Sagepoint Financial, Inc. v. Small

Filing 25

ORDER granting 8 Motion for Preliminary Injunction -- Plaintiff's motion for a preliminary injunction to enjoin Defendant from pursuing claims in the FINRA Arbitration against Plaintiff or from taking any further action with respect to Plain tiff in the Arbitration during the pendency of this action is granted. The parties are ordered to confer and report back to the Court within fourteen (14) days from the date of entry of this order, indicating whether they consent to the preliminary injunction being made permanent and to the entry of a final judgment in this case. SO ORDERED by Judge Dora Lizette Irizarry on 5/15/2015. (Irizarry, Dora)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
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SAGEPOINT FINANCIAL, INC.,
:
:
Plaintiff,
:
:
MEMORANDUM AND ORDER
-against15-CV-0571 (DLI)(RML)
:
:
MARCIA SMALL,
:
:
Defendant.
:
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DORA L. IRIZARRY, United States District Judge:
Plaintiff Sagepoint Financial, Inc. (“Plaintiff”) brings this action for declaratory and
injunctive relief to enjoin defendant Marcia Small (“Defendant”) from pursuing claims against
Plaintiff in a Financial Industry Regulatory Authority (“FINRA”) arbitration proceeding
designated as FINRA Dispute Resolution Case Number 14-03774 (the “Arbitration”). Plaintiff
now moves pursuant to Rule 65(a) of the Federal Rules of Civil Procedure for a preliminary
injunction to enjoin Defendant from taking any further action in the Arbitration with respect to
Plaintiff during the pendency of this action. Defendant opposes. For the reasons set forth below,
Plaintiff’s motion for a preliminary injunction is GRANTED.
BACKGROUND1
Plaintiff, a Delaware corporation with its principal place of business in Arizona, is a
provider of diversified financial services and investment products.

(Plaintiff’s Complaint

(‘”Compl.”) ¶ 8, Docket Entry No. 1; Declaration of Greg Curley in Support of Pl.’s Mot. for
Prelim. Inj’n (“Curley Aff.”) ¶ 3, Docket Entry No. 11.) Plaintiff is registered as a broker-dealer
with the United States Securities and Exchange Commission and is a member of FINRA.
(Curley Aff. ¶ 3.)
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The following facts are undisputed unless otherwise noted.

In 2006, Plaintiff acquired financial services firm American General Securities, Inc.
(“AGSI”).2 (Id. ¶ 4.) From approximately October 1997 until November 2004, a broker named
Robert Henry Van Zandt, Sr. (“Van Zandt”) was registered as a representative of AGSI. (Id. ¶ 6;
Exhibit A attached to Curley Aff. (“Curley Aff. Ex. A”.)) In December 2004, after terminating
his registration with AGSI, Van Zandt registered as a representative of Metropolitan Life
Insurance Company. (Curley Aff. ¶ 6 with Curley Aff. Ex. A.) Thereafter, from December 2006
until March 2010, Van Zandt was a registered representative of Gunnallen Financial, Inc.
(“Gunnallen”). (Curley Aff. ¶ 7 with Curley Aff. Ex. A.)
It later came to light that Van Zandt had orchestrated a Ponzi scheme, soliciting funds
from clients for investment in securities and real estate projects that instead were diverted for
personal use or to pay antecedent investors. (See Def.’s Opp. to Mot. for Prelim. Inj’n (“Def.
Opp.”), at 3, Docket Entry No. 12). A FINRA regulatory action initiated in September 2011
resulted in Van Zandt being barred from the securities industry, and, in November 2014, he pled
guilty to criminal charges in New York state court in connection with the fraud he perpetrated.
(See id.)
Defendant is an alleged victim of Van Zandt’s fraud, having invested approximately
$870,000 with Van Zandt in or around August 2008, when Van Zandt was a registered
representative of Gunnallen. (See id.; Curley Aff. ¶¶ 6-7 with Curley Aff. Ex. A.) On December
18, 2014, Defendant initiated the Arbitration by filing a “Statement of Claim” with FINRA,
asserting claims against certain of the brokerage firms Van Zandt was associated with during the
roughly ten-year period his fraudulent scheme allegedly spanned. (See Def. Opp. at 2; Statement
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Defendant disputes Plaintiff’s characterization that it “acquired” AGSI in 2006. Defendant contends that AGSI
and another brokerage firm, AIG Financial Advisors (“AIGF”), were sister subsidiaries of American International
Group Inc. that were merged in 2007, leaving AIGF as the surviving entity. (See Def. Opp. at 3; Exhibit B attached
to the Declaration of Adam J. Gana in Opp. to Mot. for Prelim. Inj’n, Docket Entry No. 12-1.) AIGF then
purportedly changed its name to “Sagepoint” in 2009. (See Def. Opp. at 3.)

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of Claim, Exhibit E attached to the Declaration of Theodore J. Sawicki in Support of Pl.’s Mot.
for Prelim. Inj’n (“Sawicki Aff.”), Docket Entry No. 10-5.)
In particular, Defendant alleges in the Arbitration that Plaintiff is liable either in its own
capacity or as a successor to AGSI for: (1) AGSI’s failure to properly supervise Van Zandt
during the time he was AGSI’s registered representative, particularly with respect to the socalled “selling away”3 business he engaged in; (2) AGSI’s misreporting of the reason Van Zandt
terminated his registration with AGSI, along with the failure of AGSI and Plaintiff to correct the
erroneous report thereafter; and (3) the concealment by AGSI and Plaintiff of certain facts
concerning Van Zandt’s selling away activities, and failure to properly report those activities to
regulatory authorities.

(See Def. Opp. at 4; Statement of Claim at 10-22.)

In addition,

Defendant alleges in the Arbitration that Plaintiff is vicariously liable for Van Zandt’s fraud.
(See Statement of Claim at 23-24.)
Defendant initiated the Arbitration under the FINRA Code of Arbitration Procedure for
Customer Disputes (the “FINRA Code”), Rule 12200 (“FINRA Rule 12200”), which permits a
“customer” of a FINRA member or its associated person to compel arbitration against the
member, upon demand, if certain other conditions are met. (See Statement of Claim at 1.) To
date, Plaintiff has refused to submit to the Arbitration on the ground that Defendant cannot avail
herself of FINRA Rule 12200 to force arbitration because she is not, nor has she ever been,
Plaintiff’s “customer” within the meaning of the FINRA Code. (See Exhibit A attached to the
Sawicki Aff.)

Therefore, on February 5, 2015, Plaintiff commenced this action seeking

declaratory and injunctive relief to prevent Defendant from proceeding with her claims against
Plaintiff in the Arbitration. (See Compl. ¶¶ 1-37.)

3

In the securities industry, a broker that “sells away” engages in business apart from his or her brokerage firm,
either selling, or soliciting the sale of, securities that are not held or offered by the firm. (See Def. Opp. at 1.)

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Plaintiff thereafter moved to preliminarily enjoin Defendant from taking any further
action in the Arbitration with respect to Plaintiff during the pendency of this action. (Docket
Entry No. 8.) On April 16, 2015, in response to submissions from Plaintiff showing that it faced
irreparable injury and prejudice in the Arbitration, this Court issued an order temporarily staying
proceedings in the Arbitration as to Plaintiff until a hearing on its motion for a preliminary
injunction could be held, and a decision rendered. (Docket Entry No. 22.) That hearing was held
May 4, 2015. This decision followed.
DISCUSSION
I.

Legal Standard
“The district court has wide discretion in determining whether to grant a preliminary

injunction.” Moore v. Consol. Edison Co. of N.Y., Inc., 409 F.3d 506, 511 (2d Cir. 2005). A
party seeking a preliminary injunction must show: “(1) the likelihood of irreparable injury in the
absence of such an injunction, and (2) either (a) likelihood of success on the merits or (b)
sufficiently serious questions going to the merits to make them a fair ground for litigation plus a
balance of hardships tipping decidedly toward the party requesting the preliminary relief.” Zino
Davidoff SA v. CVS Corp., 571 F.3d 238, 242 (2d Cir. 2009) (quoting Fed. Express Corp. v. Fed.
Espresso, Inc., 201 F.3d 168, 173 (2d Cir. 2000)).
Here, Defendant does not dispute that Plaintiff can demonstrate the requisite likelihood of
irreparable harm, (see Def. Opp. at 7), given applicable precedent in this Circuit holding that
“[b]eing forced to arbitrate a claim one did not agree to arbitrate constitutes an irreparable harm
for which there is no adequate remedy at law.” UBS Secs., LLC v. Voegeli, 405 F. App’x 550,
552 (2d Cir. 2011); accord Merrill Lynch Inv. Managers v. Optibase, Ltd., 337 F.3d 125, 129 (2d
Cir. 2003) (per curiam); Maryland Cas. Co. v. Realty Advisory Bd. on Labor Relations, 107 F.3d

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979, 985 (2d Cir. 1997).

Accordingly, the Court need only address whether Plaintiff can

demonstrate a likelihood of success on the merits in this action.
II.

Likelihood of Success on the Merits
A. There Is No Need for Discovery to Determine Defendant’s “Customer” Status
There is no dispute that Plaintiff, as a member of FINRA, is bound by the FINRA Code

and, thus, has consented to arbitration in accordance with the terms of FINRA Rule 12200. That
provision requires parties to arbitrate before FINRA if:
 Arbitration under the [FINRA] Code is either:
(1) Required by a written agreement, or
(2) Requested by the customer;
 The dispute is between a customer and a member or associated person of a
member; and
 The dispute arises in connection with the business activities of the member or
the associated person, except disputes involving the insurance business activities
of a member that is also an insurance company.
FINRA Rule 12200.

Here, there is no written agreement between the parties requiring

arbitration.4 Accordingly, Defendant can only satisfy the first prong of FINRA Rule 12200 if
she is a “customer” of Plaintiff. See Citigroup Global Markets, Inc. v. Abbar, 943 F. Supp. 2d
404, 407-08, 410 (S.D.N.Y. 2013), aff’d 761 F.3d 268 (2d Cir. 2014) (enjoining arbitration based
on finding that claimant was not FINRA member’s “customer” within the meaning of FINRA
Rule 12200); UBS Secs. v. Voegeli, 684 F. Supp. 2d 351, 355-57 (S.D.N.Y. 2010), aff’d 405 F.

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Defendant suggests in passing that the FINRA Code could be construed as an agreement to arbitrate, (see Def.
Opp. at 5-6), but does not argue seriously that the FINRA Code itself satisfies the “written agreement” requirement
of FINRA Rule 12200’s first prong. Even if Defendant made that argument, it would find no support in the
authorities in this Circuit or elsewhere. Moreover, if the FINRA Code itself satisfied the first prong of FINRA Rule
12200, there would be no need for the further language in that provision stating that, as an alternative, a customer
may request arbitration. The Court must reject any interpretation having such effect, given that the arbitration rules
of FINRA “are interpreted like contract terms.” Abbar, 761 F.3d at 274; Garza v. Marine Transport Lines, Inc., 861
F.2d 23, 27 (2d Cir. 1988) (“[An] interpretation [with] . . . the effect of rendering at least one clause superfluous or
meaningless . . . . is not preferred and will be avoided if possible.”)

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App’x 550 (2d Cir. 2011); Suntrust Banks, Inc. v. Turnberry Capital Mgmt. LP, 945 F. Supp. 2d
415, 421 (S.D.N.Y. 2013).
Recently, in Citigroup Global Markets, Inc. v. Abbar, the Second Circuit explained that
determining whether a claimant is a “customer” for the purposes of FINRA Rule 12200 typically
will not require a detailed examination of “the substance, nature, and frequency of each
interaction and task performed by the various persons . . . their contemporaneous
understandings . . . , and the extent to which the person’s activities shaped or caused the
transaction.” 761 F.3d 268, 276 (2d Cir. 2014) (internal citation and quotation marks omitted).
Rather, “[i]n most cases, th[e] definition of ‘customer’ can be readily applied to undisputed
facts.” Id.
Here, the facts essential to determining whether Defendant is Plaintiff’s “customer”
are not legitimately in dispute. As such, the Court finds that it can dispose of Plaintiff’s motion
for a preliminary injunction based on the papers before it, without the need for discovery
between the parties or an ensuing evidentiary hearing. See Maryland Cas. Co., 107 F.3d at 984
(“Generally, the district court is not required to conduct an evidentiary hearing on a motion for a
preliminary injunction when essential facts are not in dispute.”); Drywall Tapers & Pointers of
Greater New York, Local 1974 v. Local 530 of Operative Plasterers and Cement Masons Int’l
Ass’n, 954 F.2d 69, 76-77 (2d Cir. 1992); Pictet Funds (Europe) S.A. v. Emerging Managers
Grp., L.P., 2014 WL 6766011, at *8-9 (S.D.N.Y. Dec. 1, 2014); see also Triad Advisors, Inc. v.
Siev, 2014 WL 6601153, at *4 (E.D.N.Y. Nov. 21, 2014) (finding discovery unnecessary where
the requesting party “pointed to no disputed or missing fact . . . relevant to [the court’s]
determination of whether Rule 12200 commands arbitration here.”)

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B. Defendant Is Not Plaintiff’s Customer
The FINRA Code of Arbitration Procedure does not define “customer” except to state
that a “customer shall not include a broker or dealer.” FINRA Rule 12100(i). Seeking to clarify
the meaning of the term within the context of FINRA Rule 12200, the Second Circuit in Abbar
held that a “customer” is one who, while not a broker or dealer, either “(1) purchases a good or
service from a FINRA member, or (2) has an account with a FINRA member.” Abbar, 761 F.3d
at 275. Applying this definition to the undisputed facts here, it is clear that Defendant is not a
“customer” of Plaintiff. Defendant does not allege that she ever purchased goods or services
from Plaintiff, nor does she allege that she ever held an account with Plaintiff.
Defendant nonetheless argues the existence of a customer relationship on the basis of
the investment she made in August 2008 with Van Zandt, who, in turn, was a registered
representative of Plaintiff’s alleged predecessor, AGSI, between 1997 and 2004. Defendant
contends that these facts obligate Plaintiff to arbitrate, as FINRA Rule 12200 has been
interpreted to permit a customer of a FINRA member’s associated person to compel the member
itself to arbitrate claims arising out of the associated person’s business activities. See John
Hancock Life Ins. Co. v. Wilson, 254 F.3d 48, 59-60 (2d Cir. 2001); see also Abbar, 761 F.3d at
274 (“In short, the rule requires a FINRA member to arbitrate disputes with its ‘customers’ or the
‘customers’ of its ‘associated persons.’ ”)
However, that principle has not been applied so expansively as to permit arbitration
against a FINRA member on the basis of a customer relationship its representative maintained
during a time entirely removed from his or her affiliation with the member. See Ryan, Beck &
Co., LLC v. Fakih, 268 F. Supp. 2d 210, 228-29 (E.D.N.Y. 2003) (“[The claimant] relies on
cases like John Hancock, which are materially different in that that there the member had the

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ability to exercise supervisory control over its associated person at the time of the alleged
misconduct.”) (emphasis added) (internal citation and quotation marks omitted). Indeed, the
Second Circuit has recognized that a claimant’s status as a “customer” must be determined “as of
the time of the events providing the basis for the [claimant’s] allegations. . . .” Bensadoun v.
Jobe-Riat, 316 F.3d 171, 177 (2d Cir. 2003) (quoting Wheat, First Secs., Inc. v. Green, 993 F.2d
814, 820 (11th Cir. 1993)); see also Sands Bros. & Co., Ltd. V. Ettinger, 2004 WL 541846, at *3
(S.D.N.Y. Mar. 19, 2004); Ryan, Beck & Co., 268 F. Supp. 2d at 228-29.
Here, any customer relationship between Defendant and Van Zandt based on
investment activity in 2008 arose almost four years after Van Zandt ended his affiliation with
AGSI.

Further, Defendant’s claims in the Arbitration, whether based on AGSI’s alleged

supervisory failures or on Van Zandt’s own misconduct, do not allege any time during which
Defendant’s investment activity with Van Zandt coincided with Van Zandt’s affiliation with
AGSI. Absent any such temporal nexus, Defendant’s investment relationship with Van Zandt
does not provide a basis to compel arbitration against AGSI, or against Plaintiff as AGSI’s
alleged successor.
Defendant does not cite to any decisions adopting the construction of FINRA Rule 12200
she proposes. Rather, Defendant relies on cases that merely reconfirm the general principle that
the customer of a FINRA member’s associated person can compel the member itself to arbitrate
in certain circumstances. For example, Defendant contends that her claims that AGSI failed to
properly supervise Van Zandt are no different than the claims at issue in O.N. Equity Sales Co. v.
Emmertz5, in which the district court held that a member firm (“ONESCO”) was required to
arbitrate claims arising from the selling away activities of its representative (“Lancaster”). 526
5

Emmertz is one of a number of cases from outside the Second Circuit cited by Defendant. (See Def. Opp. at 1113.) While those authorities are not binding on this Court, it is noteworthy that none of them appears to support
Defendant’s expansive construction of FINRA Rule 12200.

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F. Supp. 2d 523, 530-31, 34 (E.D. Pa. 2007). However, Defendant overlooks the fact that the
holding in Emmertz was predicated on the court’s specific finding that the claimant had an
“investment relationship” with Lancaster “while Lancaster was a representative of ONESCO.”
See id. at 531 (emphasis added). As the court explained, “some of the specific actions regarding
[the claimant’s] investment . . . including the actual investment of [the claimant’s] funds . . . took
place while Lancaster was affiliated with ONESCO.” Id.; see also O.N. Equity Sales Co. v.
Maria Cui, 2008 WL 170584 (N.D. Cal. Jan. 17, 2008) (compelling arbitration where the
claimant still had the opportunity to confirm his investment or withdraw his funds “while
Lancaster was ONESCO’s representative . . . .”) Here, in light of Defendant’s inability to
demonstrate any similar activity with Van Zandt during the time he was associated with AGSI,
Defendant cannot establish that she was ever a “customer” of AGSI, let alone a “customer” of
Plaintiff.
In reaching this determination, the Court is mindful that the meaning of “customer”
must “be construed in a manner consistent with the reasonable expectations of FINRA
members.”

Abbar, 761 F.3d at 274-75 (quoting Wachovia Bank, N.A. v. VCG Special

Opportunities Master Fund, Ltd., 661 F.3d 164, 171 (2d Cir. 2011)). The Court finds no reason
to conclude that Plaintiff, in consenting to arbitrate claims brought by its “customers,”
reasonably expected that it would have to arbitrate claims based on an investment relationship
Defendant formed with one of AGSI’s former representatives almost four years after that
representative ended his affiliation with AGSI. See Wheat, First, 993 F.2d at 820 (“We cannot
imagine that any . . . member would have contemplated that its . . . membership alone would
require it to arbitrate claims which arose while a claimant was a customer of another
member . . . .”)

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Finally, even assuming arguendo that a sufficient basis existed for arbitration of the
claims that Defendant asserts based on AGSI’s alleged misconduct, it is questionable whether
Plaintiff could be compelled to arbitrate those claims as an alleged successor to AGSI. As courts
in this Circuit have recognized in similar contexts, “allegations against a predecessor-in-interest
[do] not give rise to a duty to arbitrate on the part of the successor.” Ettinger, 2004 WL 541846,
at *3 (quoting Bensadoun, 316 F.3d at 177); see also Sands Bros. & Co., Ltd. v. Alba Perez Ttee
Catalina Garcia Revocable Trust, 2004 WL 2186574, at *3-4 (S.D.N.Y. Sept. 28, 2004).
Defendant argues that a different result is warranted here because Plaintiff is essentially a
continuation of AGSI operating under a different name. Nevertheless, the Court need not reach
that argument to decide this motion and, therefore, declines to do so.
In sum, Defendant is not Plaintiff’s “customer” within the meaning of FINRA Rule
12200. Accordingly, the Court finds that Plaintiff has demonstrated a likelihood of success on
the merits.
III.

Balancing of the Equities and Public Interest Considerations
Defendant argues the balance of the equities favors arbitration and that a preliminary

injunction enjoining the Arbitration would not serve the public interest. Specifically, Defendant
argues that: (1) Plaintiff is seeking to escape the arbitration forum because it has not had success
in arbitrating other claims purportedly stemming from Van Zandt’s misconduct; (2) there is a
presumption in favor of arbitration in light of strong federal policy and FINRA’s own stated
intent to arbitrate claims involving selling away; and (3) arbitration before FINRA is an
important protection for investors. (See Def. Opp. at 16-18.)
Defendant’s arguments are unavailing. First, Plaintiff’s experiences in other arbitrations,
involving other facts and claimants, have no bearing on the determination the Court is called

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upon to make based on the facts of this case. Second, “[b]ecause the parties here are disputing
the existence of an obligation to arbitrate, not the scope of an arbitration clause, the general
presumption in favor of arbitration does not apply.” Abbar, 761 F.3d at 274 (citing Applied
Energetics, Inc. v. NewOak Capital Mkts., LLC, 645 F.3d 522, 526 (2d Cir. 2011)). Finally,
while the Court agrees that arbitration before FINRA plays a key role in regulating the securities
industry and providing protection to investors, those concerns do not overcome the fundamental
precept that “a party cannot be required to submit to arbitration any dispute which [it] has not
agreed so to submit.” AT&T Techs., Inc. v. Commc’ns Workers of America, 475 U.S. 643, 648
(1986) (quoting United Steelworkers of Am. v. Warrior & Gulf Navigation Co., 363 U.S. 574,
582 (1960)); see also Voegeli, 405 F. App’x at 551. Insofar as Defendant is not Plaintiff’s
“customer” within the meaning of FINRA Rule 12200, Plaintiff has not consented to the
Arbitration and, thus, cannot be required to arbitrate in derogation of its rights. As such, the
Court finds that the issuance of a preliminary injunction is favored by the balance of the equities
and will serve the public interest.

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CONCLUSION
For the foregoing reasons, Plaintiff’s motion for a preliminary injunction to enjoin
Defendant from pursuing claims in the Arbitration against Plaintiff or from taking any further
action with respect to Plaintiff in the Arbitration during the pendency of this action is granted.
The parties are ordered to confer and report back to the Court within fourteen (14) days from the
date of entry of this order, indicating whether they consent to the preliminary injunction being
made permanent and to the entry of a final judgment in this case.
SO ORDERED.
Dated: Brooklyn, New York
May 15, 2015
/s/
DORA L. IRIZARRY
United States District Judge

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