Federal Court Rejects TRO Against Brokerage Firm and RIA

At the time of filing the Verified Complaint, Doc. 1, and the First Amended Verified Complaint, Doc. 19 ("Am. V. Compl."), the two individual Plaintiffs-Richard H. Kreger and Bruce C. Ryan-were and remain registered broker-dealer agents of Noble Capital Markets, Inc., a registered broker-dealer, and investment adviser representatives of Noble Capital Management, Inc., a registered investment adviser (collectively, the "Noble Capital entities"). Am. V. Compl. at 3 ¶¶ 12-13. Kreger and Ryan are also members of the third Plaintiff, RHK Capital, LLC ("RHK"), a limited liability company. Id. at 2 ¶ 3. Defendant Advisory Group Equity Services, Ltd. ("AGES") is a registered broker-dealer. Id. at 3 ¶ 17. Defendant Trust Advisory Group, Inc. ("TAG") is a registered investment advisor. Id. at 3 ¶ 18. Defendant Tag Group, Inc. ("TGI") is the owner of AGES and TAG. Id. at 4 ¶ 19. The individual Defendant William McCance is a principal and the chief executive officer and president of AGES, TGI, and TAG. Id. at 3 ¶ 15. The individual Defendant Susan Lemoine is the chief operating officer and a principal of AGES and TGI. Id. at 3 ¶ 16. According to the Verified Amended Complaint, the events giving rise to this action took place before Kreger and Ryan became affiliated with the Noble Capital entities. 

On November 30, 2016, a Business Transfer Agreement ("BTA") was executed, whereby Defendants AGES and TAG acquired the "business" of Source Capital Group, Inc. ("Source"). Id. at 4 ¶ 20. This "business" was defined as including, inter alia, all Source registered representatives, all Source customer account agreements, and all Source investment advisory service and management agreements. Id. at 4 ¶ 21; see also Doc. 18 ("Def.'s Mem.") Ex. A. 

Plaintiffs allege that, in consideration for the transfer of Source's "business," AGES and TAG agreed to enter into a separate series of contracts establishing a "Super OSJ"1 owned and managed by Kreger and Ryan, as well as a third individual named David Harris, and guaranteed to them certain monthly cash payments. Id. at 3 ¶¶ 12-13; 4-5 ¶¶ 22, 24. Plaintiffs refer to these contracts as the "OSJ Manager Agreements." Id. The OSJ Manager Agreements form the basis for Plaintiffs' claims against Defendants. 

Although disputed by the Parties, see Def.'s Mem. at 2, 4-8, the BTA and its accompanying OSJ Manager Agreements may have become operative in early 2017. The Parties subsequently lived together in apparent harmony until, on November 30, 2020, McCance-on behalf of AGES and TAG-gave a 60-day written notice to Kreger and Ryan that he was terminating the OSJ Manager Agreements, effective February 1, 2021. Am. V. Compl. at 6-7 ¶¶ 29-30

Plaintiffs do not question Defendants' right of termination. Kreger and Ryan allege that they "immediately identified a broker-dealer with which they wanted to affiliate"-i.e., the Noble Capital entities-and that they promptly notified Defendants of the new affiliation. Am. V. Compl. at 7 ¶ 31. However, Plaintiffs claim that, subsequent to Kreger's and Ryan's reaffiliation with the Noble Capital entities, Defendants have breached the surviving terms of the OSJ Manager Agreements in two respects: (1) by failing to make payments purportedly owed to Plaintiffs based on OSJ representatives' business originated under the OSJ Manager Agreements, in violation of Paragraph 8; and (2) by impeding or failing to proactively assist the transfer of relationships and client accounts to the Noble Capital entities, in violation of Paragraph 9. Id. at 7-8 ¶¶ 34-39.

Why, then, is the case before this Court, on a motion by Plaintiffs for a TRO? The answer lies in Rule 13804 of the FINRA Code of Arbitration Procedure for Industry Disputes. Under that Rule, an arbitration claimant may seek interim injunctive relief from a court of competent jurisdiction while a FINRA arbitration hearing is pending. See FINRA Arb. Proc. R. 13804(a)(1).3 Plaintiffs invoke Rule 13804 in their motion to this Court for a TRO. 

Rule 13804 further provides for an expedited arbitration hearing, to be scheduled within fifteen days of the Court's issuance of interim relief. FINRA Arb. Proc. R. 13804(b)(1). If the Court declines to grant a TRO, however, the arbitration of the Parties' underlying disputes will proceed before FINRA arbitrators in the ordinary, non-expedited manner. Doc. 22 ("Hr'g Tr.") at 17:8-17:12. Counsel for Plaintiffs acknowledged at this Court's hearing on Plaintiffs' motion that if Plaintiffs succeed on the merits of their claims in the FINRA proceeding, the arbitrators at that time will have the power to grant Plaintiffs all the forms of relief Plaintiffs seek now in the TRO. Id. at 17:12-17:14, 24:22-24:24, 45:3-45:10. Plaintiffs nonetheless invoke Rule 13804 to seek a TRO from this Court for the purpose of obtaining an expedited arbitration hearing. Id. at 15:15-15:19. 

Whether to issue or deny interim injunctive relief, by temporary restraining order or preliminary injunction, is a much-litigated question. The standard of review in this Circuit is established by decisions of the Supreme Court and the Second Circuit. See infra Part II.B. Courts in this District apply that standard of review when asked to issue interim injunctive relief pursuant to FINRA Rule 13804. See, e.g., Westport Res. Mgmt., Inc. v. DeLaura, No. 3:16-cv-873, 2016 WL 3546218 (D. Conn. June 23, 2016); Morgan Stanley Smith Barney, LLC v. O'Brien, No. 3:13-cv-1958, 2013 WL 5962103 (D. Conn. Nov. 6, 2013).

It is immediately apparent that, to the extent Plaintiffs base this action upon Defendants' alleged failure to make payments Plaintiffs claim are owed pursuant to Paragraph 8 of the OSJ Management Agreement, a temporary restraining order is not available. Should Plaintiffs succeed on that claim in the FINRA arbitration, there is no reason to suppose that the arbitrators would not give Plaintiffs full compensation for these unpaid amounts, in the form of an award of the payments Defendants should have made plus appropriate interest. On this aspect of the case, where the remedy of money damages is plainly available, Plaintiffs have not shown that irreparable injury, as defined by the cases, is even possible, let alone likely.

Moreover, the facts reflected by the present record militate against a finding of irreparable injury to Plaintiffs. Plaintiffs' construction of Paragraph 9 of the OSJ Manager Agreements has to be that when AGES and TAG agreed to "not place any impediment in the way of" or "oppose" or "interfere with" transfers or reassignments of clients' accounts designated by an OSJ Manager, the Defendant companies also agreed by implication not to try to persuade the clients in question to stay where they are, with the Defendants. This construction of the contract term is something of a stretch, but even if one accepts it, and also accepts that Defendants are wrongfully refusing to make a block transfer under the OSJ Manager Agreements, the Court agrees with Defendants that Plaintiffs are nonetheless able, by the exercise of their own personal efforts, to obtain transfers of accounts to them through the ACATS system. Plaintiffs will have to persuade clients to transfer to the Noble Capital entities for these ACATS transfers to occur, but the Court agrees with Defendants that this is a requirement they face in any event: FINRA's rules and publicly available guidance evidently contemplate that clients will direct the transfers of their accounts between broker-dealers. See FINRA Uniform Prac. Code R. 11870; see also FINRA, Key Topics: Customer Account Transfers, https://www.finra.org/rules-guidance/key-topics/customer-account-transfers (last visited May 5, 2021) (collecting FINRA materials regarding transfers of customer accounts). 

In order to achieve their commercial purposes, Plaintiffs may have to incur greater effort and expense than they anticipated, but under the circumstances those consequences do not add up to "irreparable harm." It also seems to me likely that if the FINRA arbitrators agree with all of Plaintiffs' claims, they will be able to calculate the several elements of Plaintiffs' damages and losses, and fashion an award that will constitute full and adequate compensation. 

• TAB
• Advisory Group Equity Services
• Judge Haight
• DCT
• TRO
• Irreparable Harm
• FINRA
• Arbitration
• BrokeAndBroker
• Bill Singer