NDX Advisors, Inc. et al v. Advisory Financial Consultants, Inc. et al

Filing 87

ORDER by Judge ARMSTRONG granting 76 Motion to Compel (lrc, COURT STAFF) (Filed on 12/13/2012)

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1 2 3 UNITED STATES DISTRICT COURT 4 FOR THE NORTHERN DISTRICT OF CALIFORNIA 5 OAKLAND DIVISION 6 NDX ADVISORS, INC., NDX CAPITAL Case No: C 11-3234 SBA 7 MANAGEMENT, LLC, NDX HOLDINGS, INC., NDX TRADING, INC., and ST. 8 CROIX CAPITAL MANAGEMENT, LLC, ORDER GRANTING DEFENDANTS’ MOTION TO COMPEL ARBITRATION Plaintiffs, 9 Dkt. 76 10 vs. 11 ADVISORY FINANCIAL CONSULTANTS, INC. and RUTHE P. GOMEZ, 12 Defendants. 13 14 15 This is a declaratory relief action brought by Plaintiffs NDX Advisors, Inc., NDX 16 Capital Management LLC, NDX Holdings, Inc., NDX Trading, Inc. (“NDX Trading”), and 17 St. Croix Capital Management LLC (collectively “NDX”) against Defendants Ruthe 18 Gomez (“Gomez”) and her company Advisory Financial Consultants, Inc. (“AFC”). NDX 19 seeks a judicial determination that it has no obligation to participate in an arbitration 20 proceeding brought by AFC and Gomez now pending against NDX Trading before the 21 Financial Industry Regulatory Authority (“FINRA”). 22 The parties are presently before the Court on Defendants AFC and Gomez’s 23 renewed motion to compel arbitration. Dkt. 76. Having read and considered the papers 24 filed in connection with this matter and being fully informed, the Court hereby GRANTS 25 Defendants’ motion and dismisses the action. The Court, in its discretion, finds this matter 26 suitable for resolution without oral argument. See Fed. R. Civ. P. 78(b); N.D. Cal. Civ. 27 L.R. 7-1(b). 28 1 I. BACKGROUND 2 A. 3 Gomez is the founder, and until its sale in 2006, was the President and primary FACTUAL SUMMARY 4 owner of AFC, a securities broker-dealer registered with FINRA. Compl. ¶ 4, Dkt. 1. In 5 late 2006, Gomez sold AFC’s assets to the principals of Enterprise Trust Company 6 (“Enterprise”) and TradeRight Corporation (“TradeRight”). Id. ¶¶ 4, 25. After the sale, 7 Gomez became registered with FINRA as a representative of TradeRight. Id. ¶ 4; Answer 8 ¶ 5, Dkt. 49. Thereafter, Enterprise allegedly comingled Gomez’s assets with the funds of 9 other Enterprise customers and engaged in speculative margin trading, which, in turn, 10 resulted in losses to Gomez. Id. ¶ 31. Gomez also avers that she was not paid account 11 commissions by TradeRight, as required by the terms of the asset transfer. Defs.’ Request 12 for Judicial Notice (“RJN”), Ex. D at 8-9. 13 In or about October 2007, AFC and Gomez commenced an arbitration proceeding 14 against TradeRight before a FINRA arbitration panel in California. See Advisory Financial 15 Consultants, et al. v. TradeRight Corp., FINRA Arb. No. 07-03055.1 In that proceeding, 16 AFC and Gomez allege that John Lohmeier, President and Chief Executive Officer of 17 Enterprise, and/or Rebecca Townsend, its Vice-President, fraudulently induced Gomez to 18 transfer AFC’s investment funds to Enterprise. Id. ¶ 29. TradeRight is alleged to be liable 19 for Gomez’s losses due to its failure to take steps to uncover and prevent Enterprise’s fraud, 20 as well as its failure to pay Gomez her commissions. Id. ¶ 32; Statement of Claim ¶¶ 41- 21 43. 22 23 24 25 26 27 28 1 The Complaint makes reference to that proceeding. See Compl. ¶ 3. The Statement of Claim filed in connection with the arbitration is attached as Exhibit D to Defendants’ Request for Judicial Notice (“RJN”). Though NDX takes exception to certain facts presented in the RJN, NDX has not interposed any objection to the Statement of Claim or challenged the authenticity of the copy thereof attached to the RJN. Therefore, the Court takes judicial notice of the Statement of Claim filed by AFC and Gomez in that proceeding. See Swartz v. KPMG LLP, 476 F.3d 756, 763 (9th Cir. 2007) (“[A] court may consider a writing referenced in a complaint but not explicitly incorporated therein if the complaint relies on the document and its authenticity is unquestioned.”). -2- 1 In 2010, AFC and Gomez joined NDX Advisors, Inc., NDX Capital Management, 2 LLC, NDX Holdings, Inc., NDX Trading and St. Croix Capital Management, LLC as 3 parties to the arbitration proceeding, based on the theory that they are the alter egos of 4 TradeRight. Compl. ¶ 7; Baldwin Decl. ¶ 3, Dkt. 67. In February 2011, AFC and Gomez 5 dismissed all of the NDX entities except NDX Trading from the arbitration. Baldwin Decl. 6 ¶ 4 and Ex. C, Dkt. 67-2. NDX admits that NDX Trading and AFC are members of FINRA 7 but denies that either AFC or Gomez was its “customer” or that they otherwise transacted 8 any business with NDX Trading. Id. ¶ 12. 9 B. PROCEDURAL HISTORY 10 On January 24, 2011, NDX filed a Complaint for Declaratory and Injunctive Relief 11 against AFC and Gomez in the Northern District of Illinois, pursuant to 28 U.S.C. §§ 2201 12 and 2202. The Complaint seeks an order “preliminarily and permanently enjoining 13 Defendants from pursuing any claim against Plaintiffs in the California arbitration” and 14 “prohibiting Defendants from initiating or pursuing any new or additional claims against 15 Plaintiffs other than in a court of competent jurisdiction.” Compl. at 12. Jurisdiction is 16 predicated upon diversity of citizenship, 28 U.S.C. § 1332, as Plaintiffs are citizens of 17 Texas and Minnesota and Defendants are both citizens of California. Id. ¶¶ 15-20. 18 In response to the Complaint, AFC and Gomez filed a motion to transfer under 28 19 U.S.C. § 1406 and § 1404(a), Dkt. 11, and a motion to dismiss for lack of personal 20 jurisdiction and for failure to state a claim, Dkt. 12. On June 6, 2011, the Illinois District 21 Court granted the motion to transfer, and denied the motion to dismiss as moot. Dkt. 32, 22 33. The action and the pending motion to dismiss were then transferred to this Court. Dkt. 23 34. On September 8, 2011, AFC and Gomez renoticed their motion to dismiss on this 24 Court’s calendar. The Court denied the motion on January 20, 2012. Dkt. 48. 25 On August 10, 2012, AFC and Gomez filed a motion to compel arbitration, which 26 the Court denied on October 18, 2012, on procedural grounds. Dkt. 75. On October 30, 27 2012, AFC and Gomez filed the instant, renewed motion to compel arbitration. Dkt. 76. In 28 its motion, AFC and Gomez do not seek to compel the arbitration of any claims alleged in -3- 1 the Complaint; rather, they seek “an Order compelling Plaintiff NDX Trading, Inc., to 2 participate in the FINRA arbitration.” Mot. at 7. They contend that NDX Trading is a 3 FINRA member and therefore is obligated under Rule 13200 of the FINRA Code of 4 Arbitration for Industry Disputes (“FINRA Code”) to arbitrate the underlying claims 5 brought against it by AFC and Gomez. Id. The matter has been fully briefed and is ripe for 6 adjudication. 7 II. 8 9 LEGAL STANDARD The Federal Arbitration Act, 9 U.S.C. §§ 1-16 (“FAA”), determines the arbitrability of disputes between parties to an agreement. Agreements to arbitrate “in any maritime 10 transaction or a contract evidencing a transaction involving commerce . . . shall be valid, 11 irrevocable, and enforceable, save upon such grounds as exist in law or in equity for the 12 revocation of any contract.” 9 U.S.C. § 2. The FINRA Code constitutes an “agreement in 13 writing” within the meaning of 9 U.S.C. § 2. See Waterford Inv. Servs., Inc. v. Bosco, 682 14 F.3d 348, 353 (4th Cir. 2012). 15 A district court’s role under the FAA is limited to determining: (1) whether a valid 16 agreement to arbitrate exists; and, if it does, (2) whether the agreement encompasses the 17 dispute at issue. Lifescan, Inc. v. Premier Diabetic Servs., Inc., 363 F.3d 1010, 1012 (9th 18 Cir. 2004). If the district court determines that a valid arbitration agreement encompasses 19 the dispute, the court must enforce the arbitration agreement in accordance with its terms. 20 Id. “Any doubts concerning the scope of arbitrable issues should be resolved in favor of 21 arbitration.” Simula, Inc. v. Autoliv, Inc., 175 F.3d 716, 719 (9th Cir.1999) (internal 22 quotation marks omitted). Where the claims alleged in a pleading are subject to arbitration, 23 the Court may stay the action pending arbitration or dismiss the action. See 9 U.S.C. § 3; 24 Sparling v. Hoffman Constr. Co., 864 F.2d 635, 638 (9th Cir. 1988). 25 26 27 28 -4- 1 2 3 III. DISCUSSION AFC and Gomez contend that the parties’ obligation to arbitrate their dispute arises under FINRA Rule 13200, which provides that: Except as otherwise provided in the Code, a dispute must be arbitrated under the Code if the dispute arises out of the business activities of a member or an associated person and is between or among: • Members; • Members and Associated Persons; or • Associated Persons. 4 5 6 7 8 9 FINRA Rule 13200(a) (emphasis added). The FINRA Code defines “member” as “any 10 broker or dealer admitted to membership in FINRA.” Id. 13100(o). “The term ‘associated 11 person’ or ‘associated person of a member’ means a person associated with a member, as 12 that term is defined in paragraph (r).” Id. 13100(a). Paragraph (r) specifies that “person 13 associated with a member” includes “[a] natural person who is registered or has applied for 14 registration under the Rules of FINRA.” Id. Rule 13100(r). In addition, “a person formerly 15 associated with a member is a person associated with a member.” Id. Rule 13100(r).2 16 Here, there is no dispute between the parties that NDX Trading and AFC are FINRA 17 members, and that Gomez is an associated person, as defined by the FINRA Code. Opp’n 18 at 5. They disagree, however, on whether the underlying dispute “arises out of the business 19 activities” of a member or associated person. Id. For a dispute to fall within the purview of 20 Rule 13200, it need only “pertain to matters with some nexus to the activity [of the member 21 or associated person] actually regulated by FINRA.” Lorbietzki v. Merrill Lynch, Pierce, 22 Fenner & Smith Inc., No. 2:11-cv-01585-RLH-PAL, 2011 WL 855354, at *3 (D. Nev. Mar. 23 9, 2011) (quoting Valentine Capital Asset Mgmt., Inc. v. Agahi, 174 Cal.App.4th 606, 616 24 (2009)). 25 26 NDX asserts that the underlying dispute does not involve the business activities of NDX Trading, since it allegedly had no direct dealings with AFC or Gomez, and that 27 2 28 FINRA rules are available at its website, located at: http://www.finra.org/Industry/Regulation/FINRARules (last visited Dec. 3, 2012). -5- 1 Gomez never was a registered representative or associated person of that entity. Opp’n at 2 5. This contention lacks merit. The underlying dispute arises, inter alia, from Gomez’s 3 claim that TradeRight owes her for commissions on the accounts transferred from AFC to 4 TradeRight. In or about 2009, TradeRight allegedly went out of business and its accounts 5 were taken over by NDX Trading—which AFC and Gomez allege is the alter ego of 6 TradeRight. See Baldwin Decl. ¶ 2 and Ex. B, Dkt. 68-1; RJN Ex. C at 29 (Form ADV 7 submitted to SEC by form by NDX Advisors indicating that TradeRight is doing business 8 as NDX Trading). Thus, despite NDX’s assertions to the contrary, there clearly is some 9 nexus between AFC and Gomez on the one hand and NDX Trading on the other that arises 10 from their business activities. Although NDX disputes that it is TradeRight’s alter ego, 11 there is no dispute that NDX Trading is a FINRA member subject to the FINRA Code. 12 Whether NDX is, in fact, TradeRight’s alter ego goes to the merits of the underlying 13 dispute, which ultimately is not germane to whether AFC and Gomez’s claim against NDX 14 Trading is arbitrable. See Christensen v. General Bldg. Contractors, 952 F.2d 1073, 1077- 15 78 (9th Cir. 1991) (matters pertaining to the merits of a claim are for the arbitrator to 16 decide). 17 As an ancillary matter, NDX cites FINRA Rule 12200 and asserts that AFC and 18 Gomez were not customers of NDX Trading and therefore are not entitled to arbitrate their 19 dispute. Opp’n at 5. NDX is mixing apples with oranges. There are two sets of rules for 20 arbitrations under FINRA, depending upon the nature of the dispute. FINRA Rule 12000, 21 et seq., sets forth the rules for “customer disputes”; that is, a dispute between a FINRA 22 member (or an associated person of a member) and a customer. In contrast, Rule 13000, et 23 seq., applies to “industry disputes,” which are disputes between members and associated 24 persons, as those terms are defined by Rule 13100. NDX’s reliance on Rule 12220 and 25 related contention that Gomez was never a customer of NDX Trading are irrelevant, since 26 AFC and Gomez are relying on the FINRA rules governing industry disputes. 27 28 -6- 1 IV. CONCLUSION 2 For the reasons set forth above, 3 IT IS HEREBY ORDERED THAT Defendants’ motion to compel arbitration is 4 GRANTED. The instant action is dismissed. The Clerk shall close the file and terminate 5 all pending matters. 6 7 IT IS SO ORDERED. Dated: December 12, 2012 _______________________________ SAUNDRA BROWN ARMSTRONG United States District Judge 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -7-

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