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Media Alerts - Fourth Circuit: UBS Financial Services, Inc., et al. v. Carilion Clinic
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February 15, 2013
  Fourth Circuit: UBS Financial Services, Inc., et al. v. Carilion Clinic
Headline: FINRA Members are Accountable to a Broad Base of Customers for Business Dealings

Area of Law: Contract

Issue(s) Presented: Whether "customer" within the FINRA Rules is limited only to investors. Whether the forum selection clause in the parties' agreements displaced the more general arbitration obligation of FINRA members.

Brief Summary: Carilion Clinic, a not-for-profit healthcare organization, hired UBS Financial and Citigroup, both FINRA members, to help finance existing projects and refinance debt. UBS and Citi recommended that Carilion issue $235 million in complex bonds. However, the market for these bonds collapsed after UBS and Citi failed to continue supporting it. Carilion filed for arbitration pursuant to FINRA Rule 12200. UBS and Citi claimed that Carilion was not an investor and therefore not a "customer" who may request arbitration through FINRA. UBS and Citi further argued that even if Carilion was included in the FINRA definition of "customer," the forum selection clause in the broker-dealer agreements between the parties superseded the FINRA Rules. The United States Court of Appeals for the Fourth Circuit found that Carilion was a customer under the FINRA rules, and that although it is possible for an agreement to supersede Rule 12200, the clause at issue in this case did not.

Extended Summary: UBS Financial Services, Inc., and Citigroup Global Markets, Inc., are both members of the Financial Inventory Regulatory Authority (FINRA), the largest independent regulator of securities firms in the United States. As FINRA members, both UBS Financial and Citigroup Global agree to abide by FINRA's rules and procedures. Among them is Rule 12200, whereby any customer of a FINRA member may request arbitration of a dispute arising in connection with a member's business activities. Carilion Clinic, a non-profit organization, initiated arbitration with UBS and Citi under Rule 12200, regarding contracts that existed between the companies.

Carilion signed agreements with UBS and Citi to refinance their debt and fund future hospital renovations. On the advice of UBS and Citi, Carilion issued $235 million in auction-rate-bonds and purchased interest rate swaps to hedge against interest rate fluctuation with the bonds. The auction-bond market is highly complex, and relies on support bids to survive. UBS and Citi failed to disclose to Carilion that they were key players in this market, and that they were responsible for submitting the bids necessary to ensure the market's stability. When UBS and Citi stopped submitting support bids in the auction-bond market, the market collapsed and Carilion lost millions.

Claiming a violation of fiduciary duty amounting to fraud and negligent misrepresentation, Carilion requested arbitration with UBS and Citi. The FINRA members filed for injunctive relief, arguing that Carilion was not an investor, and therefore not a "customer" able to request arbitration under Rule 12200. UBS and Citi alternatively argued that because their broker-dealer agreements with Carilion included a forum selection clause for arbitration, Rule 12200 was effectively superseded.

No definition of "customer" is expressly provided within the Rules. Therefore, the United States Court of Appeals for the Fourth Circuit conducted a contextual analysis of the Rules in order to discern the meaning of the word. Carefully scrutinizing the text of the Rule and the underlying objectives of FINRA, the Fourth Circuit adopted the generally accepted definition of "customer" as being, "one that purchases a commodity or service." Applying this definition, the court found that Carilion Clinic was a "customer" for the purposes of FINRA Rule 12200.

The Fourth Circuit then analyzed the language of the forum selection clause contained in the parties' broker-dealer agreements to see whether Rule 12200 was superseded. Though the Fourth Circuit found that it is possible for an agreement to supersede the arbitration provisions of Rule 12200, this one did not because it was not adequately specific. Therefore, the FINRA Rules prevailed.

To read the full opinion, please visit:

Panel: Judges Niemeyer, Keenan, and Diaz

Argument: 12/4/12

Date of Issued Opinion: 1/23/13

Docket Number: 12-2066

Decided: Affirmed

Case Alert Author: Ian Anthony

Counsel: ARGUED: Jonathan K. Youngwood, SIMPSON THACHER & BARTLESS, LLP, New York, New York, for Appellants. James R. Swanson, FISHMAN HAYGOOD PHELPS WALMSLEY & SWANSON LLP, New Orleans, Louisiana, for Appellee. ON BRIEF: Hugh McCoy Fain, III, Edward E. Bagnell, Jr., SPOTS FAIN PC, Richmond, Virginia, for Appellants; Jay Cohen, PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLC, New York, New York, for Appellant Citigroup Global Markets, Inc. Jason W. Burge, Alysson L. Mills, FISHMAN HAYGOOD PHELPS WALMSLEY & SWANSON LLP, New Orleans, Louisiana; Patrick T. Fennell, CRANDALL & KATT, Roanoke, Virginia, for Appellee.

Author of Opinion: Niemeyer, J.

Case Alert Supervisor: Professor Renée Hutchins

Edited: 02/16/2013 at 09:14 AM by Renee Hutchins

    Posted By: Renee Hutchins @ 02/15/2013 06:13 PM     4th Circuit  

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