Cuyahoga Gone in Appellate Ruling To Send Dispute to FINRA Arbitration

September 23, 2022

In 2016, Bradley Schlang's interest in a company was purchased pursuant to a Redemption Agreement providing for 10 years of quarterly payments. A few years later, Covid stopped the world. The folks who bought out Schlang's interest suspended further payments citing a negotiated, contractual right. Suffice it to say that when you're supposed to get paid, you want to get paid, and, Schlang argues that he never executed a Settlement Agreement, never executed Mutual Releases, and, well, things went from bad to worse, and into court -- but should they be in a FINRA arbitration? 

FINRA Rule 13200

There are times when the simplest things cause the most trouble. For example, consider one of FINRA's shorter rules:

FINRA Code of Arbitration Procedure for Industry Disputes Rule 13200: Required Arbitration

(a) Generally
Except as otherwise provided in the Code, a dispute must be arbitrated under the Code if the dispute arises out of the business activities of a member or an associated person and is between or among:

•  Members;
•  Members and Associated Persons; or
•  Associated Persons.

(b) Insurance Activities
Disputes arising out of the insurance business activities of a member that is also an insurance company are not required to be arbitrated under the Code.

Okay, so, sure -- at first glance, Rule 13200 seems fairly straightforward. A FINRA industry dispute "must be arbitrated" when the dispute "arise out of the business activities" of a FINRA member firm or an associated person. Of course, after you're pretty sure that everything above makes sense, a wise-ass like me may ask you to explain what's a:
  • dispute
  • business activities
  • member
  • associated person
FINRA Rule 13100: Definitions

Let me help ya out here -- turn to FINRA Rule 13100: Definitions. Now that we found some definitions, let's note a few of them here:

(b) Associated Person
The term "associated person" or "associated person of a member" means a person associated with a member, as that term is defined in paragraph (u).

(n) Dispute
The term "dispute" means a dispute, claim or controversy. A dispute may consist of one or more claims.

(q) Member
For purposes of the Code, the term "member" means any broker or dealer admitted to membership in FINRA, whether or not the membership has been terminated, suspended, cancelled, revoked, the member has been expelled or barred from FINRA or the member is otherwise defunct; and any broker or dealer admitted to membership in a self-regulatory organization that, with FINRA consent, has required its members to arbitrate pursuant to the Code and to be treated as members of FINRA for purposes of the Code, whether or not its membership has been terminated, suspended, cancelled, revoked, the member has been expelled or barred from its self-regulatory organization, or the member is otherwise defunct.

(u) Person Associated with a Member
The term "person associated with a member" means:
(1) A natural person who is registered or has applied for registration under the Rules of FINRA; or
(2) A sole proprietor, partner, officer, director, or branch manager of a member, or other natural person occupying a similar status or performing similar functions, or a natural person engaged in the investment banking or securities business who is directly or indirectly controlling or controlled by a member, whether or not any such person is registered or exempt from registration with FINRA under the By-Laws or the Rules of FINRA.
For purposes of the Code, a person formerly associated with a member is a person associated with a member.

Zombie Stockbrokers Need Not Apply

Okay, so, ya wanna tell me what the difference is between an "Associated Person" and a "Person Associated with a Member"? An "Associated Person" is defined in Rule 13100(b) as a "person associated with a member, as that term is defined in paragraph (u)." Umm, what genius came up with that lunacy as a sensible definition? I need to look up how a "person associated with a member" is different from an "associated person" despite the fact that the definition of an "Associated Person" is a "person associated with a member"? All of which reminds me of The Department of Redundancy Department. Even more bizarre, a "person associated with a member" is a "natural person," which means that unnatural persons can't be associated with a member. Who knew, right? No zombies. No vampires. No Frankenstein's monsters. 

No Disputin' Dispute

FINRA Rule 13100(n): Dispute offers this definition: "The term "dispute" means a dispute, claim or controversy. A dispute may consist of one or more claims." As set forth at FINRA Rule 13100(e) Claim: "The term 'claim' means an allegation or request for relief." 

So . . . a widget is a widget, which may consist of one or more alleged widget parts. 

That clears that up.

The 2016 Redemption Agreement

To see how all of these definitions can come into play and leave a smoldering wreck on the highways and byways of Wall Street, let's consider this recent litigation:  Cedar Brook Financial Partners Holdings, LLC, et al., Plaintiffs/Appellants, v. Bradley J Schlang, Defendant/Appellee (Opinion, Court of Appeals of Ohio, No. 111072 / September 22, 2022)
The following parties are either FINRA Members or FINRA Associated Persons:

  • Cedar Brook Financial Partners Holdings, LLC ("CBFP"), 
  • Cedar Brook Financial Partners, LLC ("CBFPLLC"), 
  • William Glubiak, and
  • Bradley J. Schlang 
CBFP, CBFPLLC, and Glubiak operated an investment planning/management firm of which Schlang was an equity member of CBFP. In May 2016, CBFP purchased Schlang's interest in the company pursuant to a Redemption Agreement under which CBFP was to pay Schlang $348,410 plus interest over ten years in quarterly payments; and, the Agreement included a "Windfall Events Provision" whereby amounts up to $250,000 received by CBFP per recapitalization would be paid to Schlang. If CBFP's gross dealer concession ("GDC") fell below $10.8 million during the repayment period, CBFP could suspend payments to Schlang. 

Covid and Suspension of Payments to Schlang and the Windfall

In 2020, things got interesting . . . real interesting:

6. In March 2020, CBFP alleged that due to COVID-19, the GDC dropped below the threshold amount, and therefore, CBFP would suspend payments to Schlang until further notice. Schlang requested CBFP's financials in order to verify the company's findings. Thereafter, the parties attempted to negotiate an agreement regarding Schlang's payments. Appellants alleged that Schlang agreed to suspend the payments as of June 29, 2020, in what they term the 6/29/20 Suspension Agreement. Schlang denied agreeing to the suspension. Additionally, Schlang alleged that there had been a windfall event that Appellants failed to disclose to him. Such a windfall would have required Appellants to pay up to $250,000 to Schlang. Subsequently, the parties agreed to a settlement of the amounts owed to Schlang. Appellants alleged that that agreement was finalized on September 18, 2020, which they term the 9/18/20 Settlement Agreement. Schlang, however, claimed that the agreement was to be finalized upon execution of a mutual release.

7. On September 28, 2020, Appellants sent a mutual release to Schlang. Schlang objected to the release, arguing that it included new and objectionable terms. The following month, Schlang formally notified Appellants that they had failed to make the last three quarterly payments to him pursuant to the Redemption Agreement and that if he did not receive payment within 15 days they would be in default of that agreement. On or about October 15, 2020, Appellants severed their relationship with Schlang and asked him to vacate the premises. Prior to leaving, Schlang downloaded information regarding his clients from Appellants' computers. On October 29, 2020, Appellants filed a complaint that alleged Schlang's demand for payment was a breach of the 6/29/20 Suspension and the 9/18/20 Settlement Agreements.

at Pages 4 - 5 of the Opinion

SIDE BAR: Suspension of disbelief? It's gettin' Windy here!

The folks who bought out Schlang say that as a result of the devastation wrought by Covid, business apparently went into the shitter and, you know, they suspended the payments to Schlang per the Redemption Agreement. Also, the parties had a dispute as to whether there was a triggering windfall. 

Doesn't quite seem that Schlang agrees with how things went down. A version of events is that someone drafted a Suspension Agreement to address the suspension of payments to Schlang; however, he says that he never agreed to anything, or he might have agreed to something in principal but that the agreement contemplated an executed Settlement Agreement and a predicate Mutual Releases, which Schlang seems to argue don't exist. 

In any event, from there, the Appellants told Schlang to get the hell out of the premises, and, depending on who you ask, Schlang may or may not have improperly downloaded customer information. 

The Lawsuit Complaint

By June 2021, CBFP, CBFPLLC, and Glubiak (the "Appellants") has filed a Second Amended Complaint alleging:

breach of contract alleging Schlang breached the 6/29/20 Suspension Agreement (Count 1); anticipatory repudiation, arguing Schlang refused to proceed with the 9/18/20 Settlement Agreement (Count 2); specific performance, asking the court to enforce the 9/18/20 Settlement agreement (Count 3); conversion (Count 4); violation of the Uniform Trade Secrets Act (Count 5); tortious interference with business relations (Count 6); and declaratory judgment asking the court to find both the 6/29/20 and 9/18/20 agreements binding and enforceable (Count 7).

at Page 5 of the Opinion

Schlang Counterclaims

In his Counterclaim, Schlang's claims included:

breach of contract on the promissory note (Count 1); breach of contract for failure to make the windfall payment according to the Redemption Agreement (Count 2); breach of contract, for failure to pay compensation for client fees (Count 3); fraudulent concealment, for concealing information regarding a windfall event (Count 4); fraudulent misrepresentation, for lying about the GDC dropping below the threshold amount (Count 5); and declaratory judgment, asking the court to determine the rights and obligations in his favor (Count 6).

10. Schlang discovered after litigation commenced that Appellants had filed a Uniform Termination Notice for Securities Industry Registration (commonly, "Form U5") that he claimed was defamatory. A Form U5 is a document that must be filed whenever there is a termination of employment. Schlang moved to amend his counterclaim to add a claim relative to the alleged defamatory action. Appellants objected arguing that that claim was subject to FINRA arbitration. The trial court denied the motion, finding that Schlang's defamation counterclaim was subject to binding arbitration under FINRA Rule 13200 and the express arbitration agreement in Schlang's Form U4. The court further noted, "[O]n the other hand, the claims and counterclaims asserted by the parties thus far are outside the scope of the mandatory arbitration provisions of FINRA Rule 13200." 

at Pages 5 - 6 of the Opinion

SIDE BAR: According to online FINRA BrokerCheck disclosures as of September 23, 2022, Cedar Brook Group reported that Schlang had been "Permitted to Resign" on October 16, 2020, based upon allegations of "Improper download of firm-owned data." The "Firm Statement" alleges;

Following Mr. Schlang's voluntary resignation from Cedar Brook, the firm discovered that the evening before Schlang's departure from the firm, he improperly and unlawfully downloaded and transferred the firm's (and their clients') confidential, proprietary and trade secret information. Schlang's misconduct was in violation of the firm's internal compliance policies and applicable regulations, all of which he attested to numerous times over multiple years. The firm took prompt remedial action by filing a complaint and request for restraining order against Schlang. On December 9, 2020, the Cuyahoga County Court of Common Pleas partially granted the firm's restraining order, and the parties are still actively litigating that and related issues surrounding Schlang's resignation from the firm.

In response to the firm's allegations and statement, Schlang's "Broker Statement" alleges:

Mr Schlang emphatically contests Cedar Brook Group's Disclosure and Allegation. The files alleged to have been improperly downloaded were primarily related to clients Schlang maintained through his ongoing Broker/Dealer relationship with Securities America. Legal action by Mr Schlang against Cedar Brook is ongoing and should resolve questions associated with the download. Moreover, the July 2020 FINRA guide Individual Form Filing: Form U5 states that "Internal Review Disclosure question in Question 7B and the Internal Review Reporting Page (DRPU5) are used to report matters relating to compliance, not matters of a competitive nature. Responses should not include situations involving employment related disputes between the firm and the individual." Cedar Brook's attempt to use Form U5 as a weapon in this unrelated legal dispute is inappropriate

Movin' On

By way of context, consider Atria's Cadaret Grant Welcomes $2B Firm Cedar Brook Group / 49 person team joins Cadaret Grant (April 28, 2021, News Provide by Atria Wealth Solutions /Cision PR Newswire)

NEW YORK, April 28, 2021 /PRNewswire/ -- Cadaret Grant, an independent wealth management firm and wholly-owned subsidiary of Atria Wealth Solutions, Inc. (Atria), today announced the addition of Ohio-based Cedar Brook Group. Cedar Brook, an office of supervisory jurisdiction with $2 billion in assets under administration, adds 20 licensed financial professionals to the Atria family. William Glubiak launched Cedar Brook Group in 2005, quickly growing the organization into one of the largest financial practices at his prior firm. Glubiak continues to lead the firm as CEO/Founding Principal.

FINRA Arbitration Compelled

The Court of Common Pleas granted Schlang's motion to compel arbitration and stay the civil court case pending arbitration. On appeal to the Court of Appeals of Ohio, the parties agreed that Counts 4 - 6 are subject to FINRA Arbitration; however, they continued to disagree about whether the remaining counts constituted matters that "arise out of business activities" under FINRA Rule 13200. Preliminarily, the Court of Appeals noted that:

Although we are not bound by the trial court's findings, it is a useful starting place to begin our review. In its decision, the trial court noted: 

[T]he court reconsiders its finding of 6/2/2021 that all claims previously asserted were outside the scope of FINRA Rule 13200. The Second Circuit Court of Appeals has broadly interpreted the, "arise out of," in arbitration clauses like that in FINA [sic] Rule 13200. "If the allegations underlying the claims 'touch matters' covered by the parties' * * * agreements, then those claims must be arbitrated." Greenberg [v. Ameriprise Fin. Servs., E.D.N.Y. No. 15-CV-3589 (ADS)(AYS), 2016 U.S. Dist. LEXIS 45250, 22 (Mar. 31, 2016)] * * *. 

The parties' claims relating to the parties' promissory note, suspension agreement and settlement agreement arise out of the business activities with each other as FINRA member and associated person. See Axos Clearing, Ltd. Liab. Co. v. Reynolds, S.D.Fla. No. 19-CIV-20979-RAR, 2019 U.S. Dist. LEXIS 149622, at ¶ 10-17 (Aug. 30, 2019).

* * * 

In light of the foregoing, this matter is stayed pending arbitration.

at Page 9 of the Opinion

What's A Business Activity?

The Court of Appeals declines to narrowly construe the term "business activities" as set forth in FINRA Rule 13200. In opting for a broader construction, the Court found that the dispute arose from the business activities of the FINRA members/associated persons; and that the Redemption Agreement and the attendant litigation stem from the parties' business activities and are subject to arbitration under both Schlang's Form U4 and FINRA Rule 13200. 

Cuyahoga, Gone

Appellants' cited the forum selection clause in Redemption Agreement:

Governing Law/Forum Selection. * * * Any lawsuit arising out of this Agreement and/or the redemption of the Schlang Interest shall be filed in the Cuyahoga County, Ohio Court of Common Pleas.

The Appellants argued that the above clause requiring any lawsuit under the agreement be filed in the Court of Common Pleas removes the dispute from FINRA Arbitration. Schlang's Form U4 required, in part, the arbitration of "any dispute, claim or controversy" that is required to be arbitrated under FINRA's rule, constitution, by-laws. Further, FINRA Rule 13200 provide that such disputes must be arbitrated. 

It Says What It Says But That Doesn't Mean It Means What It Says

In resolving the conflicting interpretations and arguments, the Court of Appeals affirmed the lower court and found in part that:

[T]he language in Schlang's Form U4 is a broad arbitration clause, mandating arbitration of any dispute, claim, or controversy that is required to be arbitrated under the rules, constitutions, or bylaws of FINRA. Therefore, unless the forum-selection clause explicitly removes the dispute from arbitration or forcefully excludes arbitration, the arbitration clause is controlling. In this case, the forum-selection clause does not address arbitration at all. It merely states that "any lawsuit" must be filed in the Cuyahoga County Common Pleas Court. This language does not explicitly and/or forcefully exclude the Redemption Agreement from arbitration. Here, given the preference for arbitration, the term "any lawsuits" means any dispute unresolved in arbitration. Consequently, FINRA arbitration prevails. Given the above considerations, we agree with the trial court's finding that the forum-selection clause does not supersede the arbitration clause in the Form U4 or FINRA Rule 13200. 

at Page 19 of the Opinion


Accordingly, the Court of Appeals affirmed the Judgment of the Court of Common Pleas.

Securities Industry Commentator:
A legal, regulatory, and compliance feed
curated by veteran Wall Street lawyer Bill Singer

Cuyahoga Gone in Appellate Ruling To Send Dispute to FINRA Arbitration ( Blog)

Making lemonade of legal lemons, new wave of ERISA class actions accuse fiduciaries of 'imprudently' using low-fee, high-rated funds, like BlackRock TDFs / The lawsuits against 401(k) plan sponsors also threaten every RIA and fiduciary, if underperformance becomes a legal liability, lawyers say (RIABiz by Oisin Breen)

Boeing to Pay $200 Million to Settle SEC Charges that it Misled Investors about the 737 MAX / Former CEO Agrees to Settle to Same Charges and Pay $1 Million (SEC Release)

SEC Charges Former EY Employee with Insider Trading (SEC Release)

CFTC Charges Five Entities for Failing to Register as FCMs (CFTC Release)

CFTC Imposes $250,000 Penalty Against bZeroX, LLC and Its Founders and Charges Successor Ooki DAO for Offering Illegal, Off-Exchange Digital-Asset Trading, Registration Violations, and Failing to Comply with Bank Secrecy Act / CFTC Order Finds, and Complaint Alleges, Ooki DAO is Liable as an Unincorporated Association (CFTC Release)

Dissenting Statement of Commissioner Summer K. Mersinger Regarding Enforcement Actions Against: 1) bZeroX, LLC, Tom Bean, and Kyle Kistner; and 2) Ooki DAO

GUEST BLOG: A Personal Message From Granville A. Ungerleider, Candidate for FINRA 2022 Small Firm Member of the National Adjudicatory Council ( Blog)

Insurance Broker Charged in $4 Million Investment Fraud and Ponzi Scheme (DOJ Release)

Arcadia Man Charged with Securities Fraud for Stealing Client Funds and Concealing His Investment Firm's Massive Financial Losses (DOJ Release)

SEC Charges Former Business News Commentator with Misappropriating Client and Investor Funds (SEC Release)

SEC Charges Former Registered Investment Advisor Representative with Securities Fraud (SEC Release)

SEC Charges Recidivists for Violations of a Previous Commission Order (SEC Release)

CFTC Orders Two California Precious Metals Companies to Pay Over $1 Million for Fraud, Illegal Offering of Retail Commodity Transactions, and Registration Violations (CFTC Release)

FINRA Fines and Suspends Former Rep for Non-disclosure of Misdemeanor Theft Charge
In the Matter of Jimmie Scott Griffea, Respondent (FINRA AWC)

FINRA Censures and Fines IBN Financial Services, Inc. for OBA Supervision
In the Matter of IBN Financial Services, Inc., Respondent (FINRA AWC)

Wells Fargo Wins FINRA Arbitration Against Former Rep With Three On And Off Lawyers ( Blog)

Manhattan Real Estate Fund Manager Sentenced To Prison For Securities Fraud (DOJ Release)

SEC Charges Cheetah Mobile's CEO and its Former President with Insider Trading / Executives Sold Securities through a Purported 10b5-1 Trading Plan (SEC Release)

SEC Charges Securities Professional and Former Corporate Insider with Insider Trading (SEC Release)

SEC Denies Whistleblower Award to Claimant
Order Determining Whistleblower Award Claims

SEC Buries the Lede About Stunning Misconduct in Its Office of the Ombudsman ( Blog)

Former U.S. Department of Housing and Urban Development Assistant Inspector General Convicted of Falsifying Financial Disclosure Forms (DOJ Release)

Area man who claimed to be African prince convicted by jury of several fraud crimes (DOJ Release)

SEC Charges Investment Adviser with Violating the Proxy Voting Rule (SEC Release)

Statement Regarding In the Matter of Toews Corporation by SEC Commissioner Hester Peirce and Commissioner Mark T. Uyeda

SEC Awards Joint Claimants Almost $280,000 Whistleblower Award
Order Determining Whistleblower Award Claims

Morgan Stanley Smith Barney to Pay $35 Million for Extensive Failures to Safeguard Personal Information of Millions of Customers (SEC Release)

Sparkster to Pay $35 Million to Harmed Investor Fund for Unregistered Crypto Asset Offering / Crypto Asset Promoter Ian Balina Charged for Touting Tokens Without Disclosing Compensation (SEC Release)

SEC Obtains Final Judgment Against Municipal Advisor and Its Owner in Municipal Bond Offering Schemes (SEC Release)

FINRA Bars Former Merrill Lynch Rep for Conversion of Childcare Reimbursements
In the Matter of Jared Winston, Respondent (FINRA AWC)

Opening Remarks to the Institute for Inclusion in the Legal Profession by SEC Chair Gary Gensler

U.S. Promoter of Foreign Cryptocurrency Company Sentenced to Prison for Role in Fraud Scheme (DOJ Release)

Federal Court Orders Defendants to Pay More than $6.6 Million for Defrauding Binary Options Pool Participants (CFTC Release)

FINRA Fines and Suspends Former Wells Fargo Clearing Services Rep for Suitability Involving New Issue Preferred Securities and Cell Phone Communications
In the Matter of Solomon Wei-En Hua, Respondent (FINRA AWC)

FINRA Enforcement: Bringing Cases Against Individual Brokers (FINRA Unscripted)