Sunday, February 21, 2010
In a recent S.D.N.Y. opinion, UBS Securities, LLC v. Voegeli (Jan. 26, 2010), Judge Cote held that a lockup agreement between the underwriter for an issuer in an IPO and an investor in the issuer did not make the investor a "customer" under the FINRA Rules entitled to comepl arbitration of its claims. In deciding the case for the firm, the judge addressed several important issues: (1) subject matter jurisdiction, when a securities firm brings an action in federal court to enjoin a securities arbitration, (2) the test for granting an injunction against proceeding with a pending arbitration, (3) the definition of "customer" under FINRA Rule 12100(i). Judge Cote held:
(1) Since the investor alleges Rule 10b-5 violations in the underlying dispute, subject matter jurisdiction exists. (Complete diversity was lacking, so it was necessary to find federal subject matter jurisdiction.)
(2) Since the firm would suffer "irreparable harm" if required to arbitrate a non-arbitrable claim, injunctive relief was appropriate.
(3) The lockup agreement did not contain an arbitration agreement and did not make the investors UBS customers. "Customer" under FINRA Rule 12100(i) refers to one involved in a business relationship with a FINRA member that is related directly to investment or brokerage services. The investors' broad interpretation of the rule -- that anyone not a broker or a dealer is a customer -- is "absurd."