Today's featured lawsuit involves a somewhat tortured fact pattern, which bends and twists its way through a political scandal, entangled financing for a hotel, a FINRA arbitration, and into federal court. Even after you've read the fact pattern a few times, you're still not quite sure who did what to whom. Frankly, you never feel like you've got a firm grasp on anything.
Fundacion Nicor was a company controlled by Panamanian real-estate developer Nicolas Corcione Perez Balladares ("Corcione"). Unfortunately for Corcione, he found that he was under Panamian government investigation for alleged fraud. Apparently fearing that Panama would freeze his assets, Corcione was purportedly desperate to move his wealth outside of the government's grasp, and, in furtherance of that effort, he contacted Morgan Stanley financial advisor Candido Viyella (who allegedly was a financial advisor to a number of Panamanians).
In response to Corcione's request to open an account, Viyella and his team submitted a new account application to Morgan Stanley, but, go figure, in late 2015 (around September), the firm rejected the application. Depending upon whom you ask, either Morgan Stanley affirmatively conveyed its rejection to Corcione or the firm merely declined the request by taking no final action to approve the request -- in any event, the result is the same: no account was opened at Morgan Stanley for Corcione.
The Hotel and the Promissory Note
Okay -- so now, sit down and make yourself comfortable because we're going to take a detour back in time in order to make sense of what is going to happen in the future. Read the following buillet-points very, very slowly:
Sometime in 2013, Candido Viyella's family bought a hotel
CFLB Management issued promissory notes to finance the hotel's construction
While Corcione was trying to relocate his assets and open a Morgan Stanley account, Fundacion Nicor ("Nicor") had sustained financial losses from its investment in promissory notes issued by CFLB Management. Apparently, you can trace that lousy investment to the financing of a hotel that was indirectly owned/controlled by Morgan Stanley financial advisor Viyella's family/wife.
What did Nicor do about its losses from the promissory note investment? Well, the company filed a FINRA Arbitration Statement of Claim against associated person Viyella and FINRA member firm Morgan Stanley alleging that Viyella had induced Nicor into purchasing the promissory note and that Morgan Stanley had failed to supervise its rep's activities.
Not Takin' Care of Business
As Nicor made out its FINRA case, the company alleged that in November 2015, Viyella sent text messages to Corcione recommending the purchase of a $1 million promissory note issued by CFLB Management for the construction of a hotel. Viyella's communications allegedly characterized his recommendation of the notes as "the best option for you" and a "very good investment." When the investment went into the crapper, Nicor alleged that Viyella's recommendation had violated FINRA's Outside Business Activity Rule and/or Private Securities Transaction Rule because the rep had allegedly failed to notify Morgan Stanley in advance. Further, Nicor alleged that the Viyella's recommendation was unsuitable, and that the rep had engaged in a fraud -- for which Morgan Stanley had some derivative liability. After adding in a few other causes, Nicor sought $1 million in compensatory damages plus other relief.
A Federal Case
You got all of that? Really?? Yeah, sure you do . . . in any event, we soon find ourselves on another train on another set of tracks -- these in the United States District Court for the Southern District of Florida ("SDFL").
In his SDFL Complaint and as amended, Viyella sought a Declaration that Nicor's claims are not arbitratable under FINRA Rule 12200 because neither Viyella nor Morgan Stanely had ever entered into an arbitration agreement with Nicor, and, most critically, that Nicor was never, ever a "customer" of Viyella's or Morgan Stanley because no account was ever opened for him at the firm. Finally, Viyella asserted that any dispute pertaining to the promissory note did not arise within the context of his activities as a Morgan Stanley advisor or as part of any of his firm's business activities. Given the alleged absence of an arbitration agreement and of any customer relationship, Viyella asked SDFL to issue an injunction against Nicor's FINRA arbitration. Morgan Stanley largely joined in Viyella's motion practice.
In response to Viyella's and Morgan Stanley's arguments, Nicor asserted that it had signed a Morgan Stanely Client Agreement which contained an arbitration agreement, that arbitration is mandated under the FINRA Code of Arbitration, that Nicor is, indeed, a "customer" of both Viyella and Morgan Stanely as set forth under FINRA Rule 12200, and that the disputes arose in connection with Viyella's and Morgan Stanley's business activities.
SIDE BAR: The FINRA Rulebook
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.
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.
SDFL declines to narrowly construe the term customer, as argued by Viyella and Morgan Stanley, and the court similarly rejects the narrow construction argued for the term business activities. Ultimately, the Court offers this rationale, in part, for denying the Motion for a Preliminary Injunction Against Proceeding in FINRA Arbitration [Ed: footnotes omitted]
[M]ovants' concern that Morgan Stanley would
have to arbitrate unrelated disputes involving its employees is easily assuaged here. Movants fail to show the dispute between the parties here did not arise in connection with Morgan Stanley's or
Viyella's business activities because, as stated, Nicor alleges Viyella provided him investment
advice while Viyella was employed as a financial advisor at Morgan Stanley, and Morgan Stanley
failed to supervise Viyella. (See generally Statement of Claim). Movants' proposed limitation of
the business activities requirement risks blocking claimants from initiating FINRA arbitrations on
selling away or negligent supervision claims because those claims necessarily involve activity not
explicitly sanctioned by the FINRA member.
Because Movants fail to carry their burden as to the first necessary element to obtain a
preliminary injunction, they are not entitled to relief, and the Court need not address Movants'
arguments on the remaining elements for preliminary injunctive relief. . . .
I don't actually have a dog in this fight because I represent both the industry and public investors, as well as whistleblowers. As long as the definition of customer is fairly and consistently applied, that's all I ask -- and the same goes for the definition of what constitutes a firm's business activities. Courts often shoehorn a given set of facts into whatever jurisprudence is of a fashion for the day. In tackling the nuances of who is and who isn't a "customer," I get the sense that it often comes down to what a given judge has had for breakfast that day or whether a given court is tilting left or right or anti-Wall Street or pro-investor. I don't take offense with such biases because courts act through their judges and justices, and those folks are humans, and as humans, the men and women in robes tend to dig into their hearts and souls when struggling with ever-changing societal norms, prejudices, and preferences. Having taken such a magnanimous position, however, I feel that I have earned the right to warn you that I have virtually no idea as to what the black-letter law is these days when it comes to defining a "customer" on Wall Street. If you read the three cited cases immediately above, you. will see how fickle that interpretation has become.