GOLDSMITH v. PINEZ

84 F. Supp.2d 228 (2000) | Cited 0 times | D. Massachusetts | February 28, 2000

MEMORANDUM AND ORDER

INTRODUCTION

This case arises from a now-familiar set of facts involvingalleged insider trading, the relationship between the twodefendants, Lehman Brothers, Inc. ("Lehman") and Emanuel Pinez,the former C.E.O. of Centennial Technologies, Inc,("Centennial") and a set of options trades entered into betweenthe plaintiffs and Lehman just before Centennial's stock droppeddramatically. The plaintiffs, who are "market makers" at theChicago Board of Options Exchange ("CBOE"), lost nearly $3.7million as a result of options trades executed by Lehman, onbehalf of Mr. Pinez, in February of 1997. They allege thatLehman violated federal securities laws, as well as Illinoisstate law, inmaking these trades.1 Specifically, the market makersallege that Lehman made representations containing materiallyfalse and misleading information, and omitted to state materialfacts necessary to render such statements true at the time theywere made. They further claim that Lehman's representations thatit was trading on behalf of a customer were fraudulent anddeceptive.

Lehman has moved to dismiss the complaint, asserting: 1) thatplaintiffs' allegations fail to meet the heightened pleadingsstandards to establish scienter under the Private SecuritiesLitigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-4; 2) thatplaintiffs are attempting to impose primary liability on asecondary actor, contrary to the rule of Central Bank ofDenver, N.A. v. First Interstate Bank of Denver, N.A.,511 U.S. 164, 114 S.Ct. 1439, 128 L.Ed.2d 119 (1994); and 3) thatplaintiffs' misrepresentation claim stemming from Lehman'sassertions during trading that it was a customer should failbecause the statements were entirely true and did not need to besupplemented. Plaintiffs have filed a motion to stay theseproceedings to pursue a private arbitration claim before theCBOE. Lehman opposes the motion to stay, asserting thatplaintiffs waived their right to arbitrate by filing in thisCourt in the first instance and by taking other actions thatLehman alleges are inconsistent with an intent to arbitrate.

Despite all that has now transpired involving these plaintiffsand Lehman, Lehman has not made a showing that it would beprejudiced by a stay in this matter. I therefore ALLOWplaintiffs' motion to stay these proceedings pendingarbitration.

BACKGROUND FACTS

The complaint essentially tracks the factual summariesprovided in the two previous decisions rendered in litigationbrought by the SEC against Mr. Pinez and Lehman. See SEC v.Pinez, 989 F. Supp. 325 (Mass. 1997), remanded by SEC v. LehmanBrothers, Inc., 157 F.3d 2 (1st Cir. 1998). I incorporate thosefactual summaries here.

PROCEDURAL HISTORY

The legal fallout from the final days of Mr. Pinez's reignover Centennial has been substantial, and provides relevantcontext for consideration of the present dispute. On February14, 1997, the SEC filed a civil action against Mr. Pinez,charging that he secured the options trades at issue though theuse of insider knowledge about Centennial's true financialhealth. On March 14, 1997, the SEC added Lehman as a reliefdefendant, since the proceeds from the options trades remainedin Mr. Pinez's margin account at Lehman. Plaintiffs participatedin the SEC action as interested parties, filing notices ofappearance, attending hearings, filing amicus briefs in Marchand September of 1997, and filing a memorandum in support ofcontinuing the freeze order in September of 1997. On December16, 1997, this Court issued a preliminary injunction, freezingthe assets in the Lehman account. See Pinez, 989 F. Supp. at345.

On February 6, 1998, the plaintiffs filed this action againstMr. Pinez and Lehman.2 On March 31, 1998, after a statusconference and upon agreement of the parties, this Court issuedan order staying these proceedings. The purpose of that stay wasto await the resolution of the SEC's action against Mr. Pinezand Lehman. If the SEC had been successful in its actionagainst Lehman, that could have obviated plaintiffs' need topursue this private action.

But that case did not prove successful. On October 5, 1998,the First Circuit remanded the preliminary injunction matter tothis Court due to its interpretation of governing New York law.See Lehman, 157 F.3d at 9. Specifically, the court found thatLehman Brothers' conduct did not amount to subjective bad faithwhich would negate its status as a bona fide purchaser under NewYork law. See id. at 7. The court went on to find that the SEChad not shown that Lehman had "deliberately closed its eyes" toPinez's misconduct, and that, from the perspective of Lehman,"misconduct was merely a possibility." Id. At a statusconference on January 27, 1999, the SEC indicated that it wouldnot likely continue its action against Lehman. The stay in thismatter was also lifted at that time. On June 10, 1999, Lehmanwas formally dismissed as a defendant in the SEC action.

With the stay lifted, Lehman answered plaintiffs' complaint,and filed its motion to dismiss, on February 17, 1999.Plaintiffs filed, and Lehman assented to, a motion to extendtime to respond to the motion to dismiss. Plaintiffs' responsewas due on March 23, 1999; on that date, plaintiffs filed theirmotion to stay, or, in the alternative, to extend time torespond to the motion to dismiss. They also filed a timelyrequest to arbitrate and a statement of claim before the CBOE,which alleges violations of state and federal law as well asCBOE rules. Prior to that time, plaintiffs had not indicatedthat they would seek arbitration. This Court ordered plaintiffsto file a response to the motion to dismiss, and heard oralargument on all pending motions on August 3, 1999. There havebeen no pretrial proceedings other than the status conference inwhich the case was stayed, and no discovery in this case.

DISCUSSION

Plaintiffs seek a stay pursuant to Section3 of theFederal Arbitration Act ("FAA") 3 so that they may pursuearbitration of their claims before the CBOE.4 Lehmanargues that by filing this action, and by participating activelyin the SEC action, plaintiffs have waived their right toarbitrate. Because I conclude that the First Circuit requiresthat a party opposing a motion to compel arbitration must showprejudice, see Navieros Inter-Americanos v. M/V VasiliaExpress, 120 F.3d 304, 316 (1st Cir. 1997), Lehman's argumentfails.

In considering whether a party has waived its arbitrationright,5 courts are consistently mindful of the strongfederal policy favoring arbitration. The Supreme Court hasemphasized that any doubt concerning arbitrability "should beresolved in favor of arbitration, whether the problem at hand isthe construction of the contract language itself or anallegation of waiver, delay, or a like defense toarbitrability." Moses H. Cone Mem'l Hosp. v. Mercury Constr.Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 941, 74 L.Ed.2d 765(1983). Waiver is not to be lightly inferred. See Page v.Moseley, Hallgarten, Estabrook &Weeden, Inc., 806 F.2d 291, 2093 (1st Cir. 1986) (citing Rushv. Oppenheimer & Co., 779 F.2d 885 (2d Cir. 1985)), overruledon other grounds sub nom. Shearson/American Express, Inc. v.McMahon, 482 U.S. 220, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987).Nonetheless, courts have consistently held that a party mayimplicitly waive its right to arbitrate by engaging inlitigation. See, e.g., Navieros Inter-Americanos, 120 F.3d at316; Caribbean Ins. Servs., Inc. v. American Bankers LifeAssurance Co., 715 F.2d 17, 19 (1st Cir. 1983).

The First Circuit has laid out a set a factors for courts toconsider in determining whether a party, by conduct in court,has waived arbitration rights:

In determining whether a party to an arbitration agreement, usually a defendant, has waived its arbitration right, federal courts typically have looked to whether the party has actually participated in the lawsuit or has taken other action inconsistent with his right, . . . whether the litigation machinery has been substantially invoked and the parties were well into preparation of a lawsuit by the time an intention to arbitrate was communicated by the defendant to the plaintiff, . . . whether there has been a long delay in seeking the stay or whether the enforcement of arbitration was brought up when trial was near at hand . . . Other relevant factors are whether the defendants have invoked the jurisdiction of the court by filing a counterclaim without asking for a stay of the proceedings, . . . whether important intervening steps (e.g. taking advantage of judicial discovery procedures not available in arbitration . . .) had taken place . . . and whether the other party was affected, misled, or prejudiced by the delay. . . .

Jones Motor Co., Inc. v. Chauffeurs, Teamsters, and HelpersLocal Union No. 633, 671 F.2d 38, 44 (1st Cir. 1982) (Breyer,J.) (quoting Reid Burton Constr., Inc. v. Carpenters Dist.Council, 614 F.2d 698, 702 (10th Cir. 1980)).

Under the Jones Motor criteria, the most powerful factorpointing towards waiver is that the plaintiffs themselves filedthis claim; they not only "participated" in the lawsuit, theyinitiated it, and in doing so most certainly invoked thejurisdiction of this Court. This is a relevant considerationunder the first and fourth Jones Motor factors. See BallardShipping, 752 F. Supp. at 549 (considering plaintiffs initiationof suit as one relevant factor in waiver analysis).

Lehman contends that the plaintiffs initiation of the suit is,in fact, a dispositive indicator of waiver, and cites to fourmiddle-aged cases from this circuit as support. See MoralesRivera v. Sea Land of Puerto Rico, Inc., 418 F.2d 725, 726 (1stCir. 1969) (finding that plaintiffs waived the right toarbitrate where plaintiffs filed suit, then failed to prosecute,and then argued that the court lacked jurisdiction because theunderlying agreement called for arbitration); Hilti v. Oldach,392 F.2d 368, 372 n. 9 (1st Cir. 1968) (distinguishing, indicta in a footnote, cases in which a defendant initiallyfails to raise arbitration as a defense from cases in which aplaintiff seeks to stay his own action); Gutor Int'l AG v.Raymond Packer Co., Inc., 493 F.2d 938, 945 (1st Cir. 1974)(finding waiver where a party unconditionally submitted part ofan arbitrable matter to the courts, but later attempted to takeadvantage of the arbitration clause when the opposing partycounterclaimed); Ferber Co. v. Ondrick, 310 F.2d 462, 464-65(1st Cir. 1962) (holding that prime contractor plaintiffs in aninterpleader action could not press arbitration for acounterclaim by a subcontractor).

Reliance on these cases is unavailing for several reasons. InMorales Rivera, the court refused to allow the plaintiffs toresurrect via arbitration a claim that they brought but failedto prosecute. The court reasoned: "[Plaintiffs] cannot proceedwith an action until it proves unsuccessful, then avoid theeffect by pleading their own contractual breach in havingbrought it.Plaintiffs are seeking to play games with a court which therecord shows has been more than patient with them." MoralesRivera, 418 F.2d at 726. No such manipulation or wasting ofjudicial resources has occurred here. Moreover, it seems thatthe court in Morales Rivera framed somewhat differently, andthen left unresolved, the issue presented here. Curiously, thecourt stated: "We are not concerned with the principle that aparty may be allowed to rescind such a waiver in the absence ofprejudice." Id. (citing Carcich v. Rederi A/B Nordie,389 F.2d 692, 696 (2d Cir. 1968)). Looking to Carcich to see whatthe First Circuit reserved judgment on in Morales Rivera, thatcase squarely held that mere participation in a suit would notconstitute waiver absent prejudice to the party opposingarbitration. Carcich, 389 F.2d at 696. In a footnote, however,the court in Carcich distinguished a case in which a plaintiffbrought suit without first availing himself of an arbitrationclause. Id. at 696 n. 8. Rather than resolve this quandary, itsuffices to say that, with its quirky facts and indefinitereference to "rescission of waiver," Morales Rivera is oflimited use in resolving the issue before this Court.

The Gutor case pre-dates First Circuit cases which moredirectly confront the prejudice requirement, but the facts ofGutor certainly suggest that the court based its finding ofwaiver on more than plaintiffs initiation of the suit. Theplaintiff had won its motion for summary judgment as to itsclaims, and if it had successfully revived the arbitrationclause as to defendant's counterclaims, the dispute would haveshifted to an arbitration tribunal in Zurich to be decided underSwiss law. Gutor, 493 F.2d at 945. In fact, the court inGutor speaks in terms of prejudice to the defendant; the courtfound that the plaintiff was attempting to "take advantage ofthe arbitration clause to urge judicial abstention to theprejudice of Packer." Id. Moreover, both Gutor and Ferberinvolved an attempt by a plaintiff to press its own claims incourt, but force the defendant's counterclaims into arbitration.

The Hilti footnote, which spawned intense debate among theparties, does little to further Lehman's argument. The footnotedoes not indicate that the First Circuit was in any way adoptingthe rationale of either of the two cases cited. Rather, thecourt simply distinguished the line of cases in which adefendant sought arbitration from cases in which a plaintiffsought arbitration. Such a distinction is appropriate, and isnot inconsistent with a Jones Motor approach whereinplaintiffs' initiation of the suit is a relevant considerationin a waiver analysis.

Two additional factors undercut Lehman's argument. First, allfour of the cases it cites pre-date the Supreme Court's decisionin Moses H. Cone, which directs courts to resolve all doubtsabout arbitrability in favor of arbitration. Second, ifplaintiffs' initiation of a suit were the determinative factorLehman asserts it to be, it is difficult to understand why theJones Motor test would, by its terms, apply to plaintiffs anddefendants alike. Yet the court in Jones Motor adopted astandard to apply to "a party . . . usually a defendant . . ."who seeks to compel arbitration. Jones Motor, 671 F.2d at 44(emphasis added). While it is the more typical scenario that aplaintiff seeks to oppose a defendant's motion to arbitrate, thecases consistently speak in general terms. See, e.g., NavierosInter-Americanos, 120 F.3d at 316 (requiring "[t]he partyopposing the motion to compel arbitration" to show prejudice);Lifetime Med. Nursing Servs., Inc. v. Cambridge AutomationCorp., 780 F. Supp. 882, 884 (R.I. 1991) (finding that "theparty objecting to arbitration" must show prejudice.) I thusturn to the remainder of the Jones Motor analysis.

The second and third Jones Motor factors look to whether the"litigation machinery has been substantially invoked," whetherthe parties were well into their preparation for the suit, andwhether trial of the matter was close at hand beforearbitration was raised. Id.; see also American Recovery Corp.v. Computerized Thermal Imaging, Inc., 96 F.3d 88, 96 (4th Cir.1996) (finding that a party did not waive its right toarbitration by filing two declaratory judgment actions). Thesefactors cut against a finding of waiver in this case. Lehmanurges us to consider a "two year" delay by the plaintiffs inraising arbitration, but that description belies the unusualprocedural history of this case. Just weeks after the complaintwas filed, this case was stayed for nearly a year, after whichLehman filed its answer and motion to dismiss. No discovery hasyet taken place. Similarly unavailing is Lehman's attempt toimpute to plaintiffs the actions of the SEC; plaintiffs presencein that case as interested parties does not somehow conflatethat action with this one. Plaintiffs never moved to intervenein that action, and their participation as amici, and presenceat hearings, are not enough to constitute a waiver of theirrights in a separate — albeit related — suit.

The fifth Jones Motor factor looks to whether "importantintervening steps," such as the parties taking advantage ofjudicial discovery, have taken place. As mentioned above, nodiscovery has taken place in this case. On this point, Lehmanargues that, by forcing Lehman to answer, plaintiffs havereceived the benefit of Lehman's "full explication of itsposition on the facts and the law, without having to subjectthemselves to any discovery . . ." (Lehman Reply Mem. at 13).As a threshold matter, Lehman had the option of filing themotion to dismiss in lieu of the answer pursuant to Fed.R.Civ.P.12(b). Moreover, nothing in Lehman's answer or motion to dismissrevealed facts or positions of which any competent opposingparty would not be aware. Furthermore, Lehman's work to datewill hardly be wasted; it can argue its well-supported positionsat arbitration. Lehman now has extensive familiarity with theplaintiffs' positions as well, stemming from their participationas amici and the affidavits provided by plaintiffs at therequest of the SEC. Both sides will be able to take advantage ofthe large body of discovery from the SEC action.

The heartland of the parties' dispute involves the sixth andfinal factor in the Jones Motor waiver analysis: prejudice.Lehman argues that a defendant asserting that a plaintiffhas waived arbitration rights need not show that it has beenprejudiced by the plaintiffs delay in switching forums.Plaintiffs assert that the First Circuit now explicitly requiresprejudice as a necessary pre-condition to finding waiver.

It has long been clear that a plaintiff asserting waiver ofarbitration by a defendant must show prejudice caused by thedefendant's delay. See Commercial Union Ins. Co. v. GilbaneBldg. Co., 992 F.2d 386, 390 (1st Cir. 1993); Page, 806 F.2dat 293-94; Sevinor v. Merrill Lynch, Pierce, Fenner & Smith,Inc., 807 F.2d 16, 18 (1st Cir. 1986) (requiring plaintiffs toshow prejudice in order to prevail on a claim of waiver).Interestingly, the First Circuit hinted in a 1995 decision thatthe prejudice consideration might not be dispositive, but thecourt did not reformulate its previous approach. See MenorahIns. Co., Ltd. v. INX Reinsurance Corp., 72 F.3d 218, 221 (1stCir. 1995) (finding, given the facts of the case, no reason todecide whether to follow a "litmus test of a showing ofprejudice" or a totality of the circumstances approach). But themost recent pronouncements from this circuit on the matter are,in the opinion of this Court, unequivocal: "The party opposingthe motion to compel arbitration — that is, the party urging awaiver — must show prejudice." Navieros Inter-Americanos, 120F.3d at 316;6 accord Brennan v.King, 139 F.3d 258, 263 (1st Cir. 1998) (finding no waiver ofarbitration where the party opposing arbitration was not"prejudiced by the delay" in seeking arbitration).

In determining whether a party opposing arbitration has shownprejudice, courts have looked to whether that party's legalposition has been affected by the other party's delay in seekingarbitration. See Ballard Shipping, 752 F. Supp. at 551 (citingStone v. E.F. Hutton & Co., 898 F.2d 1542, 1543 (11th Cir.1990)) (finding prejudice where the moving party's delay allowedit to raise the defense of laches against defendant); see alsoSweater Bee by Banff Ltd. v. Manhattan Indus., Inc.,754 F.2d 457, 466 (2d Cir. 1985) (looking to "changed circumstances"between the parties in order to resolve the prejudice question).

In some circumstances, the delay itself has been found to beprejudicial, but only where the facts suggest that the partyopposing arbitration has incurred significant prejudice that itwould otherwise have avoided. See Navieros Inter-Americanos,120 F.3d at 316 (finding prejudice, despite only one month delayfrom filing of complaint to request to arbitrate, where therequest came on the eve of trial after the parties had"scrambled to prepare their cases"); Menorah Ins., 72 F.3d at221 (finding prejudice where the moving party initially declinedan invitation to arbitrate, allowed a default judgment to beentered against them, and raised arbitration on eve of havingjudgment entered against them).

Lehman asserts that if it had known plaintiffs intended toarbitrate, it would have insisted on going forward witharbitration rather than waiting for the result of the SEClitigation. This seems a rather makeweight argument, sinceLehman's position — either in litigation or in arbitration — wasstrengthened by the outcome of the SEC case. A stay in thismatter benefitted both parties; it seems highly unlikely thatLehman would have opted to engage in dual, concurrent legalproceedings had plaintiff sought intervention earlier. As forLehman's lament, in passing, that certain witnesses have leftLehman's employ since the filing of plaintiffs' complaint, thereis no indication that these individuals are now unavailable toLehman should it need to call them.

Finally, Lehman asserts that the expense it incurred inpreparing its motion to dismiss is sufficient to constituteprejudice. But the expense of filing responsive pleadings hasnot been held to be sufficient prejudice in the Page andJones Motor waiver analysis. See, e.g., Lifetime Med.,780 F. Supp. at 885 (finding no prejudice to plaintiff, despite thefact that an answer and cross-claim were filed and that thediscovery period had nearly expired before defendant raisedarbitration). Prejudice does not arise from the fact that Lehmanmust now prepare its case before a new tribunal. See Page, 806F.2d at 294 (finding no prejudice despite plaintiffs argumentthat it would need to "restart the entire process" nearly twoyears after the complaint was filed). Moreover, this Court caneasily cure any monetary loss to Lehman by requiring plaintiffsto pay the attorneys fees and expenses incurred in preparing themotion to dismiss. As for Lehman's allegation that plaintiffs'actions resulted in the freezing of $4 million of its funds forover two years, here again Lehman is imputing to plaintiffs theactions of the SEC.

Lehman argues that applying the Jones Motor framework inthis manner naivelymisses the point: plaintiffs are discovering a new-found desireto arbitrate because they now face negative First Circuitprecedent well-briefed by Lehman in its motion to dismiss andwant another bite of the apple in a different, perhaps morefavorable, forum. See SEC v. Lehman, 157 F.3d 2; Greebel v.FTP Software, 194 F.3d 185, 196 (1st Cir. 1999) (requiringplaintiff in suit under PSLRA to plead facts which give rise toa "strong inference" of scienter). Lehman's argument is welltaken. The outcome of the SEC action, in combination with theGreebel decision, makes the plaintiffs' prospects for successrather bleak. See also In re Centennial Technologies Litig.,No. 97-10304-REK (Mass. Oct. 23, 1999) Practice and ProcedureOrder No. 8 at 2-3 (allowing Lehman's motion to dismiss in arelated class action because plaintiffs failed to meet pleadingrequirements on scienter required by the PSLRA).

Indeed, the court in Jones Motor discouraged courts fromallowing "a party sensing an adverse court decision a secondchance in another forum." Jones Motor, 671 F.2d at 43; seealso Morales Rivera, 418 F.2d at 726 (holding that plaintiffs'"suddenly discovered affection for arbitration" came too latewhen the claim was made after the action was dismissed withprejudice for failure to prosecute). Moreover, "[a]rbitrationclauses were not meant to be another weapon in the arsenal forimposing delay and costs in the dispute resolution process."Menorah Ins., 72 F.3d at 222. But the circumstances underwhich courts have invoked these principles differ significantlyfrom the facts of this case. See, e.g., Jones Motor, 671 F.2dat 44 (finding waiver where the parties had engaged inconsiderable discovery, and cross-motions for summary judgmenthad been filed and decided before the defendant moved to compelarbitration); Menorah Ins., 72 F.3d at 221 (finding waiverwhere defendant refused original request for arbitration andlitigation had been proceeding for over a year); cf. MoralesRivera, 418 F.2d at 726 (denying plaintiff's motion to vacatedismissal and compel arbitration where case had been dismissedwith prejudice for plaintiffs failure to prosecute); ReidBurton Constr., Inc., 614 F.2d at 701 (finding that defendantswere properly denied the right to arbitrate where both partieshad prepared for trial, the defendants had denied they weresubject to the bargaining agreement providing for arbitration,and the defendants did not indicate desire to arbitrate untiltrial was underway).

This litigation simply has not proceeded so far thatplaintiffs' motion to stay could only be described as amanipulation of this Court. The litigation was filed within daysof the running of the statute of limitation, and plaintiffsclaim that a suit was the only way to preserve the status quo ina forum in which all the defendants, including Mr. Pinez,7could be joined. It was consistent with judicial economy for allparties to await the outcome of the circuit appeal rather thanproceed in two fora simultaneously. In the unusual context ofthis litigation, and in light of the vigorous policy favoringarbitration, I conclude that plaintiffs' conduct before thisCourt does not amount to an implicit waiver either under alitmus test requiring a show of prejudice, or a totality ofcircumstances test which considers prejudice as one factor.

ORDER

For the foregoing reasons, I ALLOW plaintiffs' motion tostay this action pending arbitration (Docket No. 10). However,as a condition of the stay, plaintiffs shall be required tocompensate defendant for the reasonable attorneys fees andexpenses incurred in preparing and pressing its motion todismiss. The cross-motion of Lehman to enjoin arbitration(Docket No. 13)is DENIED. The motion to dismiss (Docket No. 5) is DENIED.

1. Count II of the complaint alleges that Lehman violatedSection 10(b) of the Exchange Act, 15 U.S.C. § 78j(b) andRule 1Ob-5 promulgated by the Securities and Exchange Commission("SEC"), 17 C.F.R. § 240.10b-5. Count IV alleges that Lehmanviolated the Illinois Consumer Fraud and Deceptive TradePractices Act, 815 ILCS 505/1 et seq.

2. They filed it days before the statute of limitations onthe claim of violation of Section 10(b) arguably would haveexpired.

3. The Federal Arbitration Act, 9 U.S.C. § 3, states asfollows:

If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending . . . shall on application of one of the parties stay the trial of the action . . . providing the applicant for the stay is not in default in proceeding with such arbitration.

4. Under CBOE rules, a dispute between members "which arisesout of the Exchange business of such parties shall, at therequest of any such party and the approval of the Exchange'sDirector of Arbitration, be submitted to arbitration inaccordance with these rules." CBOE Rule 18.1(a), ¶ 2511.

5. Although the FAA speaks in terms of a party being in"default," courts have construed this term as analogous to"waiver." See In Matter of Complaint of Ballard Shipping Co.,752 F. Supp. 546, 548 n. 2 (R.I. 1990).

6. The Seventh Circuit has taken the position that "anelection to proceed before a nonarbitral tribune for theresolution of a contractual dispute is a presumptive waiver ofthe right to arbitrate." Cabinetree of Wisconsin, Inc. v.Kraftmaid Cabinetry, Inc., 50 F.3d 388, 390 (7th Cir. 1995).However, even Cabinetree recognized that it was easy toimagine situations in which invocation of the judicial processdid not signify an intention to proceed in court to theexclusion of arbitration, and in those "abnormal" cases, "thedistrict court should find no waiver or should permit a previouswaiver to be rescinded." Id. at 390-91. The court foundoccasion to distinguish Cabinetree on this basis in IowaGrain Co. v. Brown, 171 F.3d 504, 509-10 (7th Cir. 1999), whereplaintiffs had originally filed a class action in district court(the class form being unavailable in arbitration), but thenpromptly moved to compel arbitration when the class action wasdismissed.

7. Mr. Pinez has been incarcerated since 1997.

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