Bass, Berry & Sims attorney Chris Lazarini analyzed a case in which defendant Wilson-Davis, a securities firm, sought to enjoin an arbitration brought against it alleging that the firm's failure to supervise its agent caused the Claimants a $700,000 loss. Wilson-Davis argued that it should not be compelled to arbitrate because the investments were made away from the firm and without the firm's knowledge. The Sixth Circuit affirmed the district court's decision, drawing on FINRA Rule 12200, the mandatory arbitration rule, and finding that a dispute arising from a firm's lack of supervision over its brokers is a dispute arising "in connection with the business activities" of the firm, even where the firm is not aware of the transactions, had no involvement in them and did not profit from them.

Chris provided the analysis for Securities Online Litigation Alert (SOLA). The full text of the analysis is below and used with permission from the publication.

Wilson-Davis & Co., Inc. vs. Mirgliotta, No. 17-3496 (6th Cir., 1/8/18) 

*FINRA Rule 12200, the mandatory arbitration rule, is broadly construed.

**A dispute arising from a firm's lack of supervision over its brokers arises "in connection with" the business activities of the member firm. 

In 2013, the Mirgliottas commenced arbitration against multiple respondents, alleging that a group of financial advisors, one of whom was employed by Wilson-Davis, caused them over $700,000 in losses by conspiring to have them withdraw funds from their Wilson-Davis accounts and send them first to their personal bank accounts and then to a bank account controlled by the advisors to make the ill-fated investment. The Mirgliottas sought recovery from Wilson-Davis for its lack of oversight over their accounts and failure to supervise its employee. Wilson-Davis sought to enjoin the arbitration, arguing the Mirgliottas were not its "customers" and was not aware of, and had no involvement in, the selling away activities of its employee and his alleged co-conspirators. The district court declined to enjoin the arbitration (see SOLA 2017-20).

In this appeal, Wilson-Davis conceded that the Mirgliottas qualified for "customer" status because they had transferred funds out of their Wilson-Davis accounts to make the fraudulent investment and pursued only its argument that the arbitration should be enjoined because the investment did not arise "in connection with its business activities." Affirming, the Court rejects Wilson-Davis' narrow interpretation of FINRA Rule 12200. A dispute arising from a firm's lack of supervision over its brokers is a dispute arising "in connection with the business activities" of the firm, even where the firm is not aware of the transactions, had no involvement in them and did not profit from them.

The Court notes when reviewing a district court's grant or denial of a request for a permanent injunction, it reviews factual findings for clear error, legal conclusions de novo and the scope of relief for abuse of discretion.