Purshe Kaplan Sterling Investments v. Thomsen et al
Filing
49
MEMORANDUM DECISION AFTER A BENCH TRIAL: FINDINGS OF FACT AND CONCLUSIONS OF LAW. Signed by Judge Jill N. Parrish on 3/26/24. (dle)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH
PURSHE KAPLAN STERLING
INVESTMENTS, INC.,
MEMORANDUM DECISION AFTER A
BENCH TRIAL: FINDINGS OF FACT
AND CONCLUSIONS OF LAW
Plaintiff,
v.
Case No. 2:24-CV-00002-JNP
JEFF THOMSEN, individually and as
trustee of the JEFFREY THOMSEN REV
TRUST UA 11/23/04 and the CAROL
MARIE THOMSEN TRUST UA 6/2/14; and
CAROL THOMSEN, individually and as
trustee of the JEFFREY THOMSEN REVE
TRUST UA 11/23/04 and the CAROL
MARIE THOMSEN TRUST UA 6/2/14,
District Judge Jill N. Parrish
Defendants.
Jeff and Carol Thomsen recently initiated FINRA Dispute Resolution Services Arbitration
Number 23-03389, Jeff Thomsen and Carol Thomsen vs. Purshe Kaplan Sterling Investments,
alleging claims in their individual capacities and their capacities as trustees against Purshe Kaplan
Sterling Investments (“PKS”). PKS insists that the Thomsens’ claims are not arbitrable and
therefore filed this suit, seeking a declaratory judgment as to the non-arbitrability of the Thomsens’
claims and an order restraining and enjoining the Thomsens from pursuing claims against PKS in
the FINRA arbitration. For the reasons stated herein, the court concludes and finds that the
Thomsens are “customers” within the meaning of FINRA Rule 12200 and that the Thomsens’
claims against PKS are consequently arbitrable under that Rule.
FINDINGS OF FACT
Parties
Jeff and Carol Thomsen are individuals who reside in Draper, Utah. The Thomsens are
married and have three trusts between them. First, the Thomsens are co-trustees in the Carol Marie
Thomsen Trust (“Carol’s Trust”). Ex. No. 272, at 1.1 Second, the Thomsens are similarly cotrustees in the Jeffrey B. Thomsen Trust (“Jeffrey’s Trust”). Ex. No. 273, at 1. The trust agreements
for Carol’s Trust and Jeffrey’s Trust were both executed on June 2, 2024. Ex. Nos. 272, at 1; 273,
at 1. Third, Carol Thomsen is a co-trustee with two of the Thomsen’s children in the Thomsen
Family Dynasty Trust, which became effective on August 26, 2021. Ex. No. 8.
PKS is a broker/dealer and financial services firm with its principal place of business in
Albany, New York. PKS is registered with the Securities and Exchange Commission and is a
FINRA member.
The Thomsens’ Relationship with PKS
The Thomsens have no direct relationship with PKS. Neither the Thomsens nor any of their
trust entities opened an account with PKS. PKS never provided financial advice or any other
services to the Thomsens, whether individually or in their capacities as trustees. The Thomsens’
only relationship with PKS is through their relationship with Adam Nugent (“Mr. Nugent”), a
former representative of PKS.
PKS’s Relationship with Mr. Nugent
Mr. Nugent was PKS’s registered representative between March 22, 2017 and June 21,
2018. ECF No. 40, ¶ 15. However, Mr. Nugent never opened a PKS account on behalf of any of
his clients. Mr. Nugent never sold securities or otherwise transacted any business with or through
PKS during his time as PKS’s registered representative. It is undisputed that Mr. Nugent’s only
reason for registering with PKS was to become eligible to collect trail commissions on his past
The court cites to the various exhibits by their exhibit numbers, noting that Plaintiff filed Exhibits Nos. 1–16 and
Defendants filed Exhibits Nos. 201–273.
1
2
sales.
As a result of Mr. Nugent’s registration as PKS’s representative, PKS was required to
“exercise appropriate supervision” over Mr. Nugent’s activities “in order to prevent violations of
the securities laws.” FINRA Notice to Members 01-79: NASD Reminds Members of Their
Responsibilities Regarding Private Securities Transactions Involving Notes and Other Securities
and Outside Business Activities. To comply with this obligation, PKS began recording copies of
all of Mr. Nugent’s emails, including those regarding his activities as the Thomsens’ investment
advisor.
On March 1, 2018, Mr. Nugent emailed PKS’s compliance team to request to discuss “a
REG D we are looking to do through our RIA.” Ex. No. 233, at 7. When Mr. Nugent wrote “REG
D,” he was likely referring to a potential private placement in which he would offer his clients the
opportunity to invest in a privately held company or private fund. PKS’s Compliance Officer
responded to Mr. Nugent, informing him that he was “not permitted to do a Reg D private
placement . . . unless it is sold through and would be custodied at your normal RIA Custodian[,]”
which was TD Ameritrade. Ex. No. 233, at 6. “Otherwise[,]” the email continued, “this would
constitute selling away from PKS and would not be permitted.” Id. Following this email exchange,
PKS’s compliance team contacted Mr. Nugent on three separate occasions to request additional
information about any potential Reg D private placement and other facts relevant to PKS’s
compliance obligations. Id. at 1–5. Mr. Nugent failed to provide the requested information. Id. at
1. On June 21, 2018, Mr. Nugent abruptly ended his affiliation with PKS. Ex. No. 237.
The Thomsens’ Relationship with Mr. Nugent
Until recently, Mr. Nugent was the Thomsens’ primary financial advisor. Mr. Nugent
began providing the Thomsens with investment advice sometime in 2014. At all relevant times,
3
Mr. Nugent operated his own registered advisory firm, Foresight Wealth Management, LLC
(“Foresight”). ECF No. 40, ¶ 16. The Thomsens met with Mr. Nugent periodically to discuss
various investment opportunities and other matters related to their wealth management and
financial planning. These meetings often took place in person at Mr. Nugent’s office or the
Thomsens’ offices. When the Thomsens decided to make an investment based upon Mr. Nugent’s
advice, the Thomsens would write a check, which Mr. Nugent would personally pick up from the
Thomsens.
In or around the middle of 2017, Mr. Nugent advised the Thomsens of an investment
opportunity in a company called Agronomic, which conducted business in the cannabis industry.
Mr. Nugent told the Thomsens that Agronomic would invest money in growing cannabis crops in
the American West before using the output to manufacture and sell CBD products, including CBD
oil. As they usually did, the Thomsens took Mr. Nugent’s investment advice. The Thomsens
initially invested $500,000 in the Agronomic business. See Ex. No. 16, at 1. In exchange for their
investment, Agronomic Capital, LP sold the Thomsens a Convertible Promissory Note under
which interest would accrue on the Thomsens’ investment at a rate of 25% per annum. Ex. No. 1,
at 2. Upon Mr. Nugent’s advice, the Thomsens executed the Agronomic promissory note in the
name of Carol’s Trust. Id. at 6. The Thomsens paid Agronomic $500,000 with a check from their
joint personal bank account. See Ex. No. 16, at 1. As he usually did, Mr. Nugent personally picked
up the Thomsens’ check.
At the time that Mr. Nugent advised the Thomsens to invest in Agronomic, Mr. Nugent
represented only that this was a lucrative investment into which he was also investing some funds.
Mr. Nugent failed to disclose to the Thomsens that he was personally involved in the ownership
or operation of Agronomic. But Mr. Nugent did sign the Agronomic promissory note on
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Agronomic’s behalf, signing his name as the “MGR” of Agronomic Capital, LP, Agronomic
Holdings, LLC, and Agronomic Enterprises, LLC. Ex. No. 14, at 6. Mr. Nugent also visited the
Thomsens in person to pick up the $500,000 check that Mrs. Thomsen wrote to Agronomic Capital
(although this was standard fare in Mr. Nugent’s conduct as the Thomsens’ financial advisor).
Despite all of this, the Thomsens were not aware of Mr. Nugent’s personal involvement in
Agronomic’s operations and understood only that he would be investing in the business alongside
the money that they invested.
Mr. Nugent solicited and received the Thomsens’ initial $500,000 investment in
Agronomic while he was PKS’s registered representative. After Mr. Nugent terminated his
relationship with PKS, the Thomsens invested at least an additional $410,000 in Agronomic upon
Mr. Nugent’s advice. Ex. No. 16, at 2–3. These further investments were made through a $160,000
check written in September 2018 and a $250,000 check written in January 2019. Id. The
Thomsens’ third investment was induced by an email Mr. Nugent sent to the Thomsens on January
9, 2019, providing an update on their Agronomic investment. Ex. No. 239, at 1. In later
communications providing updates on this investment, Mr. Nugent represented to the Thomsens
that they had contributed $1,000,376 into Agronomic Capital, which had allegedly appreciated to
a valuation of $1,500,564 by June 31, 2019. Ex. No. 243, at 19.
On February 27, 2023, the Securities and Exchange Commission issued an order instituting
administrative and cease-and-desist proceedings against Mr. Nugent and Foresight. Ex. No. 248.
According to the order, Mr. Nugent raised roughly $19.5 million from over eighty investors
through offerings in Agronomic Capital between March and December 2018. Id. at 2. The SEC
concluded that Mr. Nugent and Foresight had defrauded Agronomic Capital and its investors by
“misusing certain fund assets, failing to disclose conflicts of interests, misrepresenting to investors
5
in Ag Capital how the proceeds of their investment would be used, and breaching Ag Capital’s
limited partnership agreement.” Id.
CONCLUSIONS OF LAW
Arbitrability is a matter of agreement. Howard v. Ferrellgas Partners, L.P., 748 F.3d 975,
977 (10th Cir. 2014) (“Everyone knows the Federal Arbitration Act favors arbitration. But before
the Act's heavy hand in favor of arbitration swings into play, the parties themselves must agree to
have their disputes arbitrated.”). The parties have not entered any contract requiring arbitration.
Yet neither party disputes that FINRA Rule 12200 “serves as a sufficient agreement to arbitrate,
binding [FINRA] members to arbitrate a variety of claims with third-party claimants.” 2 See, e.g.,
Sparks v. Saxon Invs., LLC, No. 2:09-CV-151-DAK, 2009 U.S. Dist. LEXIS 79184, at *8–9 (D.
Utah Sept. 2, 2009).3
As a FINRA member, PKS is therefore deemed to have agreed to arbitrate claims when
three conditions are met:
Arbitration under the 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[.]
FINRA Rule 12200. Because this Rule constitutes an agreement to arbitrate, ordinary principles
of state contract law govern its interpretation. See AT&T Mobility LLC v. Concepcion, 563 U.S.
This principle has been broadly accepted in other circuits. See, e.g., John Hancock Life Ins. Co. v. Wilson, 254 F.3d
48, 58–59 (2d Cir. 2001); Vestax Sees. Corp. v. McWood, 280 F.3d 1078, 1081 (6th Cir. 2002); MONY Secs. Corp. v.
Bornstein, 390 F.3d 1340, 1342 (11th Cir. 2004) (quoting Multi-Financial Secs. Corp. v. King, 386 F.3d 1364, 1366
(11th Cir. 2004)).
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Many cases on this topic, including Judge Kimball’s decision in Sparks, refer to provisions of the National
Association of Securities Dealers (“NASD”), the predecessor to FINRA. The court applies these precedents in
recognition of the fact that FINRA’s Rule 12200 contains the same language as that formerly written in the NASD
Code.
2
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333, 339 (2011) (internal citations and quotation marks omitted); Bensadoun v. Jobe-Riat, 316
F.3d 171, 176 (2d Cir. 2003) (“We have rules that interpretation of the NASD arbitration provision
is a matter of contract interpretation, that New York law applies, and that the provision should thus
be interpreted ‘to give effect to the parties’ intent as expressed by the plain language of the
provision.”) (quoting John Hancock, 254 F.3d at 58).4
Applying the foregoing legal principles, the court determines that PKS is required to
arbitrate the Thomsens’ claims. Specifically, the court concludes and finds that 1) the Thomsens
are “customers” under FINRA Rule 12200; 2) the dispute is between a customer and a FINRA
member or its associated person; and 3) the dispute arises in connection with the business activities
of the member or the associated person. As a result, the court finds that the Thomsens’ claims are
arbitrable pursuant to FINRA Rule 12200.
I.
THE THOMSENS ARE CUSTOMERS FOR PURPOSES OF THE
FINRA RULES
First, the court must determine whether a “customer” requested arbitration, which is the
first element of the test to compel arbitration under FINRA Rule 12200. PKS insists that the
Thomsens are not customers, and that as a result, PKS cannot be required to arbitrate disputes at
the Thomsens’ request. PKS’s primary contention is that in order to qualify as a “customer” under
the FINRA Rules, an individual must have some direct relationship with a FINRA member itself,
4
Under either New York law or Utah law, the court would give effect to the plain language of FINRA Rule 12200 as
a matter of contract law. See John Hancock, 254 F.3d at 58; see also The Tenth Circuit has not defined the term
“customer” in the context of FINRA Rule 12200 or that Rule’s predecessor in the NASD Code. In determining whether
the Thomsens were “customers” for purposes of determining the arbitrability of their claims, the court therefore begins
with the plain language of the Rule. See Roberts v. Cent. Refrigerated Serv., 27 F. Supp. 3d 1256, 1259 (D. Utah 2014)
(quoting Reed v. Davis County Sch. Dist., 892 P.2d 1063, 1064–65 (Utah App. 1995)) (“In interpreting the arbitration
agreement, the court looks first to the document itself. When a written contract's language is not ambiguous, the
parties' intent ‘must be determined from the words of the agreement.’”); see also Peterson & Simpson v. IHC Health
Servs., 2009 UT 54, *13, 217 P.3d 716 (“As with any contract, we determine what the parties have agreed upon by
looking first to the plain language within the four corners of the document. When interpreting the plain language, we
look for a reading that harmonizes the provisions and avoids rendering any provision meaningless.”).
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as opposed to merely making investments through or on the advice of the member’s associated
person. PKS asserts that the primary factor that precludes arbitration of the Thomsens’ claims is
that the Thomsens lacked any direct relationship with PKS. The court finds that PKS is mistaken,
its position being contrary to the plain language of FINRA Rule 12200 and undermined by the
weight of authority on this question.
A. NO DIRECT INVESTOR-MEMBER RELATIONSHIP IS REQUIRED
BY THE PLAIN LANGUAGE OF FINRA RULE 12200
FINRA Rule 12100(k) defines “customer” in incredibly broad terms, providing only that
“[a] customer shall not include a broker or dealer.” Moreover, nothing in the FINRA Rules requires
(or even suggests) that a “customer” must have a direct relationship with a FINRA member. See
John Hancock Life Ins., 254 F.3d at 59. The Rule’s “clear and unambiguous choice to leave the
term as defined generally immediately leads to the conclusion that [the Thomsens] satisf[y] the
‘customer’ requirement” due to their purchase of investment assets from Mr. Nugent because they
are neither brokers nor dealers, notwithstanding their lack of any direct customer relationship with
PKS. See King, 386 F.3d at 1368. “Enforcing the limitation” that an investor must have a direct
relationship with a FINRA member to be a “customer” for the purposes of Rule 12200 “would be
tantamount to reading language into the [Rule] that is conspicuously absent.” Id.
The conclusion that FINRA Rule 12200 does not require a customer to have a direct
relationship with a FINRA member is further strengthened by FINRA’s decision to impose a
requirement of a direct member-investor relationship when defining the therm “customer” in other
sections of its Rules. Compare FINRA Rule 0160(b)(4) (“The term ‘customer’ shall not include a
broker or dealer.”) and FINRA Rule 13100(i) (“A customer shall not include a broker or dealer.”)
with FINRA Rule 1250(b)(1) (“‘Customer’ shall mean any natural person and any organization,
other than a broker or dealer, executing securities transactions with or through or receiving
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investment banking services from a member.”) and FINRA Rule 2261(c) (“[T]he term ‘customer’
means any person who, in the regular course of [a] member’s business, has cash or securities in
the possession of [that] member.”). FINRA could have chosen to require a direct relationship
between an investor and a FINRA member in order to deem that investor a “customer” for purposes
of FINRA Rule 12200. But it did not do so. As a result, the plain language of FINRA Rules
12100(k) and 12200 supports the conclusion that the Thomsens are “customers” for the purposes
of these Rules.
B. PERSUASIVE AUTHORITY SUPPORTS THE CONCLUSION THAT A
CUSTOMER RELATIONSHIP DOES NOT REQUIRE DIRECT
CONTACT BETWEEN AN INVESTOR AND FINRA MEMBER
Absent Tenth Circuit precedent interpreting FINRA Rule 12200, the court is persuaded by
the majority of the circuit courts of appeals, which have held that an investor is a customer under
the FINRA Rules by conducting business with the member’s associated person, notwithstanding
the lack of any direct relationship with the FINRA member itself.
In Oppenheimer, the Second Circuit rejected a broker-dealer’s allegation that an investor
could not require a FINRA member to arbitrate unless the investor had opened a valid account
with the broker-dealer. Oppenheimber & Co. v. Neidhardt, 56 F.3d 352, 357 (2d Cir. 1995)
(“Having turned over their funds to Oppenheimer's representative so as to become customers of
Oppenheimer, the Claimants did not lose the legal benefits of customer status because
Oppenheimer's representative fraudulently established their account in a manner designed to
conceal and defeat their interest.”). Six years later, the Second Circuit revisited this question in
John Hancock Life Ins. Co., in which the court noted that “most of the decisions . . . contain
language that supports a broad interpretation of the term ‘customer.’” John Hancock Life Ins. Co.
v. Wilson, 254 F.3d 48, 60 (2d Cir. 2001). In that case, an independent investment broker,
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registered to represent a FINRA member, fraudulently sold promissory notes to investors, who
were customers of the independent broker, but not of the member. Id. at 51. The FINRA member
had no direct relationship with the investors, the investors were not apprised of the independent
broker’s affiliation with the member, and the member was not aware of the fraudulent promissory
notes that the independent broker sold to the investors. Id. The Second Circuit held that the plain
language of the Rule foreclosed the broker-dealer’s argument that “[i]nvestors must be customers
of [the FINRA member] and not merely of an associated person.” Id. at 59. The Second Circuit
therefore affirmed the district court’s order granting the investors’ motion to compel arbitration.
Id. at 61.
Other circuit courts of appeals have found the Second Circuit’s decisions on this issue
persuasive. The Sixth Circuit, for example, has held that FINRA Rule 12200’s “unambiguous text”
compels the conclusion that a customer relationship sufficient to compel arbitration requires only
a relationship between the purported customer and a member’s associated person. Vestax Sec.
Corp. v. McWood, 280 F.3d 1078, 1082 (6th Cir. 2002) (citing John Hancock, 24 F.3d at 58–59;
Oppenheimer, 56 F.3d at 352; Lehman Brothers Inc. v. Certified Reporting Co., 939 F. Supp. 1333
(N.D. Illinois 1996)). Similarly, the Fifth and Seventh Circuits have found certain claims subject
to arbitration in part on the basis that a customer relationship under the FINRA Rules may arise as
a result of an investor’s relationship with either the FINRA member or its associated person. See
California Fina Group, Inc. v. Herrin, 379 F.3d 311, 318 (5th Cir. 2004); Miller v. Flume, 139
F.3d 1130, 1135–36 (7th Cir. 1998).
Similarly, the Eleventh Circuit has repeatedly held that a customer under FINRA Rule
12200 may be a customer of either the FINRA member or of its associated person. In King, an
investor lost her entire investment when an independent broker associated with a FINRA member
10
allegedly sold unregistered securities. Multi-Financial Sec., Corp. v. King. 386 F.3d 1364, 1365
(11th Cir. 2004). In contrast to the present case, however, the investor in that case was aware of
the registered representative’s affiliation with the FINRA member, and “relied, at least in part,”
on that affiliation in making the investments at issue. Id. Despite this fact distinguishing the instant
dispute, the Eleventh Circuit’s reasoning is directly applicable here: the FINRA Rules define
“customer” to mean “anyone who is not a broker or dealer[,]” and “nothing in the [Rules] directs
otherwise or requires more”; enforcing a limitation such as the requirement that a customer must
be an investor with a direct relationship with the FINRA member “would be tantamount to reading
language into the Code that is conspicuously absent.” Id. at 1368. The King court noted that its
holding “finds support in almost every other decision on this issue.” Id. at 1368–69 (collecting
cases). The Eleventh Circuit also noted, however, that some courts had reached decisions to the
contrary. Id. at 1369–70 (citing Investors Capital Corp. v. Brown, 145 F. Supp. 2d 1302 (M.D.
Fla. 2001); Mony Secs. Corp. v. Vasquez, 238 F. Supp. 2d 1304, 1306-08 (M.D. Fla. 2002)). “The
reasoning of these decisions is not persuasive, however,” the court concluded, “because they read
a limitation into the Code that is absent from its language.” Id. at 1369. This court already arrived
at the same conclusion, finding that the plain language of FINRA Rule 12200 would not permit
PKS’s preferred interpretation, which would read into the Rule a conspicuously absent requirement
that the would-be customer possess some direct relationship to the FINRA member.
Not all courts have been unanimous in interpreting FINRA Rule 12200. In Orchard
Securities, LLC v. Pavel, for example, another judge on this court interpreted “customer” under
that rule more narrowly. No. 2:13-CV-00389-RJS, 2013 U.S. Dist. LEXIS 111188 (D. Utah Aug.
6, 2013). The Orchard Securities court took caution not to disrupt the reasonable expectations of
FINRA members in determining how broadly to interpret members’ agreement to arbitrate under
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the FINRA Rules. Id. at *7–8 (citing Zarecor v. Morgan Keegan & Co., Inc., 2011 U.S. Dist.
LEXIS 130700, 2011 WL 5592861, at *5 (E.D. Ark. July 29, 2011)). But that opinion overlooked
the opinions of the Second, Fourth, Fifth, Sixth, and Eleventh Circuits, all of which had determined
related issues the opposite way. Of course, none of those opinions, which the court discussed
above, are binding on this court. But the court finds their near-unanimity on this issue persuasive.
Moreover, while the Orchard Securities decision relied on a significant number of district court
cases in which judges have narrowly construed FINRA Rule 12200, it could not point to more than
three circuit court opinions that supported its reasoning—and each of those circuit court opinions
are distinguishable from the present case.
Orchard Securities cites two Eighth Circuit cases for the proposition that investors are not
customers of broker-dealer firms that did not provide the investors with investment or brokeragerelated services. See Orchard Securities LLC, 2013 U.S. Dist. LEXIS 111188, at *9–10 (citing
Berthel Fisher & Co. Financial Services, Inc. v. Larmon, 695 F.3d 749, 753 (8th Cir. 2012); Fleet
Boston Robertson Stephens, Inc. v. Innovex, Inc., 264 F.3d 770, 772 (8th Cir. 2001)). In Fleet
Boston, the investor seeking to compel arbitration “only received financial advice, without
receiving investment or brokerage related services[.]” 264 F.3d at 773. And in Berthel Fisher, a
group of limited liability companies sold private placements of securities to a group of investors,
with a FINRA member firm merely operating to review the private placement memoranda and
serve as an intermediary for the financial transaction. 695 F.3d at 751. The Eighth Circuit
distinguished Oppenheimer and Vestax in these cases on account of the fact that in those out-ofcircuit precedents, “[t]he investors . . . purchased securities from associated persons of the firm.”
Id. at 753 (citing Vestax, 280 F.3d at 1081–82).5 In both Orchard Securities and the instant dispute,
See also Raymond James Fin. Servs. v. Cary, 709 F.3d 382 (4th Cir. 2013) (holding that an investor was not a
customer for purposes of FINRA Rule 12200 when the investor merely purchased securities directly from a motor
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the investor (here, Carol’s Trust) purchased securities through and at the recommendation of a
FINRA member’s associated person, distinguishing Berthel Fisher and Fleet Boston.6 The court
therefore respectfully disagrees with Orchard Securities court’s conclusion that arbitration could
not be compelled on the foregoing facts. This court finds Oppenheimer, Vestax, and King to be
relevant and persuasive authorities. The court applies the same reasoning employed in those cases
here, finding the result to be that the Thomsens are customers for the purposes of FINRA Rule
12200 notwithstanding their lack of a direct relationship with PKS.
Though neither party relied upon such authority, the court also finds that the Fourth Circuit
has narrowly read the definition of “customer” in FINRA Rule 12200. See UBS Fin. Servs. v.
Carilion Clinic, 706 F.3d 319, 327 (4th Cir. 2013) (“In short, we conclude that ‘customer,’ as that
term is used in the FINRA Rules, refers to 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.”). Of course, the court could simply dismiss this out-of-court precedent in favor
of the standard set in the Second, Sixth, and Eleventh Circuits. But Carilion is also distinguishable
from the present case. In that case, the entity seeking to arbitrate was a non-profit healthcare
organization that sought to issue bonds to raise capital. A FINRA member provided advice
regarding how to structure the auctioned bonds, underwrote those bonds, and was the lead brokerdealer for the bond auctions. Id. at 321–22. The court found the non-profit entity’s claims were not
vehicle financing company upon the advice of a FINRA member’s registered representative). The Fourth Circuit’s
decision in Raymond James is distinguish for the same reason that the Eighth Circuit’s decisions in Berthel Fisher
and Fleet Boston are distinguishable: through Carol’s Trust, the Thomsens bought securities in Agronomic both
through and on the advice of PKS’s associated person, Mr. Nugent.
The Convertible Promissory Note (Ex. No. 14, at 2) likely does constitute a security. See Reves v. Ernst & Young,
49 U.S. 56, 65, 68–69 (1990) (holding that all notes are presumptively securities, particularly when the note
constitutes an “investment,” unless that presumption is disproven through a four-factor analysis).
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arbitrable because that entity did not purchase commodities or services from the FINRA member
in a manner “covered by FINRA’s regulation, namely, the activities of investment banking and the
securities business.” Id. at 325. In the present case, by contrast, PKS’s associated person provided
investment advisory services and broker-dealer services related to the claims at issue, which arise
out of Mr. Nugent’s sale of securities to the Thomsens while he was PKS’s registered
representative. Even considering Carilion’s precedent, the court finds little reason to question its
conclusion that the Thomsens were customers for purposes of FINRA Rule 12200.
C. THE AGRONOMIC INVESTMENT IS SUCCIFICIENT
DEMONSTRATE THAT THE THOMSENS ARE CUSTOMERS
TO
Having concluded that no direct investor-member relationship is required in order to
establish a “customer” relationship under FINRA Rule 12200, the court turns to the question of
whether PKS met its burden to show that the Thomsens are not “customers,” either individually
or in their capacities as trustees. The court finds that PKS has not done so.
The Thomsens’ claim to be “customers” of PKS or its associated person for purposes of
FINRA Rule 12200 arises out of their purchase of securities in Agronomic upon Mr. Nugent’s
advice. The court finds that Mr. Nugent recommended that the Thomsens consider investing in
Agronomic, drafted the Convertible Promissory Note that effectuated the investment, told the
Thomsens to make the investment in the name of Carol’s Trust, and personally picked up the
Thomsens’ personal check written in the amount of $500,000 to Agronomic. The Thomsens were
not aware that Mr. Nugent was an owner or operator of Agronomic, but instead understood him to
be a co-investor in the business with the Thomsens. When they made the Agronomic investment,
the Thomsens believed that the purchase of securities was no different than any other investment
opportunity that Mr. Nugent had presented to the Thomsens over the years. Notwithstanding the
Thomsens’ understanding, Mr. Nugent was an owner or operator of Agronomic. At the same time,
14
Mr. Nugent marketed and sold the investment to the Thomsens in his capacity as the Thomsens’
investment advisor, and the investment occurred at the same time that Mr. Nugent was PKS’s
registered representative (although PKS was not involved in the investment or any other
transaction involving the Thomsens). In its brief and at trial, PKS made several arguments
contending that the Thomsens cannot be customers under FINRA Rule 12200 based on the
foregoing facts.
First, PKS notes that Carol’s Trust purchased securities in Agronomic through the
Convertible Promissory Note. Ex. No. 14, at 2. Because the undisputed evidence is that Carol’s
Trust did not have an account with Foresight, PKS insists that this fact shows that the investment
cannot confer customer status on the Thomsens.7 In support, PKS relies upon Wachovia Sec., LLC
v. Raifman, No. C 10-04573 SBA, 2010 WL 4502360 (N.D. Cal. Nov. 1, 2010). The court finds
Raifman factually similar to the present dispute, albeit with one critical distinction: the investors
in Raifman sought to compel arbitration exclusively in their individual capacities, whereas in the
instant case, the Thomsens amended their statement of claim to seek arbitration between PKS and
the Thomsens individually and in their capacities as trustees for Carol’s Trust and Jeffrey’s Trust.
The critical facts in Raifman, such as the individual investor’s lack of a direct relationship with the
FINRA member’s registered representative, are therefore not persuasive in this case. Instead, the
court finds that the fact that Carol’s Trust effectuated the Convertible Promissory Note to be
inconclusive evidence that the Thomsens are not customers under FINRA Rule 12200.
Second, PKS argues that because the Thomsens produced only investment advisory
agreements with Foresight, but no agreements directly with Mr. Nugent, the court should conclude
The facts established at trial demonstrate that the Thomsens are each co-trustees of both Carol’s Trust and Jeffrey’s
Trust. The court therefore finds no reason to believe that an investment made by Carol’s Trust would foreclose the
Thomsens’ ability to request arbitration, individually or in the alternative in their capacities as trustees.
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that the Thomsens could be at most customers of Foresight, but not of PKS or its associated person
Mr. Nugent. The court finds this line of argument unpersuasive. The undisputed evidence at trial
showed that Mr. Nugent was the Thomsens’ long-time financial advisor. The Thomsens opened
accounts at Foresight upon Mr. Nugent’s advice. Also upon his advice, the Thomsens did not open
an account in the name of Carol’s Trust. Yet the Thomsens made the Agronomic investment in the
name of Carol’s Trust because Mr. Nugent instructed them to in his capacity as financial advisor.
The court concludes that such a technicality as the fact that Carol’s Trust did not possess an account
with Foresight could not possibly foreclose the Thomsens from being customers in their individual
capacity or their capacity as trustees when the Thomsens purchased securities in the name of
Carol’s Trust upon the advice of their financial advisor while he was PKS’s registered
representative.
Third, PKS argues that because the Thomsens wrote two additional checks for further
investments in Agronomic after Mr. Nugent disassociated himself with PKS, the Agronomic
investment cannot form the basis for the Thomsens’ customer status. This fact does not alter the
court’s conclusion for two reasons. First, it is undisputed that the Thomsens wrote Agronomic the
first check for their Agronomic investment while Mr. Nugent was still registered with PKS. And
PKS presented no evidence to demonstrate that this first check would not be sufficient standing
alone to confer customer status onto the Thomsens. Second, the plain language of the FINRA
Rules provides that “a person formerly associated with a member is a person associated with a
member.” FINRA Rule 12100(w). When the Thomsens wrote two later checks for additional
investments, Mr. Nugent was therefore still PKS’s associated person—because he was formerly
PKS’s associated person. Thus, the court concludes that the later-written checks do not show that
the Thomsens did not become customers when they wrote checks to invest in Agronomic on Mr.
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Nugent’s advice.
Finally, PKS argues that Mr. Nugent never transacted or conducted any business through
PKS, but instead was likely only registered as PKS’s representative in order to collect trail
commissions. On this alternative basis, PKS again asserts that the Thomsens could not be
customers of PKS or its associated person because Mr. Nugent’s relationship with PKS was too
attenuated for him to be PKS’s associated person. Under the FINRA Rules, the terms “associated
person” and “person associated with a member” share a definition. See FINRA Rule 12100(b)
(“The term ‘associated person’ or ‘associated person of a member’ means a person associated with
that member, as that term is defined in paragraph (w).”). And under that definition, an individual
is a FINRA member’s associated person if he or she is “[a] natural person who is registered or has
applied for registration under the Rules of FINRA[.]” FINRA Rule 12100(w)(1). PKS presented
no evidence to show that Mr. Nugent was not registered as PKS’s representative under the Rules
of FINRA between March 22, 2017 and June 21, 2018. The undisputed evidence shows the
opposite. ECF No. 40, ¶ 15. The court thus finds that under the plain language of FINRA Rule
12110(w), Mr. Nugent was PKS’s registered representative (and therefore a person associated with
a FINRA member). PKS’s argument regarding why Mr. Nugent may have chosen to register with
PKS under the Rules of FINRA is thus irrelevant to the question of whether the Thomsens are
customers under the FINRA Rules.
As a result of the foregoing, the court concludes and finds that the Thomsens, individually
or in their capacity as trustees, are “customers” for purposes of FINRA Rule 12200. Because the
Thomsens requested to arbitrate their claims against PKS, the court finds that the first element of
arbitrability under the Rules is satisfied. The court now proceeds to consider the second and third
elements, which require the court to determine whether 2) the dispute is between a customer and
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a FINRA member or its associated person and 3) the dispute arises in connection with the business
activities of the member or the associated person.
II.
THE DISPUTE IS BETWEEN A CUSTOMER AND A FINRA
MEMBER OR ITS ASSOCIATED PERSON
The second element of the test for arbitrability under FINRA Rule 12200 is whether the
“dispute is between a customer and a member or associated person of a member[.]” FINRA Rule
12200. PKS does not meaningfully dispute that this element has been met. Instead, the parties
seem to agree that so long as the Thomsens are “customers,” the dispute to be arbitrated—meaning
the Thomsens’ claims against PKS—is between a customer and a member or an associated person
of a member. The court concludes and finds that the second element of the test for arbitrability
under FINRA Rule 12200 is satisfied, the dispute being between a customer and a FINRA member.
III.
THE DISPUTE ARISES IN CONNECTION WITH THE BUSINESS
ACTIVITIES OF THE MEMBER OR THE ASSOCIATED PERSON
The final element of the test for arbitrability under FINRA Rule 12200 is whether the
“dispute arises in connection with the business activities of the member or the associated person[.]”
FINRA Rule 12200. PKS insists that this element is not satisfied because it believes that Mr.
Nugent’s sale of the Agronomic investment to the Thomsens fell beyond his traditional role as an
investment advisor, such that the transaction did not occur within the business activities of either
PKS or Mr. Nugent.
Lacking Tenth Circuit precedent on this issue, the court again looks to other circuits’
precedents for guidance in interpreting Rule 12200. In King, for example, the Eleventh Circuit
addressed a set of facts that is similar to the one at issue here. In that case, the investor alleged a
cause of action for negligent supervision against a FINRA member after the member’s registered
representative sold unregistered securities to the investor. 386 F.3d at 1365–66. The Eleventh
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Circuit found that claims arising out of a FINRA member’s supervision of its associated persons
necessarily arises out of or in connection with the member’s business because a member’s business
requires it to engage in supervision of its associated persons. Id. at 1370 (citing Vestax, 280 F.3d
at 1082; John Hancock, 254 F.3d at 58–59); see also 1 Thomas H. Oehmke, Commercial
Arbitration § 28:14 (2003) (“A dispute that arises from a securities brokerage firm's lack of
supervision over its brokers arises in connection with its business (for purposes of NASD rules
compelling arbitration of disputes).”).
The distinction between King and the present case is that Mr. Nugent not only allegedly
sold unregistered securities but sold securities to the clients of his investment advisory practice in
a business in which he possessed undisclosed ownership or control. PKS argues that this fact
should distinguish King, leading the court to conclude that Mr. Nugent’s sale of the Agronomic
investment to the Thomsens fell beyond the bounds of his investment advisory role. Some facts
support that argument. The Agronomic investment was not made through the Thomsens’ accounts
with Foresight. Moreover, Mr. Nugent advised the Thomsens to make the investment through
Carol’s Trust, although the Thomsens paid Agronomic through their personal joint bank account.
The issue, however, is that Mr. Nugent represented that he was recommending the Agronomic
investment in his capacity as the Thomsens’ financial advisor. In fact, that is the basis of the
Thomsens’ claim—that while Mr. Nugent was PKS’s registered representative, he sold the
Thomsens an investment in a business as if he was acting in his usual capacity as their investment
advisor while he possessed an undisclosed ownership in or operational control of Agronomic. The
fact that Mr. Nugent is alleged to have misrepresented those facts to the Thomsens, then, cannot
preclude arbitration. To conclude otherwise would require the court to alter Rule 12200, which
provides for arbitration not only for disputes that arise out of a FINRA member’s associated
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person’s business activities but also for disputes that arise “in connection with” those business
activities. FINRA Rule 12200. Mr. Nugent’s alleged misrepresentation does not alter the fact that
the Thomsens’ allegations of negligent representation and other claims arose in connection with
Mr. Nugent’s business activities as the Thomsens’ investment advisor or PKS’s business activities,
which include supervising the firm’s associated persons. The court therefore concludes that the
third element of FINRA Rule 12200 is satisfied, the claims to be arbitrated arising in connection
with the business activities of PKS or its associated person Mr. Nugent.
CONCLUSION AND ORDER
The court concludes and finds as follows:
1. The Thomsens are customers for purposes of FINRA Rule 12200.
2. The Thomsens have requested to arbitrate their claims against PKS.
3. The dispute is between a customer and a FINRA member or associated person of a member.
4. The dispute arises in connection with the business activities of the FINRA member
or its associated person.
5. PKS is obligated to arbitrate the Thomsens’ claims against it in FINRA Dispute Resolution
Services Arbitration Number 23-03389, Jeff Thomsen and Carol Thomsen vs. Purshe
Kaplan Sterling Investments.
6. PKS is not entitled to attorney fees or costs for this litigation.
Signed March 26, 2024
BY THE COURT
______________________________
Jill N. Parrish
United States District Court Judge
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