Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_12-cv-02165/USCOURTS-azd-2_12-cv-02165-0/pdf.json

Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 28:1332 Diversity-Declaratory Judgment

---

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

WO 

IN THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF ARIZONA 

Berthel Fisher & Company Financial 

Services, Inc., 

Plaintiff, 

v. 

Gary S. Frandino, 

Defendant. 

No. CV-12-02165-PHX-NVW

ORDER 

 Before the Court are Plaintiff’s Motion for Preliminary Injunction (Doc. 6), the 

Response, and the Reply. Plaintiff’s Motion will be granted. 

I. FACTUAL BACKGROUND 

 The relevant alleged facts of this action are straightforward and generally 

undisputed. Defendant Gary Frandino (“Defendant”) had been investing in blue chip 

stocks for decades when he moved to Arizona and decided to move funds away from his 

prior investment firm. In late 2007, he met George Kardaras; Kardaras was a registered 

representative of independent broker-dealer J.P. Turner & Company. (Doc. 20 at 2.) 

Starting in February 2008, Defendant acted on Kardaras’ investment advice and began 

investing in Echo Canyon, LLC (“Echo Canyon”), a company purportedly involved in 

wholesale vehicle exporting and resale. The sole member of Echo Canyon was Mr. Brian 

Borakowski (“Borakowski”), who had been Kardaras’ colleague from April 2003 through 

June 2006. By the time Defendant began investing with Borakowski, Borakowski had 

become a registered representative of American Capital Partners, LLC. 

Case 2:12-cv-02165-NVW Document 34 Filed 05/14/13 Page 1 of 14
- 2 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

 Defendant’s investment in Echo Canyon involved the loan of money by Defendant 

in exchange for promissory notes from Echo Canyon. (Doc. 9-1 at 36-37.) The 

promissory notes committed Echo Canyon to providing Defendant with interest payments 

and to repaying the principal of the loan at the close of the note term. (Id.) The 

promissory notes bore Defendant’s signature, as well as that of Borakowski acting for 

Echo Canyon. Further, communications between Defendant and Borakowski were sent 

to or from Borakowski’s personal email address, not one associated with any brokerdealer. (Doc. 9-1 at 39-40.) Defendant does not mention any communication with 

Borakowski before the promissory notes were signed. Defendant asserts that, by 

November 2009, he had invested approximately $211,500 in Echo Canyon. (Doc. 20 at 

3.) 

 On March 28, 2012, Defendant commenced an arbitration action with the 

Financial Industry Regulatory Authority (“FINRA”), an independent regulator for 

securities firms conducting business in the United States, against Kardaras, Borakowski, 

J.P. Turner & Company, and others. (See Doc. 9-1 at 2-34.) He sought to recover for 

losses allegedly exceeding $525,000 associated with investments made pursuant to 

Kardaras’ advice (id. at 32), as Defendant claimed Kardaras had recommended or placed 

money in “numerous unsuitable, illiquid and risky investments.” (Id. at 7.) Defendant 

alleged in particular that Echo Canyon “may [have been] an entirely fraudulent 

investment” (id.), and that his investment in Echo Canyon, made “again on the advice of 

Respondent George Kardaras, as a registered representative of Respondent J. P. Turner” 

was “at the very least highly unsuitable . . . as it came with a high level of risk . . . .” (Id.

at 10.) Defendant’s claims in the Statement of Claim range from negligence and breach 

of fiduciary duty to violations of state and federal securities law. (Id. at 14-30.) 

Among the parties from which Defendant sought relief through arbitration is 

Plaintiff Berthel Fisher & Company Financial Services, Inc. (“Plaintiff” or “Berthel 

Fisher”). Plaintiff is an independent broker-dealer incorporated in Iowa and is a licensed 

member of FINRA. (Doc. 7 at 2.) As a member of FINRA, Plaintiff is required to 

Case 2:12-cv-02165-NVW Document 34 Filed 05/14/13 Page 2 of 14
- 3 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

arbitrate disputes that fall within the guidelines provided by FINRA’s Code of Arbitration 

Procedure governing arbitrations between investors and brokers and/or brokerage firms. 

Borakowski became a registered representative of Plaintiff starting in August 2009 (see 

Doc. 20-1 at 7), after Defendant had begun investing in Echo Canyon. As Defendant 

continued to invest money with Borakowski for Echo Canyon after Borakowski became 

associated with Plaintiff, Defendant sought to make Plaintiff subject to arbitration. (Doc. 

20 at 3-4.) Plaintiff, however, never approved, recommended, or sold investments in or 

loans to Echo Canyon, and Defendant never had an account with, made an investment 

through, or sought investment advice from Plaintiff. (Doc. 7 at 3-4.) Further, Defendant 

does not allege and offers no evidence that he was aware of or relied on any perceived 

affiliation between Borakowski and Plaintiff. (Cf. Doc. 10-1 at 10.) Plaintiff seeks a 

preliminary injunction against arbitration on the grounds that Defendant does not have a 

relationship with Plaintiff or any person associated with Plaintiff that would require 

Plaintiff to participate in the arbitration of Defendant’s claims. (See Doc. 7 at 1.)1

 

II. LEGAL STANDARD AND ANALYSIS 

A. Preliminary Injunction 

 In order to obtain a preliminary injunction, a plaintiff must show: (1) a likelihood 

of success on the merits; (2) likely irreparable harm in the absence of the preliminary 

injunction; (3) that the injunction serves the public interest; and (4) that the balance of 

equities favors the plaintiff. Winter v. Natural Res. Def. Council, Inc., 555 U.S. 7, 20 

(2008). The first prong of the test—the likelihood of success on the merits—is 

established when the plaintiff demonstrates that “serious questions going to the merits” of 

the dispute exist. Alliance for the Wild Rockies v. Cottrell, 632 F.3d 1127, 1131-32 (9th 

Cir. 2011). 

B. Arbitrability 

 Arbitrability is the “question [of] whether the parties have submitted a particular 

 1

 Plaintiff filed a Motion to Dismiss before a FINRA arbitration panel on the same grounds on which it seeks a preliminary injunction. The arbitration panel denied that motion without explanation. (See Doc. 32-1). 

Case 2:12-cv-02165-NVW Document 34 Filed 05/14/13 Page 3 of 14
- 4 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

dispute to arbitration,” Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002), 

and the issue of arbitrability is for the court to decide unless the parties “clearly and 

unmistakably provide otherwise.” Id. (quoting AT & T Techs., Inc. v. Commc’ns 

Workers, 475 U.S. 643, 649 (1986)); see also John Hancock Life Ins. Co. v. Wilson, 254 

F.3d 48, 57 (2d Cir. 2001) (holding one party’s membership in a regulatory exchange 

insufficient to establish parties’ clear and unmistakable intent to have arbitrator decide 

issue of arbitrability). The basic principle at play in the determination of arbitrability is 

that an arbitrator has authority because the parties agreed in advance to resolve such 

disputes through arbitration. AT & T, 475 U.S. at 648-49. “[A] party cannot be required 

to submit to arbitration any dispute which he has not agreed so to submit.” Id. at 648 

(internal quotation marks and citations omitted). 

 When determining whether to compel arbitration, the first inquiry is whether the 

parties have agreed to arbitrate the underlying dispute. Mitsubishi Motors Corp. v. Soler 

Chrysler-Plymouth, Inc., 473 U.S. 614, 626 (1985). A written arbitration agreement 

between the parties is generally valid and enforceable. See Volt Info. Sciences, Inc. v. Bd. 

of Trs. of Leland Stanford Jr. Univ., 489 U.S. 468, 474 (1989) (discussing Federal 

Arbitration Act, 9 U.S.C. § 2). Absent a written agreement, the dispute between Plaintiff 

and Defendant is still arbitrable if as a member of FINRA, Plaintiff is obligated by the 

FINRA Code of Arbitration Procedure for Customer Disputes (“FINRA Customer Code” 

or “Code”) to arbitrate its dispute with Defendant. See Herbert J. Sims & Co., Inc. v. 

Roven, 548 F. Supp. 2d 759, 763 (N.D. Cal. 2008) (noting that under the Code, 

“customers can compel registered members of FINRA to arbitrate certain disputes even 

when no written arbitration agreement exists”).2

 Rule 12200 of the FINRA Customer 

Code provides as follows: 

Parties must arbitrate a dispute under the Code if: 

 Arbitration under the Code is either: 

(1) Required by a written agreement, or 

 2 Herbert J. Sims & Company, Inc. v. Roven, 548 F. Supp. 2d 759 (N.D. Cal. 2008), 

discusses the arbitration code under the National Association of Securities Dealers 

(“NASD”), the predecessor to FINRA’s arbitration code. 

Case 2:12-cv-02165-NVW Document 34 Filed 05/14/13 Page 4 of 14
- 5 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

(2) Requested by the customer; 

 The dispute is between a customer and a member or associated 

person of a member; and 

 The dispute arises in connection with the business activities of 

the member or the associated person, except disputes involving 

the insurance business activities of a member that is also an 

insurance company. 

Rule 12200 - Arbitration Under an Arbitration Agreement or the Rules of FINRA, Code 

of Arbitration Procedure for Customer Disputes.3

 Rule 12100 in turn defines “customer” 

by clarifying that “[a] customer shall not include a broker or dealer,” and an “associated 

person” as “a natural person engaged in the investment banking or securities business 

who is directly or indirectly controlling or controlled by a member . . . .” Rule 12100 - 

Definitions, Code of Arbitration Procedure for Customer Disputes. If the dispute 

between Plaintiff and Defendant falls within the purview of the FINRA Customer Code 

Rule 12200, then it is subject to arbitration. “[A]ny doubts concerning the scope of 

arbitrable issues should be resolved in favor of arbitration.” John Hancock, 254 F.3d at 

58 (internal quotation marks and citations omitted). 

III. ANALYSIS 

A. Likelihood of Success on the Merits 

1. Legal question 

 The parties have not clearly and unmistakably committed to having the issue of 

arbitrability decided by an arbitrator, and therefore it is an issue for the court to decide. 

At least for the purposes of the pending motion, the parties do not dispute that: 

(1) Plaintiff Berthel Fisher is a member of FINRA; (2) no written arbitration agreement 

(apart from the FINRA Customer Code at issue) exists between Plaintiff and Defendant; 

(3) Brian Borakowski became a registered representative of Plaintiff and thus an 

associated person of Plaintiff; (4) some transaction involving the exchange of funds for 

promissory notes happened between Echo Canyon and Defendant; (5) Defendant has 

 3

 The FINRA Code of Arbitration Procedure for Customer Disputes is available at http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=4096. 

Case 2:12-cv-02165-NVW Document 34 Filed 05/14/13 Page 5 of 14
- 6 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

requested an arbitration under the FINRA Customer Code; and (6) Plaintiff has not 

previously agreed to and presently objects to any arbitration. It is further undisputed that 

Defendant never sought investment advice from Plaintiff, never opened an account with 

Plaintiff, and never received investment or brokerage services from Plaintiff. (See Doc. 7 

at 3-4.) Accordingly, Plaintiff asserts that there is no “direct customer” relationship—a 

customer relationship that does not involve an associated person—between it and 

Defendant, and Defendant does not argue otherwise. (See Doc. 20 at 5-10.) 

 As Defendant is not a “direct customer” of Plaintiff, the parties agree that the only 

remaining question is whether Defendant qualifies as a customer of Brian Borakowski, 

Plaintiff’s associated member, and therefore as a customer of Plaintiff. Defendant 

contends that it is such a customer under the Code; Plaintiff disagrees. If Defendant is a 

customer of Borakowski and thereby of Plaintiff under the FINRA Customer Code, then 

Plaintiff cannot establish serious questions as to the issue of arbitrability. 

2. Customers of associated persons 

 Case law as to the definition of “customer” for FINRA purposes is unsettled; 

courts have embraced a range of approaches to clarifying the meaning of the term, and 

consequently a variety of definitions. The lack of clarity stems in part from the 

ambiguity inherent in the FINRA Customer Code. In its section on definitions, the 

FINRA Customer Code’s says only that a “customer” is not a broker or a dealer. Rule 

12100 - Definitions, Code of Arbitration Procedure for Customer Disputes. The Ninth 

Circuit has not spoken on the matter, but other courts have consistently recognized that 

“customer” cannot embrace the universe of non-brokers and non-dealers and have 

therefore rejected the expansive contention that anyone who is not a broker or dealer 

qualifies as a FINRA customer. See, e.g., Fleet Boston Robertson Stephens, Inc. v. 

Innovex, Inc., 264 F.3d 770, 772 (8th Cir. 2001); Morgan Keegan & Co., Inc. v. Jindra, 

No. C11-5704BHS, 2011 WL 5869586, at *3 (W.D. Wash. Nov. 22, 2011) (“In the past, 

courts generally have construed the term ‘customer’ broadly, but not so broadly as to 

include everyone who is not considered a broker or a dealer.”). Instead, in keeping with 

Case 2:12-cv-02165-NVW Document 34 Filed 05/14/13 Page 6 of 14
- 7 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

the sense that “customer” has a broad but not unconstrained sweep, it is frequently 

defined in a manner that does not upset the reasonable expectations of FINRA members. 

See, e.g., Wheat, First Sec., Inc. v. Green, 993 F.2d 814, 820 (11th Cir. 1993) (rejecting 

rule regarding customer status that “would do significant injustice to the reasonable 

expectations” of FINRA members). 

 Also contributing to the uncertainty in the definition of “customer” is the conflict 

between principles underpinning investment activity in the world of FINRA. On the one 

hand is FINRA’s stated mission: “to protect investors by maintaining the fairness of the 

U.S. capital markets.” FINRA, http://www.finra.org (last visited May 1, 2013). Coupled 

with this is investors’ broad sense that they have access to FINRA arbitration should 

investment-related disputes arise. On the other hand is the common-sense principle that 

there must be some limits to FINRA’s reach: broker-dealers have agreed to certain 

conditions, including arbitration in particular circumstances, in exchange for FINRA 

membership, but they cannot be compelled to do more than they agreed to do. Further, 

an overly-expansive approach to FINRA arbitration would extend to every business deal 

or transaction entered into by the members’ associated persons. Such a system would not 

reconcile with the “reasonable expectations” of FINRA members. Accordingly, the state 

of case law on the meaning of “customer” reflects the tug-of-war between competing 

understandings of how broad-reaching FINRA’s authority is. 

 That said, some things are clear. First, even without a direct connection to 

Plaintiff, Defendant may still be Plaintiff’s customer. A customer of an associated person 

of the member is a customer of the member. See, e.g., MONY Sec. Corp. v. Bornstein, 

390 F.3d 1340, 1344 (11th Cir. 2004); John Hancock Life Ins. Co. v. Wilson, 254 F.3d 

48, 59 (2d Cir. 2001); Waveland Capital Partners, LLC v. Tommerup, 840 F. Supp. 2d 

1243, 1250 (D. Mont. 2012) (noting that the addition of words “of a member” after 

“customer” was explicitly rejected because it would “narrow the scope of claims that are 

required to be arbitrated under the Customer Code”) (quoting Order Approving Proposed 

Rule Change to Amend NASD Arbitration Rules for Customer Disputes, 72 Fed. Reg. 

Case 2:12-cv-02165-NVW Document 34 Filed 05/14/13 Page 7 of 14
- 8 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

4574, 4579 (2007)). Plaintiff does not dispute the allegation that Brian Borakowski was 

its registered representative and therefore a person associated with Plaintiff. 

Accordingly, if Defendant was a customer of Borakowski, then Defendant was a 

customer of Plaintiff. 

 In addition, although assessing customer status is a fact-specific inquiry, two 

considerations are fairly consistently relevant. The first is the nature of the dealings or 

services between the associated person and the investor. The second consideration, again 

relevant though not necessarily dispositive, is whether the associated person represented 

that he was acting on behalf of a FINRA member, or the investor perceived as much. An 

investor is most likely a customer of the associated person if the latter acts as a broker, 

providing advice regarding investments and facilitating the sale of securities to the 

investor, and if the associated person acted as a representative of the FINRA member. 

3. Defendant does not qualify as Borakowski’s customer 

a. Nature of dealings 

In assessing the nature of the dealings between the parties, the Eighth Circuit has 

concluded that the definition of customer “does not include an entity . . . [that] only 

received financial advice, without receiving investment or brokerage related 

services . . . .” Fleet Boston, 264 F.3d at 773. If an associated person of a FINRA 

member “induces, or shepherds, the investment, then the investor is . . . likely a customer 

of that firm.” Herbert J. Sims & Co., Inc. v. Roven, 548 F. Supp. 2d 759, 764 (N. D. Cal. 

2008) (citing Oppenheimer & Company, Inc. v. Neidhardt, 56 F.3d 352, 357 (2d Cir. 

1995)). Investors are not customers when they “[can]not show that the FINRA member 

[or associated person] provided any financial services related to the buying or selling of 

securities directly to those investors.” Ross Sinclaire & Assocs. v. Premier Sr. Living, 

LLC, No. 11-CV-5104 YGR, 2012 WL 2501115, at *7 (N.D. Cal. June 27, 2012); cf. 

Citigroup Global Mkts. v. Abbar, No. 11 Civ 6993(LLS), 2013 WL 1855733, at *4 

(noting that it is “increasingly adopted by the courts and by FINRA” that “the investor is 

the customer of the party with which he has the account and consummates the 

Case 2:12-cv-02165-NVW Document 34 Filed 05/14/13 Page 8 of 14
- 9 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

transaction”).

That the associated person acts as a broker—provides investment or brokerage 

services—for the investor means that the investor is a customer. In Oppenheimer, the 

Vice President of broker-dealer Oppenheimer & Co., Inc. (“Oppenheimer”) solicited 

investments through Oppenheimer; in response an investor and his trustee arranged for 

the Vice President to place over $3 million with Oppenheimer for investment. 56 F.3d at 

354. When the Vice President lost or stole the invested funds, the investor and the trustee 

sought to arbitrate their claim with Oppenheimer. The Second Circuit affirmed the 

holding that the investor and trustee were customers because: (1) the Vice President had 

solicited investments and acted as a broker on Oppenheimer’s behalf; and (2) the investor 

had given funds to the Vice President, a representative of Oppenheimer, with the 

intention of establishing an account with Oppenheimer. Id. at 357. Similarly, in 

Waveland Capital Partners, LLC v. Tommerup, the investors relied on the advice and 

recommendations of Waveland Capital Partners’ registered agent when making their 

investment decisions, making the investors customers of the registered agent and thereby 

of Waveland Capital Partners. 840 F. Supp. 2d 1243, 1250 (D. Mont. 2012). See also, 

e.g., O.N. Equity Sales Co. v. Stephens, No. 4:07cv269-RH/WCS, 2008 WL 835808, at 

*1, *5 (N.D. Fla. Mar. 28, 2008) (investor was customer of registered representative 

because representative participated in sale of shares of third-party business trust to the 

investor and helped her execute new documents confirming her subscription 

participation). 

 The common thread in these cases and others is that the associated person of the 

FINRA member served as a broker or investment advisor for the investor. While even 

informal business relationships between investors and registered representatives of 

FINRA members can give rise to customer status, the registered representatives in those 

cases still functioned as brokers in advisory roles. See Vestax Sec. Corp. v. McWood, 116 

F. Supp. 2d 865, 866 (E.D. Mich. 2000); WMA Sec., Inc. v. Ruppert, 80 F. Supp. 2d 786, 

788-89 (S.D. Ohio 1999). Further, evidence that the investor purchased a good or service 

Case 2:12-cv-02165-NVW Document 34 Filed 05/14/13 Page 9 of 14
- 10 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

from the associated person can be dispositive of customer status. See Citigroup, 2013 

WL 1855733, at *5 (finding that “courts have taken a purchase transaction as the defining 

proof” of customer status); see also, e.g., UBS Fin. Servs., Inc. v. W. Va. Univ. Hosps., 

Inc., 660 F.3d 643, 650 (2d Cir. 2011) (holding that “‘customer’ includes at least a nonbroker or non-dealer who purchases, or undertakes to purchase, a good or service from a 

FINRA member”). 

 When the associated person does not act as a broker, it is less likely that an 

investor is a customer. In Herbert J. Sims, investors who had accounts with brokerage 

Muriel Seibert & Co., Inc. communicated with investment advisor James Darden III 

(“Darden”). 548 F. Supp. 2d at 760. Darden conferred with broker Scott Drayer 

(“Drayer”), a registered representative of broker-dealer and FINRA member Herbert J. 

Sims & Co, Inc. as to the broker-dealer’s bond offerings. Id. at 761. Darden’s investors 

participated in approximately forty bond offerings by Herbert J. Sims & Co., Inc. over the 

years, including—based on Drayer’s representations—one offering that was allegedly an 

unsuitable investment for the investors. Id. The relevant facts included that: (1) the 

investors did not invest directly through Herbert J. Sims & Co., Inc. or through a 

representative thereof; (2) the investors had accounts with Muriel Seibert & Co., Inc. and 

were clients of Darden; (3) Darden was not an agent or representative of Herbert J. Sims 

& Co., Inc.; and (4) no evidence existed of communications between the investors and 

Drayer or Herbert J. Sims & Co., Inc. Id. at 764-65. The court then concluded that the 

relationship between the investors and Herbert J. Sims & Co., Inc. was likely too tenuous 

to qualify as a customer relationship that could be the basis of compelled arbitration, id.

at 766, as the investors were not customers of Drayer. 

Here, as in Herbert J. Sims, the investor (Defendant) did not invest directly 

through Plaintiff or Borakowski (as distinguished from investing in Borakowski’s LLC). 

Defendant’s interactions with Borakowski amounted to investing in Echo Canyon, LLC, 

of which Borakowski was the sole member. Kardaras, a broker unaffiliated with 

Plaintiff, advised Defendant to invest his money in—meaning lend his money to—the 

Case 2:12-cv-02165-NVW Document 34 Filed 05/14/13 Page 10 of 14
- 11 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

LLC, which was to repay the loan with interest. Kardaras, not Borakowski, provided 

Defendant with the investment and brokerage services that led to the transaction in 

question; as Defendant notes, he was Kardaras’ customer (Doc. 10 ¶ 2). Borakowski’s 

LLC was a third-party beneficiary of Defendant’s customer relationship with Kardaras, 

and Borakowski simply received the funds on behalf of Echo Canyon. Receiving funds 

invested in an LLC does not constitute the type of “investment or brokerage services” 

contemplated by FINRA, Borakowski did not act as a broker for Defendant, and 

Defendant purchased neither any good nor any service from Borakowski. Thus, the first 

consideration suggests that Defendant is not Borakowski’s customer. 

b. Representation of FINRA member 

The second important consideration in assessing the presence of a customer 

relationship is whether the associated person held himself out as a representative of the 

FINRA member or the investor relied upon his understanding that such an affiliation 

existed. Cases often emphasize or at least note that the associated person held himself 

out as representing a FINRA member or that the investor believed that the associated 

person was acting in his representative capacity when deeming the investor a customer. 

See, e.g., Cal. Fina Grp., Inc. v. Herrin, 379 F.3d 311, 313, 318 (5th Cir. 2004) (noting 

that investors knew the broker was a registered representative of the broker-dealer and 

that “they made their investments based on his representations that he worked for his 

firm” before holding that investors were “customers” of broker-dealer); Vestax, 116 F. 

Supp. 2d at 868, 871; WMA Sec., 80 F. Supp. 2d at 789. In Herbert J. Sims, the court in 

finding no customer relationship noted in particular that, “[w]hile the record shows that 

[the associated person] was employed by Plaintiff, the record does not even establish that 

[he] was acting in his capacity as an employee of [Plaintiff] when he solicited” funds 

through the investment advisor. 548 F. Supp. 2d at 766. But see John Hancock, 254 F.3d 

at 51 (investors were “customer” of investment broker affiliated with broker-dealer, even 

though they had no knowledge of association between broker and broker-dealer). 

In this action, the associated person did not hold himself out as a representative of 

Case 2:12-cv-02165-NVW Document 34 Filed 05/14/13 Page 11 of 14
- 12 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

the FINRA member, and there is no evidence that Defendant believed there to be any 

affiliation between the associated person and the FINRA member. Borakowski 

communicated with Defendant using a personal email address, and he signed the 

promissory notes in his capacity as the sole member of Echo Canyon, LLC. At the time 

of the investment, Defendant had no information except that he “believed [Borakowski] 

to be professionally related to [] George Kardaras” and Kardaras’ LLC. (Doc. 10-1 at 

10.) There is no evidence that Defendant knew of any relationship between Borakowski 

and Plaintiff until after the alleged wrongdoing occurred. There is not even evidence that 

Defendant knew while funding Echo Canyon that Borakowski was a broker or that he 

was associated with any FINRA member. Moreover, Borakowski was not associated 

with Plaintiff when Defendant’s involvement with Echo Canyon began; it was only later 

that he became a registered representative of the broker-dealer. That Borakowski was not 

acting in a representative capacity, and that Defendant did not believe otherwise, suggests 

that Defendant was not Borakowski’s—or Plaintiff’s—customer. 

c. Absence of a customer relationship with Borakowski 

 Here, Defendant became a creditor of a sole member of an LLC and broker who 

then became associated with a member of FINRA. Plaintiff’s success on the merits 

ultimately hinges on whether, if an individual invests in an LLC owned by an associated 

person, the individual is that associated person’s customer under FINRA rules. 

Borakowski did not provide investment or brokerage services to Defendant; Defendant 

purchased neither any good nor any service from Borakowski. Borakowski further did 

not represent that he was acting on behalf of Plaintiff or any other FINRA member, and 

there is no evidence that Defendant believed otherwise. While the definition of 

“customer” is broad, it is not broad enough to encompass Defendant in his relationship 

with Borakowski. To find otherwise would unreasonably make Plaintiff Berthel Fisher 

and other FINRA members the guarantors of all of their registered representatives’ 

business dealings, however unrelated to investment or brokerage services such dealings 

may be. Accordingly, Plaintiff has shown it likely that it will succeed on its claim against 

Case 2:12-cv-02165-NVW Document 34 Filed 05/14/13 Page 12 of 14
- 13 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

arbitrability under FINRA rules and has satisfied the first requirement for a preliminary 

injunction. 

B. Likelihood of Irreparable Harm 

 Plaintiff asserts that it faces irreparable harm if forced to arbitrate a dispute that it 

did not agree to arbitrate. (Doc. 7 at 12-13.) Defendant does not argue that Plaintiff will 

not suffer irreparable harm if Plaintiff is likely to succeed on the merits of its case. (See 

Doc. 20 at 11.) Plaintiff’s time and resources expended for arbitration cannot be 

recovered, see Maryland Cas. Co. v. Realty Advisory Bd. on Labor Rels., 107 F.3d 979, 

(2d Cir. 1997), and “[m]any courts have held that forcing a party to arbitrate a dispute 

that it did not agree to arbitrate constitutes per se irreparable harm.” Morgan Keegan & 

Co., Inc. v. Drzayick, No. 1:11-CV-00126-EJL, 2011 WL 5403031, at *4 (D. Idaho Nov. 

8, 2011) (quoting Chicago Sch. Reform Bd. of Trs. v. Diversified Pharm. Servs., Inc., 40 

F. Supp. 2d 987, 996 (N.D. Ill. 1999)); see also Morgan Keegan & Co., Inc. v. Jindra, 

No. C11-5704BHS, 2011 WL 5869586, at *4 (W.D. Wash Nov. 22, 2011) (citing Merrill 

Lynch Inv. Managers v. Optibase, Ltd., 337 F.3d 125, 129 (2d Cir. 2003)). Similarly, 

“forcing a party to arbitrate a matter that the party never agreed to arbitrate[] unalterably 

deprives the party of its right to select the forum in which it wishes to resolve disputes.” 

Drzayick, 2011 WL 5403031, at *4 (citing Sokol Holdings, Inc. v. BMB Munai, Inc., 542 

F.3d 354, 358 (2d Cir. 2008)). As such, Plaintiff will suffer irreparable harm if the 

arbitration to which it did not consent proceeds. 

C. Public Interest and Balance of Equities 

 While there does exist a federal policy in favor of arbitration, see UBS Fin. Servs., 

Inc. v. W. Va. Univ. Hosps., Inc., 660 F.3d 643, 655 (2d Cir. 2011) (citing Green Tree 

Fin. Corp. v. Bazzle, 539 U.S. 444, 452 (2003)), that policy holds no sway when a party 

has not agreed to arbitrate in the first place. Comer v. Micor, Inc., 436 F.3d 1098, 1104 

n.11 (deeming federal policy favoring arbitration “inapposite” when issue is whether 

particular party is bound by arbitration agreement); see also McCarthy v. Azure, 22 F.3d 

351, 355 (1st Cir. 1994). Allowing an arbitration to proceed without an agreement to 

Case 2:12-cv-02165-NVW Document 34 Filed 05/14/13 Page 13 of 14
- 14 - 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

25 

26 

27 

28 

arbitrate does not serve the public interest. See Drzayick, 2011 WL 5403031, at *5. 

Further, denial of the preliminary injunction would lead to an expenditure of resources to 

obtain an arbitration resolution that would ultimately have to be set aside. Charles 

Schwab & Co., Inc. v. Reaves, No. CV-09-2590-PHX-MHM, 2010 WL 447370, at *8 (D. 

Ariz. Feb. 4, 2010). The balance of equities thus favors the Plaintiff. Accordingly, 

Plaintiff has satisfied all four elements required to establish the need for a preliminary 

injunction. 

IT IS THEREFORE ORDERED granting Plaintiff’s Motion for Preliminary 

Injunction (Doc. 6). Defendant Frandino and those in active concert or participation with 

him, including his attorneys, are preliminarily enjoined from proceeding against Berthel 

Fisher & Company Financial Services, Inc. in the arbitration filed by Defendant before 

FINRA as Frandino v. Kardaras, et al., Case No. 12-01084. 

IT IS FURTHER ORDERED that this preliminary injunction will become 

effective upon the posting of a bond in the amount of $1,000 by Plaintiff pursuant to 

Federal Rule of Civil Procedure 65(c). 

 Dated this 14th day of May, 2013. 

Case 2:12-cv-02165-NVW Document 34 Filed 05/14/13 Page 14 of 14