Perceiving advantages in the arbitration process offered by the Financial Industry Regulatory Authority (“FINRA”) for customer disputes, claimants have increasingly tried to take advantage of that forum by characterizing themselves as “customers” of a FINRA member, even when they did not transact directly with a FINRA member. This tactic has resulted in a surge of litigation over the meaning of “customer" under the FINRA rules. On Friday, in Citigroup Global Markets Inc. v. Abbar et al. (No. 13- 2172) (2d Cir. Aug. 1, 2014) (“CGMI v. Abbar”), the Second Circuit adopted a brightline definition of “customer” under the FINRA arbitration code, holding that a “customer” is “one who, while not a broker or dealer, either (1) purchases a good or service from a FINRA member, or (2) has an account with a FINRA member.” Id. at 17. This decision brings much needed clarity to what it means to be a customer under the FINRA rules and will affect the manner in which these cases will be tried in the future.
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In August 2011, appellants Abdullah and Ghazi Abbar, two Saudi businessmen, and certain of their investment vehicles, filed a request for arbitration before FINRA against Citigroup Global Markets Inc. (“CGMI”), a FINRA member. The Abbars claimed to have sustained losses due to alleged misconduct by CGMI with respect to the structuring, monitoring, and handling of their investments in two separate transactions: an options transaction entered into with a Citigroup affiliate in the United Kingdom, and a loan facility extended by two Citigroup affiliates in Switzerland. Under FINRA Rule 12200, FINRA members are obligated to arbitrate disputes with their “customers” or the “customers” of their associated persons. Milbank, on behalf of CGMI, filed an action in the United States District Court for the Southern District of New York seeking to permanently enjoin the FINRA arbitration. CGMI argued that the dispute was not arbitrable because the claimants were not its “customers” within the meaning of the FINRA arbitration code, which defines “customer” in the negative, providing only that “a customer shall not include a broker or dealer.” FINRA Rule 12100(i). Following a nine-day bench trial in April and May 2013, the District Court found that the claimants were not CGMI’s customers, and permanently enjoined the arbitration. See Citigroup Global Mkts., Inc. v. Abbar, 943 F. Supp. 2d 404 (S.D.N.Y. 2013). Milbank Chairman Scott A. Edelman, partner Daniel M. Perry, and associates Jed M. Schwartz, Katherine Rhodes Janofsky, and Taryn J. Gallup, handled both the trial and the appeal, with Mr. Edelman arguing before the Second Circuit.
In Friday’s decision, the Second Circuit observed that “[a]s this case illustrates, finance nowadays often involves worldwide sources, networks of information, talent and technology. But multiple inputs do not necessarily create customer relationships in different places simultaneously.” CGMI v. Abbar at 20. The fact that CGMI employees “provided services to Abbar [and] they helped structure and manage the options transactions,” was not sufficient to create a customer relationship because “Abbar did not purchase those services from [CGMI].” Id. at 16. Nor did Mr. Abbar ever hold an account with CGMI. Id. at 18. The Second Circuit then adopted the following definition: “a ‘customer’ under FINRA Rule 12200 is one who, while not a broker or dealer, either (1) purchases a good or service from a FINRA member, or (2) has an account with a FINRA member.” Id. at 17. The Second Circuit affirmed the District Court’s judgment, permanently enjoining the arbitration.