No. 13-2172 (2nd Cir., 8/1/14). Agreement to Arbitrate * Statutory Definitions (“Customer”) * SRO Rules (FINRA Rule 12200) * Arbitration Agreement. The only relevant inquiry in assessing the existence of a customer relationship is whether an account was opened or a purchase made; parties and courts need not wonder whether myriad facts will coalesce into a functional concept of the customer relationship.
The Court’s holding in this case, which affirms that of the District Court, states that “a ‘customer’ under FINRA Rule 12200 is one who, while not a broker or dealer, either (1) purchases a good or service from a FINRA member, or (2) has an account with a FINRA member.” Under the Court’s analysis, that excludes many foreign or international transactions, such as the one at bar, unless they have a direct connection with the United States. This is not a territorial determination, however; rather, the focus lies with the locus of the transaction – whether the transaction took place with a FINRA member or whether, if there was no transaction, the firm held an account for the investor.
In the matter at hand, which concerned a $353 million loss realized in 2009, Ghazi Abdullah Abbar, a Saudi Arabian businessman, managed Abbar family trusts and pursued a risky leveraged investment that involved options, leveraged borrowing and a portfolio of assets in a fund held by London-based brokerage firm, Citibank Global Markets Ltd. (Citi UK). Citigroup Global Markets, Inc. (CGMI), the U.S.-based broker-dealer, had a significant hand in the transactions, judging from the developed facts. CGMI personnel worked on structuring the investments, helped develop Mr. Abbar’s trading strategy, held power of attorney to intervene and were authorized to remove Mr. Abbar as the adviser to the account. CGMI personnel also handled the discussions when they did remove Mr. Abbar and all of the Abbar’s investments were lost. When talks finally broke down, Mr. Abbar initiated FINRA arbitration, naming CGMI. CGMI objected and sought injunctive relief, claiming that the Abbar entities were not CGMI “customers” and no written agreement existed to mandate arbitration. The District Court conducted hearings, gathering detailed information about the nuances of the transaction and the relationships represented among the Abbar parties and the various Citigroup affiliates.
Ultimately, the District Court concluded that, were it to base a decision on arbitrability upon the facts, as adduced from its fact-gathering, it would conclude that the Defendants were not “customers” of CGMI. They were “customers” of Citi UK, which put forth the loans, issued the options, and held the Abbar accounts. But, the District Court decided that a bright-line test was more appropriate, because, to engage in a fact-gathering process of this duration in future cases, would defeat the principles that recommend arbitration as a speedier alternative. The Second Circuit agrees. It, too, sets forth the facts in detail, illustrating plainly that CGMI and Citi UK both had a large and established presence in the Abbar transactions. It, too, opts for a simpler formula. “The only relevant inquiry in assessing the existence of a customer relationship is whether an account was opened or a purchase made; parties and courts need not wonder whether myriad facts will ‘coalesce into a functional concept of the customer relationship.’”
(ed: *Both SIFMA and PIABA submitted amicus curiae briefs in this appeal, so much was riding on the outcome. **The Court repeats its two-part alternative formula a number of times in the Opinion, emphasizing its simplicity and predictability. That caused us to wonder if it might be stepping back from earlier, broader rulings on “selling away” cases being subject to arbitration. There, the broker-dealers were compelled to arbitrate with investors who gave money to firm brokers, but did not have accounts or do transactions with the firm. Sensitive to that point, we noted in the decision this observation: “In short, the rule requires a FINRA member to arbitrate disputes with its ‘customers,’ or the ‘customers’ of its ‘associated persons.’”) (SLC Ref. No. 2014-29-01)
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