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A Philadelphia judge has declined to compel arbitration in a defamation action brought by acquitted “pay-to-play” defendant Denis Carlson against his former employer, stock brokerage firm Janney Montgomery Scott. The case stems from Janney’s firing of Carlson in the summer of 2004 on the grounds that he was under indictment by the federal government in conjunction with its investigation into municipal corruption in Philadelphia and had recently tested positive for cocaine use. In February 2005, Carlson was acquitted by a jury of charges of lying to the Federal Bureau of Investigations about his interactions with local powerbroker Ronald White, whose 2004 death came several months before the various pay-to-play trials got under way, and former city treasurer Corey Kemp, who last year was sentenced to a decade in prison for his involvement in the scheme. In Carlson v. Janney Montgomery Scott, the company claimed there was an arbitration clause included in the registration form that Carlson – like every other U.S. securities professional – had to file with a national oversight body when he became the senior vice president and director of public finance in Janney’s Philadelphia branch in February 2002. But Judge Nitza I. Quinones Alejandro agreed with Carlson that Janney’s motion to compel arbitration should be denied, as the firm was not able to produce a signed copy of the National Association of Securities Dealers “Form U4″ that it alleged Carlson had filled out in 2002. Quinones Alejandro acknowledged that the filing of a U4 with the NASD was pro forma for any securities professional, but she concluded that if a copy of the actual document signed by Carlson could not be produced, she could not order Carlson to submit to arbitration. “At first glance, case law supports in part defendant’s contentions that membership in NASD is required of all securities dealers; that this membership is achieved by the execution of Form U4; and that Form U4 is an integral part of all NASD members’ employment agreement[s],” Quinones Alejandro wrote. “It does not support in total defendant’s argument. This motion judge is unable to grant defendant’s request absent proof that plaintiff did in fact agree to arbitrate disputes occurring during his employment or that he signed Form U4, albeit a prerequisite for employment as a financial consultant or registered representative.” Carlson was indicted in June 2004, when he was 49. Among other things, he was accused of making false statements to the FBI concerning why he had granted Kemp free use of a condominium Carlson owned. During Carlson’s trial in early 2005, various media reported at the time, the jury was played an FBI recording of a July 2003 conversation between White, a friend of and fund-raiser for Mayor John F. Street, and George Burrell, a top Street aide. During that conversation, Burrell, apparently referring to a recently awarded city contract, asked White, “Why are we doing Janney Montgomery Scott?” To which White replied, “Because of Denis, Denis Carlson. He’s been with us for the last 10 years,” according to the FBI’s transcript of the conversation. According to Quinones Alejandro’s recent opinion, the FBI interviewed Carlson at his office several months after the White-Burrell conversation was recorded. The corporate counsel for Janney’s Philadelphia office was also present; the company later set Carlson up with a lawyer from an outside firm it frequently used. In June 2004, according to the opinion, Carlson was indicted on the false information charges. He faced up to 10 years’ incarceration. While being processed in conjunction with those charges, Carlson tested positive for cocaine, according to the opinion. Janney soon told Carlson that it would no longer foot his legal bills. He was fired in early July 2004. Several weeks after Carlson’s firing, Janney filed a Form U5 – the NASD document concerning termination notices – in which it indicated that Carlson was under indictment and had tested positive for drug use. The form is publicly accessible, according to the opinion. In June 2005 – roughly four months after Carlson’s February acquittal – Janney amended the Carlson Form U5 so that it reflected the jury’s not-guilty finding. But Carlson claimed in his complaint that Janney had not amended the Form U5 within the 30 days called for by NASD rules, according to the opinion. Carlson also asserted that Janney has refused to amend the form to reflect other details, and currently owes him some $50,000 for work performed in 2003. About a month after Carlson filed his complaint against Janney in August 2005, Janney filed its petition to compel arbitration, citing the relevant clause found in standard U4s. Quinones Alejandro denied that petition and has also overruled preliminary objections filed by the firm. She began her analysis by noting that Pennsylvania courts strongly favor the use of arbitration as a means of dispute resolution, but that arbitration can only be compelled where such an agreement was entered into by both parties. “Defendant contends that a valid agreement to arbitrate existed between the parties as provided in plaintiff’s employment contract,” Quinones Alejandro wrote. “In support of this contention, defendant argues that membership with NASD is mandatory, and that pursuant to the registration with NASD, defendant and its employees were required to abide by all rules and regulations promulgated to police securities brokers in the United States. . . . Defendant further contends that Form U4 contains a standard arbitration clause.” But Carlson responded that he never signed a Form U4 and said that Janney’s failure to produce a copy of the U4 he allegedly signed supports his position. Quinones Alejandro agreed, writing that under Pennsylvania law, Janney carries the burden of proving that a valid arbitration agreement existed between it and Carlson prior to Carlson’s filing suit. “Without proof of the original or even a copy of a signed Form U4, this motion judge cannot find that a valid arbitration agreement existed between the parties,” she wrote. Janney’s attorney in the matter, Michael Banks of Morgan Lewis & Bockius, was not immediately available for comment yesterday. Carlson’s lawyer, Barry Elson of Kittredge Donley Elson Fullem & Embick, also could not be reached for comment. (Copies of the nine-page opinion in Carlson v. Janney Montgomery Scott, PICS No. 06-0526, are available from The Legal Intelligencer . Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information. Some cases are not available until 1 p.m.)

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