September 25, 2018
Most reasonable folks -- and, admittedly, that's becoming a rare population -- but, just the same, most reasonable folks would agree that if you are amenable to arbitrate your disputes with me, and I'm amenable to arbitrate my disputes with you, and we write down the terms of how we will conduct any arbitration, and we sign that written agreement, and then, just for good measure, we shake on it, well, you know, you should be able to hold me to what I signed and vice versa. Unfortunately, we got lots of money on Wall Street and we got lots of folks with too much time on their hands and, thankfully for me, we also got lots of lawyers. All of which might explain how Wall Street's version of so-called "Mandatory" arbitration came into being. According to the rules of the Financial Industry Regulatory Authority ("FINRA"), parties subject to a written agreement to arbitrate must arbitrate all covered disputes. Yeah, that much is okay. In the absence of a written arbitration agreement, however, FINRA's rules provide for mandatory arbitration if "requested" by any customer and the subject dispute is between a customer and a FINRA member firm or an associated person of such a firm, and the dispute arises in connection with the firm's or person's business. Sure, you might think that this "request" form of mandatory arbitration is straightforward and fairly obvious. Trust me, it ain't. For starters, battles and wars have been waged over the definition of "customer," "member firm," "associated person," and "in connection with" a brokerage firm's or stockbroker's business. Strap on your helmet and meet me at today's front-lines for the most recent attack and counterattack in Wall Street's arbitration trenches.
Case In Point
In a recent Opinion from the United States Court of Appeals for the Eleventh Circuit ('11Cir"), the Court grapples with the thorny issue of just what constitutes a "customer" under FINRA's rules. By way of a brief diversion, consider the complex caption for the matter on appeal:
Pictet Overseas Inc., Philippe Bertherat, Remy Antoine Best, Renaud Fernand De Planta, Jacques Joseph De Saussure, Bertrand Francois Lambert Demole, Jean-Francois Demole, Marc Philippe Pictet, And Nicolas Lucien Pictet, Plaintiffs/ Appellees, v. Helvetia Trust, And AAA Group International Trust, Defendants Appellants (Opinion, 11Cir, No. 17-81088)
Not a cast of thousands but on appeal to the federal courts, we got nine, count 'em, nine Plaintiffs and two Defendants for a whopping total of 11 dueling parties on appeal. Investment trusts Helvetia Trust and AAA Group International Trusts (herein, the "Trusts") hired independent asset manager Brian Callahan to invest their funds -- and in 2008 and 2010, he opened custodial accounts with Swiss bank, Banque Pictet. As it turns out, Callahan also stole over $1.8 million of the Trusts' money.
In an effort to recover their losses, the Trusts filed a FINRA arbitration against eight individuals who were partners of Banque Pictet (the "Partners") as well as several of the bank's corporate affiliates. If you're going to go to the trouble of suing all those folks and entities, you may as well roll the dice, and roll the dice the Trusts did in seeking not only $1.8 million in damages but also treble that and, for a further fillip, $100 million in punitive damages.
A Lack of Definition
One teensy, weensy, little problem, though. How do the Claimant Trusts justify roping the Partners and the affiliates into a FINRA arbitration? There's no written agreement to arbitrate among those parties. As it turns out, one of corporate affiliates named in the FINRA arbitration was Pictet Overseas, Inc, which was a Canadian broker-dealer. For those of you playing the home version of Mandatory FINRA Arbitration, why do you think that the Canadian broker-dealer is going to become an important issue; and remember to put your answer in the form of a question. Let's consider some of FINRA's rules:
FINRA Rule 0160: Definitions
(a) The terms used in the Rules, if defined in the FINRA By-Laws, shall have the meaning as defined in the FINRA By-Laws, unless a term is defined differently in a Rule, or unless the context of the term within a Rule requires a different meaning.
(b) When used in the Rules, unless the context otherwise requires:
. . .
The term "customer" shall not include a broker or dealer.
NASD Rule 1011: Definitions
Unless otherwise provided, terms used in the Rule 1010 Series shall have the meaning as defined in Rule 0120.
. . .
(b) "Associated Person"
The term "Associated Person" means: (1) a natural person registered under NASD Rules; or (2) a sole proprietor, or any partner, officer, director, branch manager of the Applicant, or any person occupying a similar status or performing similar functions; (3) any company, government or political subdivision or agency or instrumentality of a government controlled by or controlling the Applicant; (4) any employee of the Applicant, except any person whose functions are solely clerical or ministerial; (5) any person directly or indirectly controlling the Applicant whether or not such person is registered or exempt from registration under the FINRA By-Laws or NASD Rules; (6) any person engaged in investment banking or securities business controlled directly or indirectly by the Applicant whether such person is registered or exempt from registration under the FINRA By-Laws or NASD Rules; or (7) any person who will be or is anticipated to be a person described in (1) through (6) above.
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.
FINRA Rule 12200: Who's a "customer"?
Although there was no direct, written agreement to arbitrate with the named parties, the Trusts cited FINRA Rule 12200, which provides that in the absence of a "written agreement" to arbitrate, a "customer" may request arbitration of a dispute with a "member or associated person" provided said dispute arises in connection with the member's/associated person's "business activities." The Trusts alleged that they qualified as a "customer" and Pictet Overseas, the Canadian broker-dealer, was a FINRA member firm. Except, that Banque Pictet (where Callahan opened the Trusts' custodial accounts from which he stole the Trusts' money) is not a FINRA member firm and none of the Partners are FINRA members.
In response to the Trusts' attempt to invoke mandatory FINRA arbitration based upon their requests as customers for that alternative dispute resolution, Banque Pictet and the Partners moved in the United States District Court for the Southern District of Florida ("SDFL") to enjoin the FINRA arbitration. After conducting a bench trial, SDFL found that the Trusts were not customers of Pictet
Overseas or of any of the Partners; and no partner was an "associated persons" of Pictet
Overseas; and, finally, the dispute did not arise "in connection with the business
activities" of either Pictet Overseas or any Partner. Accordingly, SDFL permanently enjoined the Trusts from arbitrating their claims against Pictet
Overseas and the Partners in a FINRA forum.
The Trusts appealed SDFL's ruling to the 11Cir. Spoiler Alert: 11Cir affirmed SDFL.
Wrestling with the thorny issue of whether the Trusts can invoke mandatory arbitration pursuant to FINRA Rule 12200, 11Cir explains in pertinent part [Ed: footnotes omitted]:
Pages 11 - 13 of the 11Cir Opinion
[C]ommon sense dictates that FINRA and its members could not
have intended to require FINRA arbitration of any claim that arose out of activities
of the associated person that are unrelated to his or her relationship with the
FINRA member. A simple example illustrates this point. Let's say that a partner of a FINRA member operates a side business as a real estate agent. The real estate
agent qualifies as an "associated person" under the FINRA Arbitration Code
because she is a partner of a member. See FINRA Rule 12100(a), (r). If the real
estate agent is involved in an automobile accident while driving a real estate client
to see a home, under the Trusts' interpretation an injured party could bring a tort
claim in a FINRA arbitration against the real estate agent because the dispute arose
in connection with her business activities -- that is, driving her clients to go visit a
home. But the relevant business activity -- acting as a real estate agent --has
nothing to do with the real estate agent's status as a partner of a FINRA member.
By contrast, a customer's claim that an associated person, an officer for example,
failed to properly supervise the business activities of the FINRA member
potentially would be arbitrable under Rule 12200 because this claim would arise
out of business activities of the associated person in his or her capacity as an
associated person of the FINRA member.
The Trusts contend that the plain language of Rule 12200 provides that a
dispute with an associated person is arbitrable if it arises in connection with any
business activities of the associated person. But we see nothing in the text of
FINRA's Arbitration Code to indicate that Rule 12200 was intended to require
arbitration before FINRA-an organization that was established to regulate stock
brokerage firms -- of disputes that are entirely unrelated to the business activities of a FINRA member or the associated person's activities undertaken in his or her
capacity as an associated person. We acknowledge that we must resolve "any
doubts concerning the scope of arbitrable issues . . . in favor of arbitration." Moses
H. Cone Mem'l Hosp., 460 U.S. at 24-25. This rule is inapplicable here, however,
because we have no doubts regarding the scope of issues arbitrable under Rule
12200. See Kemiron Atl., Inc. v. Aguakem Int'l, Inc., 290 F.3d 1287, 1290 (11th
Cir. 2002) (explaining that "the intent of the contracting parties is paramount and
can trump the FAA's policy in favor of arbitration").
Assuming for purposes of this appeal that the Partners qualified as
associated persons of Pictet Overseas, we conclude that the dispute here is nonarbitrable
because it did not arise in connection with the Partners' business
activities as associated persons of Pictet Overseas. The district court's factual
findings establish that the Trusts' claims relate to their custodial accounts that were
opened with and maintained by Banque Pictet in Switzerland. At best, the Trusts'
claims arise out of the Partners' business activities undertaken as general partners
of Banque Pictet. But Banque Pictet is not a FINRA member. Because the Trusts'
claims have no connection to the business activities of Pictet Overseas or of the Partners undertaken in their capacity as associated persons of Pictet Overseas, we agree with the district court that this dispute is not arbitrable under Rule 12200.
Bill Singer's Comment
Not the first and not going to be the last court opinion on the issue of who's a customer and what is truly "in connection" with a FINRA member firm's business. That being said, the 11Cir's pronouncements are set forth in a lucid manner and help bring some sense to this often idiotic arena of mandatory FINRA arbitration.
I found it somewhat hysterical that the 11Cir asserted that "common sense dictates" that FINRA could not have possibly intended to require arbitration of claims that were unrelated to its members' business. I mean, seriously? Have the good judges on the circuit court delved into the arcana that masquerades as "common sense" FINRA rules? In all candor, there is little about FINRA's rulebook that should summon the characterization of "common sense." Notwithstanding that quibble, I loved the Court's example of the illustration of the real estate agent activities of a FINRA firm's partner. The car accident involving the agent and his customer perfectly sets up the difficulties of parsing through who is a "customer" and of whom and when.
The 11Cir's focus on the "relevancy" of the underlying business activity to the member firm's business is spot on. As the Court succinctly concluded: "the dispute here is nonarbitrable because it did not arise in connection with the Partners' business activities as associated persons of Pictet Overseas." Ultimately, the Trusts' demand for mandatory FINRA arbitration fails because the Claimants "claims have no connection to the business activities of Pictet Overseas or of the Partners undertaken in their capacity as associated persons of Pictet Overseas . . ."