Bass, Berry & Sims attorney Chris Lazarini discussed the court's interpretation of "customer" under FINRA Rule 12200 in a case where a clearing firm sought to avoid arbitration. The court defines a "customer" as one who, while not a broker or dealer, either (1) purchases goods or services from a FINRA member or (2) has an account with a FINRA member.
Chris provided the analysis for Securities Litigation Commentator (SLC). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SLC, please visit the SLC website to sign up for the newsletter.
Wilson-Davis & Co., Inc. vs. Mirgliotta, No. 1:16 CV 3056 (N.D. Ohio, 4/28/17)
*Courts generally interpret the term "customer" in FINRA Rule 12200 as one who, while not a broker or dealer, either (1) purchases goods or services from a FINRA member or (2) has an account with a FINRA member.
**Allegations of negligent supervision may arise "in connection with" a broker-dealer's business activities, within the meaning of FINRA Rule 12200, even where the broker-dealer's agents cause a customer to make investments away from the firm.
After being defrauded of more than $700,000 by a group of recidivist brokers, the Mirgliottas commenced FINRA arbitration proceedings against the brokers, various broker-dealers, and Wilson-Davis, a clearing firm which had held the bulk of the Mirgliottas' retirement assets prior to the fraud. Wilson-Davis sought to enjoin the arbitration claims against it, citing the Mirgliottas' allegation that their account opening documents were forged and arguing that they were not its "customers" under FINRA rules.
The Court disagrees. Even accepting the alleged forgery of the documents and the absence of a written agreement to arbitrate, the Mirgliottas were Wilson-Davis "customers" under FINRA Rule 12200. The Court defines a "customer" as one who, while not a broker or dealer, either (1) purchases goods or services from a FINRA member or (2) has an account with a FINRA member. Here, the Mirgliottas discussed opening an account at Wilson-Davis with one of the brokers, had an account at Wilson-Davis, and received statements from Wilson-Davis. Given these facts, Wilson-Davis may not rely on the forged signatures to avoid arbitration.
Looking again to Rule 12200, the Court also finds that the Mirgliottas' failure to supervise allegations arose "in connection with" Wilson-Davis' business activities on transactions in the Wilson-Davis accounts, and even on those occurring away from Wilson-Davis, where the Mirgliottas alleged that the brokers caused them to withdraw funds from their accounts to make investments away from the firm. The Court does not, however, extend the "in connection with" standard to transactions occurring prior to the opening of the Wilson-Davis accounts.
Applying the facts to the standards for injunctive relief, the Court finds that Wilson-Davis failed to demonstrate that requiring it to arbitrate will cause an irreparable injury and further finds that the balance of the hardships favor the Mirgliottas. Therefore, it directs the parties to proceed to FINRA arbitration for resolution of the merits of all claims, except those before the Wilson-Davis accounts were opened.
The recidivist brokers were charged with various crimes by the DOJ and others and either pled guilty or were tried and convicted.