Selling Away Claimants can compel arbitration

Vestax Securities Corporation vs. McWood, No. 00-1936 (6th Cir., 2/14/02)

Agreement to Arbitrate * Arbitration Agreement (SRO Requirement) * Scope of Agreement * Selling Away * SRO Rules * Statutory Definitions (“Customer”) * SRO Rules (NASD Rule 10301).

Investors who purchased securities through a broker-dealer’s agents are “customers,” for purposes of NASD Rule 10301, and may compel arbitration of their disputes, even though the transactions did not involve the firm.

Vestax is an Ohio-based securities firm who, in this case, employed two brokers who purportedly engaged in substantial “selling away” activity. Among the numerous defendants are some who held accounts at Vestax and others who actually had some transactional activity with Vestax. However, the trades complained of were not done through Vestax.

When the investors sought NASD Arbitration, Vestax commenced this action for a declaratory judgment that it was not liable to these clients, but the trial court sided with defendants and ordered arbitration (SLA 2000-22).

On appeal, the Court affirms, ruling that the NASD Code “creates the right of parties to compel an NASD-member firm to arbitrate even in the absence of a direct transactional relationship with the firm.” Rule 10301 creates “two conditions that must be satisfied to trigger the NASD arbitration requirement. First, the claim must involve a dispute between either an NASD-member and a customer, or an associated person and a customer. Second, the dispute must arise in connection with the activities of the member or in connection with the business activities of the associated person.

We believe that both conditions have been satisfied in the case before us.”

For support, the Court cites the Second Circuit’s John Hancock v. Wilsondecision, SLA 2001-25, which concluded that “the term ‘customer’ plainly refers to either the member’s or the associated person’s customer” and ordered arbitration under circumstances even more removed from the member than here. (SLC Ref. No. 02-08-01)


Copyright 2000-2002 Securities Arbitration Commentator, Inc. P.O. Box 112, Maplewood, NJ 07040; t: 973-761-5880 f: 973-761-1504. Materials denoted with a SAC Reference No. (e.g. SAC Ref. No. 99-01-001) are on hand at SAC and may be obtained by calling the Securities Arbitration Commentator, or by email to help@sacarbitration.com. The Securities Arbitration Commentator is the leading publication for securities arbitration news and information, and maintains the most complete database of arbitration awards availalble anywhere. For more information regarding their services, visit their website at www.sacarbitration.com


Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.


Return to The Securities Law Home Page 

Visit Beam & Astarita, LLC, securities arbitration, regulation and litigation attorneys

]]> ]]>