Raymond James Fin. Servs., Inc. v. Cary

• Decision Date: 08 March 2013
• Docket Number: No. 12–1053.,12–1053.
• Citation: 709 F.3d 382
• Parties: RAYMOND JAMES FINANCIAL SERVICES, INCORPORATED, Plaintiff–Appellee, v. Peter CARY; Dayna Smith; Robert Barkin; Christine Spolar, Defendants–Appellants, and Financial Industry Regulatory Authority, Defendant. Public Investors Arbitration Bar Association, Amicus Supporting Appellants.
• Court: U.S. Court of Appeals — Fourth Circuit

709 F.3d 382

RAYMOND JAMES FINANCIAL SERVICES, INCORPORATED, Plaintiff–Appellee,

v.Peter CARY; Dayna Smith; Robert Barkin; Christine Spolar, Defendants–Appellants,andFinancial Industry Regulatory Authority, Defendant.

Public Investors Arbitration Bar Association, Amicus Supporting Appellants.

No. 12–1053.

United States Court of Appeals,Fourth Circuit.

Argued: Jan. 30, 2013.

Decided: March 8, 2013.

ARGUED:John Stringer Chapman, Chapman & Associates, LLC, Cleveland, Ohio, for Appellants. Stephen Grey Cochran, Roeder & Cochran, PLLC, McLean, Virginia, for Appellee. ON BRIEF:Alin L. Rosca, John S. Chapman & Associates, LLC, Cleveland, Ohio; J. Casey Forrester, ECONOMOU, FORRESTER & RAY, Alexandria, Virginia, for Appellants. Braden W. Sparks, Braden W. Sparks, PC, Dallas, Texas; Lisa A. Catalano, Director, St. John's University School of Law, Securities Arbitration Clinic, Jamaica, New York; Gina–Marie Scarpa, St. John's University School of Law, Securities Arbitration Clinic, Queens, New York, for Amicus Supporting Appellants.

Before WILKINSON, KEENAN, and WYNN, Circuit Judges.

Affirmed by published opinion. Judge WILKINSON wrote the opinion, in which Judge KEENAN and Judge WYNN joined.

OPINION

WILKINSON, Circuit Judge:

Appellants are individual investors seeking to arbitrate claims against appellee Raymond James Financial Services (“RJFS”) that arose when the investors purchased allegedly fraudulent securities directly from Inofin, Inc. (“Inofin”). As a member of the Financial Industry Regulatory Authority (“FINRA”), RJFS has agreed to arbitrate any dispute with a “customer” that “arises in connection with the business activities” of the firm. Appellants contend that they are RJFS customers because they purchased Inofin securities on the advice of an attorney who, though lacking any formal affiliation with RJFS, was a business and personal acquaintance of an RJFS registered representative.

For the reasons that follow, we hold that appellants are not “customers” of RJFS within the meaning of the FINRA arbitration provisions. To compel arbitration here would be to expand the scope of the arbitration agreement beyond what the text permits and the parties intended. Therefore, we affirm the judgment of the district court.

I.

Inofin is a Massachusetts corporation that raised over $110 million from hundreds of investors between 1994 and 2010. Around 2003, Inofin president Michael Cuomo recruited his former college roommateKevin Keough, then a registered representative of Morgan Stanley Dean Witter, Inc. (“Morgan Stanley”), and David Affeldt, Keough's friend, brokerage customer, and tax attorney, to refer investors to Inofin. These investors purchased unregistered promissory notes directly from Inofin, believing that the company was investing in sub-prime auto loans.

According to the Securities and Exchange Commission (“SEC”), Keough wanted to avoid receiving referral compensation directly from Inofin because he was employed by Morgan Stanley, a regulated broker-dealer. Cuomo and Keough thus agreed that Inofin would pay Keough's wife, Nancy Keough (“Nancy”), for Keough's referrals. Sometime in 2003, Nancy and Affeldt agreed to share equally in any referral fees they received from Inofin, regardless of who made the actual referral. At the time this agreement was concluded, Keough was still employed by Morgan Stanley. Three years later, in 2006, he joined RJFS, and his wife continued to share Inofin referral fees with Affeldt.

In January 2011, Inofin revealed that it was insolvent following protracted losses that began in 2004 after the company commenced new types of lending that were not properly disclosed to investors. Shortly after Inofin's financial state came to light, the company entered bankruptcy, and the SEC instituted civil enforcement proceedings against the company and its executives for violations of the federal securities laws.

Appellants Peter Cary, Dayna Smith, Robert Barkin, and Christine Spolar are Inofin investors who sustained losses on the unregistered promissory notes. They purchased the notes between 2006 and 2008 after Affeldt “personally met with each of [them] and recommended each invest in Inofin.” J.A. 84. Both Nancy and Affeldt received commissions from Inofin for these transactions.

On May 24, 2011, the investors filed a joint FINRA Statement of Claim against RJFS, alleging, inter alia, violations of state securities laws and FINRA conduct rules. The investors alleged that Keough assured them that “their investments were fully collateralized by auto loans” when Inofin was actually “operating a Ponzi scheme” in which executives diverted the invested funds “towards propping up their own failing businesses” and “covering personal expenses.” J.A. 23, 26. The investors sought arbitration of their claims pursuant to FINRA Rule 12200, which requires FINRA members such as RJFS to arbitrate disputes “between a customer and a member or associated person of a member” if arbitration is “requested by the customer” and the dispute “arises in connection with the business activities of the member or the associated person.”

On September 2, 2011, RJFS commenced this lawsuit in the Eastern District of Virginia, seeking declaratory and injunctive relief barring arbitration of the investors' claims on the grounds that the FINRA arbitration provisions do not apply to the dispute because appellants “are not and have never been [RJFS] customers.” J.A. 11. Shortly thereafter, the parties stipulated to the following “key operative facts” concerning the putative relationships among appellants, Affeldt, Inofin, and RJFS:

1. The investors had “no personal contact” with Keough regarding Inofin.

2. Affeldt “personally met” with the investors and “recommended each invest in Inofin.”

The investors did not hold “any accounts including trade accounts” with RJFS “at any time.”

Affeldt did not tell the investors that he was “acting for a person who claimed to be” an RJFS representative.

Affeldt “did not represent” to the investors that he was “affiliated with” RJFS.

The investors “did not understand that they were purchasing Inofin or any other security” from RJFS.

The investors “did not understand they were purchasing Inofin from an agent whom they believed to be authorized to act on behalf of” RJFS.

Following a hearing on the matter, the district court found that the connection between RJFS and appellants was “insufficient” to bring the dispute within the scope of the FINRA arbitration provisions. J.A. 717. The district court therefore granted RJFS's motion for a permanent injunction barring arbitration of the investors' claims. This appeal followed.

II.

Appellants (the investors) contend that their claims are subject to arbitration because David Affeldt, the attorney who recommended the Inofin securities to them, had connections to Kevin Keough, an RJFS registered representative. Appellants urge us to read FINRA Rule 12200 broadly—in accordance with the judiciary's longstanding presumption in favor of arbitration—and find that they are, in fact, RJFS customers. However, we conclude that no presumption in favor of arbitration applies in this case and that appellants are not customers of RJFS under our established interpretation of Rule 12200. A customer very often relies upon the representations or reputation of the entity with which the customer deals, but in this case, the investors made their decision to invest independently of any recommendation on the part of RJFS. To find a customer relationship in such a situation would impose responsibility on a company whose name was never so much as utilized to induce the investors to part with their funds.

A.

Appellants argue here, as they did below, that “any ambiguity” in the term “customer” as it used in FINRA Rule 12200 must be resolved in their favor because of a “strong national public policy favoring arbitration.” Appellants' Br. at 19. Appellants rightly point out that arbitration is a favored mechanism of dispute resolution because it provides “speed, economy, and efficiency” and allows a self-regulatory organization such as FINRA to police its members' activities by creating remedies not available in federal court for violations of the organization's rules. Id. at 32. But while it is beyond question that the Supreme Court has recognized such advantages and adopted “a liberal federal policy favoring arbitration agreements,” CompuCredit Corp. v. Greenwood, ––– U.S. ––––, 132 S.Ct. 665, 669, 181 L.Ed.2d 586 (2012) (quoting Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983)) (internal quotation marks omitted), appellants overlook the fact that a court cannot apply any presumption in favor of arbitration unless there already exists an enforceable arbitration agreement between the parties. See UBS Fin. Svcs. v. Carilion Clinic, 706 F.3d 319, 323–25 n. 2 (4th Cir.2013).

Arbitration is “a matter of consent, not coercion,” Volt Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Jr. Univ., 489 U.S. 468, 479, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989), and federal arbitration policy does not alter that maxim. As this court has recently noted, the “touchstones of arbitrability analysis” are the “twin pillars” of the parties' “consent and intent” to arbitrate, Peabody Holding Co. v. United Mine Workers of Am., 665 F.3d 96, 103 (4th Cir.2012). The Supreme Court “has never held that the presumption [in favor of arbitration] overrides the principle that a court may submit to arbitration ‘only those disputes ... the parties have agreed to submit.’ ” Carilion Clinic, 706 F.3d at 324 n. 2 (quoting Granite Rock Co. v. Int'l Bhd. of Teamsters, ––– U.S. ––––, 130 S.Ct. 2847, 2858–59, 177 L.Ed.2d 567 (2010)). The presumption, while certainly a critical component of the law governing arbitration agreements, applies only when “a validly formed and enforceable arbitration agreement is ambiguous about whether it covers the dispute at...