Robert Fazio v. Lehman Brothers, Inc.; Lehman Brothers Holdings, Inc.

1
RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
ELECTRONIC CITATION: 2003 FED App. 0284P (6th Cir.)
File Name: 03a0284p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
No. 02-3820
ROBERT FAZIO, et al.,
Plaintiffs-Appellees,
v.
LEHMAN BROTHERS, INC.;
LEHMAN BROTHERS
HOLDINGS, INC.,
Defendants,
S.G. COWEN SECURITIES
CORPORATION; SOCIETE
GENERALE,
Defendants-Appellants,
HAMBRECHT & QUIST, INC.;
J.P. MORGAN CHASE &
COMPANY,
Defendants.
No. 02-3821
ROBERT FAZIO, et al.,
Plaintiffs-Appellees,
v.
LEHMAN BROTHERS, INC.;
LEHMAN BROTHERS
HOLDINGS, INC.,
Defendants-Appellants,
S.G. COWEN SECURITIES
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Nos. 02-3820/
3821/3822/3823/
3824/3825/3826/
3867/3868/3869/
3870/3873/3874;
03-3041/3042/
3043/3045/3112/
3113/3258
2 Fazio, et al. v.
Lehman Bros.,
et al.
Nos. 02-3820/3821/3822/3823/
3824/3825/3826/3867/3868/3869/
3870/3873/3874; 03-3041/3042/
3043/3045/3112/3113/3258
CORPORATION; SOCIETE
GENERALE; HAMBRECHT &
QUIST, INC.; J.P. MORGAN
CHASE & COMPANY,
Defendants.
No. 02-3822
ROBERT FAZIO, et al.,
Plaintiffs-Appellees,
v.
LEHMAN BROTHERS, INC.;
LEHMAN BROTHERS
HOLDINGS, INC.; S.G. COWEN
SECURITIES CORPORATION;
SOCIETE GENERALE,
Defendants,
HAMBRECHT & QUIST, INC.;
J.P. MORGAN CHASE &
COMPANY,
Defendants-Appellants.
No. 02-3823
ROBERT FAZIO, et al.,
Plaintiffs,
SAMUEL GLAZER,
Plaintiff-Appellee,
v.
LEHMAN BROTHERS, INC.;
LEHMAN BROTHERS
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Nos. 02-3820/3821/3822/3823/
3824/3825/3826/3867/3868/3869/
3870/3873/3874; 03-3041/3042/
3043/3045/3112/3113/3258
Fazio, et al. v.
Lehman Bros.,
et al.
3
HOLDINGS, INC.,
Defendants,
S.G. COWEN SECURITIES
CORPORATION; SOCIETE
GENERALE,
Defendants-Appellants.
No. 02-3824
ROBERT FAZIO, et al.,
Plaintiffs,
SAMUEL GLAZER,
Plaintiff-Appellee,
v.
LEHMAN BROTHERS, INC.;
LEHMAN BROTHERS
HOLDINGS, INC.,
Defendants-Appellants,
S.G. COWEN SECURITIES
CORPORATION; SOCIETE
GENERALE; HAMBRECHT &
QUIST, INC.; J.P. MORGAN
CHASE & COMPANY,
Defendants.
No. 02-3825
ROBERT FAZIO, et al.,
Plaintiffs,
DOMINIC A. VISCONSI, SR., et
al.,
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4 Fazio, et al. v.
Lehman Bros.,
et al.
Nos. 02-3820/3821/3822/3823/
3824/3825/3826/3867/3868/3869/
3870/3873/3874; 03-3041/3042/
3043/3045/3112/3113/3258
Plaintiffs-Appellees,
v.
LEHMAN BROTHERS, INC.;
LEHMAN BROTHERS
HOLDINGS, INC.,
Defendants,
S.G. COWEN SECURITIES
CORPORATION; SOCIETE
GENERALE,
Defendants-Appellants.
No. 02-3826
ROBERT FAZIO, et al.,
Plaintiffs,
DOMINIC A. VISCONSI, SR., et
al.,
Plaintiffs-Appellees,
v.
LEHMAN BROTHERS, INC.;
LEHMAN BROTHERS
HOLDINGS, INC.,
Defendants-Appellants,
S.G. COWEN SECURITIES
CORPORATION; SOCIETE
GENERALE,
Defendants.
No. 02-3867
PETER A. SPITALIERI,
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Nos. 02-3820/3821/3822/3823/
3824/3825/3826/3867/3868/3869/
3870/3873/3874; 03-3041/3042/
3043/3045/3112/3113/3258
Fazio, et al. v.
Lehman Bros.,
et al.
5
Plaintiff-Appellee,
v.
LEHMAN BROTHERS, INC.;
LEHMAN BROTHERS
HOLDINGS, INC.,
Defendants,
S.G. COWEN SECURITIES
CORPORATION; SOCIETE
GENERALE,
Defendants-Appellants.
No. 02-3868
PETER A. SPITALIERI,
Plaintiff-Appellee,
v.
LEHMAN BROTHERS, INC.;
LEHMAN BROTHERS
HOLDINGS, INC.,
Defendants-Appellants,
S.G. COWEN SECURITIES
CORPORATION; SOCIETE
GENERALE,
Defendants.
No. 02-3869
RICHARD LOPARDO, et al.,
Plaintiffs-Appellees,
v.
LEHMAN BROTHERS, INC.;
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6 Fazio, et al. v.
Lehman Bros.,
et al.
Nos. 02-3820/3821/3822/3823/
3824/3825/3826/3867/3868/3869/
3870/3873/3874; 03-3041/3042/
3043/3045/3112/3113/3258
LEHMAN BROTHERS
HOLDINGS, INC.,
Defendants,
S.G. COWEN SECURITIES
CORPORATION,
Defendant-Appellant.
No. 02-3870
RICHARD LOPARDO, et al.,
Plaintiffs-Appellees,
v.
LEHMAN BROTHERS, INC.,
Defendant-Appellant,
S.G. COWEN SECURITIES
CORPORATION,
Defendant.
No. 02-3873
PETER M. BONUTTI, M.D.,
Plaintiff-Appellee,
v.
LEHMAN BROTHERS, INC.,
Defendant,
S.G. COWEN SECURITIES
CORPORATION,
Defendant-Appellant.
No. 02-3874
PETER M. BONUTTI, M.D.,
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Nos. 02-3820/3821/3822/3823/
3824/3825/3826/3867/3868/3869/
3870/3873/3874; 03-3041/3042/
3043/3045/3112/3113/3258
Fazio, et al. v.
Lehman Bros.,
et al.
7
Plaintiff-Appellee,
v.
LEHMAN BROTHERS, INC.,
Defendant-Appellant,
S.G. COWEN SECURITIES
CORPORATION,
Defendant.
No. 03-3041
ROBERT FAZIO, et al.,
Plaintiffs-Appellees,
v.
COWEN & COMPANY,
Defendant-Appellant.
Nos. 03-3042/3258
DOMINIC A. VISCONSI, SR., et
al.,
Plaintiffs-Appellees,
v.
COWEN & COMPANY,
Defendant-Appellant.
No. 03-3043
RICHARD LOPARDO, et al.,
Plaintiffs-Appellees,
v.
COWEN & COMPANY,
Defendant-Appellant.
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8 Fazio, et al. v.
Lehman Bros.,
et al.
Nos. 02-3820/3821/3822/3823/
3824/3825/3826/3867/3868/3869/
3870/3873/3874; 03-3041/3042/
3043/3045/3112/3113/3258
No. 03-3045
PETER M. BONUTTI, M.D., et
al.,
Plaintiffs-Appellees,
v.
COWEN & COMPANY,
Defendant-Appellant.
No. 03-3112
DOMINIC A. VISCONSI, SR., et
al.,
Plaintiffs-Appellees,
v.
LEHMAN BROTHERS, INC.;
LEHMAN BROTHERS
HOLDINGS, INC.,
Defendants-Appellants.
No. 03-3113
DOMINIC A. VISCONSI, SR., et
al.,
Plaintiffs-Appellees,
v.
S.G. COWEN SECURITIES
CORPORATION; SOCIETE
GENERALE,
Defendants-Appellants.
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Nos. 02-3820/3821/3822/3823/
3824/3825/3826/3867/3868/3869/
3870/3873/3874; 03-3041/3042/
3043/3045/3112/3113/3258
Fazio, et al. v.
Lehman Bros.,
et al.
9
Appeal from the United States District Court
for the Northern District of Ohio at Cleveland.
Nos. 02-00157; 02-00370; 02-00382; 02-00761; 02-00764;
02-01018—John M. Manos, District Judge.
Argued: June 17, 2003
Decided and Filed: August 13, 2003
Before: NORRIS, DAUGHTREY, and ROGERS, Circuit
Judges.
_________________
COUNSEL
ARGUED: Aaron R. Marcu, COVINGTON & BURLING,
New York, New York, for Appellants. Ari H.Jaffe,
KOHRMAN, JACKSON & KRANTZ, Cleveland, Ohio,
Robert P. Duvin, DUVIN, CAHN & HUTTON, Cleveland,
Ohio, David C. Frederick, KELLOGG, HUBER, HANSEN,
TODD & EVANS, Washington, D.C., Robert B. Casarona,
ROETZEL & ANDRESS, Cleveland, Ohio, John T. Murray,
MURRAY & MURRAY, Sandusky, Ohio, Daniel R. Warren,
BAKER & HOSTETLER, Cleveland, Ohio, for Appellees.
ON BRIEF: Laurence A. Silverman, COVINGTON &
BURLING, New York, New York, Mark O’Neil, Daniel A.
Richards, WESTON, HURD, FALLON, PAISLEY &
HOWLEY, Cleveland, Ohio, James Joseph Bartolozzi,
KAHN, KLEINMAN, YANOWITZ & ARNSON, Cleveland,
Ohio, Michael N. Ungar, Marvin L. Karp, Elin B. Young,
Christopher P. Fisher, ULMER & BERNE, Cleveland, Ohio,
David C. Weiner, Charna E. Sherman, SQUIRE, SANDERS
& DEMPSEY, Cleveland, Ohio, Pierre H. Bergeron,
SQUIRE, SANDERS & DEMPSEY, Cincinnati, Ohio, for
10 Fazio, et al. v.
Lehman Bros.,
et al.
Nos. 02-3820/3821/3822/3823/
3824/3825/3826/3867/3868/3869/
3870/3873/3874; 03-3041/3042/
3043/3045/3112/3113/3258
Appellants. Ari H.Jaffe, KOHRMAN, JACKSON &
KRANTZ, Cleveland, Ohio, Robert P. Duvin, Kenneth D.
Schwartz, DUVIN, CAHN & HUTTON, Cleveland, Ohio,
David C. Frederick, David E. Ross, Antonia Apps, K. Chris
Todd, KELLOGG, HUBER, HANSEN, TODD & EVANS,
Washington, D.C., Hugh E. McKay, PORTER, WRIGHT,
MORRIS & ARTHUR, Cleveland, Ohio, Robert B. Casarona,
Donald S. Scherzer, ROETZEL & ANDRESS, Cleveland,
Ohio, John T. Murray, Barbara Quinn Smith, MURRAY &
MURRAY, Sandusky, Ohio, Daniel R. Warren, Melissa M.
Eckhause, BAKER & HOSTETLER, Cleveland, Ohio, for
Appellees.
_________________
OPINION
_________________
ALAN E. NORRIS, Circuit Judge. This dispute arises
from a massive fraud in which Frank Gruttadauria, a
Cleveland stockbroker, misappropriated at least $54 million
of his clients’ money. The plaintiffs, all clients of
Gruttadauria, brought this action against the brokerage houses
for which he worked over the course of his career. The
defendants moved to stay the proceedings and compel
arbitration pursuant to arbitration clauses in the account
agreements. The district court, relying largely on the gross
nature of the fraud, ruled that the arbitration clauses in the
agreements did not apply to the dispute and set the case for
trial. The defendants appeal this decision. Thus, the only
question of law in this interlocutory appeal is whether
similarly worded arbitration clauses in the plaintiffs’
brokerage account agreements mandate arbitration of their
claims.

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Nos. 02-3820/3821/3822/3823/
3824/3825/3826/3867/3868/3869/
3870/3873/3874; 03-3041/3042/
3043/3045/3112/3113/3258
Fazio, et al. v.
Lehman Bros.,
et al.
11
I
Frank Gruttadauria was a stockbroker for the defendant
brokerage houses or firms that were purchased by them. As
early as 1987, Gruttadauria began to send falsified statements
to his clients that significantly overstated the value of their
accounts. Gruttadauria had incurred significant losses in
some of these accounts, and he falsified statements to cover
this up.
To make good when clients requested withdrawals from
their inflated accounts, Gruttaduaria either used new deposits
by other clients or withdrew funds from other clients’
accounts to make payments. In a separate criminal
proceeding against him, Gruttaduaria entered into a plea
agreement in which he admitted taking $54 million in
“unauthorized withdrawals” between 1996 and 2002 alone.
He also admitted that he gained at least $1 million personally
from the fraud.
Gruttaduaria’s scheme eventually collapsed. According to
the plea agreement, by 2001 Gruttadauria’s clients’ accounts
had a paper value of $278 million, while their actual value
was only $1.8 million. Gruttadauria fled after leaving a letter
of confession. In the letter, he claimed that he was the only
person involved in the scheme but implied that the brokerage
houses were grossly negligent for not monitoring his
activities. He later surrendered to authorities and pleaded
guilty to a multi-count federal indictment.
Plaintiffs brought this action against defendants alleging
numerous securities law violations including outright theft
from their accounts. Most plaintiffs also allege churning,
unauthorized trading, and excessive risk taking as well as a
number of other common law and statutory claims. In
denying the defendants’ motions to stay the proceedings and
12 Fazio, et al. v.
Lehman Bros.,
et al.
Nos. 02-3820/3821/3822/3823/
3824/3825/3826/3867/3868/3869/
3870/3873/3874; 03-3041/3042/
3043/3045/3112/3113/3258
compel arbitration, the district court did not provide a
separate analysis for each arbitration agreement. However,
the parties agree that each contains roughly the same
language. The typical arbitration clause in the account
agreements reads, “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.”
The district court held that the arbitration clauses were not
binding because, given the nature of the fraud, the agreements
were void ab intitio and there were effectively no accounts.
In the alternative, the district court held that the fraud alleged
here was not covered by the arbitration clauses. We reverse
the district court and remand with instructions to consider the
particular claims of the parties regarding the validity of the
arbitration clauses standing apart from the account
agreements as a whole.
II
We have jurisdiction over this interlocutory appeal under
9 U.S.C. § 16(a)(1), which provides that an appeal may be
taken from an order refusing to compel arbitration or refusing
to stay an action pending arbitration. We review a district
court’s denial of these motions de novo. Burden v. Check
into Cash of Kentucky, L.L.C., 267 F.3d 483, 487 (6th Cir.
2001); Stout v. J.D. Byrider, 228 F.3d 709, 714 (6th Cir.
2000).
A. Federal Arbitration Act
The Federal Arbitration Act (“FAA”) provides that
arbitration clauses in commercial contracts “shall be valid,
irrevocable, and enforceable, save upon such grounds as exist
at law or in equity for the revocation of any contract.”

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Nos. 02-3820/3821/3822/3823/
3824/3825/3826/3867/3868/3869/
3870/3873/3874; 03-3041/3042/
3043/3045/3112/3113/3258
Fazio, et al. v.
Lehman Bros.,
et al.
13
9 U.S.C. § 2. If a court determines that the cause of action is
covered by an arbitration clause, it must stay the proceedings
until the arbitration process is complete. 9 U.S.C. § 3. In
order to compel arbitration, a court must conduct a hearing,
and:
upon being satisfied that the making of the agreement for
arbitration or the failure to comply therewith is not in
issue, the court shall make an order directing the parties
to proceed to arbitration in accordance with the terms of
the agreement. . . . If the making of the arbitration
agreement or the failure, neglect, or refusal to perform
the same be in issue, the court shall proceed summarily
to the trial thereof.
9 U.S.C. § 4.
Under the statute, a district court must make a number of
threshold determinations before compelling arbitration:
When considering a motion to stay proceedings and
compel arbitration under the Act, a court has four tasks:
first, it must determine whether the parties agreed to
arbitrate; second, it must determine the scope of that
agreement; third, if federal statutory claims are asserted,
it must consider whether Congress intended those claims
to be nonarbitrable; and fourth, if the court concludes
that some, but not all, of the claims in the action are
subject to arbitration, it must determine whether to stay
the remainder of the proceedings pending arbitration.
228 F.3d at 714.
It is a well-established rule that any doubts regarding
arbitrability should be resolved in favor of arbitration. Moses
H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1,
14 Fazio, et al. v.
Lehman Bros.,
et al.
Nos. 02-3820/3821/3822/3823/
3824/3825/3826/3867/3868/3869/
3870/3873/3874; 03-3041/3042/
3043/3045/3112/3113/3258
24-25 (1983). In addition, the Supreme Court has held that
the FAA preempts state laws and policies regarding
arbitration. Southland Corp. v. Keating, 465 U.S. 1, 10-11
(1984). State contract law, however, governs in determining
whether the arbitration clause itself was validly obtained,
provided the contract law applied is general and not specific
to arbitration clauses. Doctor’s Assoc., Inc. v. Casarotto, 517
U.S. 681, 686-87 (1996); First Options of Chicago, Inc. v.
Kaplan, 514 U.S. 938, 944 (1995); Great Earth Cos. v.
Simons, 288 F.3d 878, 889 (6th Cir. 2002).
The leading Supreme Court case dealing with fraud and
arbitration agreements is Prima Paint Corp. v. Flood &
Conklin Manufacturing Co., 388 U.S. 395 (1967). There, the
Supreme Court held that a “claim of fraud in the inducement
of the entire contract” is a matter to be resolved by the
arbitrators, not the federal courts. Id. at 402-04. However, if
there was a fraud that “goes to the ‘making’ of the agreement
to arbitrate,” then a federal court may adjudicate. Id. at 403-
04. In so holding, the Court relied on the explicit statutory
language of section 4 of the FAA:
Under [section] 4, with respect to a matter within the
jurisdiction of the federal courts save for the existence of
an arbitration clause, the federal court is instructed to
order arbitration to proceed once it is satisfied that ‘the
making of the agreement for arbitration or the failure to
comply (with the arbitration agreement) is not in issue.’
Accordingly, if the claim is fraud in the inducement of
the arbitration clause itself--an issue which goes to the
‘making’ of the agreement to arbitrate--the federal court
may proceed to adjudicate it. . . . We hold, therefore, that
in passing upon a [section] 3 application for a stay while
the parties arbitrate, a federal court may consider only

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Nos. 02-3820/3821/3822/3823/
3824/3825/3826/3867/3868/3869/
3870/3873/3874; 03-3041/3042/
3043/3045/3112/3113/3258
Fazio, et al. v.
Lehman Bros.,
et al.
15
issues relating to the making and performance of the
agreement to arbitrate.
Id. (footnotes omitted). Thus, even if there was fraudulent
inducement to sign the contract as a whole, by the terms of
sections 3 and 4 of the FAA, the arbitration clause is
severable and will only be voided for fraudulent inducement
in its making. See also Ferro Corp. v. Garrison Indus., 142
F.3d 926, 933 (6th Cir. 1998) (“[T]he Supreme Court has held
that once a court determines that the agreement to arbitrate
has not been fraudulently induced, all other issues falling
within that agreement are to be sent to arbitration.”) (citing
Prima Paint at 403-04).
This basic analysis does not change when applied to
securities fraud claims. In Shearson/American Express, Inc.
v. McMahon, 482 U.S. 220 (1987), the Supreme Court
rejected an attempt to carve out an exception for Securities
and Exchange Act violations. In doing so, the Court
specifically approved the arbitration procedures of the New
York Stock Exchange, the American Stock Exchange, and the
NASDAQ, which are the arbitration fora specified in the
account agreements at issue here. Id. at 233-34.
B. Validity of the Arbitration Agreements in Light of the
Fraud
Before a court can send a case to arbitration, it must first
determine that a valid agreement to arbitrate exists. 9 U.S.C.
§ 2; Stout, 228 F.3d at 714. An arbitration agreement may be
invalidated for the same reasons for which any contract may
be invalidated, including forgery, unconscionability, and lack
of consideration. Casarotto, 517 U.S. at 687. “[O]rdinary
state-law principles that govern the formation of contracts”
will apply to this analysis. First Options, 514 U.S. at 944.
16 Fazio, et al. v.
Lehman Bros.,
et al.
Nos. 02-3820/3821/3822/3823/
3824/3825/3826/3867/3868/3869/
3870/3873/3874; 03-3041/3042/
3043/3045/3112/3113/3258
The district court held that, because the money in the
accounts was largely stolen and Gruttadauria had no intention
of acting as a true broker for the plaintiffs, no account
agreements really existed, thus making the agreements void
ab initio and invalidating the arbitration clauses.
Memorandum of Opinion, July 19, 2002 at 7. The district
court distinguished Prima Paint, arguing that it was not
applicable to “challenges to the very existence of the contract
on the grounds that there was never an agreement at all.” Id.
In addition, the district court held that because of the theft
there were no “accounts,” and hence the account agreements
are unenforceable. Id. at 7-8.
This reasoning is not consistent with two cases from this
court that enforced arbitration clauses in securities fraud
cases. Arnold v. Arnold Corp.-Printed Communications For
Bus., 920 F.2d 1269 (6th Cir. 1990); C.B.S. Employees Fed.
Credit Union v. Donaldson, Lufkin and Jenrette Sec. Corp.,
912 F.2d 1563 (6th Cir. 1990).
In Arnold, we held that, in order to void an arbitration
clause, the complaint must contain a “well-founded claim of
fraud in the inducement of the arbitration clause itself,
standing apart from the whole agreement, that would provide
grounds for the revocation of the agreement to arbitrate.” Id.
at 1278; Great Earth, 288 F.3d at 890 (quoting Arnold). In
addition, we noted that, under Prima Paint, allegations of
fraudulent schemes are “no longer sufficient to overcome the
strong federal policy in favor of arbitration.” Arnold, 920
F.2d at 1281.
In C.B.S. Employees, the defendant brokerage house
allegedly engaged in a large volume of unauthorized trades
that resulted in substantial losses to an employees’ credit
union. The credit union brought an action alleging violations

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Nos. 02-3820/3821/3822/3823/
3824/3825/3826/3867/3868/3869/
3870/3873/3874; 03-3041/3042/
3043/3045/3112/3113/3258
Fazio, et al. v.
Lehman Bros.,
et al.
17
1Some of the plaintiffs assert that the criminal conduct alleged voids
the arbitration clause. However, claims that, if true, amount to criminal
behavior under RIC O and antitrust laws have been held arbitrable by the
Supreme Court. See Shearson/American Exp., Inc. v. McMahon, 482 U.S.
at 239-240. In addition, all parties and the district court seem to agree that
churning is arbitrable. Mem orandum of Opinion, July 19, 2002 at 12-13.
Churning, however, is a criminal act. See, e.g., United States v. Trask ,
143 F. Supp. 2d 88, 89 (D. Mass. 2001) (discussing a 15-month prison
sentence for a conviction under Securities and Exchange Act based solely
on churning).
of federal and state securities laws, as well as the Racketeer
Influenced and Corrupt Organizations Act (“RICO”). We
rejected the argument that the underlying fraud voided the
arbitration agreements and held that “[t]he central issue,
reduced to its simplest, is whether [plaintiff’s] claim of fraud
relates to the making of the arbitration agreement.” Id. at
1566.
This court reinforced these rules recently in Burden, a case
involving consumer fraud in a check cashing/loan scheme in
which the true interest rate was allegedly over 500% that
which was stated in the loan agreements. Burden, 267 F.3d
at 486-87. In addition to the fraud, the defendants had also
allegedly failed to obtain the proper state loan licenses. Id. at
489. Under the Kentucky law applied in Burden, loan
agreements made without a license or in violation of certain
other provisions of state law are void by statute. Id. at 490.
The court concluded that the contract may well be void and
rife with fraud, but these facts do not void the arbitration
clause, which must be analyzed independently.1 Id. at 490,
492.
The district court also found that, given the theft, no
accounts existed and that this invalidated the arbitration
clauses. This legal conclusion, however, conflicts with the
18 Fazio, et al. v.
Lehman Bros.,
et al.
Nos. 02-3820/3821/3822/3823/
3824/3825/3826/3867/3868/3869/
3870/3873/3874; 03-3041/3042/
3043/3045/3112/3113/3258
holding of an intervening case decided by this court. In
Javitch v. First Union Securities, Inc., 315 F.3d 619, 628 (6th
Cir. 2003), we rejected the argument that arbitration clauses
were void because of a fraudulent account and instead
focused on the validity of the arbitration clauses standing
alone.
In sum, when claims involve “the validity of the contract as
a whole” and not just the arbitration agreement, “[s]uch
claims are to be brought before the arbitrator, not the district
court in deciding a petition to compel arbitration.” Great
Earth, 288 F.3d at 892 (citing Prima Paint, 388 U.S. at 404);
see also Burden, 267 F.3d at 491.
C. Scope of the Arbitration Agreements
District courts have the authority to decide, as a threshold
matter, whether an issue is within the scope of an arbitration
agreement. Stout, 228 F.3d at 714. A proper method of
analysis here is to ask if an action could be maintained
without reference to the contract or relationship at issue. If it
could, it is likely outside the scope of the arbitration
agreement. Ford v. NYLCare Health Plans of Gulf Coast,
Inc., 141 F.3d 243, 250-51 (5th Cir. 1998) (applying Texas
arbitration law under a choice of law provision). Torts may
often fall into this category, but merely casting a complaint in
tort does not mean that the arbitration provision does not
apply. Fyrnetics (Hong Kong) Ltd. v. Quantum Group, Inc.,
293 F.3d 1023, 1030 (7th Cir. 2002). Even real torts can be
covered by arbitration clauses “[i]f the allegations underlying
the claims ‘touch matters’ covered by the [agreement].”
Genesco, Inc. v. T. Kakiuchi & Co., Ltd., 815 F.2d 840, 846
(2d Cir. 1987). We are, however, aware of the Supreme
Court’s warning against “forc[ing] unwilling parties to
arbitrate a matter they reasonably would have thought a

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Nos. 02-3820/3821/3822/3823/
3824/3825/3826/3867/3868/3869/
3870/3873/3874; 03-3041/3042/
3043/3045/3112/3113/3258
Fazio, et al. v.
Lehman Bros.,
et al.
19
judge, not an arbitrator, would decide.” First Options, 514
U.S. at 945.
The district court held in the alternative that the allegations
of theft placed the dispute outside the scope of the arbitration
provision by reasoning as follows:
Generally, the underlying basis for the Plaintiffs’
claims is Gruttadauria’s alleged theft of their assets. . . .
Conduct amounting to theft is so beyond what is
expected from a broker that such conduct could not have
been within the reasonable contemplation of the
Plaintiffs when they signed the alleged account
agreements.
Memorandum of Opinion, July 19, 2002 at 8-9.
However, it is evident that the fraudulent activities were a
violation of the account agreements and arose out of
activities contemplated by those agreements–the sale and
purchase of securities and the management of accounts. The
lawsuit by necessity must describe why Gruttadauria was in
control of the plaintiffs’ money and what the brokerage
houses’ obligations were. The plaintiffs therefore cannot
maintain their action without reference to the account
agreements, and accordingly, this action is covered by the
arbitration clauses.
Plaintiffs claim that Gruttadauria’s outrageous conduct was
unforeseeable, and hence they could not have anticipated
arbitrating such claims. However, it is far from clear that the
conduct here was unforeseeable. Aggregating the losses of all
the parties, as the plaintiffs frequently do, leads to a shocking
total loss. But analyzed individually, it is foreseeable that
churning, unauthorized risk taking, and illegal transfers to
third parties could destroy the value of an individual account.
20 Fazio, et al. v.
Lehman Bros.,
et al.
Nos. 02-3820/3821/3822/3823/
3824/3825/3826/3867/3868/3869/
3870/3873/3874; 03-3041/3042/
3043/3045/3112/3113/3258
Furthermore, the arbitration agreements are quite broad:
“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.” We take the
arbitration agreements at their word, and hold that any dispute
arising out of (or that must make reference to) the agreements,
accounts, or transactions conducted by the defendants is
subject to arbitration.
The district court itself noted that churning, unauthorized
trading, and excessive risk-taking are clearly foreseeable
problems in a brokerage account and are encompassed by the
arbitration agreement. Memorandum of Opinion, July 19,
2002 at 12-13. Most of the parties here allege churning,
unauthorized trading, and excessive risk-taking in addition to
alleging outright theft, and all parties allege either negligent
hiring or violation of explicit or implied contracts. Under the
district court’s own analysis, those claims should have been
given to an arbitrator. See Stout, 228 F.3d at 714 (“[I]f the
court concludes that some, but not all, of the claims in the
action are subject to arbitration, it must determine whether to
stay the remainder of the proceedings pending arbitration.”)
In addition, the churning, excessive risk-taking, and
unauthorized trading claims were part of the same fraudulent
scheme and at the very least create doubts about the
arbitrability of the theft claims, which should have been
resolved in favor of arbitration as the Supreme Court directed
in Cone Memorial Hospital.
D. Mutuality of Obligation
The Supreme Court has held that, under the FAA, state law
contract defenses such as fraud, duress, and unconscionability
may be applied by courts to invalidate arbitration agreements.

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Nos. 02-3820/3821/3822/3823/
3824/3825/3826/3867/3868/3869/
3870/3873/3874; 03-3041/3042/
3043/3045/3112/3113/3258
Fazio, et al. v.
Lehman Bros.,
et al.
21
Casarotto, 517 U.S. at 687. Mutuality has been included in
that list as well. Burden, 267 F.3d at 491 (quoting
Matterhorn, Inc. v. NCR Corp., 763 F.2d 866, 868 (7th Cir.
1985)). This circuit has previously refused to compel
arbitration on the grounds that an arbitration clause lacked
mutuality when an arbitration service chosen by an employer
retained the right to modify its rules without the employee’s
consent. Floss v. Ryan’s Family Steak Houses, Inc., 211 F.3d
306, 315-16 (6th Cir. 2000) (applying Kentucky and
Tennessee law).
Plaintiffs argue that the arbitration agreements here lack
mutuality because of the extensive self-help remedies in the
account agreements that permit the defendants to seize the
accounts of the plaintiffs for basically any breach of the
account agreement. They argue that the defendants would
never have to arbitrate a claim given this self-help provision,
and therefore the clauses are unenforceable because there is
no mutuality of obligation. The main case cited to support
this notion is a California case, Flores v. Transamerica
HomeFirst, Inc., 113 Cal. Rptr. 2d 376 (Ct. App. 2001).
There, a California appeals court held that the right of
HomeFirst to foreclose prior to or during arbitration made the
arbitration provisions “unconscionable.” Id. at 382. To be
enforceable, the court held that the arbitration agreement must
at least contain a “modicum of bilaterality.” Id.
Ohio law applies here, and there is no indication that Ohio
courts have adopted the California rule. On the contrary, an
Ohio Appeals Court recently held that mutuality is not a
requirement of a valid arbitration clause if the underlying
contract is supported by consideration. Joseph v. M.B.N.A.
Am. Bank, N.A., 148 Ohio App. 3d 660, 664, 775 N.E.2d 550,
553 (2002). This appears to be the general trend. See Harris
v. Green Tree Fin. Corp., 183 F.3d 173, 179-80 (3rd Cir.
22 Fazio, et al. v.
Lehman Bros.,
et al.
Nos. 02-3820/3821/3822/3823/
3824/3825/3826/3867/3868/3869/
3870/3873/3874; 03-3041/3042/
3043/3045/3112/3113/3258
1999) (collecting cases and concluding that mutuality of
obligation is generally satisfied in arbitration agreements if
the underlying contract is supported by consideration). There
is no doubt here that the underlying contract was supported by
consideration.
In addition, plaintiffs cannot rely on this court’s limited
holding in Floss. We distinguished Floss in Morrison v.
Circuit City Stores, Inc., 317 F.3d 646 (6th Cir. 2003) (en
banc), while applying Ohio law. The employment contract at
issue in Morrison provided that only the employee’s claims
were subject to arbitration and that the employer, with thirty
days notice provided on a specified day, could alter the terms
of the arbitration agreement. Id. at 667. While noting that the
mutuality requirement of an arbitration clause is not settled
law in Ohio, Morrison held that the notice provision was
sufficient consideration to preserve mutuality and upheld the
arbitration clause. Id. at 668. The fact that only one party
was bound by the arbitration agreement was not a concern.
While it is true that the self-help provisions give the
brokerage house an upper hand, the arbitration provisions
cover “any dispute,” not just disputes in which the brokerage
houses are defendants. Thus, by the contract’s terms, the
clients have as much a right to force arbitration as the
brokerage houses. The right of self help may make this
occurrence unlikely, but as Morrison and Joseph demonstrate,
the chance that it may happen is sufficient under Ohio law to
preserve mutuality. We therefore hold that, assuming
mutuality of obligation in the arbitration clause is a
requirement under Ohio law, the arbitration clauses here
easily satisfy that requirement.

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Nos. 02-3820/3821/3822/3823/
3824/3825/3826/3867/3868/3869/
3870/3873/3874; 03-3041/3042/
3043/3045/3112/3113/3258
Fazio, et al. v.
Lehman Bros.,
et al.
23
E. Issues Specific to Individual Arbitration Agreements
Because some parties raise issues specific to their
arbitration agreements and because the record below is
undeveloped in this regard, we are unable to conclude
whether the arbitration agreements here are valid. “[A] well-
founded claim of fraud in the inducement of the arbitration
clause itself, standing apart from the whole agreement” may
invalidate an arbitration clause, and district courts are
authorized to make threshold rulings in this regard. Arnold,
920 F.2d at 1278.
It is firmly established that an arbitration clause obtained by
forgery is not valid. See, e.g., Burden, 267 F.3d at 488;
Three Valleys Mun. Water Dist. v. E.F. Hutton & Co., 925
F.2d 1136, 1140 (9th Cir. 1991). Some plaintiffs have
claimed that signatures on account agreements were forged,
and Gruttadauria is a confessed forger. In addition, there are
other valid concerns, such as whether a trust was bound by
the signature of its trustee on separate accounts containing
arbitration agreements and signed in an individual capacity.
It is well-established that a lack of signatory power can
invalidate an arbitration clause. See, e.g., Burden, 267 F.3d
at 489-90.
We cannot reach these fact-intensive issues, and we
therefore “remand Plaintiffs’ allegations that the arbitration
agreements, separate from the loan agreements, are not
enforceable against them on ‘grounds as exist at law or in
equity for the revocation of any contract.’” Burden, 267 F.3d
at 493 (quoting 9 U.S.C. § 2 and Casarotto, 517 U.S. at 683.)
In making this determination, the district court is bound by
this court’s previous directives to district courts in Great
Earth and Javitch. Great Earth requires that, to invalidate the
arbitration clauses, “the evidence presented [must be] such
24 Fazio, et al. v.
Lehman Bros.,
et al.
Nos. 02-3820/3821/3822/3823/
3824/3825/3826/3867/3868/3869/
3870/3873/3874; 03-3041/3042/
3043/3045/3112/3113/3258
that a reasonable finder of fact could conclude that no valid
agreement to arbitrate exists.” 288 F.3d at 889. Javitch
specifies that “[b]efore compelling an unwilling party to
arbitrate, the court must engage in a limited review to
determine whether the dispute is arbitrable; meaning that a
valid agreement to arbitrate exists between the parties.” 315
F.3d at 624 (emphasis added).
III
For the foregoing reasons, the judgment of the district court
is reversed, and this cause is remanded for a determination
of whether the arbitration clauses, analyzed independently
from the account agreements, are valid.

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