The term “customer” in FINRA Form U-4 and FINRA’s Code of Customer Arbitration Rule 12200 includes a member firm’s account-holder victimized by the rogue investment activities of a FINRA registered broker, even with respect to investments made outside the account that do not result in any commissions or fees to the broker.
Hunsinger vs. Carr, No. 14-2302 (E.D. Pa., 5/24/16).
A Missed Arbitration
Plaintiff, the claimant in a FINRA customer arbitration, moved to confirm the panel’s $300,000 award in his favor for losses in “capital notes” of Carr Miller Capital, a business venture of which defendant, a FINRA-registered broker, was chairman, and which turned out to be a $40 million Ponzi scheme (FINRA ID #11-03427 (Philadelphia, 10/1/13)). Plaintiff had purchased the notes directly from Carr Miller, but he did so during the time that he maintained a retirement account with defendant broker and his firm, and based on recommendations both that he purchase the notes and that he borrow money from his home to do so. Defendant broker, who did not appear at the arbitration hearing or execute a uniform submission agreement for the arbitration, opposed the motion on the ground that, because plaintiff was not a "customer" of defendant’s firm, New England Securities, with respect to the purchases, the panel lacked jurisdiction to hear the claim.
Must the Broker Arbitrate?
After a hearing, the Court rejects defendant’s contention, grants the motion and confirms the Award. The Court does so based on defendant’s obligation to arbitrate as a FINRA-registered associated person and Rule 12200 of FINRA’s Code of Arbitration Procedure. At the time defendant sold plaintiff the notes at issue, defendant was registered with FINRA and employed by a FINRA member firm. According to the Court, defendant does not dispute that he was at the time bound by the arbitration clause in his Form U-4, requiring arbitration under FINRA Rules. Further, both the Form U-4 and Rule 12200 constitute agreements to arbitrate, of which plaintiff is an intended beneficiary.
Is the Claimant a Customer?
The only question is whether the notes were sold to plaintiff as defendant’s brokerage customer. As the Court notes, neither the Form U-4 nor Rule 12200 defines the term “customer.” Nonetheless, it must be construed in a manner consistent with the reasonable expectations of FINRA members, and an individual who opens an account with a firm has a reasonable expectation that he will be treated as a customer. Though defendant claimed that he did not receive any commissions or fees for the sales, the Court notes that by maintaining an account with defendant and his firm, plaintiff had a direct investment relationship with both, and defendant’s representations to plaintiff were made in the course of that relationship. As the Court emphasizes, courts have compelled arbitration of claims arising from firm employees’ rogue activities. A valid agreement to arbitrate exists and the dispute at issue falls within the scope of that agreement.
(SLC Ref. No. 2016-24-02)
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