• Second Circuit Defines “Customer” for Mandatory FINRA Arbitration
  • September 10, 2014 | Author: Jeff Kern
  • Law Firm: Sheppard, Mullin, Richter & Hampton LLP - Los Angeles Office
  • In a case of first impression, the United States Court of Appeals for the Second Circuit in Citigroup Global Markets, Inc. v. Abbar, No. 13-2172, 2014 WL 3765867 (2d Cir. Aug. 1, 2014), established a bright-line definition of “customer” under FINRA’s mandatory arbitration provision.  Absent a written agreement to arbitrate, FINRA Rule 12200 compels FINRA members to arbitrate disputes with “customers,” but the rule does not define “customer.”  It states only that a “customer shall not include a broker or dealer.”  In Abbar, the Second Circuit held that a “customer” is “one who, while not a broker or dealer, either (1) purchases a good or service from a FINRA member, or (2) has an account with a FINRA member.”  Whether an investor is a “customer” is a threshold arbitrability question, the resolution of which can entail protracted and costly litigation.  But in establishing a clear definition of “customer,” Abbar provides a reliable framework for making this determination, which should promote the efficient resolution of FINRA-related disputes.

    Ghazi Abbar, a Saudi investor, pursued a risky investment with Citigroup Global Markets Ltd. (“CGML”), which is incorporated in the United Kingdom.  At the same time, some of the bankers who helped develop Abbar’s trading strategy, as well as some of the bankers who serviced the investment, worked for Citigroup Global Markets Inc. (“CGMI”), a New York corporation.  Abbar sustained $385 million in investment losses.  In August 2011, rather than pursuing a claim against CGML, Abbar commenced a FINRA arbitration against CGMI, a FINRA member.  CGMI sought an order enjoining arbitration in the U.S. District Court for the Southern District of New York.

    Following nearly two years of pre-trial motions and a nine-day bench trial, the district court enjoined the arbitration, finding that Abbar was not a customer of CGMI.  In its decision, the district court explained the painstaking process of adjudicating this threshold question:

    [T]he question whether Mr. Abbar was a “customer” of [CGMI] was seen to require examining and evaluating the substance, nature, and frequency of each interaction and task performed by the various persons who dealt with Mr. Abbar, their contemporaneous understandings of whose behalf the person was acting [for], and the extent to which the person’s activities shaped or caused the transaction, in the hope that such facts would coalesce into a functional concept of the customer relationship capable of supporting a judicial determination.

    Citigroup Global Mkts., Inc. v. Abbar, 943 F. Supp. 2d 404 (S.D.N.Y. 2013) (Stanton, J.).  Such an inefficient approach, however, risks making “a mockery of the statutory concept that whether there is an agreement to arbitrate be decided by the court at the outset, and promptly.”  Id. at 407.  Instead, the district court held that

    [t]he more direct, available, reliable, and predictable ground for decision is . . . [that] the investor is the customer of the party with which he has the account and consummates the transaction.

    The entity in which the investor has his account, and from whom the investor purchases his desired product, defines the legal and business locus of his status as a customer, and is the core of the relationship as a customer.

    Id. at 408.

    On appeal, the Second Circuit affirmed the district court’s decision.  In its ruling, the Court embraced the district court’s definition of “customer,” holding that “the only relevant inquiry in assessing the existence of a customer relationship is whether an account was opened or a purchase made.”  The Second Circuit stated that, “[i]n most cases, this definition of ‘customer’ can be readily applied to undisputed facts,” and “parties and courts need not wonder whether myriad facts will ‘coalesce into a functional concept of the customer relationship.’”  Under this framework, the Court explained, while a trial may be required if it is unclear whether the investor in fact purchased goods or services from the FINRA member, it will not be necessary to scrutinize, as the district court did here, every facet of the investor-member relationship.

    Applying this definition of “customer” to Abbar’s claim, the Second Circuit found that he was not a “customer” of CGMI.  Abbar neither held an account with nor purchased any goods or services from CGMI.  As the Court reasoned, while CGMI employees provided services to Abbar, he did not purchase those services from CGMI: the operative investment agreement was between Abbar and CGML, and CGML received all of the fees associated with Abbar’s investment.  Finding that Abbar was not a “customer” of a FINRA member, the Second Circuit affirmed the district court’s decision to enjoin the arbitration.

    The Second Circuit’s decision in Abbar provides an efficient framework for determining whether FINRA’s mandatory arbitration rule is applicable to investor-initiated claims.  And while such determinations have proved costly in the past, the ruling in Abbar should serve to diminish the sort of “sprawling litigation” that transpired there, which defeats the goal of arbitration to “yield economical and swift outcomes.”