9th Circuit Holds Issuer Is Investment Bank’s “Customer” And “Actions and Proceedings” Include Arbitrations


In 2005 and 2006, the biggest little city in the world (aka Reno, Nevada) issued approximately $211 million in securities employing Goldman, Sachs & Co. as its sole underwriter and broker-dealer.  The financing didn’t work out and Reno initiated arbitration proceedings against Goldman, Sachs before the Financial Industry Regulatory Authority (FINRA).  Goldman, Sachs filed an action in federal court to enjoin the arbitration.  Goldman v. City of Reno, 2014 U.S. App. LEXIS 5894 (9th Cir. 2014)

Apophasis and The Meaning of Customer

The city relied on FINRA rule 12200 which requires parties to arbitrate disputes when requested by a customer.  Thus, the first issue was whether the city was a customer, with the city contending that it was a customer and Goldman, Sachs taking the opposite view.  This threshold definitional question would seem to be easy, but for the fact that FINRA defines “customer” not be describing what a customer is, but by stating what a customer is not.  According to FINRA, a “customer shall not include a broker or dealer”.  FINRA Rule 12100(i).   The Ninth Circuit resolved the question by enunciating what a customer is and is not:

[A] ”customer” is a non-broker and non-dealer who purchases commodities or services from a FINRA member in the course of the member’s FINRA-regulated business activities, i.e., the member’s investment banking and securities business activities.

With this definition in mind, the Ninth Circuit found that “Reno easily qualifies as Goldman’s ‘customer.’”

The Penumbra of Actions and Proceedings

Goldman, Sachs was more successful with its other argument – even if Reno is a customer for purposes of FINRA Rule 12200, the city disclaimed its right to arbitrate by agreeing to forum selection clauses in the broker-dealer agreements.  These clauses provided that “all actions and proceedings . . . shall be brought in the . . . District of Nevada”.   The question for the Court of Appeals was whether this language, which makes no mention of arbitration, clearly and unambiguously disclaimed any right to FINRA arbitration?

In addressing this question, the Ninth Circuit acknowledged the courts have not consistently reached the same conclusion.  The Fourth Circuit Court of Appeals and the District of Minnesota have held that an identical forum selection clause does not supersede the FINRA member’s obligation to arbitrate while two judges in the Southern District of New York have held that “materially identical” clauses “trump FINRA Rule 12200 . . .”.  UBS Fin. Servs., Inc. v. Carilion Clinic, 706 F.3d 319 (4th Cir. 2013); UBS Sec. LLC v. Allina Health Sys., No. 12-2090, 2013 WL 500373 (D. Minn. Feb. 11, 2013); Goldman, Sachs & Co v. N.C. Mun. Power Agency No. One, No. 13-CV-1319, 2013 WL 6409348, at *7 (S.D.N.Y. Dec. 9, 2013); and Goldman, Sachs & Co. v. Golden Empire Schools Fin. Auth., 922 F. Supp. 2d 435 (S.D.N.Y. 2013).  After working through the city’s arguments, the Ninth Circuit held that the forum selection clauses negated Goldman, Sach’s default obligation to arbitrate under FINRA Rule 12200.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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