Citigroup Global Markets Inc. v. Abbar et al, No. 1:2011cv06993 - Document 47 (S.D.N.Y. 2013)
Court Description: OPINION. The evidence establishes that defendants had no agreement to arbitrate their disputes before FINRA. The motion for an injunction (Dkt. No. 3) is therefore granted, and the plaintiff shall, on consent if possible, within the next 10 days, submit a form of judgment permanently enjoining the arbitration. In case of disagreement, defendants may respond within a week. (Signed by Judge Louis L. Stanton on 5/2/2013). (rjm)
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USDC SDNY DOCUMENT ELECTRONICALLY FILED DOC#: mITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK - r qATEi!~~Di~3jj;/=- CITIGROUP GLOBAL MARKETS, INC. Plaintiff, 11 Civ. 6993(LLS) -againstOPINION GHAZI ABBAR (as an individual and as temporary administrator of the estate of Abdullah Mahmoud Abbar), AJIAL LEVERAGED FEEDER HOLDINGS, LTD., AMATRA LEVERAGED FEEDER HOLDINGS, LTD., AMAVEST HOLDINGS, LTD. GAMA INVESTMENT HOLDINGS, LTD., and CHRISTINE WOODHOUSE (as temporary administrator of the estate of Abdullah Mahmoud Abbar) Defendants. x Defendant wealth 's f ("Cit with Ghazi "), numerous stments call Mr. Abbar with filiates investment of a large multinational financial business sions and and performed is responsib ng to adj not worl Abbar, t the Inc. The whom I shall asserts that function of this simply to determine itration of them here. Mr. Abbar cla Inc. is cate those claims whether he can separately i It his ces provider offices Sheikh of Citigroup, Abbar in accordance with American usage, tigroup Markets, the a right to arbitrate his dispute against a ed component of Cit ("CGMI"). CGMI has 1 , Citigroup Global thi s proceeding to enjo year s and travel, doing so. a half So of that liti ion issue has g with and extensive preparat se to a depositions, for tri discovery, which we are now completing on its ninth day. Rule ial F of 12200 the Industry filed of Arbitration Regulatory requires FINRA members the request of Code Authority (including CGMI) ir customer. a claim with FINRA claimed mishandling of (known of as the FINRA) to arbitrate disputes at The defendants led by Mr. Abbar seeking the Procedure its arbitration investments. CGMI over CGMI' s denies the defendants were its customers. It says they were customers of a different entity Markets, and Citigroup Ltd. moved spute business ( "CGML") to located in London. ly prel be FINRA. oin The Citigroup Global CGMI filed this suit the arbitration hearing s trial on the me consolidated with called on ts that of motion this was r Fed. R. Civ. P. 65 (a) (2) . For reasons which follow, the unction is granted. BACKGROUND In late 2005 to early 2006, Mohanned Noor changed Private Bank in Geneva, business with him. Ghazi Abbar's private banker oyment from Deutsche Bank to Citigroup and sought to bring the Abbar ly's In the following months, Abbar family trusts 2 (through Holdings fendant purchased Markets Abbars I Ltd. l and option Ltd. with their hedge invescment vehicles Amatra Ajial agreements ("CGML") choice of law in In I "leverage" fund Leveraged a investments clauses Feeder Holdings from tigroup London cransaccion substantially Leveraged which l Ltd. ) Global provided increasing the size of and included forum selection and I directing the resolution of di es in the courts of England and under English law. Under the structure of the options transaction funds" owned by CGML 1 cont Abbar held the Abbars l led by CGMI hedge fund I l "reference and managed by Ghazi investments! which were increased by "leverageD funds extended by CGML in exchange for a form of interest payment. the reference funds! CGML owned the economic and CGMI the vot erest. hired Ghazi Abbar as their "Investment Advisor mechanism for him to select the funds! erest in I It The funds establishing a invescments f subj ect to CGMI1s approval. The options entitled the Abbar trusts to the value of the assets held in the reference funds, accumulated interest, recourse basis. less the leverage funds and and CGML extended the leverage on a non CGML1s ownership of the reference funds secured its position in the transaction: it would only lose money if the 3 value the reference funds' hedge fund holdings impair the The va process requi of the leverage of structuring substantial work by (the "gap risk") . and negot CGMI continued to monitor prepare monthly reports on the voti shares of the ing personnel communications between them and Mr. Abbar. employees 11 enough to frequent After closing, risk reference options and to CGML status of the the the and CGMI helped As owner of funds, CGMI reviewed and approved the investment recommendations submitted by Ghazi Abbar as the funds' Investment Advisor, and assisted Mr. Abbar and his agents in complet CGMI personnel the submission procedures. devised transact ion because such special CGML's whereas investments were 1 business in "fund different structure deri vati ves London with of the were lf t financial with working sions, the options wi thin typically products. colleagues CGMI employed their arranged personnel by and regarded that as part of their ce of CGMI. That arrangement was understood and in fact desired by Mr. Abbar. He paid little attention to whi Citi 1 happened to employ the bankers working with him. Swiss entire banker Noor tigroup,1f "to and be to able to "have 4 walk access the to He wanted his corridors t entity of entirety the of tigroup through Abbar himself Noor ff "wherever the best inceracted di visions and with employees fices locat people were. of numerous Geneva and London, Mr. 1/ tigroup as well as in Ne'ltJ York. That was practice episodi ly, formalized in on documented intra Citigroup significant internally, business occasions in albeit arrangements, powers of was attorney (including one which granted a CGMI managing director authority to sign the transaction confirmations given economic effect by systems on CGML's behalf), accounting reflect the value of services and ustments to by Citigroup affiliates other Citigroup affiliates. That consistent lS with transaction after closing. monthly CGMI reports, CGMI's involvement ion of employees CGML's due diligence on hedge of leverage light of the ri shareholder, CGMI CGML helped satisfy performed assets to determine the appropriate should extend to CGML's funds. exercised on the investments, control over the reference to protect CGML's economic than to provide Mr. Abbar with beneficial s as Investment Advisor. 5 in With its power as the vot investment decisions his own wi the In assisting with the contractual obligation to provide such reports. amount in interest, ces, more overriding When the Abbar as ef s ef Investment Advisor, s money, transaction came under to "work out" iled, and Mr. t stress, CGMI removed Mr. and its employees ic transaction with Mr. ed in Abbar. Those the Abbar family lost a considerable amount of Abbar filed a statement of claim with FINRA on behalf of himself, his father, and their investment vehicles. The failed statement private tzerland) of claim includes allegations loan facility completed equi SA, a Swiss commercial bank, concerning with and a Citibank Citibank, NA (Geneva Branch) CGMI personnel played no role in negotiating the ty private loan facility. They approvals and in the "work out" process, Mr. some Abbar about relationship e equi between loan in and spoke generally to sting. the participated asserts Mr. facility and the options the two a "package deal," that transaction in that he cons leverage from the options transaction was at times extended to assets collateral i z the loan facili and that "work out" discussions proposed consolidation of the two transactions. DISCUSSION Under FINRA Rule 12200, Parties must arbitrate a dispute under the Code if: ¢ Arbitration under the Code is either: (1 ) by a written 6 , or st (2 ) by customer; ¢ The di e is between a customer and a member or associated person of a member; and ¢ The dispute arises in connection with the business activities of member or the associated person, except disputes involving the insurance business activities of a member that is also an insurance company. 1. When arbitration States Code, is resisted, Section 4 provides that parties" and if "the making of issue, thereof. Webster's court shall "Summarily" 11 Article the New of United "The court shall the arbitration agreement means Third 9 proceed summarily "without International delay Dictionary to or the trial formality, 2289 11 (3rd ed. of tort 1981), as compared to "plenary." That is because decision liability, part of the trial, is not like one but one that precedes and settles the nature of the trial itself. the application of the Because of the method of det word "customer," pI and the compl this not proceeding statement of claim was in this case was been summary filed twenty months ago, filed nineteen months ago. The Amended Joint Pretrial Order was 130 pages long: proposed 363 findings of fact, defendants 397. 7 but plaintiff There were nine albums conta scores exhibits. We are concluding on ninth day of trial. That is because "customer" the question whether nature, and frequency each task performed by the various persons their contemporaneous understand acting, was a and the extent to coalesce into a interaction and dealt with Mr. Abbar, w~o of whose behalf the person person's activities in the hope that such facts whic~ shaped or caused the transaction/ would Abbar CGMI was seen to require examining and evaluating substance, was Mr. functional the concept of the customer relationship capable of supporting a judicial determination. Upon my appraisal of the documentary evidence as a whole, and the credible and germane testimony / I would rule Ghazi Abbar and the other defendants were not customers primarily execution t~e the because that Mr. CGMI/ significance the transactions with CGML and the Swiss banks, and planning, t~e overw~elming t~at structuring/ and other services performed by CGMI in New York were ancillary and collateral to t~ose central core transactions. However, I do not rest that decision on those grounds which require, as they have in this case, such an expenditure of time, expense and statutory effort concept to establish as to there that 8 make is a an mockery of the to trate be decided by the court at the outset! and promptly. is a better way. 2. The ground more direct! for ision courts and by FINRA. the party with available! is the one That is! which he reliable! increasingly and predictable adopted by the the investor is the customer of has the account and consummates the transaction. The enti whom the in which the investor has his account! investor purchases his desired product! and from defines the legal and business locus of his status as a customer, and is the core of relati as a customer. An account is the necessary proof of a 1 relationship with the broker. without it. and bus One cannot transact this business As Richard Burns head of I the Ci t igroup bus unit which conducted the options transaction testified: A: In order to transact with a U.K. broker dealer! you have to set the account up you have to have opened it, you have to have gone through the formal regulatory requirements for money laundering! suitability! appropriateness, background checks in order to be able to execute and contract with a counter under - in the U.K. I * * * In this case with your work at CGML! do you know whether CGML has any internal requirements before it does a transaction with a customer? Q: 9 ~~-----~ - ..------... -----~--- .. ss --------- s A: Yes. It has fairly proscriptive pol icies around opening suitability procedures, compliance around KYC and AML procedures, very extensive internal policy documents. * * * Q: You said before that these trades were booked at CGML, is that correct? A: Yes. Q: How do you know that? A: The contract entered into between the cl ient and the CGML is referenced and is contracted with CGM~, the f is provided, the funding is providing of CGM~' s bank its books. The risk is by CGML, the approval process specifies whi enti books the transaction, CGM~. The reporting, monthly ing is all CGML for ri Burns Direct, Trial Tr. vol. 2, 159:20 161:5, Apr. 22, 2013. The purchase or account is also relied upon as proof of the customer relationship by courts in the commonplace litigation over execution of the transaction, status as a customer. None FINRA ingly arbitrability. With the these two are the touchstones of the defendants purchased a product from or opened an account with CGMI. The Second Circuit stated in DBS Financial Services v. West Vi a Dniversi ,660 F. 3d 643, 650 (2d Cir. 2011): conceded oral the parties at DBS asserts, and buys argument, that "customer" means "someone who or services. " Appellant's Br. at 18 (internal quotation marks omitted) . See Webster's Third New International Dictionary 559 (3d ed. 2002) (defining 10 "customer" as "one that purchases some commodity or service" (def. 2 a) ) ; id. at 1844 fining "purchase" as "buy for a price" (def. 1d)) American Heritage Dictionary of the ish 450 (4th ed. 2000) (defining customer as "[o]ne t buys goods and ces" (def. 1) ) Because the term is unambiguous wi respect to this core definition, we need not here provide a comprehensive f tion of the term under Rule 12200. The term "customer" includes at least a non-broker or non-dealer who purchases, or undertakes to purchase, a good or ce from a FINRA member. Accordingly, purchased a the court held for the investor, service, specifically auction "because WVUH ces, from UBS," id. The Second Circuit v. VCG _________ 2011), ~_________k~ because, oined an arbitration in Wachovia Bank ties Fund, 661 ...__________________ among other reasons, VCG had a brokerage agreement" F.3d 164, there was 173 (2d Cir. "no claim that with Wachovia's FINRA registered broker dealer. The Fourth Circuit concluded in Inc. v. Carilion Clinic, 706 F.3d 319 1 UBS Financial Services l 327 (4th Cir. 2013) that "customer," as that term is used in the FINRA Rules, refers to one not a broker or a dealer, who purchases commodities or services from a FINRA member in the course of the member's bus ss activities insofar as those activities are regulated by FINRA namely investment banking and securities business activities. 1 In & Co. Inc. v. Silverman, 567 68 (4th Cir. 2013) { the court stated: 11 706 F. 3d 562 { Accordingly, we hold that, under the facts presented, the defendants were not "customers" of Morgan Keegan as contemplated by Rule 12200, because defendants did not purchase commodi ties or services from Morgan Keegan in the course of its bus ss activities regulated by FINRA. In 382, James Financial Services (4th 388 Cir. 2013) (emphasis Inc. v. in original) 709 F.3d the court stated: That Keough and Affeldt commissions and both ted investors on behalf of Inofin does not save appellants' argument in light of our conclusion that a customer is one "who purchases commodities or services from a FINRA member." I do not this one, suggest that those cases are on all fours or cannot be distinguished on one ground or another, or that they control the decision here. Their value lies in the ence, t that in one case after another in this field of the wi th courts have taken a purchase transaction as defining proof. FINRA investment itself does has not brokerage account does, for provided establish a a recommendation customer of an relationship; a unless the broker receives a commission recommending the purchase of issuer. that a securi ty directly from the Thus, its suitability rules apply stered ative when a broker-dealer or ial investor who makes a recommendation to a Where, for example, a then becomes a customer. registered representative makes a recommendation to ential investor, the purchase a security to a 12 suitability rule would apply to the recommendation if that individual executes transaction through the broker-dealer with whi the registered sentat is associated or the broker-dealer rece s or will receive, directly or indirectly, compensation as a result of the recommended transaction. FINRA Regulatory Notice No. at 12-55, Q&A 6(b) (Dec. 2012) (footnotes omitted) . The elements of an account and a all at the outset of the di as a rule of arbitrability decision of ution process. e allows disputes, and purchase are visible to ready Their use of the avoids determination lengthy need proceedings over whether arbitration is available. for It the to the financial community reasonable expectations wi e that will app case, and it That is the ground of decision should be in appli appropriate exceptions to avoid i other the such this cases, with ustice. CONCLUSION establishes that The to arbitrate injunction their disputes (Dkt. No.3) before defendants had no agreement FINRA. is therefore granted, The motion for an and the plaintiff 1, on consent if possible, within the next 10 days, submit a ng the arbitration. form of judgment permanently of disagreement, defendants may respond within a week. So ordered. 13 In case DAT:2:D: New York, New York May 2, 2013 LOUIS L. STANTON U. S. D. J. 14
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