Centaurus Financial, Inc. v. Ausloos and FINRA
Posted on Categories Court Decisions, Securities Arbitration

By Christopher G. Lazarini

*For FINRA Rule 12200, a “customer” who may compel arbitration absent an agreement to arbitrate is a non-broker and non-dealer having a business relationship with a FINRA member, usually by purchasing goods or services from the member. **Purchasing goods or services from an “associated person” acting on behalf of his own independent company, does not make one a FINRA member’s “customer.”

Centaurus Financial, Inc. vs. Ausloos and FINRA, No. 19-CV-243 (E.D. Wis., 5/8/19).

In December 2018, Defendant initiated a FINRA arbitration against Centaurus (an independent contractor, broker/dealer) and one of its registered representatives. Like many independent contractor registered representatives, the one here “owned” a company named Estate Planning Team, Inc. (“EPT”). The arbitration included alleged fraud and other claims related to an alleged guaranteed return on a Marketing Sublicense Agreement (“MSA”) entered into between Defendant and EPT. FINRA set the hearing location in Wisconsin where Defendant resides.

Centaurus filed this action seeking to enjoin the arbitration pending its request for a declaratory judgment that the matter was not arbitrable. In support, Centaurus argued there was no arbitration agreement between it and Defendant, the MSA was not a security, and the relationship between Defendant and the registered representative/EPT had nothing to do with Centaurus. Defendant moved to dismiss for improper venue under Fed. R. Civ. P. 12(b)(3), and also asked for a stay pending the arbitration.

The Court first considers, sua sponte, whether it has subject matter jurisdiction. It finds it does based on diversity of citizenship – Centaurus is a California corporation with its principal place of business in California and Defendant is a Wisconsin citizen – and the amount in controversy exceeding the $75,000 threshold. The Court notes the $125,000 damage claim in the underlying arbitration was not challenged and accepts it as made in good faith and controlling. The Court denies Defendant’s venue challenge as inappropriate, because neither side argued the arbitration must occur outside of the Eastern District of Washington and declines to re-characterize the motion as one for summary judgment or judgment on the pleadings. The Court similarly denies the motion to stay stating if the arbitration were held first, Centaurus’ motion would be moot.

Turning to Centaurus’ request to enjoin the arbitration, and because there was no arbitration agreement, the Court considers Defendant’s argument under FINRA Rule 12200 that he was Centaurus’ “customer.” In support, Defendant relied on an unsigned agreement between Defendant and EPT providing for the payment of commissions to Centaurus. The Court notes, however, Centaurus is not a party to the unsigned agreement, which identified EPT as the entity providing services. The Court examines various opinions where Rule 12200 was interpreted and states they share a common concept – “a business relationship between the purported customer and the FINRA member, usually by purchasing goods or services from a FINRA member.”

The Court finds that purchasing a service from an “associated person” acting on behalf of an independent company does not meet the “customer” standard and concludes Centaurus is reasonably likely to succeed on the merits. The Court then easily concludes that one facing compulsory arbitration in an unarbitrable dispute has no adequate remedy at law and will suffer irreparable harm if injunctive relief is not granted. The Court also finds for Centaurus on the balancing of harms standard as its potential injury – being wrongfully compelled to arbitrate – is irreparable and far outweighs the delay Defendant would suffer in getting to arbitrate if he ultimately prevailed on the arbitrability question. Finally, the Court finds that granting the injunction will not harm the public interest. The Court grants the injunction but leaves Centaurus’ request for declaratory relief for another day.

(C. Lazarini: Centaurus also sued FINRA because it would “make the process much smoother.” The Court finds this insufficient and dismisses FINRA as being improperly joined.)

(SOLA Ref. No. 2019-37-03)

NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA), from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis. 

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