AXA Distributors, LLC et al v. Bullard et al
MEMORANDUM OPINION AND ORDER denying defendants' 9 MOTION to Dismiss or in the Alternative, Motion to Compel Arbitration; denying plaintiffs' 12 MOTION for Preliminary Injunction; denying as moot defendants' 29 Motion to Strike Affidavit of John E. Pinto. Signed by Honorable William Keith Watkins on 12/24/2008. (cc, )
IN THE UNITED STATES DISTRICT COURT F O R THE MIDDLE DISTRICT OF ALABAMA S O U T H E R N DIVISION A X A DISTRIBUTORS, LLC, et al., P l a i n t if f s , v. G A Y L E S. BULLARD, et al., D e f e n d a n ts . ) ) ) ) ) ) ) ) )
C A S E NO. 1:08-CV-188-WKW [WO]
M E M O R A N D U M OPINION AND ORDER Plaintiff AXA Distributors, LLC ("AXA Distributors") brings this action to enjoin the a rb itra tio n of disputes over the purchase of variable annuities distributed by AXA D i s t rib u to rs and purchased by Defendants.1 Defendants initiated arbitration proceedings a g a in st AXA Distributors under the rules of the Financial Industry Regulatory Authority (" F IN R A " ), formerly the National Association of Securities Dealers ("NASD").2 AXA D is trib u to rs asks the court to enjoin the arbitration in this action. Three motions are pending a n d will be addressed in this opinion: Defendants' Motion to Dismiss or in the Alternative, M o tio n to Compel Arbitration (Doc. # 9); AXA Distributors' motion for preliminary
AXA Advisors, LLC ("AXA Advisors") is also a plaintiff, but, on the representation of the Defendants that AXA Advisors is not implicated in the business activities made the basis of this action, AXA Advisors is not a proper subject of the motion to dismiss or compel.
See, e.g., About Finra, http://www.finra.org/AboutFINRA/index.htm (last visited Dec. 23,
in ju n c tio n (Doc. # 12); and Defendants' motion to strike affidavit of John E. Pinto (Doc. # 29). For the reasons that follow, all three motions are due to be denied. I. JURISDICTION T h e court exercises subject matter jurisdiction pursuant to 28 U.S.C. § 1332(a), an d venue is appropriate under 28 U.S.C. § 1391(a). The parties contest neither.3 I I . BACKGROUND A. Facts In the mid-1990s, The Equitable Life Assurance Society of the United States, now A X A Equitable Life Insurance Company ("AXA Equitable"), developed and issued the E q u ita b le Accumulator (the "Accumulator") variable annuity investment product.4 AXA E q u ita b le did not market the Accumulator directly because it is not a broker-dealer, but in s te a d entered into distribution arrangements with registered broker-dealers AXA D is trib u to rs for wholesale distribution, and AXA Advisors for retail distribution of the s e c u rity. AXA Distributors is described by AXA Equitable as an "indirect, wholly owned su b sid iar [ y]" of AXA Equitable, and "the distributor of the contract [with] responsibility
Defendants initially challenged jurisdiction to consider the arbitrability question (see Mot. to Dismiss or Compel 6) but have since abandoned that argument (Mots. Hr'g Tr. 22, Aug. 1, 2008 (Doc. # 35)). Even if not abandoned, the argument was due to be decided against Defendants; arbitrability "is undeniably an issue for judicial determination," AT&T Techs., Inc. v. Commc'ns Workers of Am., 475 U.S. 643, 649 (1986). The only remaining argument with respect to dismissal is for a failure to state a claim. (Mot. to Dismiss or Compel 1.) The Accumulator was described in company documents as "a combination fixed and variable deferred annuity designed to provide for the accumulation of retirement savings and for income at a future date." (Mot. to Dismiss or Compel Ex. C.)
f o r sales and marketing functions." (Mot. to Dismiss or Compel Ex. F at 38.) AXA D is trib u to rs in turn entered into a Broker-Dealer and General Agent Sales Agreement (" D is trib u tio n Agreement") with the business predecessors of Raymond James Financial S e r v ic e s , Inc. ("Raymond James"),5 an agreement which identified Raymond James as a b ro k e r-d e a le r for the retail distribution of the Accumulator. Raymond James uses registered re p re se n ta tiv e s who are independent contractors (Hr'g Tr. 28) to sell a variety of financial p ro d u c ts , including in this case, the Accumulator. Defendants purchased Accumulator c o n tra c ts from two Raymond James representatives, Ann Holman ("Ms. Holman"), and M a x in e Chappell ("Ms. Chappell"). In order to sell the Accumulator, it is undisputed that M s . Holman and Ms. Chappell were appointed non-exclusive insurance agents for AXA E q u ita b le . (Verified Compl. ¶ 16 (Doc. # 1).) In its agreement with the NASD, as amended March 21, 1996, Equitable Distributors (n o w AXA Distributors) agreed to limit its business activities as a broker-dealer to "a) w h o le sa lin g variable and fixed contracts . . . through other broker/dealers and banks, and b) d is trib u tin g investment company securities on a wholesale basis only." (NASD Agreement (P ls .' Reply Mem. Ex. A).) AXA Equitable described AXA Distributors as having
" re sp o n s ib ility for sales and marketing functions." In furtherance of the sales and marketing
In the interest of convenience and simplicity, this entity will be referred to as Raymond James. For the record, Investment Management & Research, Inc. was identified in the agreement as the "BrokerDealer," and Planning Corporation of America was identified as the "General Agent." (See Distribution Agreement (Pls.' Reply Mem. Ex. B (Doc. # 28)).) Apparently, there was a merger of one or both of these companies into the Raymond James group of entities in 1998.
f u n c tio n s , AXA Distributors undertook several business functions to assist in the marketing o f the Accumulator. It directly provided training to Ms. Holman and Ms. Chappell with re s p e c t to the Accumulator's features and materials (Holman Aff. & Chappell Aff. (Defs.' S u p p le m e n ta l Br. Exs. 1 & 2 (Doc. # 34))), directly provided follow-up services to the c u sto m e rs of Ms. Holman and Ms. Chappell (Mot. to Dismiss or Compel Ex. C), and offered " e ff e ctiv e sales ideas, and a commitment to excellent service to help [them] and [their] c lien ts achieve their goals" (Mot. to Dismiss or Compel Ex. E). According to
c o r re s p o n d e n c e from AXA Distributors to the Raymond James office from which Ms. H o lm an and Ms. Chappell worked, AXA Distributors offered "immediate marketing support a n d illustrations" and told the Raymond James representatives to "not hesitate to contact A X A Distributors for anything that [they] need[ed] to help grow [their] business." (Mot. to D ism iss or Compel Ex. E.) Though they were non-exclusive agents of AXA Equitable when they marketed the A cc u m u lato r, Ms. Holman and Ms. Chappell were independent contractors, and therefore " a ss o c ia te d persons" of Raymond James, which also served, by the then-NASD rules and the e x p re ss terms of the Distribution Agreement, as their supervising broker-dealer (Distribution A g re e m e n t Articles III & IV). Specifically, Raymond James agreed that it would "train, s u p e rv is e and be solely responsible for the conduct of the Agents in their solicitation a c tiv itie s in connection with the Contracts" and cause its agent-representatives to comply s tric tly with the rules and procedures of AXA Equitable and all "federal and state securities
la w s and NASD requirements" in connection with solicitation activities. (Distribution A g re e m e n t §§ 4.1, 4.2.) Thus, while they were agents of AXA Equitable, the issuer of the s e c u r ity, the agents were registered representatives of, and supervised by, a third-party b r o k e r - d e a l e r .6 S a le s procedures for marketing the Accumulator were straightforward. Ms. Holman, f o r instance, took orders and payment from her customers. (Holman Aff.) Raymond James f o r w a r d e d the funds collected by Ms. Holman (or, in some cases, which were already on d e p o sit with Raymond James) to AXA Equitable, which retained the right under the D is trib u tio n Agreement to reject applications.7 (Distribution Agreement § 2.5; Holman Aff. ¶ 16.) If the application was accepted, AXA Equitable issued the contract directly to the c u s to m e r. (See Distribution Agreement § 4.7.) AXA Distributors sent follow-up
c o rre sp o n d e n c e directly to the customer, identifying at least in some cases Ms. Holman as a s "your financial professional." (Mot. to Dismiss or Compel Ex. C.) AXA Distributors re c eiv e d remuneration for marketing from AXA Equitable, and forwarded commissions d o w n s tre a m to Raymond James, which then paid the selling agents, in this case, Ms. Holman an d Ms. Chappell. (William C. Miller Supplemental Aff. ¶ 10 (Pls.' Reply Mem. Affs.);
Ms. Holman and Ms. Chappell are no longer associated with Raymond James.
While AXA Distributors is a wholly owned subsidiary of AXA Equitable, this retained power is nevertheless deemed control retained by the issuer, not the distributor, and is not attributed to the distributor.
D istrib u tio n Agreement §§ 7.1, 7.5.) It is undisputed that, in addition to the Accumulator, M s . Holman and Ms. Chappell had several other financial products in their inventory. In their arbitration Statement of Claim, Defendants seek damages from AXA D is trib u to rs in excess of one million dollars arising out of their purchases of the A c c u m u la to r.8 (Statement of Claim 12 (Verified Compl. Ex.).) Their claims include fraud, s u p p re s s io n , negligent training and supervision, breach of contract, conversion, Alabama s e c u ritie s fraud, and unsuitable investment/suitability review. (Statement of Claim 7-12.) R a ym o n d James, Ms. Holman and Ms. Chappell are not named as respondents in the a rb itra tio n proceeding. Interestingly, Ms. Holman is a claimant in the arbitration proceeding b u t is not named as a defendant in this action.9 The essence of the claims in arbitration is that D e f en d a n ts were fraudulently induced to purchase the Accumulator "based upon re p re se n tatio n that the annuity provided a guaranteed rate of return, guarantee of principal, a n d liquidity at the end of term." (Mot. to Dismiss or Compel 2.) Defendants also claim that A X A Distributors failed to disclose that these representations were false. (Mot. to Dismiss o r Compel 2.) Arbitration of this dispute is premised solely on the characterization by D ef en d an ts of Ms. Holman and Ms. Chappell as "associated persons" of AXA Distributors
AXA Equitable is also named as a respondent in the arbitration, but AXA Equitable is not a member of FINRA and is not required to submit to arbitration. (See Verified Compl. 4 n.1.) Because "she was an associated person of Raymond James . . . during the relevant time period, . . . [Ms.] Holman may be entitled to rely upon different FINRA rules . . . to determine at least the eligibility of her claims for arbitration against the Plaintiffs." (Verified Compl. 4 n. 1.)
w h e n they marketed the Accumulator. "Associated persons" is a term of art and law in the s e c u ritie s world. B . FINRA Rules F IN R A is an industry association. In connection with its FINRA membership, AXA D is trib u to rs bound itself, by subscribing to the FINRA Rules as a condition of membership, to arbitrate certain disputes between its customers and itself, or between its customers and its associated persons, when such customer disputes arise in connection with its (or the a ss o c ia te d persons') business activities. Because there is no written arbitration agreement b e tw e e n the parties, determining arbitration begins with Rule 12200 of the FINRA Rules re la tin g generally to matters eligible for submission to arbitration.1 0 It requires arbitration if arbitration is requested by the customer, the dispute is between a customer and a member o r associated person of a member, and the dispute "arises in connection with the business a c tiv itie s of the member of the associated person." Rule 12200. Rule 12100 defines "associated person," "customer," "member," and "person a ss o c ia te d with a member." "For purposes of the Code, the term `member' means any broker o r dealer admitted to membership in [FINRA] . . . ." Rule 12100(o). The terms "associated p e rs o n " or "associated person of a member" means "a person associated with a member, as
The Securities and Exchange Commission ("SEC") approved new FINRA Rules, which became effective December 15, 2008, and apply to all claims filed on or after April 16, 2007. Order Approving FINRA Proposed Rule Changes, Exchange Act Release No. 34-58643, 73 Fed. Reg. 57,174 (Oct. 1, 2008); FINRA, Regulatory Notice 08-57, SEC Approves New Consolidated FINRA Rules, 2008 WL 4685588 (Oct. 16, 2008). Authority arising under the NASD Code governs and guides interpretations of the FINRA Rules to the extent that there is no meaningful change from the NASD Code.
that term is defined in paragraph (r)." Rule 12100(a). Paragraph (r) contains a more e x te n siv e definition of "person associated with a member": (1 ) A natural person registered under the Rules of FINRA; or (2 ) . . . a natural person engaged in the . . . securities business who is directly o r indirectly . . . controlled by a member, whether or not any such person is re g is te re d or exempt from registration . . . . R u le 12100(r). "Customer" is defined simply, but not particularly helpfully, by what it "shall n o t include" a broker or dealer. Rule 12100(i). The imprecise language of the Rules c o m p lic a te s the analysis of the legal characterization of Ms. Holman and Ms. Chappell, and c o n s e q u e n tia lly, the status of Defendants as customers of AXA Distributors. C . Issue for Resolution The only issue for resolution is whether this dispute will be arbitrated. Because there is no independent written arbitration agreement between Plaintiff and Defendants, the dispute w ill be arbitrated only if Defendants were "customers" of AXA Distributors, thereby in v o k in g the FINRA Rules. Defendants were not customers of AXA Distributors unless Ms. H o lm a n and Ms. Chappell were "associated persons" of AXA Distributors when they m a r k e te d the Accumulator to Defendants.1 1 Ms. Holman and Ms. Chappell were not a ss o c ia te d persons of AXA Distributors unless they were directly or indirectly controlled by A X A Distributors when they were marketing the Accumulator.
"When an investor deals with a member's agent or representative, the investor deals with the member." Multi-Fin. Sec. Corp. v. King, 386 F.3d 1364, 1370 (11th Cir. 2004).
I I I . STANDARDS OF REVIEW A party may move to dismiss actions raised against that party for "failure to state a c l a im upon which relief can be granted." Fed. R. Civ. P. 12(b)(6). A motion pursuant to R u le 12(b)(6) tests the sufficiency of the complaint against the pleading standards set forth in Rule 8 of the Federal Rules of Civil Procedure. "When considering a motion to dismiss, a ll facts set forth in the plaintiff's complaint `are to be accepted as true and the court limits its consideration to the pleadings and exhibits attached thereto.'" Grossman v. Nationsbank, N .A ., 225 F.3d 1228, 1231 (11th Cir. 2000) (per curiam). If a party is "aggrieved by the alleged failure, neglect, or refusal of another to arbitrate u n d e r a written agreement," it may petition a federal district court "for an order directing that s u c h arbitration proceed in the manner provided for in [the] agreement." 9 U.S.C. § 4. When a d d re ss in g a Section 4 motion, the district court must determine whether there is a binding a g re e m e n t to arbitrate and if so, whether the nonmovant has breached its obligation to a rb itr a te under that agreement. Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U .S . 1, 22 n.27 (1983) (citing 9 U.S.C. §§ 4, 6). If the existence of a binding agreement to arb itrate and the failure of the nonmovant to comply with that term are not at issue, the court m u st order arbitration. 9 U.S.C. § 4. If either of these determinations is at issue, however, th e court must "proceed summarily to the trial" to determine the issues. Id. The court can c o n sid e r evidence outside of the pleadings for purposes of a motion to compel arbitration. S e e , e.g., Chastain v. Robinson-Humphrey Co., Inc., 957 F.2d 851, 854 (11th Cir. 1992);
M a g n o lia Capital Advisors, Inc. v. Bear Stearns & Co., 272 F. App'x 782, 785 (11th Cir. 2 0 0 8 ) (per curiam) ("More specifically, we require a party resisting arbitration to `s u b s ta n tia te [ ] the denial of the contract with enough evidence to make the denial c o lo ra b le .'" (quoting Wheat, First Sec. Inc. v. Green, 993 F.2d 814 (11th Cir. 1993))). IV. DISCUSSION A X A Distributors contends that it has no legal obligation to arbitrate the FINRA d isp u te with Defendants "because (1) there is no agreement to arbitrate between Defendants a n d  Plaintiffs, and (2)  Defendants were not customers of  Plaintiffs or their associated p e r s o n s , nor does Defendants' arbitration proceeding arise in connection with Plaintiffs' b u s in e ss activities." (Verified Compl. 2.) Thus, say Plaintiffs, Defendants must litigate. (P ls .' Reply Mem. 3.) On the other hand, Defendants claim to have been "customers" of A X A Distributors, as that term applies under the FINRA Rules and applicable case law, w h e n they purchased the Accumulator from persons associated with AXA Distributors, and th u s are entitled to arbitrate their dispute with AXA Distributors. T h e FINRA Rules constitute the arbitration agreement for disputes between customers a n d FINRA members or persons associated with FINRA members. "[T]he [NASD] Code se rv e s as a sufficient written agreement to arbitrate, binding its members to arbitrate a variety o f claims with third-party claimants." King, 386 F.3d at 1367. As to governing contract law, th e courts "must interpret the [NASD] Code as it would a contract under the applicable state la w ." Id. Thus, Alabama contract law applies, and it favors arbitration when there is doubt.
C a rr o ll v.W. L. Petrey Wholesale Co., 941 So. 2d 234, 235-37 (Ala. 2006). Likewise, the F e d e ra l Arbitration Act, 9 U.S.C. §§ 1-16, creates a presumption in favor of arbitrability, but th e Eleventh Circuit recently has been ambivalent as to whether that presumption applies w h e n a court is determining whether an agreement to arbitrate exists. Compare King, 386 F .3 d at 1367 ("[A]ny doubts concerning the scope of arbitrable issues should be resolved in f a v o r of arbitration."), with MONY Sec. Corp. v. Bornstein, 390 F.3d 1340, 1342 n.1 (11th C ir. 2004) ("However, the presumption is not necessary in this case because we can decide th e issue as a matter of law without resorting to a presumption. Accordingly, we recognize th a t King addresses the applicable presumption, but we need not dwell on it in this case."). D e te rm in in g whether the presumption applies, however, is not necessary for the resolution o f this case, as will become apparent. T h e question for resolution is whether Ms. Holman and Ms. Chappell were associated p e r s o n s of AXA Distributors when they marketed the Accumulator to Defendants. D e f en d a n ts urge the court to examine the question whether Defendants were customers of A X A Equitable as well, but this second question is subsumed in the first. Clearly, AXA
D e f e n d a n ts were customers of the Raymond James registered representatives.
D istri b u to rs is the broker-dealer and member of FINRA and thus, the AXA-related party s u b je c t to FINRA's arbitration rules; marketing the Accumulator is the business of AXA D is trib u to rs , and the parties have a dispute arising out of the marketing of the Accumulator to Defendants. Therefore, if the Raymond James representatives were "associated persons"
o f AXA Distributors, Defendants were customers of AXA Distributors. So, the salient issue c a n be reduced to whether the Raymond James registered representatives were associated p e rs o n s of AXA Distributors. Under Rule 12100(r), an "associated person" includes (1) a natural person (2) engaged in the securities business (3) who is directly or indirectly controlled (4) by a member (5) w h e t h e r such person is registered or exempt from registration. It is undisputed that Ms. H o lm an and Ms. Chappell were natural persons engaged in the securities business who were d ire c tly controlled by Raymond James (a member), and that they were registered re p re se n ta tiv e s. The ultimate question then becomes: Were they controlled directly or in d ire c tly by AXA Distributors (also a member) at the relevant times? The facts impacting th e question are largely undisputed. A . AXA's Arguments A X A Distributors asserts that Ms. Holman and Ms. Chappell were not associated p e rs o n s . First, they insist that the agents were associated persons of Raymond James only. In the Distribution Agreement, Raymond James agreed to "train, supervise and be solely r e sp o n s ib l e for the conduct of the Agents in their solicitation activities in connection with th e Contracts." (Distribution Agreement § 4.1.) The agents were registered representatives o f Raymond James who operated out of a Raymond James office and called on customers o f Raymond James. Moreover, the agents had numerous products, not issued by or
a s s o c ia te d with any AXA entity, at their disposal to offer for sale to their customers,
in c lu d in g Defendants. Ms. Holman and Ms. Chappell offered independent investment advice w ith o u t interference, influence or control of AXA Equitable. For AXA Distributors, "associated persons" is a term of art that specifies those p e rs o n s subject to regulatory control. (Pls.' Opp'n (Doc. # 19).) In other words, a person w h o is supervised by a broker-dealer is an associated person of that broker-dealer, and any p erso n not supervised by that broker-dealer cannot be an associated person of the brokerd e a le r . At oral argument, when confronted with the question of the distinction between
d ire c t and indirect control, AXA Distributors' counsel distinguished "indirect" control as re la tin g to persons who are not "direct" employees of a broker-dealer, but are perhaps e m p lo ye e s of their independent contractor registered representative. (Hr'g Tr. 43-44.)12
The second argument posited by AXA Distributors is that "there must be some connection between the investors and the member firm or their associated person in order to support a finding that a customer relationship exists." (Pls.' Mem. Supp. Mot. for Prelim. Inj.13 (Doc. # 13).) AXA Distributors finds comfort in the language of Wheat, First Securities Inc., 993 F.2d 814. At issue was whether parties who purchased tainted securities from Marshall & Company ("Marshall"), a predecessor firm which ultimately sold its assets to Wheat First, could compel Wheat First to arbitrate claims arising out of the Marshall transaction that occurred before the asset purchase. In the asset purchase agreement, Wheat First "expressly did not assume any liability, known or unknown, fixed or contingent, of [Marshall]," and the court found that the investors were not customers because "[w]e cannot imagine that any NASD member would have contemplated that its NASD membership alone would require it to arbitrate claims which arose while a claimant was a customer of another member merely because the claimant subsequently became its customer. . . . We therefore hold that customer status . . . must be determined as of the time of the events providing the basis for the allegations of fraud." Id. at 816 (internal quotation marks omitted), 820. The language giving aid and comfort to AXA Distributors is the observation that "Wheat First and Appellants had absolutely no relationship at the time of the alleged events that Appellants seek to arbitrate." Id. at 818. The rationale for this "nexus" argument is that courts should factor in the reasonable expectations of the FINRA member when considering compulsion to arbitrate. To bolster its narrower view of the definition of "customer," AXA Distributors cites Fleet Boston Robertson Stephens, Inc. v. Innovex, Inc., 264 F.3d 770 (8th Cir. 2001), a case which turned on whether business activities outside of investing or brokerage activities fall within the NASD arbitration net. Rejecting a broad definition of "customer" in a "close call," the court declined to extend the definition "where the business relationship did not include [investing or brokerage activities]." Id. at 773.
A X A Equitable is somewhat handicapped because it has to prove the negative. It c la im s that the Raymond James representatives were not AXA Equitable associated persons b e c au s e they were never appointed such; it had no supervisory control or responsibility for th e Raymond James agents - by agreement and FINRA rules, Raymond James supervised th e m ; it was prohibited from retail activities by the terms of its FINRA membership; and it m a rk e te d wholesale to Raymond James, which marketed retail through its registered re p re se n ta tiv e s. AXA Distributors therefore had no direct or indirect control over the R a ym o n d James representatives.1 3 T h u s , AXA Distributors concludes that, because the Raymond James representatives w e re not controlled directly or indirectly by AXA Distributors, they could not be "associated p erso n s" of AXA Distributors under the Rules. Ergo, if the representatives were not a s s o c ia te d persons of AXA Distributors, then Defendants cannot be customers of AXA
AXA Distributors additionally rejects the notion that the Rule 12100(i) defines "customer." The Rule, which is entitled "Definitions," says in toto: "A customer shall not include a broker or dealer." Id. According to AXA Distributors, "that definition is not intended to imply that every person or entity in the universe that is not a broker or dealer is a customer of every FINRA member firm." (Pls.' Reply Mem. 7.) All these arguments, consuming dozens of pages, miss the mark. It is undisputed that Defendants were customers of the Raymond James representatives. If it is found that Defendants were dealing with associated persons of AXA Distributors when they purchased the Accumulator, they were dealing with AXA Distributors, and thus, were customers of AXA Distributors. Though Plaintiffs make the more specific following points to argue that Defendants were not customers, the arguments bear on whether Ms. Holman and Ms. Chappell were "associated persons." Defendants were not customers of AXA Distributors, AXA Distributors argues, because it never conducted any business with any of them; never took an application or cash from them; never opened an account for them and never sent them an account statement; and never executed a retail order or confirmation of order for them. In short, there was "absolutely no relationship whatsoever" between them. (Pls.' Mem. Supp. Mot. for Prelim. Inj. 10-11.)
D istrib u to rs. If Defendants are not customers, they are not entitled to arbitration of this d is p u te . B . Defendants' Arguments D e f en d a n ts advance a broader definition of "associated person." Their contentions c a n be summed up in one statement: "Plaintiff's sole business was to sell and market the p r o d u c ts at issue in this case and to train and supervise others who sell and market the p ro d u c ts , and Plaintiff was involved in and received compensation for each sale." (Defs.' R e p ly 4 (Doc. # 21).) Leaning on the "indirect control" component of the definition of " a ss o c ia te d person," Defendants point out that AXA Distributors conducted all the training o n the Accumulator; directed the Raymond James representatives in sales techniques; a d v is e d the Raymond James representatives on how to sell the Accumulator and retained d is c re tio n over how it was marketed; provided direct customer and sales support, including p ro sp e c tu se s and marketing materials; and made post-sale contact with the investors. It is u n d is p u te d by AXA Distributors that Raymond James provided no direct training on the A c c u m u l a to r . The training consisted of AXA Distributors training events (see Holman Aff. ¶ 4; Chappell Aff. ¶ 3) and Raymond James training events conducted by AXA Distributors' r e p re s e n ta tiv e s (see Holman Aff. ¶ 13; Chappell Aff. ¶ 4). Ms. Holman and Ms. Chappell d e n y any knowledge of the Accumulator except that which they received from the AXA e n tities . AXA Distributors explained the complicated product to them, taught them how to s e ll it, answered their questions almost daily, gave them quotes and illustrations, and directed
a n d instructed them on interpreting the quarterly statements. (See Holman Aff.; Chappell A f f .) Indeed, AXA Distributors wrote Ms. Holman in March of 2000 that it was "always re a d y to answer [her] questions . . . give [her] a quote or a hypothetical illustration . . . p r o v i d e [her] with marketing materials . . . help [her] in any way we can." (Mot. to Dismiss o r Compel Ex. H. (ellipses in original).)1 4 Defendants conclude that these activities amount to indirect control as contemplated by the definition of associated person in Rule 12100(r).1 5 D e f e n d a n ts also argue generally that the fact that AXA Distributors benefitted financially f ro m the sales of the Raymond James representatives is relevant. C . Analysis 1. P r e lim in a r y Discussion of Controlling Sources B e c au s e the parties point to no case directly on point factually, and the court has found n o n e , the cases upon which the parties rely are not particularly helpful in determining w h ethe r AXA Distributors controlled the Raymond James representatives. AXA Distributors re lie s upon Wheat First for the proposition that one cannot be a customer of a broker-dealer if one has absolutely no relationship with the broker-dealer at the time of the event causing the dispute. This is not an instructive conclusion when it is undisputed that Defendants are
To be fair, the same letter to Ms. Holman refers to "your client" or "your clients" three times never to "our" clients. (Mot. to Dismiss or Compel Ex. H.) A subset of the indirect control argument is that, having undertaken to train, direct and support the representatives of Raymond James, AXA Distributors had a duty to do so with due care. This argument can be taken as support for the state-law claims, not for arbitration. Of note, this is as close as Defendants come to suggesting that AXA Distributors had a duty to supervise the Raymond James representatives.
c u sto m e r s of the persons who sold them the Accumulator, and the issue is whether the p e rs o n s selling it were associated with AXA Distributors. To that scenario, Wheat First does n o t speak. Likewise, Defendants rely upon the somewhat related but factually
d is tin g u is h a b le cases, King, 386 F.3d 1364 and Bornstein, 390 F.3d 1340. (See Defs.' Reply 5 .) King and Bornstein are not apropos because in both cases it was undisputed that the re g is te re d representative was an associated person of the broker-dealer and the investor was a customer of the associated person.16 The essence of the dispute is whether the registered representative is an associated p e rs o n of, in effect, two broker-dealers, Raymond James and AXA Distributors. The matter c a n be resolved only by interpretation and application of the FINRA Rules under state-law c o n tra c t principles. In this exercise, the plain and unambiguous meaning of the Rules a p p lie s, unless ambiguities in the Rules are evident, in which case, parole evidence can be
In King and Bornstein, the issue was whether the broker-dealer would be compelled to arbitrate when its admitted agent or representative (associated person) sold securities not issued, marketed or approved by the broker-dealer to customers of the associated person. The issue in both turned on whether the customer of an associated person is also the customer of the broker-dealer who supervised the associated person, even if the broker-dealer had no knowledge of the transaction. In both cases, the broker-dealer was compelled to arbitrate because the court ultimately found that the investor was a customer of both the associated person and the broker-dealer.
c o n s id e re d .1 7 Of the Rules, only Rule 12100(r) defines "person associated with a member." 1 8 T h e Rule references "a member," which the court takes to mean, without any ambiguity, any m e m b e r of FINRA, therefore inclusive of AXA Distributors. Direct or indirect control is not d e f in e d in the Rules. The definition of an "associated person" is also found in the Securities Exchange Act o f 1934 ("Exchange Act") but its definition differs slightly from that in the FINRA Rules. In d e e d , at least four circuits have held that the definition of "associated person" in 15 U.S.C. § 78(c)(21) of the Exchange Act does not trump the FINRA's definition of "associated p e rs o n ." "[N]othing in the [Exchange Act] prohibits a self-regulatory organization (such as th e NASD) from using a term for its own purposes (in applying its own rules and regulations) in a way that is narrower than the way that term is defined in the [Exchange Act]." Burns v . N.Y. Life Ins. Co., 202 F.3d 616, 621 (2d Cir. 2000) (joining the D.C. and 5th Circuits) (p o in tin g out that the SEC must approve of the NASD's rules and that the NASD's definition d id not result "in any rule or practice that is inconsistent with the statute or any regulatory c o m m a n d of the SEC" (citing Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220, 233AXA has submitted the affidavits of John Pinto (Pls.' Reply Mem. Affs.) and William C. Miller (Pls.' Mem. Supp. Mot. for Prelim. Inj. Ex. C) as parole evidence on the legal issues. "Person associated with a member" is also defined in the FINRA By-Laws, and it includes a person "directly or indirectly . . . controlled by a member." FINRA, FINRA By-Laws Art. I(gg). Rule 0160 states that "[t]he terms in the Rules, if defined in the FINRA By-Laws, shall have the meaning as defined in the FINRA By-Laws unless the term is defined differently in a Rule, or unless the context of the term is defined differently in a Rule, or unless the context of the term within a Rule requires a different meaning." Thus, cases and FINRA (or formerly NASD) guidance elucidating definitions in the By-Laws that, by this standard, carry the same definition as in the Rules, are applicable and referred to in this analysis. Subsequent discussion of the FINRA Rules incorporates applicable interpretations of the By-Laws.
3 4 (1987)1 9 )); see also Paul Revere Variable Annuity Ins. Co. v. Kirschhofer, 226 F.3d 15, 2 1 (1st Cir. 2000) ("[I]n the absence of any specific reference to touchstones outside the N A S D Code, there is not the slightest reason to believe that the drafters of the NASD Manual c o n sid e re d . . . the Exchange Act to be part of the `context' relevant in deciding whether to a d h e re to the definition stated in the by-laws."). The First Circuit more explicitly has c o u n se led against relying on the Exchange Act at all to interpret the FINRA Rules: "[I]t is m u ch more plausible that the drafters [of the NASD Manual] intended to direct interpreters t o the text, structure, and purpose of the NASD's various regulations and practices rather th a n to an endless (and ever-changing) array of outside factors . . . ." Paul Revere Variable A n n u i ty Ins. Co., 226 F.3d at 21. Because the Exchange Act and the then-NASD Rules " se rv e very different purposes," the First Circuit reasoned, "it is hardly surprising that they e m p lo y dissimilar definitions." Id. at 22. T he way in which the Exchange Act's and FINRA's definitions of "associated person" c o n f lic t, however, is not implicated in this case. Cf. Burns, 202 F.3d at 620 (highlighting the d iffe ren ce between the provisions with respect to the inclusion or exclusion of "company"). A d d itio n a lly, the cases interpreting the "directly or indirectly" controlled language in the
"Since the 1975 amendments [of the Exchange Act] . . . the [SEC] has had expansive power to ensure the adequacy of the arbitration procedures employed by the [self-regulatory organizations ("SRO")]. No proposed rule change may take effect unless the SEC finds that the proposed rule is consistent with the requirements of the Exchange Act; and the [SEC] has the power, on its own initiative to `abrogate, add to, and delete from' any SRO it if finds such changes necessary or appropriate to further the objectives of the Act. In short, the [SEC] has broad authority to oversee and to regulate the rules adopted by the SROs relating to customer disputes, including the power to mandate the adoption of any rules it deems necessary to ensure that arbitration procedures adequately protect statutory rights." Shearson/Am. Express, Inc., 482 U.S. at 233-34 (citations omitted).
E x ch an g e Act are not motivated by policy implications that appear to deviate from FINRA's p u r p o s e s . Furthermore, the Eleventh Circuit has not ruled on the interplay between these p ro v isio n s in this context. For these reasons, the following "associated person" analysis will d ra w not only from case law on the FINRA and formerly-NASD language, and from FINRA a n d NASD decisions,2 0 but also on case law interpreting the same language in the Exchange A c t .2 1 2. D e fin in g Direct and Indirect Control T h e pivotal definition of the FINRA Rules at issue is of "control," and the key d is tin c tio n is between direct and indirect control. Black's Law Dictionary defines the noun " c o n tro l" as "[t]he direct or indirect power to direct the management and policies of a person o r entity, whether through ownership of voting securities, by contract, or otherwise; the p o w e r or authority to manage, direct, or oversee." Black's Law Dictionary 253 (8th ed. 1 9 9 9 ); see also id. (defining the verb "control" as "to exercise power or influence over" or
AXA Distributors urges the court to afford deference to FINRA's interpretation of its own regulations. (Pls.' Supplemental Reply Mem. 4 (Doc. # 33).) It is not clear, however, that a "controlling weight" deference applies to the review of NASD decisions. Nevertheless, in light of Paul Revere Variable Annuity Insurance Co., the prudence in considering an association's interpretation of its own rules, and the fact that the SEC delegated authority to NASD, the NASD interpretations factor into the analysis. See, e.g., Nat'l Planning v. Achatz, No. 02-cv-0196E (SR), 2002 WL 31906336, at *2 (W.D.N.Y. Dec. 17, 2002) (noting in the slightly different context of considering an arbitration rule on composing an NASD panel, that "courts should be wary about disregarding NASD Rules and should accord deference to the NASD's interpretation of its Rules" ); Kashner Davidson Sec. Corp. v. Mscisz, 531 F.3d 68, 71 n.1 (1st Cir. 2008) (describing the relationship between the SEC and NASD). It is appropriate to consider terminology as it is used throughout a statutory scheme. See, e.g., United Sav. Ass'n of Tex. v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 371 (1988). Though the NASD is not a part of the Exchange Act, the interrelatedness between the SEC and the NASD justifies comparing the language. See Credit Suisse Sec. (USA) LLC v. Billing, 127 S. Ct. 2383, 2395 (2007) (describing the interrelatedness).
" [ t] o regulate or govern"). Webster's defines "direct" as "characterized by . . . a close [ e sp e c ia lly] logical, causal, or consequential relationship" and "marked by absence of in te rv e n in g agency, instrumentality, or influence." Webster's Third International Dictionary (U n a b r id g e d ) 640 (1961). Indirect means "not straightforward and open" or "not directly a im e d at or achieved." Webster's, supra. These definitions alone, however, are too general to resolve the meaning of control, or the distinction between direct and indirect control. Courts tend to define direct and indirect control, both as used in the FINRA Rules and f o rm e r NASD Code, and the Exchange Act, not expressly but through the description of f a cto rs . In John Hancock Life Ins. Co. v. Wilson, 254 F.3d 48 (2d Cir. 2001), the court found a n independent insurance agent and investment broker an "associated person" under the N A S D Code despite his working from home; the agent was authorized, through a sales re p re s e n ta tiv e agreement, to sell life insurance and annuities on behalf of John Hancock, a b ro k e r- d e a le r member. Id. at 51. In First Liberty Inv. Group v. Nicholsberg, 145 F.3d 647 (3 d Cir. 1998), the court reviewed the factual realities of a business relationship and found a n "associated person," eschewing labels that the parties chose for that relationship. Id. at 6 5 2 . Even though an agreement between First Liberty and Nicholsberg specifically named h im as an "independent contractor," that denomination was "not controlling in the face of the c o n f lic tin g reality." Id. It was the "parties' total relationship," including limitations on N ic h o ls b e rg and First Liberty in conducting their business, that dictated the result. Id.
T h e total relationship amounted to at least "indirect control." 2 2 First Liberty Inv. G r o u p , 145 F.3d at 642. The court highlighted the following underlying facts and provisions o f the agreement: (1) First Liberty's provision of facilities to Nicholsberg for executing tra n sa c tio n s ; (2) First Liberty's appointing Nicholsberg's office to offer and solicit sales of sec u rities; (3) First Liberty's giving Nicholsberg geographic exclusivity; (4) Nicholsberg's ag ree ing to comply with First Liberty's manual; (5) Nicholsberg's agreeing to First Liberty's p rio r approval before he sent correspondence or caused advertising pertaining to securities s o lic ita tio n ; and (6) Nicholsberg's promising not to engage in a security transaction with any o th e r individual or broker-dealer. Id. Underlying those factors was also a policy concern. If First Liberty could "escape the NASD arbitration requirements simply by calling someone a c tin g in Nicholsberg's capacity an independent contractor, [it] could easily frustrate N A S D 's firm policy of submitting industry disputes to binding arbitration." 23 Id.2 4
The court also found that the relationship "plac[ed] Nicholsberg in much the same practical position that would be occupied by a branch manager." First Liberty Inv. Group, 145 F.3d at 652. The NASD acknowledged, albeit by implication, that it construes the definition of "associated person" broadly "as it must in order to take regulatory action in circumstances where a person's connection with a member firm implicates the public interest." Dist. Bus. Conduct Comm. v. Paramount Invs. Int'l, Inc., No. C3A940048, 1995 WL 1093392 (NASDR Oct. 20, 1995) (affirming the District Business Conduct Committee's decision, which the NASD noted, included the observation that it "had always construed [the `associated person'] definition broadly"). The Eleventh Circuit has addressed NASD language only briefly. It found an individual, Riccard, "was a natural person engaged in the securities business who was controlled by member Prudential at the time of the 1995 events giving rise to the dispute," and thus, was an associated person under the NASD By-Laws. Riccard v. Prudential Ins. Co., 307 F.3d 1277, 1287 n.6, 1288 n.7 (11th Cir. 2002). The parties had considered Riccard an employee of Prudential at all relevant times. Id. at 1286 n.3.
T h o u g h FINRA has not provided clear guidance on what control means, it has p ro v id e d some signals as to its meaning. FINRA's Uniform Application for Broker-Dealer R e g i str a tio n (Form BD) defines control as "power, directly or indirectly, to direct the m a n a g e m e n t or policies of a company, whether through ownership of securities, by contract, o r otherwise." 2 5 But that definition begs the question of what directing management or p o lic ie s entails. Furthermore, the question of whether an individual is controlled by a brokerd e a le r is not presumptively synonymous with the definition of control for purposes of re g is tr a tio n . An NASD interpretive letter's discussion of "associated persons" under the NASD B y-la w s, although not binding, targets some relevant indicia of control. In a letter to Pamela M . Krill, the NASD commented on a proposed arrangement not entirely dissimilar to the a rra n g e m e n t here.2 6 CAI was an insurance agency that intended to register as a broker-dealer a n d become a member of the NASD. CAI asked the NASD whether in that event, CAI could p a y commissions from sales of variable annuity products and mutual funds shares to its in s u ra n c e agent employees, who, by agreement, would become registered representatives at
FINRA, Current Uniform Registration Forms for Electronic Filing in Web CRD, Form BD, http://www.finra.org/web/groups/industry/@ip/@comp/@regis/documents/appsupportdocs/p005260.pdf (last visited Dec. 23, 2008). NASD, Interpretive Ltr. (Feb. 3, 2003), http://www.finra.org/Industry/Regulation/ Guidance/InterpretiveLetters/P002661 (last visited Dec. 23, 2008).
th e same time of another broker-dealer and NASD member.2 7 In determining whether the re g is te re d representatives were under the control of CAI and thus, deemed associated persons o f CAI as well, the court looked to several indicia of control, some of which pertain sp e c if ica lly to the registered representatives' status as CAI's employees, but others that did n o t. The NASD noted how CAI would maintain control over the employee-registered re p re se n tativ e s' commission payments, would issue paychecks to them, determine their b e n e fits levels, help determine which securities products they would offer, and provide office s p a c e for securities-related activities. These factors for the most part relate to control CAI w o u ld have as an employer over the agent-representatives. The interpretive guidance c o n tin u e d , however, by noting other factors of control: (1) that CAI would retain a portion o f the securities commission revenues; (2) that the other broker-dealer would receive only a flat fee for supervising, training, and providing administrative services to the agentsre p re se n ta tiv e s; (3) that CAI "potentially could have a greater financial interest in the securities-related activities of the registered representatives" than the other broker-dealer; and (4) that the registered representatives appeared to be selling the products on behalf of CAI. In a separate interpretive letter, in a factual situation less on point but still relevant, th e NASD declined to find that one member broker-dealer (Firm A) controlled the re p re se n ta tiv e s of another (Firm B) based on these factors: (1) Firm B's representatives
In our case, certain facts are distinguishable AXA Distributors had already registered as an NASD Member prior to the agreement with the broker-dealer of the registered representatives and the registered representatives were not employees of AXA Distributors but insurance agents of AXA Equitable. The discussion of control, however, is still applicable.
"p erf o rm [e d ] their functions solely as salaried employees" of Firm B; (2) Firm B's re p re se n ta tiv e s did not "solicit securities transactions or make other recommendations"; and (3 ) Firm B's representatives did not "retain ownership or control of accounts opened and fo rw ard ed " to Firm A.2 8 Importantly, the NASD also stated: "Since the activities of [Firm B 's ] registered representatives on behalf of [Firm A] occur pursuant to a contract between th e two members, [Firm B's] registered representatives are not employed, directly or in d ire c tly, outside the scope of their relationship with their employing member [Firm B]" and d o not receive compensation outside that scope. Id. The contract between the outside firm a n d employing firm helped to buffer the employing firm's employees from being deemed " c o n tro lle d " by the outside firm.29 T h e word "control" comes up in analogous contexts under the Exchange Act. The E x c h a n g e Act defines "associated persons," in relevant part as "any person directly or in d ire c tly controlling, controlled by . . . such broker or dealer." 15 U.S.C. § 78c(a)(18) (o m ittin g distinguishable language). In a case applying this definition to the relationship b etw ee n a securities broker barred from the U.S. market and a U.S. securities broker, Sec. E x c h . Comm'n v. Zahareas, 272 F.3d 1102, 1004 (8th Cir. 2002), the Eighth Circuit chided th e district court for "judicially grafting onto the statute . . . an expansive clause." Id. at
NASD, Interpretive Ltr., Apr. 22, 1998, http://www.finra.org/Industry/Regulation Guidance/InterpretiveLetters/P005274 (last visited Dec. 23, 2008). The National Adjudicatory Council's decision in Department of Enforcement v. Respondent 1, No. CAF000029, 2002 WL 970381 (NASDR Mar. 21, 2002) also addressed the meaning of "associated person." The facts in that case, however, are so distinguishable that extrapolating from its findings does not aid the analysis.
1 1 0 6 . Specifically, the circuit court declined to include in the definition of "associated p e rs o n ," "registered representative." Id. at 1107. The court also noted there was no p re c e d e n t that "providing and verifying paperwork" amounted to control. Id. at 1106. In s te a d , the court focused on the lack of evidence that the broker-dealer controlled Z a h a re a s 's means and manner of performance. Id. The broker-dealer "knew little about how [ h e ] conducted his business . . . [,] provided none of the workplace instruments such as te le p h o n e s or computers" and did not hire or monitor his employees. Id. Judge Bright, in d is s e n t, listed other factual circumstances that persuaded him of the opposite conclusion th a t under Black's Law Dictionary's definition of control, the broker-dealer exercised c o n tro l. Id. at 1108 (Bright, J., dissenting). Zahareas steered Greek investors to the brokerd e a ler , those customers received account numbers and materials from the broker-dealer, it p ro v id e d Zahareas with its account opening materials, applications, tax forms, and margin a g re e m e n ts , and it reviewed and approved new account information from him on the new c u s to m e rs . Id. All of those factors, however, were not enough to convince the majority that th e broker-dealer controlled an individual.3 0 Id. at 1106. In a federal district court case from the Southern District of New York, the court listed v a rio u s facts in support of its finding that the defendant violated an SEC order by willfully a s s o c ia tin g with various broker-dealer firms. Sec. Exch. Comm'n v. Telsey, Fed. Sec. L. Rep. (C C H ) ¶ 95,871 (Mar. 13, 1991). With one broker-dealer, Tesley had his own telephone and
Admittedly, the opinion was tied to the statute's express purpose, as well as the statute's plain language. Zahareas, 272 F.3d at 1106.
d e sk , solicited accounts for the broker-dealer, prepared order tickets, filled out account fo rm s, used the broker-dealer's NASDAQ machine to trade on behalf of the broker-dealer's p rop rietary account, quoted bids and offers when asked, traded in stocks for the brokerd e a le r, went into its offices almost daily during business hours, had a registered re p re se n ta tiv e number for identifying his customer's order tickets so that he could receive c o m m is s io n s , and was compensated for his association with the broker-dealer. Id. He was a ls o associated with other broker-dealers based on those and additional facts including d e s c rib in g himself as a "principal" of the broker-dealer and bringing in new customers. Id. T h e Exchange Act also uses "control" in defining control liability. The Exchange Act im p o se s liability on "[e]very person who, directly or indirectly controls any person liable u n d e r any provision" of the pertinent chapter, rule, or regulation unless the controlling person a c ted in good faith. 15 U.S.C. § 78t(a). The Eleventh Circuit recently has expounded on this la n g u a g e . See Laperriere v. Vesta Ins. Group Inc., 526 F.3d 715 (11th Cir. 2008) (per c u ria m ) . In discussing the definition of controlling person, the court explained that
" C o n g re ss recognized that it would be difficult, if not impossible, to enumerate or anticipate th e many ways in which actual control may be exercised and expressly declined to define the te rm `control,' leaving courts free to decide issues of control on a case by case basis." 3 1 Id.
The court also noted that the SEC's more specific definition of control, promulgated as a regulation, "like the statute, does not attempt to formulate a precise definition of `control' applicable to all cases, but is intended only to provide some guidance, leaving a determination of whether control exists dependent on the particular factual circumstances of each case." Laperriere, 526 F.3d at 723. The regulation defines control as "the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through ownership of voting securities, by contract, or otherwise." 17 C.F.R. § 230.405 (West 2008).
a t 722-23. As the Ninth Circuit announced, control for purposes of control liability, like c o n tro l under the Rules and the then-NASD By-Laws, is not limited to the relationship of e m p lo ye e s or agents, and employers, but includes independent contractors. Hollinger v. T ita n Capital Corp., 914 F.2d 1564, 1574 (9th Cir. 1990) (en banc). To limit control by exclu din g independent contractors would "frustrate Congress's goal of protecting investors." Id . The court made a point of tying control to supervision.3 2 Id. (In describing the outcome h a d it not found that independent contractors could be associated persons, the court noted the b rok er-d ea ler could have thereby "avoid[ed] a duty to supervise simply by entering into a c o n tra c t that purports to make the representative . . . an `independent contractor.'" (emphasis a d d e d )) . Control that triggers liability can be indirect as well, though the difference between d ire c t and indirect control remains largely unexplained.3 3 The Eighth Circuit approached a d e f in itio n of "indirect control" in Martin v. Shearson Lehman Hutton, Inc., 986 F.2d 242 (8th C ir. 1993). There, it held that control liability "reaches persons who have only `some indirect m e a n s of discipline or influence' less than actual direction." Id. at 244 (quoting Myzel v.
The company tried to contract away supervision by stating it had "no right to control or direct" the sales contractor, "`not only as to the result to be accomplished by the work but also as to the details and means by which the result is accomplished,'" except for oversight and instructions required for legal compliance, and left the contractor "`completely free'" to control the results and means. Hollinger, 914 F.2d at 1574 n.7 (quoting the contract). For instances in which control is defined, in the SEC regulation for example, the definition of control includes a reference to both "direct" and "indirect" embedded in the definition of control. It is unclear, in those instances, whether "direct" or "indirect" within the definition of "control" sufficiently address what direct and indirect control mean.
F ie ld s , 386 F.2d 718, 738 (8th Cir. 1967)); accord Harrison v. Dean Witter Reynolds, Inc., 9 7 4 F.2d 873, 880-81 (7th Cir. 1992) (quoting the Eighth Circuit). The Seventh Circuit d e sc rib e s control that is indirect as the potential to control. The culpable party must have " p o ss e ss e d the power or ability to control the specific transaction or activity upon which the p rim a ry violation was predicated, whether or not that power was exercised." Id. at 882; see a ls o Rochez Bros., Inc. v. Rhoades, 527 F.2d 880, 890-91 (3d Cir. 1975). The distinction b e tw e e n direct and indirect control otherwise must be gleaned by deciphering a distinction b e tw e e n the two from the facts of cases that interpret control. 3. A p p l ic a t io n : AXA Distributors Did Not Directly or Indirectly Control the R a y m o n d James Representatives A X A Distributors did not control the Raymond James representatives by any of the f o re g o in g definitions of control.3 4 Two features of this relationship account predominantly f o r why AXA Distributors did not control the Raymond James representatives: (1) the c o n tra c tu a l relationship, which was between AXA Distributors and Raymond James, not its r e g is te r e d representatives; and (2) the separation of AXA Equitable from AXA Distributors. It is significant that it was Raymond James, and not its registered representatives, that entered in to a contract with AXA Distributors, and that Raymond James retained control over its
The contract between AXA Distributors and Raymond James states that "[n]othing [therein] shall constitute [Raymond James] or any agents or representatives of [Raymond James] as employees of [AXA Equitable] or [AXA Distributors]" (Distribution Agreement § 2.7), and Raymond James is an independent contractor and not employee under the contract (Distribution Agreement § 2.7). Contractual language, however, is not dispositive of whether AXA Distributors controlled the Raymond James representatives. Determining control depends the factual details of the relationship, as well as the agreement.
re g is te re d representatives. It is also significant that any control the AXA entities retained o v e r the Raymond James representatives was lodged in AXA Equitable. AXA Distributors' sales agreement was with Raymond James, not its registered re p re se n ta tiv e s. (Distribution Agreement 1.) Raymond James sold products of other c o m p a n ie s . (Distribution Agreement § 2.7.) The registered representatives did not use AXA D is tr ib u to r s ' facilities for their sales.3 5 (See Holman Aff. ¶ 4; Chappell Aff. ¶ 3.) Raymond J a m e s retained the duties to train and supervise the registered employees more generally, and to be fully responsible for their solicitation activities. (Distribution Agreement § 4.1.) R a ym o n d James provided the seminar where Ms. Holman and Ms. Chappell were trained by A X A Distributors on the Accumulator (Chappell Aff. ¶ 4); they otherwise were not trained a t AXA Distributor's facilities. Raymond James agreed that its representatives who were a p p o in te d AXA Equitable's agents would not solicit applications for contracts without c e rta in materials and would only make statements with that information, and that AXA D is trib u to rs would be responsible for supplying the relevant materials. (Distribution
A g re e m e n t, §§ 5.1(b), 6.1, 6.2.) Even if AXA Distributors conducted the actual training for M s . Holman and Ms. Chappell, that factor alone is not enough to determine that AXA D is trib u to rs controlled them, especially in light the intermediary contractual party Raymond Jam es.
Although Ms. Holman and Ms. Chappell stated that AXA Distributors provided the training for the Accumulator, that training was not at AXA Distributors' facilities, nor was any of the business solicitation. (See Holman Aff. & Chappell Aff.)
A d d itio n a lly, though both AXA entities stood to gain by the arrangement, Raymond J a m e s directly received payment to distribute to its brokers and retained a portion for itself. T o the extent that the agreement between AXA Distributors and Raymond James dictated the re p re se n ta tiv e s' actions, that was an agreement that the supervising broker-dealer entered i n t o and the supervisory broker-dealer retained responsibility over the representatives' a c tio n s , not to mention, the power and responsibility to discipline the representatives. (D is trib u tio n Agreement §§ 4.1, 4.9.) The factual circumstances of the arrangement do not u n d e rm in e these roles. Ms. Holman and Ms. Chappell have attested only to constant c o m m u n ic a tio n with and assistance from AXA Distributors. (See Holman Aff. & Chappell A f f .) But AXA Distributors' control of the information for selling the products is not the s a m e as control of Ms. Holman and Ms. Chappell in the brokering activities. Also important to finding that AXA Distributors did not control the Raymond James re g is te re d representatives is the fact that AXA Equitable, and not AXA Distributors, retained c o n tro l over the sales arrangement. AXA Equitable had discretion to refuse to appoint a p ro p o s e d agent or to terminate her with or without cause, and to reject applications or p re m iu m s . (Distribution Agreement §§ 2.3, 2.5.) AXA Distributors did not retain any c o m m is s io n s on the sales. (Miller Supplemental Aff. ¶ 10.) Instead, it received an annual a llo w a n c e from AXA Equitable "for its distribution activity," based in part on volume, and th a t allowance was a "pass-through for compensation" to brokers like Raymond James. (M iller Supplemental Aff. ¶ 10.) Raymond James paid out the commissions due to its
b ro k e rs, retaining the portion to which it was entitled. (Miller Supplemental Aff. ¶ 10; see a ls o Distribution Agreement, §§ 7.1, 7.5; Defs.' Reply Ex. A at 15 of original.) Registered re p re s e n ta tiv e s forwarded premiums and loan repayments to AXA Equitable, not to AXA D istrib u tors. (Distribution Agreement § 4.5.) AXA Distributors' business was to distribute securities on a wholesale basis to other b ro k e r-d e a le rs , not to enter into relationships directly with registered representatives of other b ro k e r-d e a le rs . (NASD Agreement.) The circumstances of the relationship bear this out, and th e relationship does not amount to control. To the extent that the Raymond James
rep rese n ta tiv es steered customers to AXA Equitable, to the extent that AXA Distributors p ro v id e d the materials and applications for that business, and to the extent that those entities w e re involved in reviewing and approving that business, at least one circuit has found that th o s e factors alone do not amount to "control," at least with respect to control liability. F u rth e rm o re , AXA Distributors only provided the materials and applications. It was, in e f f e c t, a marketing entity segmented off from AXA Equitable. This arrangement may permit an entity like AXA Distributors, or AXA Equitable for th a t matter, to avoid responsibilities under the FINRA Rules, but that is a policy matter for o th e r institutions to address. Based on the facts submitted by the parties, along with their b rie f s, and on an institutional reticence to transform a complicated business arrangement into a nefarious web of evasion, this court finds AXA Distributors did not control the registered re p re se n ta tiv e s of Raymond James. Because Ms. Holman and Ms. Chappell were not
" a s s o c ia te d persons" of AXA Distributors, Defendants were not customers of AXA D is trib u to rs , and therefore, the FINRA Rules do not govern. Defendants have no agreement w ith Plaintiffs to arbitrate. Thus, the Motion to Dismiss or in the Alternative, Motion to C o m p e l Arbitration (Doc. # 9) is due to be denied. 4. P r e lim in a r y Injunctive Relief A X A Distributors also requests preliminary and permanent injunctive relief to restrain D e f e n d a n ts from proceeding with their claims against AXA Distributors, which are currently in FINRA arbitration.3 6 (Verified Compl. ¶¶ 27-30.) A federal court may issue three types o f injunctions: (1) "a `traditional' injunction, which may be issued as either an interim or p e rm a n e n t remedy for certain breaches of common law, statutory, or constitutional rights"; ( 2 ) a statutory injunction; or (3) an injunction under the All Writs Act. Klay v. United H e a lth g r o u p , Inc., 376 F.3d 1092, 1097, 1098 & 1099 (11th Cir. 2004) (footnote omitted). A X A Distributors requests a "traditional" injunction. (See Pls.' Mot. for Prelim. Inj. ¶ 1.) T h e type of injunction at issue in this case, however, is not a traditional injunction. K la y , 376 F.3d at 1098. A party requesting injunctive relief against defendants who have in itia te d (or presumably continued in) arbitration even though a federal court denied their m o tio n to compel arbitration on those claims, "[has] no cause of action against the d e f en d a n ts upon which the injunction [would be] based." Id. "`Wrongful arbitration' . . .
AXA Advisors is not entitled to preliminary injunctive relief for the reasons discussed in this
is not a cause of action for which a party may sue." Id. Thus, a plaintiff seeking this relief m u s t proceed under a different type of injunction. Id. T h e parties in this case have not argued that relief is appropriate as a matter of statu tory law, and as the Eleventh Circuit has not resolved the availability of statutory in ju n c tiv e relief for enjoining arbitration, Klay, 376 F.3d at 1099, injunctive relief on this b a sis will not be awarded. Injunctive relief is also unavailable under
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