Broker-Dealer Litigation - Greenberg Traurig LLP

support the FINRA arbitration as proper, specifically arguing that FINRA rules do not include
arbitration for sophisticated parties, that FINRA has a narrow “investor protection” mandate, and
that a customer relationship requires a fiduciary relationship and cannot be found in an armslength
transaction. The Second Circuit held that the FINRA rules did not support these
contentions and rejected each of them, concluding that defendant was a customer of the Firm’s.
The Second Circuit affirmed the district court’s order denying the Firm’s motion for a
preliminary injunction restraining defendant from proceeding with the FINRA arbitration.
Wachovia Bank, N.A. v. VCG Special Opportunities Master Fund, Ltd., 661 F.3d 164 (2d Cir.
2011).
This appeal stemmed from a judgment entered by the district court dismissing a
complaint that sought an injunction against a FINRA arbitration and simultaneously granted
Defendant’s motion to compel arbitration on the ground that defendant, in a credit default swap
agreement, was a customer of the entity with which it negotiated part of the agreement but which
was a nonparty to the agreement. The crux of the district court action centered upon an
arbitration proceeding brought by defendant, a hedge fund, against a broker-dealer that initiated
negotiations for a credit default swap between plaintiff and defendant. The district court held
that the FINRA Code of Arbitration Procedure for Customer Disputes (“FINRA Code”) provided
for arbitration of disputes between a FINRA member and its customers, and that the brokerdealer
was a member and defendant was a customer, and granted the order compelling
arbitration. Plaintiff and the broker-dealer continued to contest that the arbitration would be
duplicative of a separate action defendant brought against the broker-dealer that was still pending
in the district court, and that the FINRA arbitration could not proceed because defendant did not
have an arbitration agreement with the broker-dealer and that defendant was not a customer of
the broker-dealer within the meaning of the FINRA Code. The appellate court reversed this
decision, holding that defendant was not a “customer” of the broker-dealer. The court reasoned
that Defendant did not have a brokerage agreement with the broker-dealer and the parties’
agreements expressly disclaimed any sort of advisory, brokerage, or other fiduciary relationship.
Indeed, the parties had acknowledged in their agreement that this was an “arm’s length”
relationship. As a result, the Second Circuit concluded that there was no reason for it to further
analyze the boundaries of the FINRA meaning of “customer,” as defendant did not fall within
that definition. The Second Circuit thus reversed the district court’s decision and enjoined
Defendant from continuing with the FINRA arbitration.
Anderson v. Beland, 2011 U.S. App. LEXIS 22209 (2d Cir. Nov. 3, 2011).
Plaintiffs filed claims in a FINRA arbitration for breach of fiduciary duty, breach of
contract, fraud, and negligent misrepresentation stemming from a decline in the value of assets
managed by defendant. Defendant moved the district court (which retained exclusive
jurisdiction over a related 2007 class-action settlement) to enforce that settlement agreement
against plaintiffs, resulting in a withdrawal of their claims before FINRA as they were members
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