Second Circuit Adopts Bright-Line Rule For Determining Customer Status For Mandatory FINRA Arbitration
22nd September 2014
Thirty years after the McMahon decision (Shearson/American Express Inc. v. McMahon, 482 U.S. 220 (1987)), which upheld mandatory arbitration of customer disputes, the Second Circuit Court of Appeals clarified under what circumstances a claim against a brokerage firm must be filed in arbitration in Citigroup Global Markets, Inc. v. Abbar, No. 13 2172 (2d Cir. Aug. 1, 2014). The case involved a Saudi investor who lost $383 million through an investment with a United Kingdom affiliate of Citigroup. The investor trusts were administered through two wholly-owned off shore vehicles and pursued a risky leveraged investment strategy by purchasing options from a Citigroup UK affiliate. Some of the investment bankers who helped develop the trading strategy and some personel who worked on the investements were employed at a Citigroup US affiliate.
Affirming the district court’s judgment, the Second Circuit ruled that for purposes of FINRA arbitration, a “customer” of a FINRA member 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. In assessing the existence of a customer relationship, for purposes of determining the availability of FINRA arbitration, the court held that the only relevant inquiry is whether an account was opened or a purchase made; parties and courts need not wonder whether myriad facts will "coalesce into a functional concept of the customer relationship."
In the past, courts have taken a variety of approaches to defining customer status for purposes of FINRA arbitration, often involving fact-intensive inquiries and leading to uncertain outcomes. This opinion, while attempting to provide a bright-line rule, may provide fodder for adjudicating customer-related disputes outside of FINRA arbitration.