Principal Securities, Inc. v. Agarwal, No. 20-3312 (8th Cir. Jan. 31, 2022)
Unanimous Eighth Circuit in a selling away case: the purpose of FINRA Rule 12200 “is not to make a brokerage firm the insurer of failed business ventures.”
FINRA Rule 12000 requires firms to arbitrate disputes with “customers” where the dispute “arises in connection with the business activities” of the firm. Like most selling away cases where the parties are in disagreement over FINRA’s authority to administer an arbitration, Principal Securities, Inc. v. Agarwal, No. 20-3312 (8th Cir. Jan. 31, 2022), required the Court to focus on the definitions of “customer” and “business activities.” The underlying dispute concerned a business venture gone bad between the Agarwals and PSI broker Krohn. The District Court enjoined a FINRA arbitration against PSI started by the Agarwals, resulting in an appeal to the Eighth Circuit. A unanimous Court affirms, finding that, although there was a business relationship between the Agarwals and Krohn, there was not enough to support FINRA arbitration jurisdiction against PSI:
“The information in the record makes plain that the Agarwals were business partners with Krohn (and others) ..... [But] the Agarwals have not pointed to evidence demonstrating Krohn provided investment advice or brokerage services during the Spotlight transaction. Nor has Dr. Agarwal pointed to evidence suggesting his decisions were influenced because he thought Krohn was advising him as a result of Krohn’s association with PSI.... FINRA’s purpose is not to make a brokerage firm the insurer of failed business ventures. The Agarwals, relying on their own knowledge and expertise, engaged in arms-length business transactions outside of Krohn’s association with PSI that led purportedly to the loss of millions of dollars. The Agarwals cannot compel arbitration under FINRA Rule 12200 because they have failed to demonstrate that they were Krohn’s customers -- that is, in a relationship with Krohn that was related directly to investment or brokerage services.”
(ed: *Seems right. **There is a Circuit split on the definition of “customer” that your Publisher and Editor-in-Chief wrote about in 2013. See, Defining Who is a Customer in FINRA Arbitration: Time to Clear Things Up!, published in the Securities Arbitration Commentator.)
CLOSE THIS WINDOW TO RETURN TO THE NEWSLETTER
