In order to obtain injunctive relief declaring FINRA Rule 12200 inapplicable to an investor’s demand for arbitration, a broker-dealer must demonstrate either that: (1) Defendants do not meet the definition of “customer” under 12200; or (2) the selling agent was not an “associated person” of the broker-dealer.
This action was begun by Raymond James Financial Services, Inc. (“RJFS”) with the objective of staying a FINRA arbitration commenced by the Defendants. Defendants claim in the arbitration proceeding that they were defrauded by developers of financially distressed real estate in Florida, who allegedly raised capital from foreign investors through the sale of financial products sold through a captive RIA and broker-dealer, Biscayne Capital. Defendants sued Raymond James & Associates (“RJA”) and Insight Securities initially, then attempted to add RJFS.
The Court reviews the evidence before it and the allegations that RJA employed one of the promoters (Chatburn), cleared for the captive BD, Biscayne Capital, supported the venture, reviewed and approved the offerings, and would open accounts for the investors. Citing as undisputed the fact that Mr. Chatburn was, indeed, registered with RJFS for a short period in 2008, when the fund raisings were first organized, the Court describes how Defendants were misled to believe that broker Chatburn was a branch manager and that, for a seven-year period following, investors were misled about the “Raymond James” imprimatur on the deals.
While RJA did maintain accounts for investors in the Chatburn venture, RJFS did not and argues here that it has no obligation to arbitrate. It seeks a declaration that Defendants “are not and never were” RJFS “customers,” for purposes of FINRA Rule 12200. The Court’s analysis focuses primarily on whether RJFS has a “substantial likelihood of success in establishing that Rule 12200 bars the Arbitration.” If not, the motion must be denied. Looking to Eleventh Circuit precedent, the Court describes its task as deciding if: (1) Defendants do not meet the definition of “customer” under 12200; or (2) “Chatburn was not an ‘associated person’ of RJFS....”
Guidance on the first point from the Second Circuit’s Abbar test holds that either the sale of a “good or service” or the existence of an account will satisfy the “customer” test. Here, the Court finds that the accounts at RJA, opened by Chatburn while a broker at RJFS, combined with the continued representations by the broker, well after his termination at RJFS, that he was working with “Raymond James,” resolves the point. RJFS argues that the RJA accounts were custodial through Biscayne, but the Court rejects the need for a “direct relationship” with RJFS. “RJFS’ argument that Defendants were not customers of RJFS because they lacked signed agreements is unavailing.”
The Court also finds the second test satisfied. RJFS has failed to demonstrate a strong likelihood that it can prove Chatburn was not an “associated person” during the time frame of the dispute. RJFS argues that scope of its supervisory responsibilities and its obligation under Rule 12200 eclipse with the broker’s tenure at the company. The Court rejects the notion of a temporal bar. Some transactions were, indeed, executed with investors during the 2008 employment period and the broker’s representations thereafter about his continuing connection with “Raymond James” belies the notion of a “temporal nexus.” The Court finds that the FINRA Code equates the two terms, “formerly associated” and “associated” and that this makes “Chatburn ... an ‘associated person’ with RJFS for purposes of Defendants’ claims.” That he further repeatedly claimed status as a “branch manager” -- a term that specifically appears in the “associated person” definition at FINRA Rule 12100(u) -- provides “a separate and independent basis” for denying the preliminary injunctive motion.
(ed: *Fn. 1 of the decision indicates that the April 15 hearing regarding the preliminary injunction was held by telephone, “given concerns related to the COVID-19 virus....” **Plaintiff RJFS has appealed the denial of its motion to the Eleventh Circuit. According to the PACER docket, the District Court case has been administratively closed pending the outcome of the appeal.)
(SOLA Ref. No. 2020-22-02)
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