Investors who were customers of an associated person customers of the NASD member by virtue of their relationship with the associated person.
Washington Square Securities, Inc. v. Aune; Washington Square Securities, Inc. v. Miltz, Nos. 3:02CV308 & -309 (W.D. N.C., 3/7/03). Arbitrability * Agreement to Arbitrate * SRO Rules (NASD Rules 10101 & 10301) * Selling Away * Statutory Definitions (“Customer”) * Arbitration Agreement * Contractual Issues (“Apparent Authority;” Agency) * Evidentiary Standards (Parol/Extrinsic Evidence) * Staff Interpretations, Effect of * Discovery Issues.
Where an investor was, within the context of the dispute, the “customer” of the broker-dealer, then, for purposes of the SRO arbitration rules requiring arbitration upon demand of a customer, s/he is also a “customer” of the broker-dealer.
Adopting what, by now, must be viewed as the majority rule on this issue, the Court denies a stay of arbitration regarding two investors who were allegedly defrauded by the same WSS broker. The broker was evidently an independent contractor and the investors neither opened accounts with WSS nor paid any commissions to WSS. However, they did allege that, in purchasing payphone investments through the broker, they understood that the broker “was being supervised by Plaintiff Washington Square and that Plaintiff was approving and reviewing all of the proposed investments offered” to them.
The Court disregards as irrelevant allegations that the broker had an agreement with WSS which prohibited him from selling products not approved by WSS and argument that some courts have deemed payphone investments non-securities. The Court’s critical finding is “that investors who were customers of an “associated person” [become] customers of the NASD member by virtue of their relationship with the associated person.”
Under NASD Rules, this status gives them the right to seek arbitration. As a consequence, the Court reconsiders an earlier order granting WSS expedited discovery. “[T]here is no need to conduct any discovery, albeit limited, where it is clear that the instant dispute is, in fact, arbitrable.” New evidence of an interpretative nature, which WSS seeks to introduce, is rejected as well. “The Court need not resort to extrinsic evidence when the language of the NASD Arbitration Code provisions are not ambiguous.” (SLC Ref. No. 2003-13-012
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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.
He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.
