BERTHEL FISHER & COMPANY FINANCIAL SERVICES, INC.; Thоmas J. Berthel; Ronald O. Brendengen; Shelley Rae Davenport; Frederick P. Fisher; Richard M. Murphy; Leslie D. Smith; Daniel P. Wegmann; and Thomas R. Biesheuvel, Plaintiffs-Appellees v. Craig LARMON; Geneva OSWX XXII, LLC, a Delaware limited liability corporation; Earl Holasek; OSWX XXXVI, LLC, a Delaware limited liability corporation; Geneva FTCX I, LLC, a Delaware limited liability corporation; Geneva BCCX XVIII, LLC, a Delaware limited liability corporation; Karen Lane; Geneva OSWX IX, LLC, a Delaware limited liability company; Declaration of Trust of Karen Lane dated April 24, 1996; Jack Hoopes; Lorna Hoopes; Geneva OSWX XIX, LLC, a Delaware limited liability company; Patrick Jordan; Geneva OSWX XXVII, LLC, a Delaware limited liability company; and Patrick J. Jordan Trust dated April 6, 1990, Defendants-Appellants.
No. 11-2877.
United States Court of Appeals, Eighth Circuit.
Submitted: June 12, 2012. Filed: Oct. 1, 2012.
695 F.3d 749
Fifth, it appears that some restitution claims granted by the district court wеre submitted by buyers recruited by SIG for the fraudulent loan transactions. These awards ignored two relevant principles: first, that awarding restitutionary payments to perpetrators of the offense of conviction is “fundamental” error, United States v. Reifler, 446 F.3d 65, 127 (2d Cir. 2006); and second, that buyers who purchased at inflated prices with knowledge of kickback non-disclosures were not MVRA victims if their losses were caused by factors other than the underlying lender fraud. Compare United States v. Archer, 671 F.3d 149, 171-73 (2d Cir.2011), with United States v. Ojeikerе, 545 F.3d 220, 222-23 (2d Cir.2008). Moreover, even if a buyer who received an undisclosed payment from the loan proceeds can establish that he or she was an innocent victim of the fraud, the amount of the kickback received must be taken into account in determining that victim‘s actual loss. The inadequate record on appeal suggests this was not done, for example, in calculating the award to “victim” Vallantine Atem who was listed in paragraph 13 of the PSR.
Fоr the foregoing reasons, the judgment of the district court is reversed insofar as it includes a final order of restitution, and the case is remanded for further restitution proceedings not inconsistent with this opinion. In all other respects, the judgment is affirmed. We note that on remand the court may decline to award restitution to any victim if it determines that “the burden on the sentencing process” outweighs “the need to provide restitution” because there are “complex issues of fact related to the cause or amount of the victim‘s losses.”
Stephen John Holtman, argued, Cedar Rapids, IA, Paul Daniel Gamez, Cedar Rapids, IA, Vincent D. Louwagie, Courtland Collinson Merill, Minneapolis, MN, on the brief, for appellee.
Before MURPHY, MELLOY, and COLLOTON, Circuit Judges.
This case comes to us on appeal from the district court‘s1 grant of the plaintiffs’ motion for a preliminary injunction and denial of the defendants’ motion to compel arbitration. Because we hold that the district court correctly concluded that the defendants are not the plaintiffs’ “customers” under the Financial Industry Regulatory Authority‘s (FINRA) Code of Arbitration Procedure for Customer Disputes (FINRA Code) we affirm the judgment of the district court.
I.
This case arises out of securities2 issued by a group of Minnesota limited liability companies (collectively, Geneva) and purchased by defendants-appellаnts (the Investors) in 2007 and 2008. Plaintiff-appellee Berthel Fisher & Company Financial Services., Inc., et al. (collectively, Berthel), a licensed broker-dealer and member of FINRA, served as managing broker-dealer for the offering. As mаnaging broker-dealer, Berthel assembled a group of FINRA-registered broker-dealers—Selling Group Members, or SGMs—who in turn offered the securities to their own customers, including the Investors.
Although Geneva prepared the private placement memoranda (PPMs) to be provided to prospective purchasers of the securities, Berthel reviewed at least two of the PPMs, suggesting changes that Geneva adopted. Per the agreement between Berthel and the SGMs, Berthel collected investor payments from the SGMs and passed those payments along to Geneva. In addition, the contract between Berthel and Geneva obligated Berthel and the SGMs to determine еach investor‘s eligibility to participate in the offering. Because of this, Berthel maintained a file on each investor that included the investors’ names, dates of birth, and contact information.
The securities did not perform as anticipated, leading the Investors to file FINRA arbitration claims against Berthel. The Investors alleged that Berthel performed insufficient due diligence on the offering, leading to critical omissions in the PPMs. After preliminary proceedings before FINRA, Berthel filed suit in the United States District Court for the District of Minnesota, seeking a declaratory judgment that the Investors were not Berthel‘s “customers” under the FINRA Code and that Berthel was therefore not obligated to arbitrаte with the Investors. Further, Berthel moved for a preliminary injunction enjoining the arbitrations, and the Investors cross-moved to compel arbitration.
Relying on Fleet Boston Robertson Stephens, Inc. v. Innovex, Inc., 264 F.3d 770 (8th Cir.2001), the district court held that the Investors did not qualify as Berthel‘s customers under the FINRA Code and that the Investors’ claims against Berthel were therefore not arbitrable before FINRA. Accordingly, the court granted Berthel‘s motion to enjoin the pending arbitrations and denied the Investors’ cross-motion to compel arbitration.
II.
“We have jurisdiction to review the denial of a motion to compel arbitration as an interlocutory appeal within the scope of
“[T]he first task of a court asked to compel arbitration of a dispute is to determine whether the partiеs agreed to arbitrate that dispute.” Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985). The Investors do not allege that Berthel explicitly agreed to arbitrate; rather, they allege that they qualify as Berthel‘s “customers” under the FINRA Code. The FINRA Code, which Berthel has signed as a FINRA member, constitutes an agreement to arbitrate disputes between Berthel and its customers. See In re Am. Exp. Fin. Advisors Secs. Litig., 672 F.3d 113, 128 (2d Cir.2011) (“Ameriprise does not dispute that, by virtue of its membership in FINRA, it has consented to arbitrate with its customers.“); MONY Secs. Corp. v. Bornstein, 390 F.3d 1340, 1342 (11th Cir.2004) (the predecessor to the FINRA Code “itself constitutes the agreement” to arbitrate.). Rule 12200 of the FINRA Code, which is the successor to National Association of Securities Dealеrs Code of Arbitration Procedure Rule 10301,3 states:
Parties must arbitrate a dispute under the Code if:
- Arbitration under the Code is either:
- Required by a written agreement, or
- Requested by the customer;
- The dispute is between a customer and a member or associated person of a member; and
- The dispute arises in connection with the business activities of the member or the associated person, except disputes involving the insurance business activities of a member that is also an insurance company.
Here, the Investors have requested arbitration by filing claims with FINRA. Further, the dispute “arises in connection with the business activities” of Berthel because the Investors claim that Berthel failed to conduct adequate due diligence. Accordingly, it is undisputed that the question of arbitrability in this case turns on whether the Investors are Berthel‘s сustomers under the FINRA Code.
The FINRA Code defines “customer” in the negative, stating only that “[a] customer shall not include a broker or dealer.”
The provision of these services in this case failed to transform the Investors into Berthel‘s customers, because Berthel provided those services nоt to the Investors but instead to the SGMs and Geneva. If the provision of these services formed any customer relationships at all, it formed them between Berthel, Geneva, and the SGMs, not between Berthel and the Investors.
According to the Investors, Vestax Securities Corp. v. McWood, 280 F.3d 1078 (6th Cir.2002), establishes that a customer relationship is possible “even in the absence of a direct transactional relationship with the firm.” Id. at 1081. Citation to Vestax, however, is misplaced. The investors in that case purchased sеcurities from associated persons of the firm. Id. at 1081-82. Arbitration was therefore required because Rule 12200 requires arbitration when “[t]he dispute is between a customer and a member or associated person of a member.” Aсcordingly, that case stands for the unremarkable proposition that customers of associated persons of a firm may compel arbitration with the firm. It does not suggest that an investor who interacts with neither the firm nor its associated persons may nevertheless qualify as a customer of the firm. Neither party argues that the SGMs are associated persons of Berthel; accordingly, Vestax is inapposite.
The Investors argue that Fleet Boston requires only “investment or brokerage related services.” But agаin, the provision of “investment or brokerage related services” is only half of the picture—not only must the FINRA member firm provide those services, but also must it provide those services to the customer either directly or through its assоciated persons. In Fleet Boston, we observed that “[a]lthough other cases interpreting the term ‘customer’ have in some ways taken a broad view of the term, in all of these cases there existed some brokerage or investment relationship between the parties.” Id. at 772 (emphasis added). Simply put, there is no “relationship” between Berthel and the Investors as required by Fleet Boston. Because Berthel did not provide “investment or brokerage related services” to thе Investors, the Investors are not Berthel‘s customers under FINRA Rule 12200. We affirm the judgment of the district court.