October 9, 2014
The financial carnage caused by Wall Street's origination and sales of mortgage-backed securities is now legendary and still serves as the grist for the slowly grinding mills of litigation, regulation, and prosecution. As demonstrated in a recent FINRA arbitration brought against Wells Fargo Securities and Deutsche Bank Securities, those who feel that they were defrauded into such investments are still strapping on the gloves and climbing into the ring.
Case In Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in September 2013 and thereafter amended, Claimant Fernandez asserted breaches of contract and fiduciary duty; fraud; churning; and manipulation against Respondents Wells Fargo Securities, LLC and Deutsche Bank Securities, Inc. in connection with Respondents' alleged issuance (and re-issuance) of a mortgage-backed security ("MBS"). Claimant argued that he was an undisclosed third-party beneficiary in relation to the MBS at issue. Claimant Fernandez sought $32 Million in compensatory damages plus interest, and a further $78 Million in punitive damages. In the Matter of the FINRA Arbitration Between Nestor Fernandez, Claimant, vs. Wells Fargo Securities, LLC and Deutsche Bank Securities, Inc., Respondents (FINRA Arbitration 13-02741, September 26, 2014).
Respondents generally denied the allegations and asserted various affirmative defenses.
He's Nothing To Us
In April 2014, Respondent Wells Fargo filed (and Respondent Deutsche Bank adopted) a Motion to Dismiss asserting that Claimant Fernandez:
Accordingly, Respondents moved that the dispute was not arbitrable and should be dismissed under FINRA Rules 12200 and 12504.
- was not a customer;
- did not have an account with either Respondent;
- did not have a written agreement to arbitrate with Respondents; and
- had no dealings whatsoever with either Respondent.
FINRA Rule 12200. Arbitration Under an Arbitration Agreement or the Rules of FINRA
Parties must arbitrate a dispute under the Code if:
• Arbitration under the Code is either:
(1) Required by a written agreement, or
(2) Requested by the customer;
• The dispute is between a customer and a member or associated person of a member; and
• The dispute arises in connection with the business activities of the member or the associated person, except disputes involving the insurance business activities of a member that is also an insurance company.
In reply to Respondents' Motion to Dismiss, Claimant argued that he was an undisclosed third-party beneficiary to the investment contract at issue, and was therefore entitled to arbitrate his claims.
And The Winner Is . . .
Following oral argument, on September 11, 2014, the Panel granted the Motion to Dismiss on the following grounds:
[I]t is the Panel's opinion that there was no specific written agreement requiring arbitration and there was no specific evidence the Claimant was a customer of Respondents. Based on the foregoing. Respondents, as the moving parties, could not have been associated with an account that did not exist. . .
Accordingly, the FINRA Arbitration Panel dismissed with prejudice Claimant's claims. Alas, $110 Million in combined damages had such a nice ring to it.
Bill Singer's Comment
Given how expansive the definition of a "customer" is under FINRA's Arbitration Code, it will be interesting to see if Claimant appeals this decision. Moreover, the third-party-beneficiary argument is an edgy and interesting legal stratagem and may also serve as the basis for appeal.