Federal District Court Holds that Investor in Hedge Fund that Invested in Madoff Operation Must Arbitrate His Claims against the Financial Adviser Who Recommended Investment in the Hedge Fund

Plaintiff Larry Wald (Wald) had a long business relationship with defendants 1 Financial Marketplace Securities, LLC (1 Financial Securities), and its Chief Executive Officer, Kevin M. Ross (Ross).  In 2002, in connection with the opening of an IRA account, Wald signed client account forms required by 1 Financial Securities.  The agreement contained a provision that called for any dispute “arising out of or relating to your business or this agreement” to be submitted to arbitration.  From 2007 through February 2008, Ross solicited investments by Wald in a hedge fund run by affiliates of the defendants.  The fund turned out to be a Madoff feeder fund and Wald’s entire investment was lost.  Wald sued the defendants in federal court, alleging various counts of federal and state securities fraud, breach of fiduciary duty, breach of contract and similar claims.  Defendants, pointing to the arbitration clause in the client agreement, moved to compel arbitration.  On October 5, 2009, the district court agreed that the arbitration clause was applicable to Wald’s claims, even though the investment was not made through 1 Financial Securities, and directed the parties to arbitrate the dispute.  This article examines the relevant facts and explains the court’s reasoning.

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