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SDNY Defines FINRA “Customer” – Again: Deutsche Bank Securities, Inc. v. Roskos
Posted on Categories Arbitration, Arbitration Agreements, Broker-Dealer, Court Decisions, Securities Arbitration, Securities CustomersTags , , , ,

By Christopher G. Lazarini

Absent an arbitration agreement, a person seeking to compel a FINRA member to arbitrate as its “customer” must (1) have an account with the FINRA member or (2) have purchased goods and services from the FINRA member.

Deutsche Bank Securities, Inc. vs. Roskos, No. 15-CV-534 (S.D. N.Y., 8/4/16).

Plaintiffs, broker-dealers Deutsche Bank Securities and DB Alex.  Brown and several associated persons, brought this action seeking to enjoin a FINRA arbitration.  Plaintiffs argued Defendants (Claimants in the arbitration) were not their “customers” under FINRA Rule 12200 and, therefore, were not entitled to arbitrate their claims.  Defendants had been participants in tax shelter schemes known as Custom Adjustable Rate Debt Structures (“CARDS”) and filed the arbitration after the IRS concluded the CARDS lacked economic substance, disallowed Defendants’ claimed losses, and required them to pay back taxes, penalties, and interest.

Defendants conceded that non-FINRA member Deutsche Bank AG (“DB AG”) was the counter-party to the CARDS transactions, having executed credit agreements with Defendants and collected loan fees from them.  Also, with one exception, the accounts holding the collateral for the CARDS transactions were held by non-FINRA member Deutsche Bank Trust Company.  Defendants claimed “customer” status under FINRA Rule 12200, arguing that the associated persons’ execution of foreign exchange swaps and other securities transactions in connection with the CARDS transactions on behalf of Defendants were brokerage services.

FINRA Rule 12200 requires FINRA members to arbitrate disputes, if arbitration is required by written agreement or is requested by a “customer.”  FINRA’s Code does not define “customer” except to say that a “customer shall not include a broker or dealer.”  Examining Citigroup Global Markets, Inc. v. Abbar, 761 F.3d 268 (2d. Cir. 2014), the Court notes the Second Circuit’s adoption of a “bright line rule” and states that a “customer” under FINRA Rule 12200 is one who either (1) purchases goods or services from a FINRA member or (2) has an account with a FINRA member.  Applying this standard, the Court concludes that all Defendants, save one, were not “customers” of Plaintiffs. First, the core relationship – the credit agreement – existed between non-FINRA member DB AG and Defendants.  Second, the Court finds, Defendants did not have accounts with Plaintiffs, nor did they purchase services from Plaintiffs.  Finally, the Court notes the lack of evidence demonstrating that the compensation the associated persons may have received for the CARDS transactions was anything other than an ancillary consequence of being employees of Deutsche Bank Securities or DB Alex. Brown.  The Court grants Plaintiffs’ request for injunctive relief and permanently enjoins Defendants, save one, from pursuing their claims in arbitration.  The Court allows one of the Defendants to proceed in arbitration, finding he had an account with DB Alex. Brown and that his account was used to collateralize his CARDS transactions; factors meeting the bright line definition of “customer” set out in Abbar.

(C. Lazarini) (EIC: The Court’s interpretation of the Second Circuit’s definitional ruling in Abbar may be too restrictive. It has been fairly settled law in the Second Circuit (see, e.g., John Hancock v. Wilson, SLA 2001-25) that “selling away” claims are arbitrable, yet those investors, almost by definition, were not serviced by the firm. Because they were serviced by the firm’s broker, as part of his “business activities,” they were deemed “customers” for Rule 12200 purposes. These CARDS investors had closer relationships with Plaintiff BD than that. It seems to us that these two lines of cases need to be reconciled.)

(SLC Ref. No. 2016-32-03)

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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