Berthel Fisher & Co. Financial Services v. Larmon
695 F.3d 749
8th Cir.2012Background
- Investors purchased tenancy-in-common securities from Geneva in 2007–2008; Berthel Fisher was managing broker-dealer for the offering.
- Berthel reviewed at least two private placement memoranda and passed investor payments to Geneva.
- Berthel and SGMs determined investor eligibility; Berthel maintained investor records.
- Investors filed FINRA arbitration against Berthel for alleged due-diligence failures in the offering.
- Berthel sued in district court for declaratory judgment that Investors are not Berthel's customers under FINRA Code and for a preliminary injunction.
- District court granted Berthel’s injunction and denied Investors’ motion to compel arbitration based on non-customer status.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Investors are Berthel’s FINRA customers | Investors qualify as customers under Rule 12200 | No direct customer relationship; services were to SGMs/Geneva | Investors are not Berthel’s customers under FINRA Rule 12200 |
| Whether FINRA Code creates an arbitration obligation | Code creates an agreement to arbitrate with customers | Arbitration valid only if customer relationship with Berthel exists | Arbitration not compelled because no customer relationship |
| What is the proper standard of review | De novo review of arbitrability and injunction | Maintain standard of review as set by circuit law | Standards reviewed de novo for arbitrability and injunction |
| Whether Fleet Boston and Vestax are controlling | Those cases support customer status | Inapplicable where no direct firm–investor relationship | Fleet Boston/Vestax do not establish customer status here |
Key Cases Cited
- Fleet Boston Robertson Stephens, Inc. v. Innovex, Inc., 264 F.3d 770 (8th Cir. 2001) (rejected customer status absent brokerage relationship)
- Vestax Secs. Corp. v. McWood, 280 F.3d 1078 (6th Cir. 2002) (customer relationship may exist with associated persons)
- MONY Secs. Corp. v. Bornstein, 390 F.3d 1340 (11th Cir. 2004) (Code itself constitutes the arbitration agreement)
- In re Am. Exp. Fin. Advisors Secs. Litig., 672 F.3d 113 (2d Cir. 2011) (FINRA membership implies consent to arbitrate with customers)
- Franke v. Poly-America Med. & Dental Benefits Plan, 555 F.3d 656 (8th Cir. 2009) (valid arbitration inquiry focuses on existence of an arbitration agreement)
- Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985) (establishes arbitral agreement default framework)