Selling Away Claimants can compel arbitration

Vestax Securities Corporation vs. McWood, No. 00-1936 (6th Cir., 2/14/02)

Agreement to Arbitrate * Arbitration Agreement (SRO Requirement) * Scope of Agreement * Selling Away * SRO Rules * Statutory Definitions (“Customer”) * SRO Rules (NASD Rule 10301).

Investors who purchased securities through a broker-dealer’s agents are “customers,” for purposes of NASD Rule 10301, and may compel arbitration of their disputes, even though the transactions did not involve the firm.

Vestax is an Ohio-based securities firm who, in this case, employed two brokers who purportedly engaged in substantial “selling away” activity. Among the numerous defendants are some who held accounts at Vestax and others who actually had some transactional activity with Vestax. However, the trades complained of were not done through Vestax.

When the investors sought NASD Arbitration, Vestax commenced this action for a declaratory judgment that it was not liable to these clients, but the trial court sided with defendants and ordered arbitration (SLA 2000-22).

On appeal, the Court affirms, ruling that the NASD Code “creates the right of parties to compel an NASD-member firm to arbitrate even in the absence of a direct transactional relationship with the firm.” Rule 10301 creates “two conditions that must be satisfied to trigger the NASD arbitration requirement. First, the claim must involve a dispute between either an NASD-member and a customer, or an associated person and a customer. Second, the dispute must arise in connection with the activities of the member or in connection with the business activities of the associated person.

We believe that both conditions have been satisfied in the case before us.”

For support, the Court cites the Second Circuit’s John Hancock v. Wilsondecision, SLA 2001-25, which concluded that “the term ‘customer’ plainly refers to either the member’s or the associated person’s customer” and ordered arbitration under circumstances even more removed from the member than here. (SLC Ref. No. 02-08-01)

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Securities Attorney at Sallah Astarita & Cox | 212-509-6544 | | Website | + posts

Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page -, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.