Finding that investors were “customers” of a retail broker-dealer for purposes of the NASD’s Code of Arbitration, a federal district court compelled the broker-dealer to arbitrate the investors’ securities fraud claims. The broker-dealer argued that because the investors’ claims were premised upon purportedly false statements made by an employee/registered representative prior to his employment with the broker-dealer, NASD Rule 10301 – which requires any dispute between a customer and an NASD member to be arbitrated under the NASD Code – was inapplicable.
Rejecting this argument, the Court explained that in the Eighth Circuit, a customer for purposes of Rule 10301 is anyone engaged in an investment relationship with a NASD member. The Court found that regardless of when the registered representative made the alleged misrepresentations, there was no dispute that the investors purchased additional shares in the company that was the subject of the alleged misrepresentations when the registered representative was employed by the broker-dealer. Accordingly, the Court ruled that the investors were customers of the broker-dealer and that the broker-dealer was therefore required to arbitrate their claims before the NASD.(O.N. Equity Sales Company v. Prins, 2007 WL 3286406 (D. Minn. Nov. 7, 2007))