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Second Circuit Holds Mandatory Broker Dealer Arbitration Not Available To Non-Customer

Last month, the US Court of Appeals for the Second Circuit issued a summary order in SunTrust Banks, Inc. et al. v. Turnberry Capital Management LP, 13-CV-2075 (2d Cir., May 15, 2014), which was a case regarding the circumstances in which a broker dealer may be compelled to arbitrate with an institutional counter-party which is not a traditional customer of the broker-dealer.

As of recent years, arbitration has seemingly grown to be more claimant friendly, making arbitration a less-hospitable environment for defendants as compared to traditional courtrooms. It was in this context that Turnberry arose. Turnberry is a hedge fund that began a FINRA arbitration against its point-of-sale broker dealer, Raymond James, regarding the purchase of trust certificates collateralized by cash flows from a pool of residential mortgage loans. FINRA rules generally compel broker dealers to arbitrate disputes with their customers. With regard to Raymond James, this was not an issue.

The issue arose in that in addition to naming Raymond James as a defendant, Turnberry also named SunTrust Robinson Humphrey (STRH), the broker dealer affiliate of SunTrust Banks, which had sponsored and/or issued the subject trust certificates. STRH moved to enjoin the arbitration of claims against it, arguing that Turnberry was not its “customer” under FINRA rules and that STRH had no contractual obligation to arbitrate a dispute with Turnberry. Turnberry then asserted that it was effectively a customer of both Raymond James and STRH and entitled to arbitrate against both. The US District Court rejected Turnberry’s argument and held that Turnberry was not STRH’s customer and enjoined the arbitration of Turnberry’s claims.

The Second Circuit affirmed under a de novo standard, regarding the issue of arbitrability, and clear error standard, regarding factual findings, sustaining the District Court’s finding that there was no indication of a customer relationship based on a review of a number of factors. The Second Circuit focused on the District Court’s findings as relying on whether Turnberry acquired goods or services from STRH, whether it received financial advice, whether there was a brokerage agreement, whether a fee was paid, and whether STRH made statements evincing a customer relationship.

If you or someone you know has lost money as a result of an investment, please contact Richard Frankowski at 888-390-0036 to discuss your potential legal remedies.