Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Monday, October 31, 2011

Seond Circuit Again Addresses "Customer" Definition in CDS Dispute

There has been considerable litigation in the Second Circuit over the issue of arbitrability in connection with credit default swap agreements.  Specifically, the issue presented is whether there is a customer/broker-dealer relationship that permits the disappointed party to require arbitration of claims against the financial services firm involved in the transaction.  In Wachovia Bank, N.A. v. VCG Special Opportunities Master Fund, Ltd. (No. 10-1648-cv, Oct. 28, 2011Download Wachovia.102811[1]), the Second Circuit, reversing the district court, held that the hedge fund was not a "customer" of the Wachovia broker-dealer within the scope of FINRA Rule 12200, even though employees of the broker-dealer negotiated part of the CDS agreement.  The court emphasized that all the agreements were between the hedge fund and Wachovia Bank, and the agreement contained a non-reliance clause in which the hedge fund acknowledged that the counter-party was not its broker or advisor in any respect.  In these circumstances, "there is no need to grapple with the precise boundaries of the FINRA meaning of 'customer.'"  The court distinguished the facts from those in two recently decided Second Circuit opinions where the broker-dealer provided brokerage services, Citigroup Global Markets, Inc. v. VCG, 598 F.3d 30 (2d Cir. 2010) and UBS Financial Services Inc. v. West Virginia University Hospitals, Inc. (2d Cir. Sept. 22, 2011).

Judicial Opinions, Securities Arbitration | Permalink

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