Federal Court Says FINRA Arbitration Not So Lucid in the Sky with Diamonds

July 19, 2023

Few things prompt more lawsuits than a once-promising business deal that goes sour. In today's installment of when-things-go-wrong, we got quite the cast of characters [Ed: footnotes omitted]:

This case arises out of a broken business deal between three individuals and their respective entities -- Plaintiff and his business Clear Landing Capital, LLC ("Clear Landing"). Defendant Rokah and his investment vehicle BINA-N.R. Consulting; and a third-party named Yishai "Jesse" Raphael and his company ARIDO Brand Jewelry ("ARlDO"). This case does not involve securities, but rather it concerns $2 million Defendants transferred to Plaintiff between 2018 and 2020 as a part of a potential transaction to purchase ARIDO jewelry. Unless otherwise noted, the following facts concerning that transfer are not in dispute.

At the time of these events, Plaintiff was a registered FINRA representative and an associated person of Brooks, Houghton Securities, Inc. ("BHS"). Malecki Deel., Exs. D, E, ECF No. 18. BHS is "engaged in the offering of private company equities and debt primarily from financial institutions." Malecki Decl., Ex. D at 9. It primarily transacts in secured financial instruments. Id. Defendants had no direct interaction with BHS. Rather, in addition to his work with BHS, Plaintiff operated another business called Clear Landing, which is not a FINRA member. Defendants' allegations focus on Plaintiff's actions as the sole owner and employee of Clear Landing. 

at Pages 1 - 2 of Nathaniel Land, Plaintiff, v. Nir Rokah and Bina - N.R. Consulting Ltd., Defendants (Opinion/Order, United States District Court for the Southern District of New York ("SDNY"), 23-CV-793)

To Arbitrate or Not To Arbitrate

By way of spoiler alert and as summarized in the Opinion's Syllabus:

Plaintiff Nathaniel Land moves for a preliminary injunction pursuant to Federal Rule of Civil Procedure 65 to enjoin an arbitration currently pending before the Financial Industry Regulatory Authority ("FINRA") between Plaintiff and Defendants Nir Rokah and BINA-N.R. Consulting Ltd. (collectively, "Defendants"). Defendants cross move to compel that same arbitration. The Court held a hearing on the motions on March 17, 2023. The Court GRANTS Plaintiffs motion for a preliminary injunction for the following reasons: (1) the parties have no formal agreement to arbitrate; (2) Plaintiff has raised serious questions as to whether there was a customer relationship between him and Defendants; and (3) Plaintiff has raised serious questions as to whether this dispute arose out of his business activities. Defendants' motion is DENIED.

The Busted Deal

As this courtroom drama unfolds, Plaintiff Land wants to enjoin the pending FINRA Arbitration; whereas, the Defendants can't wait to start that same hearing. As far as SDNY is concerned, the arbitration ain't goin' nowhere -- at least while a preliminary injunction is in place. Suffice it to say, the contemplated transaction encountered difficulties:

On March 3, 2020, Defendant Rokah alleges that he demanded Plaintiff return the $2 million he deposited. Id. On April 22, 2020, Plaintiff emailed Mr. Raphael and his colleagues at ARIDO regarding the collateral art. Malecki Deel., Ex. K. It was clear from the exchange that Plaintiff could not obtain the collateral for Defendants' deposit from Mr. Raphael, and Plaintiff threatened litigation. Id. Defendant Rokah was copied on the email. Id. The $2 million was never returned to Defendants.

In October 2020, prior to pursuing FINRA arbitration, Defendants initiated an action against BHS and Plaintiff in Israel, but the Israeli court dismissed the case for lack of jurisdiction. Rokah Decl ¶4. On October 14, 2022, Defendants initiated FINRA arbitration proceedings against Plaintiff and BHS. See Statement of Claim; Compl ¶8. Plaintiff then filed this current action on January 31, 2023, seeking to enjoin the arbitration.

at Pages 5 - 6 of the SDNY Memorandum

In The Absence of An Agreement

So, we got a classic stand-off because:

[I]t is undisputed that there was no agreement between the parties to arbitrate disputes and that Defendants are requesting arbitration. Therefore, the Court turns to FINRA Rule 12200's other requirements to determine whether (1) this dispute is between a customer requesting arbitration and an associated person or member; and (2) it arises in connection with the "business activities" of the member or associated person. 

at Page 8 of the SDNY Memorandum

Suitably Broad Definition of a Customer

Would Plaintiff Land's mere registration with FINRA prove enough of an anchor to which to attach the right to arbitrate? If Land did not provide any financial advice or investment services, would that preclude arbitration? Pointedly, SDNY noted that [Ed: footnote omitted]:

Here, Defendants undisputedly did not hold an account with Plaintiff or with BHS, nor did Defendants purchase any goods from Plaintiff. The crux of the parties' dispute is whether or not Defendants purchased services from Plaintiff. On this point, Plaintiff alleges that (1) Defendants did not purchase services from him or BHS; (2) to the extent there were services purchased, they were not within the scope of "business activities" of BHS or Plaintiff. 

at Pages 8 - 9 of the SDNY 

As the Court worked its way through the nuances, it noted that:

[W]hile FINRA has ample jurisdiction to help protect investors, it must be balanced against the reasonable expectations of FINRA members and brokers, who are bound to arbitrate claims when they are acting in their FINRA-registered capacity. Balancing these principles was precisely what led the Second Circuit to articulate a "simple, predictable, and suitably broad definition" of the word "customer." Abbar, 761 F.3d at 276.

Further, it is not sufficient to compel arbitration that the investor purchased any services from the member or associated person; the dispute must arise "in connection with the business activities of the member or the associated person." FINRA Rule 12200. Courts in the Second Circuit have found that a dispute must arise "in connection with the investment banking or securities business activities of a member or associated person." Lincoln Fin. Sec. Corp. v. Foster ("Lincoln II"), No. 20-CV-1132 (VLB), 2021 WL 1197534, at *4 (D. Conn. Mar. 29, 2021). 

at Pages 12 - 13 of the SDNY Memorandum

Diamonds in the Rough -- But Are They Securities?

Not only does SDNY have to tackle the thorny definition of who's a "customer," but, making matters worse, there's also the equally troubling question of whether the diamonds investment was a securities transaction:

[H]ere, Plaintiff disputes that a failed transaction regarding potential diamonds investments involved securities, and Defendants do not contradict this argument. While the absence of securities does not necessarily defeat FINRA jurisdiction, given the unique circumstances of this case and the disputed nature of the transaction, the utter lack of financial instruments involved at least raises serious questions about FINRA's regulatory interest in this matter. See Lincoln I, 2020 WL 6150916, at *5 (granting a preliminary injunction where the plaintiff raised serious questions as to whether "any of the Claimant[s] were securities customers of [Plaintiff]"). 

at Pages 15 - 16 of the SDNY Memorandum

Yes, There Is Irreparable Harm

SDNY concluded that forcing Plaintiff Land to arbitrate before FINRA would cause him "irreparable harm;" and perhaps opting for the lesser of two evils, the Court deemed that its invocation of a Preliminary Injunction against the FINRA Arbitration would simply maintain the status quo until such time as the competing arguments were presented and adjudicated. If, as it turns out, the Defendants ultimately prevail on the issue of arbitrability, the Court views the delay engendered by the injunction as amounting to an inconvenience versus the potential for harm that Plaintiff would suffer in the alternative.

Federal Court Says FINRA Arbitration Not So Lucid in the Sky with Diamonds (BrokeAndBroker.com Blog)

Federal Court Says Mere Email Noting Change of Employment Does Not Arise to Solicitation (BrokeAndBroker.com Blog)

Grandchildren Should Have Bought Decoder Ring to Decipher FINRA Arbitration Award (BrokeAndBroker.com Blog)

Financial Professionals Coalition, Ltd. JOIN TODAY -- FREE MEMBERSHIP

2023 Draft Merger Guidelines (DOJ / FTC Release)

Senator Elizabeth Warren Requests SEC Investigation into Tesla, Inc.'s Alleged Failure to Address Corporate Governance Issues Attendant to CEO Elon Musk (Letter from Senator Warren to SEC Chair Gary Gensler / July 17, 2023)


CEO Of Cryptocurrency And Forex Trading Platform Sentenced To Nine Years In Prison For $240 Million Scheme To Defraud Investors (DOJ Release)

Southern California Man Charged With Diverting $4.8 Million In San Francisco-Based Investment Fraud Scheme / Defendant Joon Woo Kim Also Charged With Bank Fraud In Connection With Allegedly False Business Loan Application (DOJ Release)

Ex-Spouses Indicted for Laundering Money Stolen from Retirement and Investment Accounts (DOJ Release)

Nigerian National Extradited from South Africa for Cyber Fraud Scheme Targeting Tulsa Company / Spoofed Email Led to Fraudulent Shipment of $400,000 in Surface Pro Tablets (DOJ Release)

International Cyber Fraudster Sentenced to More Than 8 Years in Federal Prison (DOJ Release) 


SEC Charges Legendary Partners, LLC and Its President with Reality Tv Offering Fraud Targeting Mostly Elderly Investors / SEC Seeks Court Approval for Settlement That Includes Antifraud Injunctions, Officer and Director Bar, and Monetary Relief (SEC Release)

SEC Charges Fifth Third Securities, Inc. for Violating Municipal Bond Disclosure Law (SEC Release)

SEC Charges Former Broker-Dealer Representative in Connection with Fraudulent Scheme to Manipulate Stock Prices (SEC Release)

“Isaac Newton to AI” Remarks before the National Press Club by SEC Chair Gary Gensler




FINRA Fines and Suspends Associated Person For Failure to Disclose Two Felony Charges and Guilty Plea
In the Matter of Logan J. LaPace, Respondent (FINRA AWC)

FINRA Suspends Rep For Excessively Trading Senior's Account
In the Matter of Murat Kartal, Respondent (FINRA AWC) 

FINRA Fines and Suspends Rep For Unsuitable Use of Margin in Customer Trades
In the Matter of Daniel M. King, Respondent (FINRA AWC)