Morgan Keegan & Company, Inc. v. Shadburn
ORDER granting 5 Motion for Preliminary Injunction, and that Dft William Shadburn is immediately RESTRAINED and ENJOINED from pursuing his claims against Morgan Keegan in the arbitration proceeding, as further set out; further ORDERED that, on or before 11/17/2011, the parties shall jointly confer for the purposes of reaching an agreement on the bond issue and file a joint report, as further set out in order. Signed by Chief Judge William Keith Watkins on 11/3/2011. (wcl, )
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF ALABAMA
MORGAN KEEGAN & COMPANY,
) CASE NO. 2:11-CV-624-WKW[WO]
ORDER GRANTING PRELIMINARY INJUNCTION
Plaintiff Morgan Keegan & Company brings this action under the Federal
Arbitration Act, see 9 U.S.C. §§ 1-16, for declaratory and injunctive relief to prevent
an arbitration proceeding brought against it by Defendant William Shadburn (“Dr.
Shadburn”) before the Financial Industry Regulatory Authority (“FINRA”). Before
the court is Morgan Keegan’s Motion for Preliminary Injunction (Doc. # 5), which
has been fully briefed (Docs. # 13, 21, 25). For the reasons discussed, Morgan
Keegan has shown a substantial likelihood of success on its claim that Dr. Shadburn’s
FINRA claims are not arbitrable, that it would suffer irreparable injury if compelled
to arbitrate, and that the balance of the harms and the public interest weigh in its
favor. Accordingly, the Motion for Preliminary Injunction is due to be granted.
II. JURISDICTION AND VENUE
Personal jurisdiction and venue are not contested, and there are adequate
allegations of both. More discussion is required, however, on the issue of subject
matter jurisdiction.1 Although Morgan Keegan invokes the Federal Arbitration Act
(“FAA”), 9 U.S.C. §§ 1-16, as a source of subject matter jurisdiction, the FAA
“bestows no federal jurisdiction but rather requires for access to a federal forum an
independent jurisdictional basis over the parties’ dispute.” Vaden v. Discover Bank,
129 S.Ct. 1262, 1271 (2009) (internal quotation marks and alterations omitted); see
also Cmty. State Bank v. Strong, 651 F.3d 1241, 1252 (11th Cir. 2011) (“It is a
long-accepted principle that the FAA is non-jurisdictional: The statute does not itself
supply a basis for federal jurisdiction over FAA petitions.”). It must be determined,
therefore, whether an independent basis for subject matter jurisdiction exists.
Morgan Keegan also contends that this court has federal question jurisdiction
pursuant to 28 U.S.C. § 1331 because Dr. Shadburn’s claims in the underlying
arbitration include alleged violations of the federal securities laws. The court agrees
Even though subject matter jurisdiction is not contested by the parties, the court has an
independent obligation to determine whether subject matter jurisdiction exists. See Indus. Risk
Insurers v. M.A.N. Gutehoffnungshutte GmbH, 141 F.3d 1434, 1439 (11th Cir. 1998) (Courts
“must inquire sua sponte into the source of . . . jurisdiction whenever it might be in question.”).
that § 1331 provides an independent jurisdictional basis for subject matter
In Vaden, the Supreme Court held that, pursuant to 9 U.S.C. § 4, federal courts
have subject matter jurisdiction to hear a petition to compel arbitration where the
underlying dispute between the parties “arises under” federal law. 129 S. Ct. at 1273.
A federal court may “look through” a petition under § 4 of the FAA and assess
whether it is predicated on an action that “arises under” federal law. Id. Although
Vaden addressed a federal court’s subject matter jurisdiction to compel arbitration,
district courts have applied Vaden’s precepts when the motion is instead one to enjoin
an arbitration proceeding, and the court agrees with the reasoning of these courts. See
In re Sept. 11 Litig., 765 F. Supp. 2d 587, 591 (S.D.N.Y. 2011) (“Though Vaden
considered the [jurisdictional] issue in the posture of a motion to compel arbitration,
that distinction is legally insignificant” where the issue is whether to stay an
arbitration proceeding); see also UBS Sec. LLC v. Voegeli, 684 F. Supp. 2d 351, 354
(S.D.N.Y. 2010) (Vaden’s “reasoning applies to situations where, as here, a party
seeks to stay or enjoin an arbitration.”), aff’d, 405 F. App’x 351 (2d Cir. 2011).
Here, the underlying dispute between Morgan Keegan and Dr. Shadburn
includes alleged violations of the Securities Act of 1933, see 15 U.S.C. §§ 77a-77aa,
namely § 11 (governing misleading registration statements), § 12(a)(2) (governing
material misstatements or misleading omissions in a prospectus or oral
communication), and § 15 (governing liability of persons in a position of control over
§§ 11 and 12 violators). See 15 U.S.C. §§ 77k, 77l, 77o. Dr. Shadburn also alleges
violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j,
and Securities Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5. (Statement
of Claim 6-16.) Federal courts have jurisdiction over claims arising under the
Securities Act of 1933 and the Securities Exchange Act of 1934. See § 1331 (“The
district court shall have original jurisdiction of all civil actions arising under the . . .
laws . . . of the United States.”). Because the substantive controversy between
Morgan Keegan and Dr. Shadburn “arises under” federal law, Vaden establishes that
subject matter jurisdiction exists over Morgan Keegan’s action filed in this court.2
See § 1331; see also Household Bank v. JFS Group, 320 F.3d 1249, 1259 (11th Cir.
2003) (“[A] federal district court has subject-matter jurisdiction over a declaratory
judgment action if, as here, a plaintiff’s well-pleaded complaint alleges facts
demonstrating the defendant could file a coercive action arising under federal law.”).
The parties also have assumed, without discussion, that the FAA gives this
court the power to grant the relief requested, that is, to enjoin the pending arbitration
Morgan Keegan also premises subject matter jurisdiction on diversity of citizenship.
28 U.S.C. § 1332(a). Because federal question jurisdiction exists, it need not be decided whether
§ 1332(a)’s amount in controversy requirement is satisfied.
under the FAA. Section 4 of the FAA permits a party aggrieved by another party’s
failure to arbitrate according to the terms of a written agreement to petition the court
for an order compelling the arbitration to proceed as agreed. 9 U.S.C. § 4. Section 4
does not speak to the converse scenario where a party seeks federal court intervention
to halt an arbitration on the ground that there is no written agreement to arbitrate.
Notwithstanding this silence, the First Circuit has held that “the power to enjoin an
arbitration is ‘the concomitant of the power to compel arbitration,’ and thus the same
provision of the FAA, 9 U.S.C. § 4, authorizes both types of orders.”3 PCS 2000 LP
v. Romulus Telecomm., Inc., 148 F.3d 32, 35 (1st Cir. 1998) (quoting Societe
Generale de Surveillance, S.A. v. Raytheon European Mgmt. & Sys. Co., 643 F.2d
863, 868 (1st Cir. 1981)). On at least one occasion, the Eleventh Circuit has cited the
holding in Societe Generale de Surveillance as support for its conclusion that “the
district court had the power to enjoin the arbitration of the newly-asserted contract
District courts have followed suit. See Berthel Fisher & Co. Fin. Servs., Inc. v. Larmon,
No. 11-889, 2011 WL 3294682, at *2 (D. Minn. Aug. 1, 2011) (If the parties agreed to arbitrate,
the FAA “directs the Court to compel arbitration . . . . If not, the Court may enjoin the
arbitrations pursuant to Federal Rule of Civil Procedure 65.”); J.P. Morgan Sec. Inc. v. La.
Citizens Prop. Ins. Corp., 712 F. Supp. 2d 70, 76 n.38 (S.D.N.Y. 2010) (“While the FAA only
explicitly empowers courts to compel arbitrations, district courts in this Circuit have generally
held that district courts have the concomitant power to enjoin arbitration proceedings in
appropriate circumstances.” (collecting cases)); Interactive Brokers v. Duran, No. 08cv6813,
2009 WL 393827, at *6 (N.D. Ill. Feb. 17, 2009) (preliminarily enjoining investors from
proceeding with their arbitration proceeding); Goldman Sachs & Co. v. Becker, No. 07–1599,
2007 WL 1982790, at *8 (N.D. Cal. July 2, 2007) (granting motion for preliminary injunction in
an action brought under the FAA and enjoining the investors “from prosecuting the NASD
arbitration against [the member firm]”).
claims.” Indus. Risk Insurers v. M.A.N. Gutehoffnungshutte GmbH, 141 F.3d 1434,
1449 n.23 (11th Cir. 1998). Finding strong support in the case law, the court
concludes that it has the power to enjoin arbitration under the circumstances of this
The material facts are undisputed. Morgan Keegan is a licenced broker-dealer
in the state of Tennessee and a member of FINRA. Morgan Keegan was the
underwriter of the Regions Morgan Keegan High Income Fund (“RMK Fund”), a
closed-end, high-yield fund. (Statement of Claim ¶¶ 1-2 (Ex. A to Doc. # 24); Compl.
¶ 10 (Doc. # 2); Answer 2 (Doc. # 14).)
Dr. Shadburn, an Alabama citizen, is a retired physician. He describes himself
as a “moderate investor,” with his “investment objectives [being] income and capital
preservation.” (Statement of Claim 5.) From 2006 to 2007, Dr. Shadburn invested
approximately $80,000 in shares of the RMK Fund. (Shaburn Decl. ¶ 2 (Ex.
to Answer); Statement of Claim 5-6.) Dr. Shadburn did not purchase the RMK Fund
through Morgan Keegan, and he “did not maintain a brokerage account with [Morgan
This exhibit is Dr. Shadburn’s Statement of Claim filed against Morgan Keegan in the
Keegan].”5 (Shadburn Answer 1, 2.) Rather, he invested in the RMK Fund through
an unrelated, third-party broker-dealer, Synovus Securities, where he maintains an
account. (Compl. ¶ 10; Answer 2 (admitting ¶ 10 of the Complaint); Statement of
Claim ¶ 5.) Dr. Shadburn made this investment decision based upon representations
in Morgan Keegan’s prospectus and marketing materials that the RMK Fund was
“conservative” and “diversified.” (Statement of Claim 5-6; Shadburn Decl. ¶ 4.) He
also visited Morgan Keegan’s website and examined the written information on the
RMK Fund and other online information posted by Morgan Keegan relating to the
performance and nature of the RMK Fund. (Shadburn Decl. ¶ 4.) In fact, the RMK
Fund was a risky investment tied to the high-risk, subprime mortgage market, and
consequently Dr. Shadburn suffered a loss of approximately $67,000 through his
investment in the RMK Fund. (Statement of Claim 5-6; Shadburn Decl. ¶ 3.)
On June 1, 2011, Dr. Shadburn filed a Statement of Claim initiating arbitration
proceedings before FINRA against Morgan Keegan, based upon alleged “material
misrepresentations and omissions made by [Morgan Keegan] as underwriters of the
[RMK Fund].” (Statement of Claim ¶ 1.) In the FINRA arbitration, Dr. Shadburn
Morgan Keegan also submitted a declaration from its First Vice President and Associate
Attorney Thomas F. Barnett, who attests that he conducted a records search, which revealed “no
record of any documents, accounts, or files related to anyone named William Shadburn.” (See
Barnett Decl. ¶ 5 (Ex. B to Doc. # 1); see also Barnett Decl. ¶¶ 7-8.)
seeks approximately $67,000 in damages and asserts violations of the federal
securities law, the Alabama Securities Act, and the Tennessee Consumer Protection
Act. It is not necessary for this opinion to recount the sixteen pages of details
surrounding Dr. Shadburn’s underlying claims brought in the FINRA arbitration
because the merits of those claims are not material to the issue of whether Morgan
Keegan must arbitrate those claims. It suffices for present purposes that the
gravamen of Dr. Shadburn’s claims is that Morgan Keegan fraudulently marketed the
RMK Fund and concealed and misrepresented the investment risks. (Statement of
Claim 6-22; see also Def. Br. in Opp to Mot. Prelim. Inj. 6 (“The false and misleading
marketing material, prospectuses and other investment material provided by Morgan
Keegan misled [Dr. Shadburn] as to the risk of the funds, the funds[’] underlying
assets, and the continued viability of the fund.”).
On August 4, 2011, in response to the arbitration proceeding, Morgan Keegan
filed this action, seeking declaratory and injunctive relief. It seeks a declaration that
it “has no obligation to arbitrate the FINRA Arbitration initiated by [Dr. Shadburn].”
(Compl. 9 (Prayer for Relief).) Morgan Keegan also requests a preliminary and
permanent injunction to enjoin Dr. Shadburn “from further proceedings against [it]
in the FINRA Arbitration.” (Compl. 9 (Prayer for Relief).) The next day, Morgan
Keegan filed a Motion for Preliminary Injunction and a brief in support. (Pl. Mot.
Prelim. Inj. (Doc. # 5); Pl. Br. in Support of Mot. Prelim. Inj. (Doc. # 1).) Morgan
Keegan effected service of a summons and copies of the Complaint and Motion for
Preliminary Injunction on Dr. Shadburn. (Docs. # 1, 5, 7.) On August 15, 2011, the
parties filed a Joint Stipulation as to an agreed-upon briefing schedule for the pending
Motion for Preliminary Injunction.6 (Joint Stip. (Doc. # 9).) Those briefs have been
filed (Docs. # 13, 21), and the motion is ready for a ruling.
IV. STANDARD OF REVIEW
On a motion for a preliminary injunction, the court may consider evidence
outside of the pleadings, and a hearing is not required where the facts are undisputed.
See McDonald’s Corp. v. Robertson, 147 F.3d 1301, 1313 (11th Cir. 1998) (“[W]here
material facts are not in dispute, or where facts in dispute are not material to the
preliminary injunction sought, district courts generally need not hold an evidentiary
hearing.”); see also Multi-Financial Sec. Corp. v. King, 386 F.3d 1364, 1368 (11th
Cir. 2004) (An evidentiary hearing was not required on the issue of whether an
investor was a “customer” of a NASD member “because the underlying factual
circumstances [were] undisputed.”). Here, the evidentiary record includes the
underlying Statement of Claim by which Dr. Shadburn initiated the FINRA
In that Joint Stipulation, the parties also represented that they have filed with FINRA
the “papers necessary to stay for sixty (60) days the underlying arbitration proceeding.” (Joint
arbitration, a declaration from Dr. Shadburn, a declaration from a Morgan Keegan
representative, and correspondence from Morgan Keegan’s counsel and FINRA in
other FINRA arbitrations. A review of the record reveals that the material facts are
uncontested and that no credibility determinations need to be made. Hence, the court
finds that a hearing is neither required nor necessary.7
A preliminary injunction may be issued, pursuant to Federal Rule of Civil
Procedure 65, to preserve the positions of the parties until a full trial can be
conducted. See Am. Radio Ass’n v. Mobile S.S. Ass’n, Inc., 483 F.2d 1, 4 (5th Cir.
1973). The decision to grant or deny a preliminary injunction “is within the sound
discretion of the district court.” Palmer v. Braun, 287 F.3d 1325, 1329 (11th Cir.
To prevail on a motion for preliminary injunction, the movant bears the burden
of demonstrating that
(1) it has a substantial likelihood of success on the merits; (2) irreparable
injury will be suffered unless the injunction issues; (3) the threatened
injury to the movant outweighs whatever damage the proposed
Morgan Keegan has not expressly requested a hearing, but has referred to a potential
hearing date in its Motion for Preliminary Injunction. (Pl. Mot. Prelim. Inj. 2.) However, the
parties’ Joint Stipulation contains neither a request for a hearing nor an assertion that the material
facts are disputed. The court deems any request for a hearing abandoned, but alternatively finds
that one is not needed on this record.
injunction may cause the opposing party; and (4) if issued, the
injunction would not be adverse to the public interest.
Am. Civil Liberties Union of Fla., Inc. v. Miami-Dade Cnty. Sch. Bd., 557 F.3d 1177,
1198 (11th Cir. 2009) (quoting Siegel v. LePore, 234 F.3d 1163, 1176 (11th Cir.
2000)). “‘A preliminary injunction is an extraordinary and drastic remedy not to be
granted unless the movant clearly establishes the burden of persuasion as to the four
requisites.’” Id. (quoting All Care Nursing Serv., Inc. v. Bethesda Mem’l Hosp., Inc.,
887 F.2d 1535, 1537 (11th Cir. 1989)). Here, Morgan Keegan has demonstrated
entitlement to the extraordinary remedy of a preliminary injunction.
Substantial Likelihood of Success on the Merits
Morgan Keegan contends that it is substantially likely to succeed on the merits
because it did not agree to arbitrate Dr. Shadburn’s FINRA claims. Dr. Shadburn
concedes that “[t]here is no written agreement between [Morgan Keegan] and [him].”
(Def. Br. in Opp. to Pl. Mot. Prelim. Inj. 8 (Doc. # 13).) He argues, however, that
Morgan Keegan is obligated to arbitrate on the basis of FINRA Rule 12200 because
he is Morgan Keegan’s “customer.”8 For the reasons to follow, the court finds that
Morgan Keegan has demonstrated a substantial likelihood of success on the merits
of its declaratory and injunctive relief claims.9
Morgan Keegan is a member of FINRA, an industry association that provides
an arbitration forum for claims against its members.10 Morgan Keegan does not
“[T]he question of whether the parties agreed to arbitrate is to be decided by the court,
not the arbitrator,” unless the parties expressly have provided otherwise, see AT & T Techs., Inc.
v. Commc’n Workers of Am., 475 U.S. 643, 649 (1986), which they have not in this case. The
decision of whether the parties have agreed to arbitrate is, thus, for the court. While § 2 of the
FAA represents “a national policy favoring arbitration,” Southland Corp. v. Keating, 465 U.S. 1,
10 (1984), the FAA “does not require parties to arbitrate when they have not agreed to do so.”
Volt Info. Scis., Inc. v. Bd. of Trs., 489 U.S. 468, 478 (1989). “Simply put, parties cannot be
forced to submit to arbitration if they have not agreed to do so.” Chastain v. RobinsonHumphrey Co., 957 F.2d 851, 854 (11th Cir. 1992).
The finding that Morgan Keegan is likely to succeed on the merits is addressed solely to
the merits of Morgan Keegan’s claim that arbitration is not the proper forum to resolve Dr.
Shadburn’s dispute against it relating to the demise of Dr. Shadburn’s investment in the RMK
Fund. In other words, the issue is not whether the underlying claims in the FINRA arbitration
have merit, but only whether Morgan Keegan must “defend [Dr. Shadburn’s] claims in the
arbitral forum.” King, 386 F.3d at 1365 n.1.
FINRA, a self-regulatory organization since 2007, was established under Section 15A
of the Securities Exchange Act of 1934, 15 U.S.C. § 78o–3, and is vested with the “authority to
exercise comprehensive oversight over all securities firms that do business with the public.”
UBS Fin. Servs., Inc. v. W. Va. Univ. Hosps., Inc., No. 11-235-cv, 2011 WL 4389991, at *5 (2d
Cir. 2011) (internal citations and quotation marks omitted). FINRA is the successor to the
National Association of Securities Dealers (“NASD”). See Kashner Davidson Secs. Corp. v.
Mscisz, 601 F.3d 19, 21 (1st Cir. 2010); see also Gonchar v. S.E.C., 409 F. App’x 396, 398 (2d
Cir. 2010) (“In 2007, NASD was consolidated with other regulatory bodies and the name of the
new body was changed to the Financial Industry Regulatory Authority, Inc., or FINRA.”).
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. FINRA Rule
12200 does not materially differ from NASD Rule 10301. Accord J.P. Morgan Sec. Inc. v. La.
Citizens Prop. Ins. Corp., 712 F. Supp. 2d 70, 78 n.45 (S.D.N.Y. 2010).
dispute that as a FINRA member, it is bound to arbitrate all disputes contemplated
under FINRA Rule 12200. See Multi-Financial Sec. Corp. v. King, 386 F.3d 1364,
1367 (11th Cir. 2004) (The NASD Code of Arbitration Procedure “serves as a
sufficient written agreement to arbitrate, binding its members to arbitrate a variety of
claims with third-party claimants.”). FINRA Rule 12200 provides, insofar as is
pertinent here, that arbitration is required when “[r]equested by the customer,” and
“[t]he dispute is between a customer and a member or associated person of a member”
and “arises in connection with the business activities of the member or the associated
person.” Hence, an investor can compel a FINRA member to arbitrate a claim, even
when no written arbitration agreement exists, provided that the investor demonstrates
that the dispute (1) is between either a customer and a member or a customer and a
member’s associated person, and (2) arises in connection with the business activities
of the member or its associated person.
The first issue is whether Dr. Shadburn is a “customer” of Morgan Keegan
within the meaning of FINRA Rule 12200. Under FINRA, “‘customer’ is defined
simply, but not particularly helpfully, by what it ‘shall not include’ – a broker or
dealer.” AXA Distribs., LLC v. Bullard, No. 1:08cv188, 2008 WL 5411940 (M.D.
Ala. Dec. 24, 2008) (finding that investors in variable annuities were not customers
of the company that distributed the variable annuities to broker-dealers that acted as
retailers of variable annuities); see also UBS Fin. Servs., Inc. v. W. Va. Univ. Hosps.,
Inc., No. 11-235-cv, 2011 WL 4389991, at *6 (2d Cir. 2011) (observing that “neither
FINRA nor the courts have ‘offer[ed] [a] precise definition of ‘customer’” (quoting
Oppenheimer & Co. v. Neidhardt, 56 F.3d 352, 357 (2d Cir. 1995)). The parties
disagree on the legal parameters of the definition of “customer” and whether the
undisputed facts bestow “customer” status on Dr. Shadburn, such that he can compel
Morgan Keegan to arbitrate before FINRA.
Morgan Keegan argues that a customer is one who has a broker or investment
relationship with the FINRA member. It contends that Dr. Shadburn is not its
customer because he never purchased any shares of the RMK Fund through Morgan
Keegan, never maintained an account with Morgan Keegan, and never had any direct
relationship with Morgan Keegan. In fact, Morgan Keegan’s position is that there
never was any sort of relationship between it and Dr. Shadburn. Absent any evidence
of a broker or investment relationship, Morgan Keegan maintains that Dr. Shadburn
does not qualify as its customer. (Pl. Br. in Supp. of Mot. Prelim. Inj. Br. 3-4, 10-11,
13-14; Pl. Reply Br. in Supp. of Mot. Prelim. Inj. 4 (Doc. # 21).) To support its
argument, Morgan Keegan relies principally upon Wheat, First Sec., Inc. v. Green,
993 F.2d 814 (11th Cir. 1993); Fleet Boston Robertson Stephens, Inc. v. Innovex, Inc.,
264 F.3d 770, 772 (8th Cir. 2001); and Zarecor v. Morgan Keegan & Co., Inc., No.
4:10cv1643-SWW (E.D. Ark. July 29, 2011) (Order Vacating Arbitration Award).11
Dr. Shadburn argues, on the other hand, that FINRA Rule 12200 is “crystal
clear in defining the term ‘customer’” to exclude only brokers and dealers. (Def. Br.
in Opp. to Pl. Mot. Prelim. Inj. 9.) He contends that a “direct customer relationship”
is not required, and that because he is neither a broker nor a dealer, he is a “customer”
under FINRA’s plain meaning. (Def. Br. in Opp. to Pl. Mot. Prelim. Inj. 9.) Dr.
Shadburn also contends that Morgan Keegan’s marketing activities and valuation
services upon which he says he and his broker relied in making and maintaining his
investments in the RMK Fund solidify the customer relaionship. (Def. Br. in Opp.
to Pl. Mot. Prelim. Inj. 5.)
The court turns first to the arguments addressed to the scope of the definition
of “customer.” In Fleet Boston, which turned on whether business activities outside
of investing or brokerage activities fall within the “customer” definition, the Eighth
Circuit rejected an argument that “by negative inference . . . a ‘customer’ is everyone
who is not a broker or dealer.” 264 F.3d at 772. That construction is “too broad.”
Id. Instead, the Eighth Circuit held that a “customer” is one who “receive[s]
Zarecor, an unpublished opinion with no westlaw citation, is attached as Exhibit F to
Morgan Keegan’s Motion for Preliminary Injunction.
investment or brokerage related services, from an NASD member,” and the
“customer” definition does not encompass a business relationship that includes only
“financial advice” Id. at 773; see also UBS Fin. Servs., Inc., 2011 WL 4389991, at *6
(holding that the requisite business relationship exists where the investor “purchases,
or undertakes to purchase, a good or service from a FINRA member”). The Eighth
Circuit recognized that other courts arguably had “taken a broad view” of the term
“customer,” but it explained that “in all of these cases there existed some brokerage
or investment relationship between the parties.” 264 F.3d 772 (citing, among other
cases, Oppenheimer, 56 F.3d at 358(holding that investors who had been defrauded
by a representative of a NASD firm were customers of that firm under the NASD
Code, despite the fact that they never opened formal accounts with the firm)); see also
UBS Sec. LLC, 684 F. Supp. 2d at 356 (observing that it “would be absurd” to
interpret “customer” as everyone who is not a broker or dealer because such an
interpretation “would imply that a party seeking to compel arbitration pursuant to the
FINRA rules need not have an actual customer relationship with any FINRA member;
rather, the party need only not be a broker or dealer”). Moreover, in Wheat First, the
Eleventh Circuit addressed the time frame for analyzing “customer” status: “We . .
. hold that customer status . . . must be determined as of the time of the events
providing the basis for the allegations of fraud.” 993 F.2d at 816 (internal quotation
Under Dr. Shadburn’s proposed definition of “customer,” the investors in
Wheat First would have been “customers” (because they were not brokers or dealers),
but that was not the court’s holding. There, the investors purchased tainted securities
from a firm that ultimately sold its assets to a successor firm. The investors sought
to compel the successor firm to arbitrate claims arising out of the investors’
transaction with the predecessor firm. Absent any written contract to the contrary, the
Eleventh Circuit held that to define “customer” as encompassing the investors would
contravene the expectations of NASD members as to the scope of arbitrable claims:
“We 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.” Id. at 820. The successor firm and the investors “had absolutely no
relationship at the time of the alleged events that [the investors] seek to arbitrate,”
and, thus, the investors were not customers of the successor firm. Id. at 818.
It is true, as Dr. Shadburn points out, that there need not always be a “direct
customer relationship” between the investor and the member firm. (Def. Br. in Opp.
to Pl. Mot. Prelim. Inj. 9.) However, the cases upon which Dr. Shadburn relies for
this general proposition are factually distinguishable. See, e.g., John Hancock Life
Ins. Co. v. Wilson, 254 F.3d 48 (2d Cir. 2001); King, 386 F.3d at 1368. In King and
John Hancock, it was undisputed that the investor was a “customer” of the member’s
“associated person.” See King, 386 F.3d at 1368; John Hancock, 254 F.3d at 58-59.
The issue turned on whether the customer of a member’s associated person was also
the customer of the member, even if the member had no knowledge of the transaction
or independent relationship with the investor. In both cases, the member was
compelled to arbitrate “solely because” the investor was a customer of the associated
person. King, 386 F.3d at 1368-69 (Because the investor “dealt directly” with the
member’s associated person, it was inconsequential that the investor was not a “direct
customer” of the member and did not have a “direct transactional relationship” with
the member.); see also John Hancock, 254 F.3d at 58-60. Alternatively, King held
that arbitration was required because “[w]hen an investor deals with a member’s
agent or representative, the investor deals with the member.” 386 F.3d at 1370. It
was in this factual context that King and John Hancock rejected the notion that a
direct customer relationship between the customer and the member was required.
Here, unlike in King and John Hancock, the issue is not whether Morgan
Keegan and Dr. Shadburn conducted transactions through Morgan Keegan’s
associated person.12 Neither party invokes the “association person” component of the
There is no contention that Synovus Securities is an
“associated person” of Morgan Keegan or that Dr. Shadburn had any direct dealings
or direct transactional relationship with an associated person of Morgan Keegan
concerning Dr. Shadburn’s RMK Fund investment. Hence, King and John Hancock
have limited utility in resolving the “customer” issue presented in this case.
The application of “customer” urged by Dr. Shadburn is inconsistent with
Wheat First’s reasoning and is not supported by either John Hancock or King.
Furthermore, the court finds persuasive Fleet Boston’s reasoning for rejecting such
a broad construction of the term “customer.” See 264 F.3d at 772; see also
Contemporary Fin. Solutions, Inc. v. Miller, No. 07cv00793, 2007 WL 4197588, at
*4 (D. Colo. Nov. 20, 2007) (“Courts generally have construed the term ‘customer’
broadly, but not so broadly as to include anyone other than a broker or dealer.”). Dr.
Shadburn’s proposed definition could lead to scenarios where a FINRA member’s
membership alone would require arbitration. Such a result would “do significant
Oppenheimer is distinguishable on the same ground. See 56 F.3d at 352. In
Oppenheimer, the investors purchased investments through the member firm’s representative
who was supposed to maintain the account with the member firm, but who instead fraudulently
diverted the funds into an account with a third-party corporation and then depleted the funds.
The investors were customers because they invested directly with a firm’s authorized agent.
When the investors “dealt with” the member firm’s authorized agent “they were dealing with”
the member firm. Id. at 357.
injustice to the reasonable expectations of [FINRA] members,” Wheat First, 993 F.2d
at 820, and “would contravene the core principle . . . that ‘an obligation to arbitrate
can be based only on consent.’” Interactive Brokers, LLC v. Duran, No. 08cv6813,
2009 WL 393827, at *5 (N.D. Ill. Feb. 17, 2009) (quoting Sokol Holdings, Inc. v.
BMB Munai, Inc., 542 F.3d 354, 358 (2d Cir. 2008)); see also BMA Fin. Servs., Inc.
v. Guin, 164 F. Supp. 2d 813, 819 (W.D. La. 2001) (rejecting a definition of
“customer” that would require firms, simply because of their NASD membership, to
“arbitrate the claims of any person who purchased an investment, not just the claims
of their customers, or the claims of their associated persons’ customers” because
“[s]uch a boundless definition would surely upset the reasonable expectations of
NASD members”). Accordingly, the court declines to find that Dr. Shadburn is a
“customer” of Morgan Keegan based solely on the fact that he is neither a broker nor
On the other hand, the court also need not adopt the Eighth Circuit’s position
in Fleet Boston, as urged by Morgan Keegan, that a customer is not one who merely
receives financial advice, but is one who is “involved in a business relationship with
[the] [FINRA] member that is related directly to investment or brokerage services.”
264 F.3d at 772. That is because on this record, not only is Dr. Shadburn and
Morgan’s relationship void of any investment or brokerage qualities, it is void of any
form of business qualities whatsoever. The list of what their relationship is not is
telling on the question of whether Dr. Shadburn is a customer of Morgan Keegan.
The list of “nots” is long.
Dr. Shadburn did not have any written contract or customer agreement with
Morgan Keegan. Dr. Shadburn did not purchase shares in the RMK Fund through
Morgan Keegan. Dr. Shadburn did not invest in the RMK Fund in its initial public
offering.13 He did not pay for any investment, brokerage or other service from or
through Morgan Keegan. He did not have a “direct transactional relationship” with
Morgan Keegan (or its associated person). King, 386 F.3d at 1369. He did not have
any direct contact with Morgan Keegan. Morgan Keegan did not receive or disburse
funds associated with Dr. Shadburn’s RMK Fund transaction. It did not facilitate any
transaction for Dr. Shadburn’s purchase of the RMK Fund. In fact, Dr. Shadburn did
not have an account with Morgan Keegan, and Morgan Keegan does not have a
Dr. Shadburn does not challenge Morgan Keegan’s contention that “customer” status
cannot be attained merely because Morgan Keegan was an underwriter for the RMK Fund years
prior to Dr. Shadburn’s investment in the Fund on the secondary market through a third-party
broker-dealer. Morgan Keegan’s position finds support in the case law. See Zarecor, No.
4:10cv1643-SWW, at 3 (noting that it is “undisputed that Morgan Keegan, a registered member
of FINRA, served as an underwriter of the RMK Funds,” but rejecting the investors’ arguments
that they were customers of Morgan Keegan); see also Goldman Sachs, 2007 WL 1982790, at
*5-6 (finding an alleged customer relationship based upon the member firm’s underwriting of
another firm’s initial public offering too tenuous and noting that there was no indication that the
investors participated in the initial public offering).
record of “any documents, accounts or files related to anyone named William
Shadburn.” (Barnett Decl. ¶ 6.)
Rather, Dr. Shadburn’s relationship was with the brokerage firm Synovus
Dr. Shadburn was a brokerage client of Synovus Securities and
maintained an account with that firm. Morgan Keegan did not manage or otherwise
exercise any discretion over Dr. Shadburn’s account. Also, Synovus Securities is not
an employee, agent, representative or associated person of Morgan Keegan. Based
upon these facts, Dr. Shadburn is not a customer of Morgan Keegan for purposes of
FINRA Rule 12100, and thus cannot compel arbitration pursuant to Rule 12200.
On similar facts, the same conclusion was reached in Morgan Keegan & Co.
v. Garrett, No. 4:10cv4308 (S.D. Texas Sept. 30, 2011) (Order Vacating Arbitration
Award).14 Analyzing whether the investors were Morgan Keegan’s customers, within
the meaning of FINRA Rule 12200, the court focused on the absence of a “direct
relationship” between the investors and Morgan Keegan: “[The investors] bought
shares in the fund from third-party brokers on the secondary market.
information was from the street. They never gave money to Morgan Keegan. They
never contacted Morgan Keegan for advice.” Id. The court concluded that the
Garrett, an unpublished opinion with no westlaw citation, is attached as an exhibit to
Morgan Keegan’s Supplement to Reply Memorandum. (Doc. # 22.)
investors were not customers of Morgan Keegan, and, therefore, their claims were not
arbitrable. Id. at 2.
Dr. Shadburn nonetheless argues that he has a customer relationship with
Morgan Keegan for purposes of arbitration because on its public website, Morgan
Keegan published materials about the nature and performance of the RMK Fund, to
include the prospectus, and that he relied on these materials in making his decision
to invest in the RMK Fund. (Def. Br. in Opp. to Pl. Mot. Prelim. Inj. 6; Statement of
Claim 5; Shadburn Decl. ¶ 4.) The argument is not convincing, as Dr. Shadburn cites
no authority on similar or analogous facts to support his argument. Indeed, at least
one court has rejected a similar argument on arguably stronger facts. See Zarecor,
In Zarecor, Morgan Keegan argued that the investors were not customers
because they had purchased the RMK Fund from competitor brokerage firms, had
maintained the RMK Fund with that firm and “had no dealings with Morgan
Keegan.” No. 4:10cv1643-SWW, at 3. The investors argued that they were
customers, even absent “a direct transactional relationship” with Morgan Keegan,
based upon their direct contacts with Morgan Keegan’s representatives both before
and after investing in the RMK Fund. Id. at 8. Those contacts included two
conversations with Morgan Keegan’s representatives about how the funds functioned,
during which Morgan Keegan represented that “the funds were very liquid,”
assurances from Morgan Keegan’s representatives that “dividends were not in
danger” after share prices declined, and the investors’ attendance at an annual
Morgan Keegan meeting. Id. at 8-9. Notwithstanding these contacts, the court was
not persuaded that a customer relationship had been established: “Cases in which
courts have found a customer relationship based on interactions between an investor
and a FINRA member’s representative involve conduct on the part of the
representative indicating the existence of a business or investment relationship – such
as soliciting a purchase, taking money from an investor, or facilitating investment
transactions.” Id. at 9-10 (citing Oppenheimer, 56 F.3d at 352 and John Hancock,
254 F.3d at 58). The court noted that it found “no cases to support the proposition
that an investor achieves ‘customer’ status under Rule 12200 merely by seeking and
receiving information regarding a particular security from a FINRA member
representative.” Id. at 10. The investors were not customers of Morgan Keegan
because they “did not have a business relationship with Morgan Keegan related
directly to investment or brokerage related services,” and even assuming as true that
the investors communicated with Morgan Keegan’s agents, “those confabs failed to
transform [the investors] into ‘customers’ entitled to demand arbitration under Rule
Here also, as in Zarecor, the suggested relationship between Dr. Shadburn and
Morgan Keegan is far too tenuous to equate a “customer” relationship. As already
discussed, Dr. Shadburn is not Morgan Keegan’s customer within the meaning of
Moreover, no direct communications even resulted out of Dr.
Shadburn’s review of Morgan Keegan’s online materials, as occurred in Zarecor.
The mere fact that Morgan Keegan made available to the public on its website
materials pertaining to the RMK Fund is insufficient under any of the cases cited
above to bestow “customer” status on Dr. Shadburn. While Dr. Shadburn argues that
Zarecor is wrongly decided, he fails to present any case law or argument that
persuasively supports his attack, or that reached a contrary conclusion on similar or
analogous facts. (Def. Br. in Opp. to Pl. Mot. Prelim. Inj. 10.)
Finally, while Dr. Shadburn agrees that “questions of substantive arbitrability
are for this court to decide,” he argues that decisions of the Director of FINRA on this
issue should be given “Auer deference.” (Def. Br. in Opp. to Mot. Prelim. Inj. 11-12
(citing Auer v. Robbins, 519 U.S. 452, 461 (1977) (holding that the Secretary of
Labor’s interpretation of his own rules is “controlling unless plainly erroneous or
inconsistent with the regulation” (citation and internal quotation marks omitted))).)
In particular, Dr. Shadburn cites a letter from a FINRA “Case Administrator,”
notifying Morgan Keegan (in a different case) that the Director of FINRA Dispute
Resolution had denied its “request to decline FINRA’s arbitration forum.” (FINRA
Letter (Ex. E to Doc. # 13).) Morgan Keegan disputes that Auer deference applies to
a FINRA decision. (See Pl. Reply Br. in Supp. of Mot. Prelim. Inj. 10 (“FINRA is a
self-regulatory organization, not a governmental agency, and is therefore not entitled
to Auer deference.”).) The court need not resolve this dispute. Under any standard,
no deference is due here because the decision is unaccompanied by any analysis or
supporting rationale. See Royal Alliance Assocs., Inc. v. Branch Ave. Plaza, L.P., 587
F. Supp. 2d 729, 735 (E.D. Va. 2008) (“[E]ven if the Court were inclined to give
some deference to FINRA’s decision, via letter, to deny [the member firm’s] request
for a stay of the arbitration, . . . the letter, although noting that FINRA undertook
‘careful consideration of [the] request,’ provides no indication as to whether FINRA
considered the question of arbitrability. Indeed, it provides no reason for the denial
at all.” (citing Goldman Sachs & Co. v. Becker, No. 07–01599, 2007 WL 1982790
(N.D. Cal. July 2, 2007) (finding, in a similar posture, that “[although] [t]he NASD
did deny plaintiffs’ motion to be excused from arbitration, . . . there [was] little
indication that the NASD actually took a close look . . . to see if there was an
agreement or relationship that governed the question of arbitrability”))).
In sum, Morgan Keegan has demonstrated that the relationship between it and
Dr. Shadburn is too tenuous to establish a customer relationship. Accordingly, it has
demonstrated a substantial likelihood of success on the merits of its claim that Dr.
Shadburn cannot compel it to arbitrate.15
Morgan Keegan also asserts that its “forced participation in the arbitration of
a dispute that [it] [has] not agreed to arbitrate will cause it[ ] irreparable harm.” (Pl.
Br. in Support of Mot. Prelim. Inj. 15.) It contends that a preliminary injunction is
necessary because otherwise it will have to expend resources and effort in
participating in the arbitration pending resolution of its claims for permanent
injunctive relief, and will lose its right to have Dr. Shadburn’s claims decided in a
court, rather than through arbitration before FINRA. (Pl. Br. in Support of Mot.
Prelim. Inj. 16, 18.)
Courts have concluded that a movant suffers irreparable harm when it is
“forced to expend time and resources arbitrating an issue that is not arbitrable, and
for which any award would not be enforceable.” Merrill Lynch Inv. Managers v.
Optibase, Ltd., 337 F.3d 125, 129 (2d Cir. 2003); see also McLaughlin Gormley King
Co. v. Terminix Int’l Co., L.P., 105 F.3d 1192, 1194 (8th Cir. 1997) (observing that
Because Dr. Shadburn is not a customer of Morgan Keegan’s, the court need not, and
declines to, decide whether Dr. Shadburn’s claims arose “in connection with the business of”
Morgan Keegan. See Wheat First, 993 F.2d at 820-21 (Given the absence of a customer
relationship, “we do not reach the question of whether the [investors’] claims arose ‘in
connection with the business of’ [the NASD member].”).
courts “uniformly hold that the party urging arbitration may be enjoined from
pursuing what would now be a futile arbitration, even if the threatened irreparable
injury to the other party is only the cost of defending the arbitration and having the
court set aside any unfavorable award”); Chase Manahattan Bank USA, N.A. v. Nat’l
Arbitration Council, Inc., No. 3:04cv1205, 2005 WL 1270504, at *3 (M.D. Fla. May
27, 2001) (“Being compelled to arbitrate a claim in the absence of an agreement to
arbitrate that claim constitutes an irreparable injury.” (citation and internal quotation
marks omitted)). Moreover, Dr. Shadburn “does not dispute the irreparable harm
prong” of the preliminary injunction test, presumably based upon the foregoing
authority. (Def. Br. in Opp. to Pl. Mot. Prelim. Inj. 7.) Because Morgan Keegan has
demonstrated a substantial likelihood of success on its claim that it is not obligated
to arbitrate, it has demonstrated that it will suffer irreparable injury without a
Balancing of the Harms
Morgan Keegan also satisfies the third element of the preliminary injunction
standard. To balance the harms, the court weighs the harm to Morgan Keegan if a
preliminary injunction is not issued against the harm that granting an injunction will
cause Dr. Shadburn. Dr. Shadburn does not articulate any harm that may occur if a
preliminary injunction issues. The court recognizes, however, that if the entry of a
preliminary injunction is ultimately found to be erroneous, then Dr. Shadburn will
have suffered a delay in the FINRA arbitration. However, in light of Morgan
Keegan’s showing of a substantial likelihood of success that it cannot be forced to
arbitrate the underlying dispute and the irreparable injury that flows from that forced
arbitration, the harm to Morgan Keegan clearly outweighs the harm to Dr. Shadburn.
Accordingly, the balance of harms weighs in favor of entering a preliminary
The public interest factor also weighs in favor of Morgan Keegan. Arbitration
is in the public interest only where “the subject of the arbitration is one that the
parties actually agreed to arbitrate.” Chi. Sch. Reform Bd. of Trs. v. Diversified
Pharm. Servs., Inc., 40 F. Supp. 2d 987, 996 (N.D. Ill. 1999). Where a party has not
agreed to submit a dispute to arbitration, the public has an interest in ensuring that the
arbitration does not proceed. See Berthel Fisher, 2011 WL 3294682, at *8 (“Public
confidence in arbitration would be undermined if a party could be compelled to
arbitrate without its consent.”). Given the demonstration of a likelihood of success
on the merits, the court finds that a preliminary injunction will serve the public
interest by avoiding the time and expense that will result from a needless arbitration.
For the foregoing reasons, Morgan Keegan has demonstrated a substantial
likelihood of success on the merits by showing that Dr. Shadburn is not Morgan
Keegan’s “customer” within the meaning of FINRA Rule 12200, and, therefore, that
Dr. Shadburn cannot require Morgan Keegan to arbitrate any dispute between them.
Morgan Keegan also has demonstrated that it would suffer irreparable harm if forced
to arbitrate a dispute that it did not agree to arbitrate. The balance of the harms and
the public interest also weigh in Morgan Keegan’s favor.
Because all four requirements for a preliminary injunction are satisfied, it is
ORDERED that Morgan Keegan’s Motion for Preliminary Injunction (Doc. # 5) is
GRANTED, and that Defendant William Shadburn is immediately RESTRAINED
and ENJOINED from pursuing his claims against Morgan Keegan in the arbitration
proceeding, styled William Shadburn v. Morgan Keegan & Co., Inc., FINRA Case
No. 11-02252, pending a trial on this action.
It is further ORDERED that, on or before November 17, 2011, the parties shall
jointly confer for the purposes of reaching an agreement on the bond issue and file
a joint report as to the terms of any agreement.16 If an agreement cannot be reached,
then the parties shall file a statement as to their respective positions, with Morgan
Keegan’s statement due on or before November 17, 2011, and Dr. Shadburn’s
statement due on or before November 23, 2011. The preliminary injunction shall
remain in full force and effect while the bond issue is under consideration.
DONE this 3rd day of November, 2011.
/s/ W. Keith Watkins
CHIEF UNITED STATES DISTRICT JUDGE
The parties have not addressed whether a bond is necessary and, if so, in what in
amount. See Fed. R. Civ. P. 65(c) (requiring that the movant “give[ ] security in an amount that
the court considers proper to pay the costs and damages sustained by any party found to have
been wrongfully enjoined or restrained”).
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