Credit Suisse Securities (USA) LLC et al v. Downing et al

Filing 41

MEMORANDUM AND ORDER granting 29 Plaintiffs' Motion for Preliminary Injunction. Sims is ENJOINED from proceeding with the FINRA arbitration captioned Downing, et al. v. Credit Suisse Securities (USA) LLC and VLS Securities LLC, Arbitration No. 12-04113, pending further order of this Court. Joint Discovery/Case Management Plan due 10/22/13 and Status and Scheduling Conference set for 10/29/13 at 1:00 p.m.(Signed by Judge Nancy F. Atlas) Parties notified.(TDR, 4)

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
CREDIT SUISSE SECURITIES (USA) §
LLC and VLS SECURITIES LLC,
§
Plaintiffs,
§
§
v.
§
§
DEBRA SIMS,
§
Defendant.
§

CIVIL ACTION NO. H-13-1260

MEMORANDUM AND ORDER
In this declaratory judgment action, Plaintiffs Credit Suisse Securities (USA)
LLC (“Credit Suisse”) and VLS Securities LLC (“VLS”) seek a ruling that they have
no obligation to arbitrate Defendant Debra Sims’s claims before the Financial Industry
Regulatory Authority (“FINRA”).1 The case is now before the Court on Plaintiffs’
Motion for a Preliminary Injunction (“Motion”) [Doc. # 29], seeking a preliminary
injunction precluding Sims from proceeding with the FINRA arbitration until her right
to arbitration has been decided by this Court. Defendant filed a Response [Doc. # 34],
and Plaintiffs filed a Reply [Doc. # 39]. Having reviewed the full record and the
applicable legal authorities, the Court grants Plaintiffs’ Motion.

1

Sims is joined in the FINRA arbitration proceeding by 31 other claimants. By
agreement of the parties, Sims is the sole named Defendant and is serving as the
representative of the other claimants.

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I.

BACKGROUND
In early 2012, Sims purchased an exchange-traded note (“ETN”) called the

VelocityShares Daily 2x Long VIX Short Term ETN (“TVIX”) on the secondary
market through an account at a third-party broker-dealer unaffiliated with Credit
Suisse or VLS. TVIX is designed to provide investors twice the daily return of the
S&P 500 VIX Short-Term Futures Index. Credit Suisse is the underwriter of TVIX,
and VLS performs certain services for Credit Suisse AG (“CSAG”), the issuer of
TVIX.2 Credit Suisse and VLS are both members of FINRA, an industry association
that provides an arbitration forum for claims against its members. FINRA members
such as Credit Suisse and VLS agree to comply with Rule 12200, which provides in
pertinent part that arbitration is required when requested by a “customer” and the
dispute is between the customer and a member and “arises in connection with the
business activities of the member.”
Sims alleges in the FINRA arbitration proceeding that Plaintiffs made
misrepresentations and inadequate disclosures regarding the risks of investing in
TVIX in violation of the federal securities laws. Plaintiffs have filed this lawsuit
seeking a ruling that they are not required to arbitrate any of Sims’s claims in the

2

CSAG is neither a party to this lawsuit nor a FINRA member.

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FINRA proceeding. Plaintiffs then moved for a preliminary injunction. The Motion
has been fully and capably briefed, and it is now ripe for decision.
II.

STANDARD FOR PRELIMINARY INJUNCTION
To be entitled to a preliminary injunction, Plaintiffs must show (1) a substantial

likelihood that they will prevail on the merits, (2) a substantial threat that they will
suffer irreparable injury if the injunction is not granted, (3) their threatened injury
outweighs the threatened harm to Sims if the injunction is denied, and (4) that
granting the preliminary injunction will not disserve the public interest. Bluefield
Water Ass’n, Inc. v. City of Starkville, Miss., 577 F.3d 250, 252-53 (5th Cir. 2009).
Plaintiffs bear the burden of proof on all four factors. See Dennis Melancon, Inc. v.
City of New Orleans, 703 F.3d 262, 268 (5th Cir. 2012). “Because a preliminary
injunction is an extraordinary and drastic remedy, the movant must carry his burden
of persuasion ‘by a clear showing.’” Stringer v. McDaniels, 252 F.3d 436, *1 (5th
Cir. Mar. 21, 2001) (quoting Mazurek v. Armstrong, 520 U.S. 968, 972 (1997)).
“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.”
Morgan Keegan & Co. v. Shadburn, 829 F. Supp. 2d 1141, 1145 (M.D. Ala. 2011)
(citing McDonald’s Corp. v. Robertson, 147 F.3d 1301, 1313 (11th Cir. 1998)); see
also Scanvec Amiable Ltd. v. Chang, 80 F. App’x 171, 176-77 (3rd Cir. Oct. 15, 2003)

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(citing Bradley v. Pittsburgh Bd. of Educ., 910 F.2d 1172, 1176 (3rd Cir. 1990)). In
this case, the material facts are not in dispute.
III.

ANALYSIS
A.

Substantial Likelihood of Success on the Merits

In deciding whether Plaintiffs have established a likelihood of success on the
merits of their argument that they are not obligated to arbitrate Sims’s claims, the
Court must first determine whether Plaintiffs have a substantial likelihood of
demonstrating that the parties did not agree to arbitrate their dispute. See Berthel
Fisher & Co. Fin. Servs., Inc. v. Larmon, 695 F.3d 749, 752 (8th Cir. 2012). The
FINRA Code, including Rule 12200, constitutes an agreement to arbitrate certain
disputes between Plaintiffs and their customers. See id. Specifically, Plaintiffs agreed
to arbitrate disputes if there is a written agreement between the parties to arbitrate.
See id. (quoting Rule 12200). It is undisputed that there is no written agreement
between Sims and Plaintiffs that requires arbitration of their dispute.
Absent a written agreement to arbitrate, Rule 12200 requires arbitration if
requested by a “customer,” if the dispute is between the customer and the member,
and if the dispute “arises in connection with the business activities of the member”
(with exceptions not relevant here). See id.; Rule 12200. The dispositive issue in this

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case is whether Sims is a “customer” of Plaintiffs for purposes of Rule 12200.
Plaintiffs must establish a likelihood of success on the merits of this issue.
FINRA Rule 12100(I) defines “customer” only by stating that a “customer shall
not include a broker or a dealer.” Courts have rejected the argument that everyone is
a “customer” except a broker or a dealer. See, e.g., Larmon, 695 F.3d at 752; Morgan
Keegan & Co. v. Silverman, 706 F.3d 562, 565-66 (4th Cir. 2013).3 The Fourth
Circuit has defined “customer” for purposes of Rule 12200 as “one, not a broker or
a dealer, who purchases commodities or services from a FINRA member in the course
of the member’s business activities insofar as those activities are regulated by FINRA
– namely investment banking and securities business activities.” UBS Fin. Servs., Inc.
v. Carilion Clinic, 706 F.3d 319, 325 (4th Cir. 2013). The Eighth Circuit “construed
‘customer’ to refer to one involved in a business relationship with a FINRA member
that is related directly to investment or brokerage services.” Larmon, 695 F.3d at 752
(citing Fleet Boston Robertson Stephens, Inc. v. Innovex, Inc., 264 F.3d 770, 772 (8th
Cir. 2001)). The Eighth Circuit noted that the term “customer” requires that the

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Sims argues that “customer” for purposes of Rule 12200 should be defined to include
everyone other than a broker or a dealer because other FINRA Rules define the term
in a more specific manner for purposes of those rules. The Fourth Circuit in
Silverman explicitly rejected this argument. See Silverman, 706 F.3d at 565-66. This
Court finds the Fourth Circuit’s analysis and decision in Silverman to be persuasive.

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FINRA member provide investment or brokerage services “to the customer either
directly or through its associated persons.” Id. at 753 (emphasis in original).
In this case, it is undisputed that Sims did not have a contractual relationship
with either Plaintiff, and did not purchase TVIX from either Plaintiff. Instead, Sims
purchased TVIX through an account with a third-party broker-dealer unaffiliated with
Plaintiffs. It is undisputed that Sims had no contact or relationship with either
Plaintiff prior to purchasing TVIX. There was no nexus between Plaintiffs and Sims
in connection with her purchase of TVIX.
Sims argues that she benefitted from and is indirectly charged for services
Plaintiffs provide to CSAG, the issuer of TVIX. There is no evidence, however, that
Plaintiffs were obligated to or in fact did provide services directly to Sims, or that
Sims paid Plaintiffs directly for the services they provided to CSAG. The services
provided to CSAG may have created a customer relationship between Plaintiffs and
CSAG, but they do not create a customer relationship between Plaintiffs and Sims.
See, e.g., UBS Fin. Servs. Inc. v. City of Pasadena, 2012 WL 3132949, *4 (C.D. Cal.
July 31, 2012) (finding customer relationship between Plaintiffs and Defendant who
hired them to perform underwriting services); see also Carilion, 706 F.3d at 327-28
(finding customer relationship between Plaintiffs and Defendant who entered into
broker-dealer and underwriting agreements with them).

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The Fourth Circuit’s opinion in Silverman is directly on point factually and
persuasive legally. In that case, the plaintiff (Morgan Keegan) was the underwriter
of certain bond funds. The defendants purchased shares of the funds from a third
party that was unaffiliated with Morgan Keegan. On those facts, which were nearly
identical to those in the case before this Court, the Fourth Circuit held that the
defendants were not “customers” of the plaintiff for purposes of Rule 12200 “because
the defendants did not purchase commodities or services from [the plaintiff] in the
course of its business activities regulated by FINRA.” Silverman, 706 F.3d at 568.
Based on the Silverman decision and the other cases cited above, the Court finds on
the undisputed evidence that Plaintiffs have demonstrated a substantial likelihood of
success on the merits of their claim for declaratory relief.
B.

Irreparable Harm

As discussed above, Plaintiffs have established a likelihood of success on the
merits of their claim that they have not agreed to arbitrate Sims’s claims because Sims
is not their “customer” for purposes of Rule 12200. Plaintiffs will suffer irreparable
harm if they are forced to participate in an arbitration where the dispute is not subject
to an agreement to arbitrate. See Shadburn, 829 F. Supp. 2d at 1153 (and cases cited
therein); Proshares Trust v. Schnall, 695 F. Supp. 2d 76, 80 (S.D.N.Y. 2010) (citing
Merrill Lynch Inv. Managers v. Optibase, Ltd., 337 F.3d 125, 129 (2d Cir. 2003));

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Koman v. Weingarten/Inv., Inc., 2010 WL 3717312, *9 (S.D. Tex. Sept. 17, 2010)
(Miller, J.); Kellogg Brown & Root Servs., Inc. v. Altanmia Commercial Mktg Co.,
2007 WL 4190795, *16 (S.D. Tex. Nov. 21, 2007) (Rosenthal, J.). As a result,
Plaintiffs have satisfied this element of the preliminary injunction analysis.
C.

Balancing of Hardships

Sims asserts that she will be denied her right to arbitrate this dispute if the
preliminary injunction is granted, and states that she will be harmed because
arbitration is a “speedy and less expensive forum to adjudicate” her claims. See
Response, p. 19. Even if the Court’s ruling that Plaintiffs are entitled to the requested
preliminary injunction is erroneous, Sims’s ability to arbitrate this dispute will be
delayed rather than precluded. “However, in light of [Plaintiffs’] showing of a
substantial likelihood of success that [they] cannot be forced to arbitrate the
underlying dispute and the irreparable injury that flows from that forced arbitration,
the harm to [Plaintiffs] clearly outweighs the harm to [Sims].” Shadburn, 829 F.
Supp. 2d at 1153. Consequently, the balance of hardships weighs in Plaintiffs’ favor.
D.

Public Interest

Sims argues that Plaintiffs agreed through Rule 12200 to arbitrate this dispute,
and that public policy favors giving effect to the parties’ agreement. “Where a party
has not agreed to submit a dispute to arbitration, the public has an interest in ensuring

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that the arbitration does not proceed.” Id. To force a party to arbitrate a dispute
absent an agreement to do so “would undermine the longstanding principle that
arbitration is a consent-based process through which parties can decide for themselves
where and how to resolve a specific set of potential disputes.” Raymond James Fin.
Servs., Inc. v. Cary, 709 F.3d 382, 388 (4th Cir. 2013). “Moreover, compelling
arbitration when parties have not agreed to do so would discourage entities from
agreeing to arbitrate at all out of fear that such agreements would be stretched too far
in the course of judicial construction. This in itself would undermine the federal
policy favoring arbitration.” Id. The Court, therefore, concludes that issuance of the
requested preliminary injunction will serve the public interest.
IV.

CONCLUSION AND ORDER
Plaintiffs have made a clear showing that they are likely to prevail on the merits

of this declaratory judgment action. Plaintiffs have demonstrated that they will suffer
irreparable harm if Sims is not enjoined from continuing with the FINRA arbitration
unless and until this Court determines that she is a “customer” for purposes of Rule
12200, that the irreparable harm to Plaintiffs outweighs any harm to Sims if the
preliminary injunction is granted, and that the preliminary injunction is in the public
interest. As a result, it is hereby

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ORDERED that the Plaintiffs’ Motion for Preliminary Injunction [Doc. # 29]
is GRANTED. It is further
ORDERED that Sims is ENJOINED from proceeding with the FINRA
arbitration captioned Downing, et al. v. Credit Suisse Securities (USA) LLC and VLS
Securities LLC, Arbitration No. 12-04113, pending further order of this Court. It is
further
ORDERED that counsel shall appear before the Court on October 29, 2013,
at 1:00 p.m. for a status and scheduling conference. The parties shall file their Joint
Discovery/Case Management Plan by October 22, 2013.
SIGNED at Houston, Texas this 4th day of October, 2013.

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