Principal Securities, Inc. v. Agarwal

• Citation: 23 F.4th 1080
• Decision Date: 31 January 2022
• Docket Number: No. 20-3312,20-3312
• Parties: PRINCIPAL SECURITIES, INC., Plaintiff - Appellee v. Sanjeev AGARWAL; Rajshri Agarwal; Technochem International, Inc., Defendants - Appellants
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

23 F.4th 1080

PRINCIPAL SECURITIES, INC., Plaintiff - Appellee

v.Sanjeev AGARWAL; Rajshri Agarwal; Technochem International, Inc., Defendants - Appellants

No. 20-3312

United States Court of Appeals, Eighth Circuit.

Submitted: April 14, 2021

Filed: January 31, 2022

Kathryn Roe Eldridge, Peter S. Fruin, Molli Masaniai, MAYNARD & COOPER, Birmingham, AL, Angel A. West, MAYNARD & COOPER, Johnston, IA, for Plaintiff - Appellee.

Gail E. Boliver, BOLIVER LAW FIRM, Marshalltown, IA, Jonathan Kurta, FITAPELLI & KURTA, New York, NY, Adam J. Weinstein, GANA & WEINSTEIN, New York, NY, for Defendants - Appellants.

Before SMITH, Chief Judge, COLLOTON and ERICKSON, Circuit Judges.

ERICKSON, Circuit Judge.

Principal Securities, Inc. ("PSI") commenced this action in the Southern District of Iowa to enjoin an arbitration proceeding filed with the Financial Industry Regulatory Authority ("FINRA"). The claimants in the underlying arbitration are Dr. Sanjeev Agarwal and his wife Rajshri Agarwal, individually and on behalf of their company Technochem International, Inc. (collectively "the Agarwals"). The district court¹ found that the Agarwals were involved in joint business ventures with PSI's former registered representative, not securities transactions governed by FINRA, and thus there was no basis to compel PSI to participate in a FINRA arbitration proceeding. The Agarwals appeal the grant of injunctive relief enjoining them from proceeding with arbitration. We affirm.

I. BACKGROUND

According to the Agarwals’ Statement of Claim filed with FINRA, Dr. and Mrs. Agarwal reside in Ames, Iowa. They are the sole owners of a nearly 50-year-old company, Technochem, International, Inc., that builds plants for the extraction and refining of essential oils, vegetable oils, and animal fats as well as the distillation of glycerin

and fermentation. Technochem's principal place of business is Boone, Iowa. Dr. Agarwal is the president of Technochem and has a Bachelor of Science degree in chemical engineering, a Master of Business Administration degree, and a Ph.D. in International Business and Marketing.

PSI is a member of FINRA and registered with the Securities and Exchange Commission. John Krohn previously worked as a financial advisor who was associated with PSI from March 1996 through December 31, 2016. In 2014, Krohn, Dr. Agarwal, and two other business partners formed Glycerin Group LLC d/b/a KemX Global ("KemX"). The purpose of KemX was to build and operate industrial glycerin

and biofuel refining plants. Dr. Agarwal was KemX's president and co-chief executive officer.

Pursuant to an operating agreement for KemX executed in 2015, K4 Enterprises, LLC ("K4") owned 50 percent of KemX, Dr. and Mrs. Agarwal owned 25 percent through Technochem, and a third business partner, Mark Merritt, owned the remaining 25 percent. K4 was an investment company owned by Krohn and a business partner.

On February 2, 2016, Dr. Agarwal and Merritt, acting on behalf of KemX, offered Krohn the position of chief financial officer for KemX. In the written offer, Dr. Agarwal and Merritt recognized that Krohn was fiercely loyal to his employer, Principal Financial Group, which was one of the traits they admired most. In addition to proposing a salary, Dr. Agarwal and Merritt told Krohn that Krohn would have the ability to acquire ownership interests in KemX and any other related operations that Dr. Agarwal and Merritt developed. Krohn declined the employment offer.

KemX completed construction of its first biofuel refinery in 2017. In 2015 and 2016, while the plant was being constructed, Technochem lent KemX over $4.8 million worth of equipment and construction costs. The sum was recognized as debt on KemX's balance sheet. Due to construction cost overruns, Technochem provided an additional $1.7 million in cash that was also recognized as debt on KemX's books. In June 2019 when KemX was sold, KemX was indebted to Technochem in an approximate amount of $9.3 million. The Agarwals purportedly lost the money they lent to KemX, but have not identified the purchase of any securities in connection with this project.

In 2016, Dr. Agarwal began investing in a different venture—Spotlight Innovation, Inc. ("Spotlight"), a company in which Krohn held an approximate 38% ownership. In August 2016, the Agarwals invested $250,000 in Spotlight stock; in December 2016, they invested another $100,000; and in April 2017 (after Krohn had left PSI), the Agarwals loaned Spotlight $400,000. Spotlight was a development stage company purportedly involved in identifying, validating, and financing healthcare-focused companies founded for the purpose of commercializing intellectual property. The parties dispute the worth of Spotlight. The Agarwals contend that after it became apparent Spotlight lacked any legitimate business prospects, Krohn continued to facilitate acquisitions, used K4 to provide debt financing and make loans to Spotlight, and continued to solicit investors to fund his dubious venture. PSI, in contrast, asserts the Spotlight entities are not sham entities and all appear to be active going concerns with research agreements with universities and a hospital, a product registered with the Food and Drug Administration, and, at least one, commercially available product. This dispute, however, is immaterial to our analysis of the dispositive issue before us.

The Agarwals’ principle claim is that PSI failed to supervise the outside business activities of Krohn. PSI has denied the allegations, contending it acted consistent with its policies and FINRA Rules that required Krohn to disclose private securities transactions and outside business activities. See FINRA Rules 3270 & 3280. PSI asserts that during the 20 years Krohn was associated with PSI, PSI audited Krohn's activities 14 times in an effort to ensure compliance with securities regulations and PSI's policies. There is evidence in the record demonstrating that Krohn requested approval for the initial Spotlight purchase and he notified PSI when he was appointed a member of the Spotlight Board. PSI maintains that its approval and oversight with regard to Spotlight as well as Krohn's other business activities was appropriate based on Krohn's representations. Again, resolution of this dispute is immaterial and unnecessary for us to resolve.

Krohn consented to the imposition of sanctions related to private securities transactions and outside business activities that are the subject of this litigation and underlying FINRA arbitration. With the advice of counsel, on April 16, 2018, Krohn signed a letter of acceptance, waiver, and consent ("AWC") that settled a number of alleged violations of FINRA Rules 2010, 3270 & 3280. R. Doc. 13-9. The violations included: (1) engaging in four outside business activities without giving PSI prior written notice, and (2) conducting more than two dozen purchases of ten companies’ securities outside the scope of his employment with PSI and without notifying PSI of these transactions, his role in them, and whether he received or expected to receive selling compensation. Id. at p. 2. FINRA accepted the AWC on May 29, 2018. Id. at p. 5.

The Agarwals contend that for nearly a decade Krohn controlled the finances and operations of various companies and ventures. In this capacity Krohn allegedly solicited approximately $40 million from dozens of investors and then shuffled the investors’ money from venture to venture to satisfy other investors, banks, and other creditors until the ventures ultimately all collapsed. In their Statement of Claim, the Agarwals allege FINRA has jurisdiction because PSI knew about Krohn's activities but failed to supervise or place reasonable controls on his other business activities, including KemX and Spotlight. The Agarwals seek compensatory damages in the amount of $10 million, as well as interest, attorneys’ fees, expert fees, forum fees, punitive damages, and treble damages.

The Agarwals appeal the district court's decision granting a preliminary and permanent injunction and enjoining their FINRA arbitration proceeding.

II. ANALYSIS

"We review a district court's ultimate ruling on a preliminary injunction for abuse of discretion, though we review its underlying legal conclusions de novo." Home Instead, Inc. v. Florance, 721 F.3d 494, 497 (8th Cir. 2013). A district court abuses its discretion if it applies an incorrect legal standard, follows improper procedures in making the determination, or makes findings of fact that are clearly erroneous. See Laredo Ridge Wind, LLC v. Neb. Pub. Power Dist., 11 F.4th 645, 649 (8th Cir. 2021). We find no abuse of discretion here.

The Federal Arbitration Act, 9 U.S.C. § 4, "permits a federal court to compel arbitration based on an arbitration clause in a written contract, but does not permit a court to enjoin arbitration based on an issue's nonarbitrability." Klay v. United Healthgroup, Inc., 376 F.3d 1092, 1099 n.8 (11th Cir. 2004). In other words, " ‘wrongful arbitration,’ is not a cause of action for which a party may sue." Meierhenry Sargent LLP v....