Second Circuit Rules on the Meaning of ‘Customer’ Under FINRA


The Second Circuit held recently that the term “customer” under FINRA Rule 12200 does not include a broker-dealer non-party to a credit default swap agreement. See Wachovia Bank v. VCG Special Opportunities Master Fund Ltd., No. 10-1648-cv (2d Cir. N.Y. Oct. 28, 2011).

In the present case, Wachovia Bank, N.A. (“Wachovia Bank”) and Wachovia Capital Markets, LLC (“WCM”) (collectively “Wachovia”) sued VCG Special Opportunities Master Fund, Ltd., (“VCG”) in connection with a credit default swap (or “CDS”) transaction.Wacovia asserted that there was no arbitration agreement between VCGand Wacovia Bank. The district court the motion ruling that the FINRA Code of Arbitration Procedure for Customer Disputes (“FINRA Code”) provides for arbitration of disputes between a FINRA member and its “customer[s],” and that, as WCM was a FINRA member and negotiated part of the CDS agreement entered into by VCG and Wachovia Bank, VCG should be considered a customer of WCM within the meaning of the FINRA Code.

The Second Circuit concluded that no rational fact-finder could infer that VCG was a customer of WCM. Thus, Wachovia should have been granted summary judgment.

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