Securities Law Prof Blog

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

Friday, November 30, 2012

Goldman Loses Effort to Enjoin FINRA Arbitration over Auction Rate Securities Issued by Reno

In Goldman Sachs & Co. v. City of Reno (D. Nv. Nov. 26, 2012)( Download GSvReno) the investment banker sought to preliminarily enjoin a FINRA arbitration brought against it by the City of Reno, in connection with the city's issuance of auction rate securities.  Goldman acted as underwriter and also as broker-dealer in the offerings.  Neither the underwriting nor the broker-dealer agreement contained an arbitration clause, and the broker-dealer agreement contained a forum selection clause that all proceedings would be brought in the federal district court in Nevada.  Goldman argued, therefore, that FINRA arbitration could not be maintained.  The court refused to issue a preliminary injunction, finding that the City was a "customer" of Goldman because of the broker-dealer agreement and therefore could bring an arbitration under FINRA Rule 12200, requiring arbitration if requested by a customer.

The court's analysis largely adopts the analysis of the Second Circuit in UBS Financial Services, Inc. v. W. Va. Univ. Hosps., Inc., 660 F.3d 643 (2d Cir. 2011).  The forum selection clause, it held, was not a waiver of arbitration, but only controlled the forum of a court action apart from, or in review of, arbitration.  It recognized that the investment banker may have an argument that the alleged wrongdoing in this case was not directly related to its broker-dealer functions, but this was an issue of arbitrability that Goldman, as a FINRA member, agreed to arbitrate.

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