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Media Alerts - Morgan Keegan & Co., Inc. v. Louise Silverman - Fourth Circuit
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March 18, 2013
  Morgan Keegan & Co., Inc. v. Louise Silverman - Fourth Circuit
Headline: FINRA Members Not Obligated to Arbitrate with Parties Who Purchase Securities Through Third Party.

Area of Law: Securities

Issue Presented: Whether a consumer who buys investments through a financial broker may compel arbitration with the underwriter of those investments under FINRA.

Brief Summary: The Silvermans purchased bonds through their securities broker Legg Mason. These bonds were underwritten by Morgan Keegan. In 2007, the Silvermans suffered financial losses when the value of the bond funds dropped due to alleged misconduct on the part of Morgan Keegan. The Silvermans initiated arbitration proceedings against Morgan Keegan, pursuant to FINRA Rule 12200. Rule 12200 states that a party can compel a FINRA member to participate in arbitration if the party is a "customer" of the FINRA member and there is a dispute between the "customer" and the FINRA member or the member's associated person, which arises from the business activities of the FINRA member or their associated person. The Silvermans argued that they qualified to pursue arbitration pursuant to Rule 12200 because employees of Morgan Keegan encouraged the Silvermans' Legg Mason broker to purchase the securities. The district court found no customer relationship between Morgan Keegan and the Silvermans under the FINRA rules and granted a permanent injunction to bar arbitration proceedings. The Fourth Circuit affirmed.

Citing its recent ruling in UBS Financial Services, Inc. v. Carilion Clinic, which addressed the meaning of the term "customer" in Rule 12200, the Fourth Circuit found the Silvermans were not entitled to relief. In UBS Financial, the Fourth Circuit determined that Rule 12200's term "customer" refers to an entity that is "not a broker or dealer, who purchases commodities or services from a FINRA member in the course of the member's business activities," namely, "the activities of investment banking and the securities business." The court ruled that the Silvermans lacked the necessary contractual relationship with Morgan Keegan because they had not purchased the investments from the company. Moreover, the Legg Mason broker who the Silvermans did make the purchase from was not an "associated person" of Morgan Keegan. Accordingly, under FINRA rule 12200, the Silvermans' purchase of the securities through a third party did not qualify them as a "customer" of Morgan Keegan.

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Significance: Building on its recent discussion of the issue, the Fourth Circuit further defined the term "customer" under FINRA Rule 12200, finding a party purchasing securities through a third party is not entitled to compel arbitration.

Panel: Judges Niemeyer, Keenan, and Diaz

Date of Issued Opinion: 02/04/13

Docket Number: No. 12-1208

Decided: Affirmed

Case Alert Author: Devin Farrelly

Counsel: ARGUED: Adam J. Gana, NAPOLI BERN RIPKA SHKOLNIK LLP, New York, New York, for Appellants. George C. Freeman, III, BARRASSO, USDIN, KUPPERMAN, FREEMAN & SARVER, LLC, New Orleans, Louisiana, for Appellee.
ON BRIEF: Thomas C. Costello, COSTELLO LAW GROUP, Baltimore, Maryland, for Appellants. Priscilla A. Donovan, DONOVAN AND RAINIE LLC, Baltimore, Maryland;
Larry E. Mobley, David N. Luder, BARRASSO, USDIN, KUPPERMAN, FREEMAN & SARVER, LLC, New Orleans, Louisiana, for Appellee.

Author of Opinion: Keenan, J.

Case Alert Circuit Supervisor: Professor Renée Hutchins

    Posted By: Renee Hutchins @ 03/18/2013 03:44 PM     4th Circuit  

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