off the SG parties. In late 2008, SG terminated Jacobson's management of the Santa Fe Fund. In mid-January 2009, SG issued a notice to all warrantholders that SFIA had resigned as adviser to the Santa Fe Fund and that this was a "[f]und [t]ermination [e]vent." In mid-March 2009, the SG parties informed the warrantholders that following the liquidation strategy set by SFIA, Lyxor and SG intended to wind down the master fund and feeder fund.
In early September 2009, SGSP issued a notice stating that it would issue only a partial payment to the warrantholders, while fully repaying the leveraged funds borrowed from the SG parties. As such, in late September 2009, SGSP made a partial payment to the Joneses.
In response, the SG appellants moved to compel arbitration, alleging that all of the Joneses' claims against them arose under the account agreement containing the arbitration provision. The Jacobson appellants "joined" in that motion.
The trial court denied the motion of the SG appellants to compel arbitration and the joinder in that motion by the Jacobson appellants. The trial court found the SG appellants did not "[meet] their burden of proving the existence of an agreement to arbitrate the current dispute between the parties . . . [because] the SG [appellants] are not parties or signatories to the Account Agreement. Thus, there is no written agreement to arbitrate disputes between [the parties]." The trial court further found the doctrine of equitable estoppel did not apply because the SG appellants did not establish that the Joneses' claims against them "are founded in or intertwined with the Account Agreement entered into between [the Joneses] and SGAS."
"Whether an arbitration agreement applies to a controversy is a question of law to which the appellate court applies its independent judgment where no conflicting extrinsic evidence in aid of interpretation was introduced in the trial court. [Citation.]" (Brookwood v. Bank of America (1996) 45 Cal.App.4th 1667, 1670 [53 Cal.Rptr.2d 515]; see also Brown v. Wells Fargo Bank, N.A. (2008) 168 Cal.App.4th 938, 953 [85 Cal.Rptr.3d 817].)
However, if there are material facts in dispute, we must accept the trial court's resolution of such disputed facts when supported by substantial evidence. (Engineers & Architects Assn. v. Community Development Dept. (1994) 30 Cal.App.4th 644, 653 [35 Cal.Rptr.2d 800].) We also must presume the court found every fact and drew every permissible inference necessary to support its judgment or order, and we must defer to the court's determination of credibility of the witnesses and weight of the evidence in resolving such disputed facts. (Ibid.)
The arbitration provision is included in a preprinted, standard form,
"* Arbitration is final and binding on the parties.
"* The parties are waiving their right to seek remedies in court, including the right to jury trial.
"* Pre-arbitration discovery is generally more limited than and different from court proceedings.
"* The arbitrators' award is not required to include factual findings or legal reasoning and any party's right to appeal or to seek modification of ruling by the arbitrators is strictly limited.
"* The panel of arbitrators will typically include a minority of arbitrators who were or are affiliated with the securities industry.
"* No person shall bring a putative or certified class action to arbitration, nor seek to enforce any pre-dispute arbitration agreement against any person who has initiated in court a putative class action; or who is a member of a putative class who has not opted out of the class with respect to any claims encompassed by the putative class action until: (i) the class certification is denied; or (ii) the class is decertified; or (iii) the customer is excluded from
"Any controversy arising out of or relating to any of my accounts, to transactions with you for me, or to this or any other agreement or the construction, performance or breach thereof, shall be settled by arbitration before an arbitration panel appointed by the NASD or the New York Stock Exchange, Inc. or the American Stock Exchange, Inc. (and only before such a panel) as I may elect. If I do not make such election by registered mail addressed to you at your main office (Attn: Legal Dept.) within five (5) days after demand by you that I make such an election, then you may make such election. Judgment upon any award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The provisions of this paragraph shall also apply to any such controversy involving any agent or employees of yours."
As also relevant here, paragraph 11 states that the account agreement is governed by and construed in accordance with the law of New York.
Also noteworthy is paragraph 7 of the account agreement. It provides: "If my account has been introduced to you by arrangement with another broker-dealer, you are authorized to accept from such other broker-dealer, without inquiry or investigation by you, (i) orders for the purchase or sale of securities or other property for my account, on margin or otherwise, and (ii) any other instructions concerning my account. I understand and agree that such other broker-dealer is not your agent and that you shall have no responsibility or liability to me for any acts or omissions of such other broker-dealer, its officers, employees or agents. The terms and conditions of
Here, the SG appellants argue they satisfied their burden of proving the existence of a valid and enforceable arbitration provision in the account agreement(s) signed by the Joneses. (See Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394, 413 [58 Cal.Rptr.2d 875, 926 P.2d 1061] [to satisfy this burden, the motion to compel must be "accompanied by prima facie evidence of a written agreement to arbitrate the controversy" in question].) The SG appellants further argue that the burden then shifted to the Joneses to show the arbitration provision cannot be interpreted to require arbitration of this "controversy" and that the Joneses failed to meet their burden. (See Titolo v. Cano (2007) 157 Cal.App.4th 310, 316-317 [68 Cal.Rptr.3d 616].)
The cases relied on by the SG appellants regarding the burdens of proof in a motion to compel arbitration by a nonsignatory are not inconsistent with our conclusion. For example, in Titolo v. Cano, supra, 157 Cal.App.4th at pages 316-317, there was no dispute that the plaintiff patient was a party to the arbitration agreement sought to be enforced by the defendant physician, also a party to the agreement. Indeed, the court in Titolo v. Cano specifically noted that the plaintiff did not "challenge the validity of the physician-patient arbitration agreement." (Id. at p. 317.)
Not surprisingly, the SG appellants have been unable to cite any authority placing the burden on a signatory to show the nonsignatory is not a party to the arbitration agreement. Moreover, such a rule would make little sense in the case before us because the SG appellants have superior access to information, and vastly greater knowledge, than the Joneses regarding whether the necessary "identity of interest" (discussed post) exists between the SG appellants and SGAS, such that the SG appellants are entitled to enforce the arbitration provision.
Thus, our inquiry in the instant case is whether the SG appellants satisfied their burden to show they together or individually are a party to the account agreement containing the arbitration provision. This inquiry requires us to apply the rules of contract interpretation to construe the arbitration provision in the account agreement.
"Arbitration is consensual in nature. The fundamental assumption of arbitration is that it may be invoked as an alternative to the settlement of disputes by means other than the judicial process solely because all parties have chosen to arbitrate them. [Citations.] Even the strong public policy in favor of arbitration does not extend to those who are not parties to an arbitration agreement or who have not authorized anyone to act for them in executing such an agreement. `The right to arbitration depends on a contract.'" (County of Contra Costa v. Kaiser Foundation Health Plan, Inc., supra, 47 Cal.App.4th at pp. 244-245; see also Engineers & Architects Assn. v. Community Development Dept., supra, 30 Cal.App.4th at p. 653 ["The right to arbitration depends upon contract; a petition to compel arbitration is simply a suit in equity seeking specific performance of that contract. [Citations.]"]; Badie v. Bank of America (1998) 67 Cal.App.4th 779, 787 [79 Cal.Rptr.2d 273] ["Under both federal and California state law, arbitration is a matter of contract between the parties."].)
The SG appellants contend they are entitled to enforce the arbitration provision in paragraph 9 of the account agreement because it is broadly worded and requires arbitration of "[a]ny controversy arising out of or relating to any of my [(the Joneses')] accounts, to transactions with you [(SGAS)] for me [(the Joneses)], or to this or any other agreement or the construction, performance or breach thereof . . . ." While it may be true that the arbitration provision at issue here is broadly worded, that does not answer the threshold question of whether the SG appellants satisfied their burden to show one or more of them are a party to the account agreement containing the arbitration provision.
Moving to the heart of this appeal, the SG appellants argue they qualify as parties to the account agreement because the Joneses' amended complaint establishes that Debreu and Auvray were "central to the misrepresentations allegedly made to the Joneses from 2005 through 2008 regarding the Joneses' investments in the [w]arrants, the handling of the [w]arrants, and the Joneses' ability to withdraw their investments." According to the SG appellants, because the Joneses have conceded that Debreu and Auvray at all relevant times were employees of SGAS, paragraph 9 requires the Joneses to arbitrate their dispute because that provision "shall also apply to any such controversy involving any agent or employee of yours [(SGAS)]."
Here, the SG appellants do not argue either of them is an agent or employee of SGAS. Therefore, we independently conclude this language from paragraph 9 of the account agreement is inapplicable in the instant case.
The SG appellants next argue that even if neither of them is entitled to enforce the arbitration provision as a party to the account agreement, the Joneses are still required to arbitrate this "controversy" based on the judicially created equitable estoppel doctrine.
The doctrine focuses on the "nature of the claims asserted by the plaintiff against the nonsignatory defendant." (Boucher v. Alliance Title Co., Inc., supra, 127 Cal.App.4th at p. 272.) "Claims that rely upon, make reference to, or are intertwined with claims under the subject contract are arbitrable." (Rowe v. Exline (2007) 153 Cal.App.4th 1276, 1287 [63 Cal.Rptr.3d 787]; see also Goldman v. KPMG, LLP, supra, 173 Cal.App.4th at pp. 229-230 ["Because equitable estoppel applies only if plaintiffs' claims against the nonsignatory are dependent upon, or inextricably bound up with, the obligations imposed by the contract plaintiff has signed with the signatory defendant, we examine the facts alleged in the complaints."]; Metalclad Corp. v. Ventana Environmental Organizational Partnership (2003) 109 Cal.App.4th 1705, 1713 [1 Cal.Rptr.3d 328] ["Courts applying [the doctrine] against a signatory have `looked to the relationships of persons, wrongs and issues, in particular whether the claims that the nonsignatory sought to arbitrate were "`"intimately founded in and intertwined with the underlying contract obligations."'"'"].)
Here, based on our independent review of the Joneses' amended complaint, we conclude their claims against the SG appellants are not dependent on or inextricably intertwined with the account agreement. None of the allegations in the amended complaint is based on the account agreement or any of its provisions. In fact, the amended complaint does not even reference the account agreement.
Nonetheless, the SG appellants argue that a sufficient nexus exists between the account agreement and the allegations of wrongdoing made by the Joneses in their amended complaint because "but for" the account agreement, the Joneses would not have been able to purchase any of the warrants that are at issue in this case. We disagree.
We note from the record that the Joneses purchased 100 warrants for $2.5 million before they signed the account agreement(s). Thus, the Joneses' purchase of at least some of the warrants was not dependent on their signing the account agreement.
In addition, the Joneses allege myriad acts of wrongdoing by both the SG parties and the Jacobson appellants that predate the account agreement, as set forth in the factual summary ante.
Finally, while the focus of the Joneses' amended complaint is the substantial losses they sustained from their purchase of the 250 warrants, they allege that a substantial portion, if not all, of those losses occurred in mid-2008—close to three years after they signed the account agreement(s)—when they allege the SG appellants/parties (and Jacobson appellants) inappropriately blocked their myriad requests to redeem their warrants. The Joneses further allege that at the time they made those requests to redeem, the Santa Fe Fund had sufficient assets and liquidity to cash out their investment.
Thus, we conclude the Joneses' allegations, claims and damages in their amended complaint against the SG appellants (and Jacobson appellants) are not "founded in and inextricably bound up with" the obligations imposed under the account agreement. (See Goldman v. KPMG, LLP, supra, 173 Cal.App.4th at p. 219.) We therefore reject the argument of the SG appellants that the equitable estoppel doctrine provides an independent basis to enforce the arbitration provision in the account agreement.
As we noted ante, although the Jacobson appellants in this appeal have fully adopted the factual and legal averments of the SG appellants, the Jacobson appellants also included an additional argument not raised by the SG appellants, to wit: as "broker-dealers" within the meaning of paragraph 7 of the account agreement, they are entitled in their own right to enforce the arbitration provision against the Joneses as third party beneficiaries to that agreement. We disagree.
Not unexpectedly, the Jacobson appellants have not cited any authority holding a third party beneficiary can invoke an arbitration clause in an agreement not applicable to the lawsuit. As we noted ante, there is not a sufficient nexus between the account agreement containing the arbitration provision and the allegations, claims and damages sought by the Joneses in their amended complaint. We thus reject the argument of the Jacobson appellants that they were entitled to enforce the arbitration provision in their own right or as third party beneficiaries.
The order denying the SG appellants' motion to compel arbitration, and the Jacobson appellants' "joinder" in that motion, is affirmed. The Joneses to recover their costs on appeal.
Nares, J., and O'Rourke, J., concurred.
