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Broker-dealer required to arbitrate in connection with dispute between associated person and his customer when the dispute arises from business of broker-dealer

MONY Securities v. Bornstein, 2:02-cv-9-FTM-29DNF (M.D. Fla. 2/26/03). Arbitration Agreement * Selling Away * SRO Rules (NASD Rules 2520 & 10101).

Broker-dealer is required to arbitrate in connection with dispute between associated person and his customer when dispute arises from business of broker-dealer, especially when claim of lack of supervision is involved.

The Bornsteins invested large amounts in viatical settlements, on the advice of Lawrence Keller, an independent contractor with Plaintiff MONY. A viatical is an interest in an insurance policy, entitling the purchaser to receive the benefit of the policy on insured’s death. MONY did not offer viatical settlements for sale. After large losses, the Bornsteins complained to MONY, then filed an NASD arbitration against them. MONY filed a declaratory judgment and injunctive action on the basis that it had no obligation to arbitrate with non-MONY clients.

When Defendants responded to Keller’s newspaper ad, he identified himself as working for MONY, giving them his MONY business card, which described him as “Certified Fund Specialist,” and a card that said “Comprehensive Viaticals.” Prior to purchasing, Defendants received numerous letters from Keller on MONY’s letterhead and MONY supervised Keller as part of its standard business activity.

MONY argues that an obligation to arbitrate before the NASD arises only if (1) there is a contractual obligation, or (2) NASD rules require it as a member to arbitrate with “eligible parties,” which does not include Defendants.

NASD Rule 10101 requires a member to arbitrate disputes involving a “claim …arising out of or in connection with the business of any member…(c)…or associated persons and public customers, or others.” Rule 10101(a) provides for arbitration of claims between an associated person arising in connection with the business of the member or in connection with the activities of such associated person. The necessary requirements for arbitration are: (1) a dispute between a customer and member or associated person of a member; and (2) arising in connection with the business activities of the member or associated person. Customers of associated persons are also customers of the member and the “activity of supervision can form the basis for an arbitration claim under the NASD.” Keller’s actions are “intricately connected to the business of MONY (investment advice and supervision of its agents),” especially where the dispute arose due to MONY’s failure to supervise its brokers. NASD Code § 2520(a)(3) contains a broad definition of customer: “any person for whom securities are purchased or sold or to whom securities are purchased or sold….” (S. Anderson) (SLC Ref. No. 2003-13-01)

  

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