Sixth Circuit To Hear Appeal From Preliminary Injunction Enjoining Arbitration Under FINRA

This appeal stems from the Eastern District of Kentucky’s order granting Morgan Keegan & Company Inc.’s motion for preliminary injunction to enjoin Robert Ras from compelling arbitration before the Financial Industry Regulatory Authority (“FINRA”).  Ras, the investor, filed a Statement of Claim before FINRA, which is a self-regulatory organization under the Securities and Exchange Act of 1934.  Constituted in 2007 through NASD and NYSE Group, FINRA has “authority to, inter alia, create and enforce rules for its members in order to provide ‘regulatory oversight of all securities firms that do business with the public.’”  Under FINRA Rules, a customer may compel arbitration by request.  A day before its answer was due, Morgan Keegan filed for a preliminary injunction.

Judge Karen Caldwell applied the four factors for granting preliminary injunctions.  She found that, as to the first, Morgan Keegan demonstrated a substantial likelihood of success.  Specifically, Judge Caldwell followed a recent decision out of the Middle District of Alabama, which granted Morgan Keegan’s motion for preliminary injunction in a “virtually identical case.”  The basis there, and here, was that the investor was not a customer, and thus could not compel arbitration under FINRA.  Notably, the court cited two other district courts had vacated FINRA arbitration awards against Morgan Keegan on the basis that the investor did not qualify as a customer.

FINRA Rules provide only that “a customer shall not include a broker or dealer.”  The court held, however, that Ras does not qualify as a customer because his relationship with Morgan Keegan is “void of any form of business qualities whatsoever.”  Ras did not purchase the RMK Fund through Morgan Keegan, and did not maintain any transactional or account relationship with Morgan Keegan.  The absence of a “direct relationship,” the court held, was dispositive.  Finding that the remaining three factors weighed in favor of Morgan Keegan, including irreparable harm arising from arbitrating a case it did not agree to arbitrate—a factor Ras did not dispute—the court granted its motion for preliminary injunction.

On appeal, the Sixth Circuit must determine the scope of “customer” under FINRA, which could carry important ramifications for the future of FINRA arbitrations within the Circuit.