Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-almd-1_08-cv-00188/USCOURTS-almd-1_08-cv-00188-0/pdf.json

Nature of Suit Code: 370
Nature of Suit: Other Fraud
Cause of Action: 31:3731 Fraud

---

AXA Advisors, LLC (“AXA Advisors”) is also a plaintiff, but, on the representation of the 1

Defendants that AXA Advisors is not implicated in the business activities made the basis of this action,

AXA Advisors is not a proper subject of the motion to dismiss or compel.

See, e.g., About Finra, http://www.finra.org/AboutFINRA/index.htm (last visited Dec. 23, 2

2008). 

IN THE UNITED STATES DISTRICT COURT

FOR THE MIDDLE DISTRICT OF ALABAMA

SOUTHERN DIVISION

AXA DISTRIBUTORS, LLC, et al., )

)

Plaintiffs, )

)

v. ) CASE NO. 1:08-CV-188-WKW [WO] 

)

GAYLE S. BULLARD, et al., )

 )

Defendants. )

MEMORANDUM OPINION AND ORDER

Plaintiff AXA Distributors, LLC (“AXA Distributors”) brings this action to enjoin the

arbitration of disputes over the purchase of variable annuities distributed by AXA

Distributors and purchased by Defendants. Defendants initiated arbitration proceedings 1

against AXA Distributors under the rules of the Financial Industry Regulatory Authority

(“FINRA”), formerly the National Association of Securities Dealers (“NASD”). AXA 2

Distributors asks the court to enjoin the arbitration in this action. Three motions are pending

and will be addressed in this opinion: Defendants’ Motion to Dismiss or in the Alternative,

Motion to Compel Arbitration (Doc. # 9); AXA Distributors’ motion for preliminary

Case 1:08-cv-00188-WKW-TFM Document 36 Filed 12/24/08 Page 1 of 35
Defendants initially challenged jurisdiction to consider the arbitrability question (see Mot. to 3

Dismiss or Compel 6) but have since abandoned that argument (Mots. Hr’g Tr. 22, Aug. 1, 2008 (Doc.

# 35)). Even if not abandoned, the argument was due to be decided against Defendants; arbitrability “is

undeniably an issue for judicial determination,” AT&T Techs., Inc. v. Commc’ns Workers of Am., 475

U.S. 643, 649 (1986). The only remaining argument with respect to dismissal is for a failure to state a

claim. (Mot. to Dismiss or Compel 1.) 

The Accumulator was described in company documents as “a combination fixed and variable

4

deferred annuity designed to provide for the accumulation of retirement savings and for income at a

future date.” (Mot. to Dismiss or Compel Ex. C.)

2

injunction (Doc. # 12); and Defendants’ motion to strike affidavit of John E. Pinto (Doc.

# 29). For the reasons that follow, all three motions are due to be denied. 

I. JURISDICTION

The court exercises subject matter jurisdiction pursuant to 28 U.S.C. § 1332(a),

and venue is appropriate under 28 U.S.C. § 1391(a). The parties contest neither.3

II. BACKGROUND

A. Facts

In the mid-1990s, The Equitable Life Assurance Society of the United States, now

AXA Equitable Life Insurance Company (“AXA Equitable”), developed and issued the

Equitable Accumulator (the “Accumulator”) variable annuity investment product. AXA 4

Equitable did not market the Accumulator directly because it is not a broker-dealer, but

instead entered into distribution arrangements with registered broker-dealers AXA

Distributors for wholesale distribution, and AXA Advisors for retail distribution of the

security. AXA Distributors is described by AXA Equitable as an “indirect, wholly owned

subsidiar[y]” of AXA Equitable, and “the distributor[] of the contract[] [with] responsibility

Case 1:08-cv-00188-WKW-TFM Document 36 Filed 12/24/08 Page 2 of 35
In the interest of convenience and simplicity, this entity will be referred to as Raymond James. 5

For the record, Investment Management & Research, Inc. was identified in the agreement as the “BrokerDealer,” and Planning Corporation of America was identified as the “General Agent.” (See Distribution

Agreement (Pls.’ Reply Mem. Ex. B (Doc. # 28)).) Apparently, there was a merger of one or both of

these companies into the Raymond James group of entities in 1998.

3

for sales and marketing functions.” (Mot. to Dismiss or Compel Ex. F at 38.) AXA

Distributors in turn entered into a Broker-Dealer and General Agent Sales Agreement

(“Distribution Agreement”) with the business predecessors of Raymond James Financial

Services, Inc. (“Raymond James”), an agreement which identified Raymond James as a 5

broker-dealer for the retail distribution of the Accumulator. Raymond James uses registered

representatives who are independent contractors (Hr’g Tr. 28) to sell a variety of financial

products, including in this case, the Accumulator. Defendants purchased Accumulator

contracts from two Raymond James representatives, Ann Holman (“Ms. Holman”), and

Maxine Chappell (“Ms. Chappell”). In order to sell the Accumulator, it is undisputed that

Ms. Holman and Ms. Chappell were appointed non-exclusive insurance agents for AXA

Equitable. (Verified Compl. ¶ 16 (Doc. # 1).)

In its agreement with the NASD, as amended March 21, 1996, Equitable Distributors

(now AXA Distributors) agreed to limit its business activities as a broker-dealer to “a)

wholesaling variable and fixed contracts . . . through other broker/dealers and banks, and b)

distributing investment company securities on a wholesale basis only.” (NASD Agreement

(Pls.’ Reply Mem. Ex. A).) AXA Equitable described AXA Distributors as having

“responsibility for sales and marketing functions.” In furtherance of the sales and marketing

Case 1:08-cv-00188-WKW-TFM Document 36 Filed 12/24/08 Page 3 of 35
4

functions, AXA Distributors undertook several business functions to assist in the marketing

of the Accumulator. It directly provided training to Ms. Holman and Ms. Chappell with

respect to the Accumulator’s features and materials (Holman Aff. & Chappell Aff. (Defs.’

Supplemental Br. Exs. 1 & 2 (Doc. # 34))), directly provided follow-up services to the

customers of Ms. Holman and Ms. Chappell (Mot. to Dismiss or Compel Ex. C), and offered

“effective sales ideas, and a commitment to excellent service to help [them] and [their]

clients achieve their goals” (Mot. to Dismiss or Compel Ex. E). According to

correspondence from AXA Distributors to the Raymond James office from which Ms.

Holman and Ms. Chappell worked, AXA Distributors offered “immediate marketing support

and illustrations” and told the Raymond James representatives to “not hesitate to contact

AXA Distributors for anything that [they] need[ed] to help grow [their] business.” (Mot. to

Dismiss or Compel Ex. E.) 

Though they were non-exclusive agents of AXA Equitable when they marketed the

Accumulator, Ms. Holman and Ms. Chappell were independent contractors, and therefore

“associated persons” of Raymond James, which also served, by the then-NASD rules and the

express terms of the Distribution Agreement, as their supervising broker-dealer (Distribution

Agreement Articles III & IV). Specifically, Raymond James agreed that it would “train,

supervise and be solely responsible for the conduct of the Agents in their solicitation

activities in connection with the Contracts” and cause its agent-representatives to comply

strictly with the rules and procedures of AXA Equitable and all “federal and state securities

Case 1:08-cv-00188-WKW-TFM Document 36 Filed 12/24/08 Page 4 of 35
Ms. Holman and Ms. Chappell are no longer associated with Raymond James. 6

 While AXA Distributors is a wholly owned subsidiary of AXA Equitable, this retained power

7

is nevertheless deemed control retained by the issuer, not the distributor, and is not attributed to the

distributor.

5

laws and NASD requirements” in connection with solicitation activities. (Distribution

Agreement §§ 4.1, 4.2.) Thus, while they were agents of AXA Equitable, the issuer of the

security, the agents were registered representatives of, and supervised by, a third-party

broker-dealer.6

Sales procedures for marketing the Accumulator were straightforward. Ms. Holman,

for instance, took orders and payment from her customers. (Holman Aff.) Raymond James

forwarded the funds collected by Ms. Holman (or, in some cases, which were already on

deposit with Raymond James) to AXA Equitable, which retained the right under the

Distribution Agreement to reject applications. (Distribution Agreement § 2.5; Holman Aff. 7

¶ 16.) If the application was accepted, AXA Equitable issued the contract directly to the

customer. (See Distribution Agreement § 4.7.) AXA Distributors sent follow-up

correspondence directly to the customer, identifying at least in some cases Ms. Holman as

as “your financial professional.” (Mot. to Dismiss or Compel Ex. C.) AXA Distributors

received remuneration for marketing from AXA Equitable, and forwarded commissions

downstream to Raymond James, which then paid the selling agents, in this case, Ms. Holman

and Ms. Chappell. (William C. Miller Supplemental Aff. ¶ 10 (Pls.’ Reply Mem. Affs.);

Case 1:08-cv-00188-WKW-TFM Document 36 Filed 12/24/08 Page 5 of 35
AXA Equitable is also named as a respondent in the arbitration, but AXA Equitable is not a 8

member of FINRA and is not required to submit to arbitration. (See Verified Compl. 4 n.1.)

Because “she was an associated person of Raymond James . . . during the relevant time period, 9

. . . [Ms.] Holman may be entitled to rely upon different FINRA rules . . . to determine at least the

eligibility of her claims for arbitration against the Plaintiffs.” (Verified Compl. 4 n. 1.)

6

Distribution Agreement §§ 7.1, 7.5.) It is undisputed that, in addition to the Accumulator,

Ms. Holman and Ms. Chappell had several other financial products in their inventory.

In their arbitration Statement of Claim, Defendants seek damages from AXA

Distributors in excess of one million dollars arising out of their purchases of the

Accumulator. (Statement of Claim 12 (Verified Compl. Ex.).) Their claims include fraud, 8

suppression, negligent training and supervision, breach of contract, conversion, Alabama

securities fraud, and unsuitable investment/suitability review. (Statement of Claim 7-12.)

Raymond James, Ms. Holman and Ms. Chappell are not named as respondents in the

arbitration proceeding. Interestingly, Ms. Holman is a claimant in the arbitration proceeding

but is not named as a defendant in this action. The essence of the claims in arbitration is that 9

Defendants were fraudulently induced to purchase the Accumulator “based upon

representation that the annuity provided a guaranteed rate of return, guarantee of principal,

and liquidity at the end of term.” (Mot. to Dismiss or Compel 2.) Defendants also claim that

AXA Distributors failed to disclose that these representations were false. (Mot. to Dismiss

or Compel 2.) Arbitration of this dispute is premised solely on the characterization by

Defendants of Ms. Holman and Ms. Chappell as “associated persons” of AXA Distributors

Case 1:08-cv-00188-WKW-TFM Document 36 Filed 12/24/08 Page 6 of 35
 The Securities and Exchange Commission (“SEC”) approved new FINRA Rules, which

10

became effective December 15, 2008, and apply to all claims filed on or after April 16, 2007. Order

Approving FINRA Proposed Rule Changes, Exchange Act Release No. 34-58643, 73 Fed. Reg. 57,174

(Oct. 1, 2008); FINRA, Regulatory Notice 08-57, SEC Approves New Consolidated FINRA Rules, 2008

WL 4685588 (Oct. 16, 2008). Authority arising under the NASD Code governs and guides

interpretations of the FINRA Rules to the extent that there is no meaningful change from the NASD

Code.

7

when they marketed the Accumulator. “Associated persons” is a term of art and law in the

securities world.

B. FINRA Rules

FINRA is an industry association. In connection with its FINRA membership, AXA

Distributors bound itself, by subscribing to the FINRA Rules as a condition of membership,

to arbitrate certain disputes between its customers and itself, or between its customers and

its associated persons, when such customer disputes arise in connection with its (or the

associated persons’) business activities. Because there is no written arbitration agreement

between the parties, determining arbitration begins with Rule 12200 of the FINRA Rules

relating generally to matters eligible for submission to arbitration. It requires arbitration 10

if arbitration is 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 of the associated person.” Rule 12200. 

Rule 12100 defines “associated person,” “customer,” “member,” and “person

associated with a member.” “For purposes of the Code, the term ‘member’ means any broker

or dealer admitted to membership in [FINRA] . . . .” Rule 12100(o). The terms “associated

person” or “associated person of a member” means “a person associated with a member, as

Case 1:08-cv-00188-WKW-TFM Document 36 Filed 12/24/08 Page 7 of 35
 “When an investor deals with a member’s agent or representative, the investor deals with the 11

member.” Multi-Fin. Sec. Corp. v. King, 386 F.3d 1364, 1370 (11th Cir. 2004).

8

that term is defined in paragraph (r).” Rule 12100(a). Paragraph (r) contains a more

extensive definition of “person associated with a member”:

(1) A natural person registered under the Rules of FINRA; or

(2) . . . a natural person engaged in the . . . securities business who is directly

or indirectly . . . controlled by a member, whether or not any such person is

registered or exempt from registration . . . .

Rule 12100(r). “Customer” is defined simply, but not particularly helpfully, by what it “shall

not include” – a broker or dealer. Rule 12100(i). The imprecise language of the Rules

complicates the analysis of the legal characterization of Ms. Holman and Ms. Chappell, and

consequentially, the status of Defendants as customers of AXA Distributors.

C. Issue for Resolution

 The only issue for resolution is whether this dispute will be arbitrated. Because there

is no independent written arbitration agreement between Plaintiff and Defendants, the dispute

will be arbitrated only if Defendants were “customers” of AXA Distributors, thereby

invoking the FINRA Rules. Defendants were not customers of AXA Distributors unless Ms.

Holman and Ms. Chappell were “associated persons” of AXA Distributors when they

marketed the Accumulator to Defendants. Ms. Holman and Ms. Chappell were not 11

associated persons of AXA Distributors unless they were directly or indirectly controlled by

AXA Distributors when they were marketing the Accumulator.

Case 1:08-cv-00188-WKW-TFM Document 36 Filed 12/24/08 Page 8 of 35
9

III. STANDARDS OF REVIEW

A party may move to dismiss actions raised against that party for “failure to state a

claim upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6). A motion pursuant to

Rule 12(b)(6) tests the sufficiency of the complaint against the pleading standards set forth

in Rule 8 of the Federal Rules of Civil Procedure. “When considering a motion to dismiss,

all facts set forth in the plaintiff’s complaint ‘are to be accepted as true and the court limits

its consideration to the pleadings and exhibits attached thereto.’” Grossman v. Nationsbank,

N.A., 225 F.3d 1228, 1231 (11th Cir. 2000) (per curiam). 

If a party is “aggrieved by the alleged failure, neglect, or refusal of another to arbitrate

under a written agreement,” it may petition a federal district court “for an order directing that

such arbitration proceed in the manner provided for in [the] agreement.” 9 U.S.C. § 4. When

addressing a Section 4 motion, the district court must determine whether there is a binding

agreement to arbitrate and if so, whether the nonmovant has breached its obligation to

arbitrate under that agreement. Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460

U.S. 1, 22 n.27 (1983) (citing 9 U.S.C. §§ 4, 6). If the existence of a binding agreement to

arbitrate and the failure of the nonmovant to comply with that term are not at issue, the court

must order arbitration. 9 U.S.C. § 4. If either of these determinations is at issue, however,

the court must “proceed summarily to the trial” to determine the issues. Id. The court can

consider evidence outside of the pleadings for purposes of a motion to compel arbitration.

See, e.g., Chastain v. Robinson-Humphrey Co., Inc., 957 F.2d 851, 854 (11th Cir. 1992);

Case 1:08-cv-00188-WKW-TFM Document 36 Filed 12/24/08 Page 9 of 35
10

Magnolia Capital Advisors, Inc. v. Bear Stearns & Co., 272 F. App’x 782, 785 (11th Cir.

2008) (per curiam) (“More specifically, we require a party resisting arbitration to

‘substantiate[] the denial of the contract with enough evidence to make the denial

colorable.’” (quoting Wheat, First Sec. Inc. v. Green, 993 F.2d 814 (11th Cir. 1993))). 

IV. DISCUSSION

AXA Distributors contends that it has no legal obligation to arbitrate the FINRA

dispute with Defendants “because (1) there is no agreement to arbitrate between Defendants

and [] Plaintiffs, and (2) [] Defendants were not customers of [] Plaintiffs or their associated

persons, nor does Defendants’ arbitration proceeding arise in connection with Plaintiffs’

business activities.” (Verified Compl. 2.) Thus, say Plaintiffs, Defendants must litigate.

(Pls.’ Reply Mem. 3.) On the other hand, Defendants claim to have been “customers” of

AXA Distributors, as that term applies under the FINRA Rules and applicable case law,

when they purchased the Accumulator from persons associated with AXA Distributors, and

thus are entitled to arbitrate their dispute with AXA Distributors.

The FINRA Rules constitute the arbitration agreement for disputes between customers

and FINRA members or persons associated with FINRA members. “[T]he [NASD] Code

serves as a sufficient written agreement to arbitrate, binding its members to arbitrate a variety

of claims with third-party claimants.” King, 386 F.3d at 1367. As to governing contract law,

the courts “must interpret the [NASD] Code as it would a contract under the applicable state

law.” Id. Thus, Alabama contract law applies, and it favors arbitration when there is doubt.

Case 1:08-cv-00188-WKW-TFM Document 36 Filed 12/24/08 Page 10 of 35
11

Carroll v.W. L. Petrey Wholesale Co., 941 So. 2d 234, 235-37 (Ala. 2006). Likewise, the

Federal Arbitration Act, 9 U.S.C. §§ 1-16, creates a presumption in favor of arbitrability, but

the Eleventh Circuit recently has been ambivalent as to whether that presumption applies

when a court is determining whether an agreement to arbitrate exists. Compare King, 386

F.3d at 1367 (“[A]ny doubts concerning the scope of arbitrable issues should be resolved in

favor of arbitration.”), with MONY Sec. Corp. v. Bornstein, 390 F.3d 1340, 1342 n.1 (11th

Cir. 2004) (“However, the presumption is not necessary in this case because we can decide

the issue as a matter of law without resorting to a presumption. Accordingly, we recognize

that King addresses the applicable presumption, but we need not dwell on it in this case.”).

Determining whether the presumption applies, however, is not necessary for the resolution

of this case, as will become apparent.

The question for resolution is whether Ms. Holman and Ms. Chappell were associated

persons of AXA Distributors when they marketed the Accumulator to Defendants.

Defendants urge the court to examine the question whether Defendants were customers of

AXA Equitable as well, but this second question is subsumed in the first. Clearly,

Defendants were customers of the Raymond James registered representatives. AXA

Distributors is the broker-dealer and member of FINRA and thus, the AXA-related party

subject to FINRA’s arbitration rules; marketing the Accumulator is the business of AXA

Distributors, and the parties have a dispute arising out of the marketing of the Accumulator

to Defendants. Therefore, if the Raymond James representatives were “associated persons”

Case 1:08-cv-00188-WKW-TFM Document 36 Filed 12/24/08 Page 11 of 35
12

of AXA Distributors, Defendants were customers of AXA Distributors. So, the salient issue

can be reduced to whether the Raymond James registered representatives were associated

persons of AXA Distributors. 

Under Rule 12100(r), an “associated person” includes (1) a natural person (2) engaged

in the securities business (3) who is directly or indirectly controlled (4) by a member (5)

whether such person is registered or exempt from registration. It is undisputed that Ms.

Holman and Ms. Chappell were natural persons engaged in the securities business who were

directly controlled by Raymond James (a member), and that they were registered

representatives. The ultimate question then becomes: Were they controlled directly or

indirectly by AXA Distributors (also a member) at the relevant times? The facts impacting

the question are largely undisputed.

A. AXA’s Arguments

AXA Distributors asserts that Ms. Holman and Ms. Chappell were not associated

persons. First, they insist that the agents were associated persons of Raymond James only.

In the Distribution Agreement, Raymond James agreed to “train, supervise and be solely

responsible for the conduct of the Agents in their solicitation activities in connection with

the Contracts.” (Distribution Agreement § 4.1.) The agents were registered representatives

of Raymond James who operated out of a Raymond James office and called on customers

of Raymond James. Moreover, the agents had numerous products, not issued by or

associated with any AXA entity, at their disposal to offer for sale to their customers,

Case 1:08-cv-00188-WKW-TFM Document 36 Filed 12/24/08 Page 12 of 35
The second argument posited by AXA Distributors is that “there must be some connection

12

between the investors and the member firm or their associated person in order to support a finding that a

customer relationship exists.” (Pls.’ Mem. Supp. Mot. for Prelim. Inj.13 (Doc. # 13).) AXA Distributors

finds comfort in the language of Wheat, First Securities Inc., 993 F.2d 814. At issue was whether parties

who purchased tainted securities from Marshall & Company (“Marshall”), a predecessor firm which

ultimately sold its assets to Wheat First, could compel Wheat First to arbitrate claims arising out of the

Marshall transaction that occurred before the asset purchase. In the asset purchase agreement, Wheat

First “expressly did not assume any liability, known or unknown, fixed or contingent, of [Marshall],” and

the court found that the investors were not customers because “[w]e cannot imagine that any NASD

member would have contemplated that its NASD membership alone would require it to arbitrate claims

which arose while a claimant was a customer of another member merely because the claimant

subsequently became its customer. . . . We therefore hold that customer status . . . must be determined as

of the time of the events providing the basis for the allegations of fraud.” Id. at 816 (internal quotation

marks omitted), 820. The language giving aid and comfort to AXA Distributors is the observation that

“Wheat First and Appellants had absolutely no relationship at the time of the alleged events that

Appellants seek to arbitrate.” Id. at 818. The rationale for this “nexus” argument is that courts should

factor in the reasonable expectations of the FINRA member when considering compulsion to arbitrate. 

To bolster its narrower view of the definition of “customer,” AXA Distributors cites Fleet

Boston Robertson Stephens, Inc. v. Innovex, Inc., 264 F.3d 770 (8th Cir. 2001), a case which turned on

whether business activities outside of investing or brokerage activities fall within the NASD arbitration

net. Rejecting a broad definition of “customer” in a “close call,” the court declined to extend the

definition “where the business relationship did not include [investing or brokerage activities].” Id. at

773.

13

including Defendants. Ms. Holman and Ms. Chappell offered independent investment advice

without interference, influence or control of AXA Equitable. 

For AXA Distributors, “associated persons” is a term of art that specifies those

persons subject to regulatory control. (Pls.’ Opp’n (Doc. # 19).) In other words, a person

who is supervised by a broker-dealer is an associated person of that broker-dealer, and any

person not supervised by that broker-dealer cannot be an associated person of the brokerdealer. At oral argument, when confronted with the question of the distinction between

direct and indirect control, AXA Distributors’ counsel distinguished “indirect” control as

relating to persons who are not “direct” employees of a broker-dealer, but are perhaps

employees of their independent contractor registered representative. (Hr’g Tr. 43-44.) 

12

Case 1:08-cv-00188-WKW-TFM Document 36 Filed 12/24/08 Page 13 of 35
AXA Distributors additionally rejects the notion that the Rule 12100(i) defines “customer.” The

Rule, which is entitled “Definitions,” says in toto: “A customer shall not include a broker or dealer.” Id. 

According to AXA Distributors, “that definition is not intended to imply that every person or entity in the

universe that is not a broker or dealer is a customer of every FINRA member firm.” (Pls.’ Reply Mem.

7.)

All these arguments, consuming dozens of pages, miss the mark. It is undisputed that Defendants

were customers of the Raymond James representatives. If it is found that Defendants were dealing with

associated persons of AXA Distributors when they purchased the Accumulator, they were dealing with

AXA Distributors, and thus, were customers of AXA Distributors. 

 Though Plaintiffs make the more specific following points to argue that Defendants were not 13

customers, the arguments bear on whether Ms. Holman and Ms. Chappell were “associated persons.”

Defendants were not customers of AXA Distributors, AXA Distributors argues, because it never

conducted any business with any of them; never took an application or cash from them; never opened an

account for them and never sent them an account statement; and never executed a retail order or

confirmation of order for them. In short, there was “absolutely no relationship whatsoever” between

them. (Pls.’ Mem. Supp. Mot. for Prelim. Inj. 10-11.) 

14

AXA Equitable is somewhat handicapped because it has to prove the negative. It

claims that the Raymond James representatives were not AXA Equitable associated persons

because they were never appointed such; it had no supervisory control or responsibility for

the Raymond James agents - by agreement and FINRA rules, Raymond James supervised

them; it was prohibited from retail activities by the terms of its FINRA membership; and it

marketed wholesale to Raymond James, which marketed retail through its registered

representatives. AXA Distributors therefore had no direct or indirect control over the

Raymond James representatives.13

Thus, AXA Distributors concludes that, because the Raymond James representatives

were not controlled directly or indirectly by AXA Distributors, they could not be “associated

persons” of AXA Distributors under the Rules. Ergo, if the representatives were not

associated persons of AXA Distributors, then Defendants cannot be customers of AXA

Case 1:08-cv-00188-WKW-TFM Document 36 Filed 12/24/08 Page 14 of 35
15

Distributors. If Defendants are not customers, they are not entitled to arbitration of this

dispute.

B. Defendants’ Arguments

Defendants advance a broader definition of “associated person.” Their contentions

can be summed up in one statement: “Plaintiff’s sole business was to sell and market the

products at issue in this case and to train and supervise others who sell and market the

products, and Plaintiff was involved in and received compensation for each sale.” (Defs.’

Reply 4 (Doc. # 21).) Leaning on the “indirect control” component of the definition of

“associated person,” Defendants point out that AXA Distributors conducted all the training

on the Accumulator; directed the Raymond James representatives in sales techniques;

advised the Raymond James representatives on how to sell the Accumulator and retained

discretion over how it was marketed; provided direct customer and sales support, including

prospectuses and marketing materials; and made post-sale contact with the investors. It is

undisputed by AXA Distributors that Raymond James provided no direct training on the

Accumulator. The training consisted of AXA Distributors training events (see Holman Aff.

¶ 4; Chappell Aff. ¶ 3) and Raymond James training events conducted by AXA Distributors’

representatives (see Holman Aff. ¶ 13; Chappell Aff. ¶ 4). Ms. Holman and Ms. Chappell

deny any knowledge of the Accumulator except that which they received from the AXA

entities. AXA Distributors explained the complicated product to them, taught them how to

sell it, answered their questions almost daily, gave them quotes and illustrations, and directed

Case 1:08-cv-00188-WKW-TFM Document 36 Filed 12/24/08 Page 15 of 35
 To be fair, the same letter to Ms. Holman refers to “your client” or “your clients” three times - 14

never to “our” clients. (Mot. to Dismiss or Compel Ex. H.)

 A subset of the indirect control argument is that, having undertaken to train, direct and support 15

the representatives of Raymond James, AXA Distributors had a duty to do so with due care. This

argument can be taken as support for the state-law claims, not for arbitration. Of note, this is as close as

Defendants come to suggesting that AXA Distributors had a duty to supervise the Raymond James

representatives.

16

and instructed them on interpreting the quarterly statements. (See Holman Aff.; Chappell

Aff.) Indeed, AXA Distributors wrote Ms. Holman in March of 2000 that it was “always

ready to answer [her] questions . . . give [her] a quote or a hypothetical illustration . . .

provide [her] with marketing materials . . . help [her] in any way we can.” (Mot. to Dismiss

or Compel Ex. H. (ellipses in original).) Defendants conclude that these activities amount 14

to indirect control as contemplated by the definition of associated person in Rule 12100(r).

15

Defendants also argue generally that the fact that AXA Distributors benefitted financially

from the sales of the Raymond James representatives is relevant.

C. Analysis

1. Preliminary Discussion of Controlling Sources

Because the parties point to no case directly on point factually, and the court has found

none, the cases upon which the parties rely are not particularly helpful in determining

whether AXA Distributors controlled the Raymond James representatives. AXA Distributors

relies upon Wheat First for the proposition that one cannot be a customer of a broker-dealer

if one has absolutely no relationship with the broker-dealer at the time of the event causing

the dispute. This is not an instructive conclusion when it is undisputed that Defendants are

Case 1:08-cv-00188-WKW-TFM Document 36 Filed 12/24/08 Page 16 of 35
 In King and Bornstein, the issue was whether the broker-dealer would be compelled to 16

arbitrate when its admitted agent or representative (associated person) sold securities not issued,

marketed or approved by the broker-dealer to customers of the associated person. The issue in both

turned on whether the customer of an associated person is also the customer of the broker-dealer who

supervised the associated person, even if the broker-dealer had no knowledge of the transaction. In both

cases, the broker-dealer was compelled to arbitrate because the court ultimately found that the investor

was a customer of both the associated person and the broker-dealer.

17

customers of the persons who sold them the Accumulator, and the issue is whether the

persons selling it were associated with AXA Distributors. To that scenario, Wheat First does

not speak. Likewise, Defendants rely upon the somewhat related but factually

distinguishable cases, King, 386 F.3d 1364 and Bornstein, 390 F.3d 1340. (See Defs.’ Reply

5.) King and Bornstein are not apropos because in both cases it was undisputed that the

registered representative was an associated person of the broker-dealer and the investor was

a customer of the associated person.16

 The essence of the dispute is whether the registered representative is an associated

person of, in effect, two broker-dealers, Raymond James and AXA Distributors. The matter

can be resolved only by interpretation and application of the FINRA Rules under state-law

contract principles. In this exercise, the plain and unambiguous meaning of the Rules

applies, unless ambiguities in the Rules are evident, in which case, parole evidence can be

Case 1:08-cv-00188-WKW-TFM Document 36 Filed 12/24/08 Page 17 of 35
 AXA has submitted the affidavits of John Pinto (Pls.’ Reply Mem. Affs.) and William C. 17

Miller (Pls.’ Mem. Supp. Mot. for Prelim. Inj. Ex. C) as parole evidence on the legal issues.

 “Person associated with a member” is also defined in the FINRA By-Laws, and it includes a 18

person “directly or indirectly . . . controlled by a member.” FINRA, FINRA By-Laws Art. I(gg). Rule

0160 states that “[t]he terms in the Rules, if defined in the FINRA By-Laws, shall have the meaning as

defined in the FINRA By-Laws unless the term is defined differently in a Rule, or unless the context of

the term is defined differently in a Rule, or unless the context of the term within a Rule requires a

different meaning.” Thus, cases and FINRA (or formerly NASD) guidance elucidating definitions in the

By-Laws that, by this standard, carry the same definition as in the Rules, are applicable and referred to in

this analysis. Subsequent discussion of the FINRA Rules incorporates applicable interpretations of the

By-Laws. 

18

considered. Of the Rules, only Rule 12100(r) defines “person associated with a member.” 17 18

The Rule references “a member,” which the court takes to mean, without any ambiguity, any

member of FINRA, therefore inclusive of AXA Distributors. Direct or indirect control is not

defined in the Rules. 

The definition of an “associated person” is also found in the Securities Exchange Act

of 1934 (“Exchange Act”) but its definition differs slightly from that in the FINRA Rules.

Indeed, at least four circuits have held that the definition of “associated person” in 15 U.S.C.

§ 78(c)(21) of the Exchange Act does not trump the FINRA’s definition of “associated

person.” “[N]othing in the [Exchange Act] prohibits a self-regulatory organization (such as

the NASD) from using a term for its own purposes (in applying its own rules and regulations)

in a way that is narrower than the way that term is defined in the [Exchange Act].” Burns

v. N.Y. Life Ins. Co., 202 F.3d 616, 621 (2d Cir. 2000) (joining the D.C. and 5th Circuits)

(pointing out that the SEC must approve of the NASD’s rules and that the NASD’s definition

did not result “in any rule or practice that is inconsistent with the statute or any regulatory

command of the SEC” (citing Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220, 233-

Case 1:08-cv-00188-WKW-TFM Document 36 Filed 12/24/08 Page 18 of 35
 “Since the 1975 amendments [of the Exchange Act] . . . the [SEC] has had expansive power to 19

ensure the adequacy of the arbitration procedures employed by the [self-regulatory organizations

(“SRO”)]. No proposed rule change may take effect unless the SEC finds that the proposed rule is

consistent with the requirements of the Exchange Act; and the [SEC] has the power, on its own initiative

to ‘abrogate, add to, and delete from’ any SRO it if finds such changes necessary or appropriate to further

the objectives of the Act. In short, the [SEC] has broad authority to oversee and to regulate the rules

adopted by the SROs relating to customer disputes, including the power to mandate the adoption of any

rules it deems necessary to ensure that arbitration procedures adequately protect statutory rights.” 

Shearson/Am. Express, Inc., 482 U.S. at 233-34 (citations omitted). 

19

34 (1987) )); see also Paul Revere Variable Annuity Ins. Co. v. Kirschhofer, 226 F.3d 15, 19

21 (1st Cir. 2000) (“[I]n the absence of any specific reference to touchstones outside the

NASD Code, there is not the slightest reason to believe that the drafters of the NASD Manual

considered . . . the Exchange Act to be part of the ‘context’ relevant in deciding whether to

adhere to the definition stated in the by-laws.”). The First Circuit more explicitly has

counseled against relying on the Exchange Act at all to interpret the FINRA Rules: “[I]t is

much more plausible that the drafters [of the NASD Manual] intended to direct interpreters

to the text, structure, and purpose of the NASD’s various regulations and practices rather

than to an endless (and ever-changing) array of outside factors . . . .” Paul Revere Variable

Annuity Ins. Co., 226 F.3d at 21. Because the Exchange Act and the then-NASD Rules

“serve very different purposes,” the First Circuit reasoned, “it is hardly surprising that they

employ dissimilar definitions.” Id. at 22.

The way in which the Exchange Act’s and FINRA’s definitions of “associated person”

conflict, however, is not implicated in this case. Cf. Burns, 202 F.3d at 620 (highlighting the

difference between the provisions with respect to the inclusion or exclusion of “company”).

Additionally, the cases interpreting the “directly or indirectly” controlled language in the

Case 1:08-cv-00188-WKW-TFM Document 36 Filed 12/24/08 Page 19 of 35
 AXA Distributors urges the court to afford deference to FINRA’s interpretation of its own 20

regulations. (Pls.’ Supplemental Reply Mem. 4 (Doc. # 33).) It is not clear, however, that a “controlling

weight” deference applies to the review of NASD decisions. Nevertheless, in light of Paul Revere

Variable Annuity Insurance Co., the prudence in considering an association’s interpretation of its own

rules, and the fact that the SEC delegated authority to NASD, the NASD interpretations factor into the

analysis. See, e.g., Nat’l Planning v. Achatz, No. 02-cv-0196E (SR), 2002 WL 31906336, at *2

(W.D.N.Y. Dec. 17, 2002) (noting in the slightly different context of considering an arbitration rule on

composing an NASD panel, that “courts should be wary about disregarding NASD Rules and should

accord deference to the NASD’s interpretation of its Rules” ); Kashner Davidson Sec. Corp. v. Mscisz,

531 F.3d 68, 71 n.1 (1st Cir. 2008) (describing the relationship between the SEC and NASD).

 It is appropriate to consider terminology as it is used throughout a statutory scheme. See, e.g., 21

United Sav. Ass’n of Tex. v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 371 (1988). Though

the NASD is not a part of the Exchange Act, the interrelatedness between the SEC and the NASD

justifies comparing the language. See Credit Suisse Sec. (USA) LLC v. Billing, 127 S. Ct. 2383, 2395

(2007) (describing the interrelatedness).

20

Exchange Act are not motivated by policy implications that appear to deviate from FINRA’s

purposes. Furthermore, the Eleventh Circuit has not ruled on the interplay between these

provisions in this context. For these reasons, the following “associated person” analysis will

draw not only from case law on the FINRA and formerly-NASD language, and from FINRA

and NASD decisions, but also on case law interpreting the same language in the Exchange 20

Act.21

2. Defining Direct and Indirect Control

The pivotal definition of the FINRA Rules at issue is of “control,” and the key

distinction is between direct and indirect control. Black’s Law Dictionary defines the noun

“control” as “[t]he direct or indirect power to direct the management and policies of a person

or entity, whether through ownership of voting securities, by contract, or otherwise; the

power or authority to manage, direct, or oversee.” Black’s Law Dictionary 253 (8th ed.

1999); see also id. (defining the verb “control” as “to exercise power or influence over” or

Case 1:08-cv-00188-WKW-TFM Document 36 Filed 12/24/08 Page 20 of 35
21

“[t]o regulate or govern”). Webster’s defines “direct” as “characterized by . . . a close

[especially] logical, causal, or consequential relationship” and “marked by absence of

intervening agency, instrumentality, or influence.” Webster’s Third International Dictionary

(Unabridged) 640 (1961). Indirect means “not straightforward and open” or “not directly

aimed at or achieved.” Webster’s, supra. These definitions alone, however, are too general

to resolve the meaning of control, or the distinction between direct and indirect control. 

Courts tend to define direct and indirect control, both as used in the FINRA Rules and

former NASD Code, and the Exchange Act, not expressly but through the description of

factors. In John Hancock Life Ins. Co. v. Wilson, 254 F.3d 48 (2d Cir. 2001), the court found

an independent insurance agent and investment broker an “associated person” under the

NASD Code despite his working from home; the agent was authorized, through a sales

representative agreement, to sell life insurance and annuities on behalf of John Hancock, a

broker-dealer member. Id. at 51. In First Liberty Inv. Group v. Nicholsberg, 145 F.3d 647

(3d Cir. 1998), the court reviewed the factual realities of a business relationship and found

an “associated person,” eschewing labels that the parties chose for that relationship. Id. at

652. Even though an agreement between First Liberty and Nicholsberg specifically named

him as an “independent contractor,” that denomination was “not controlling in the face of the

conflicting reality.” Id. It was the “parties’ total relationship,” including limitations on

Nicholsberg and First Liberty in conducting their business, that dictated the result. Id. 

Case 1:08-cv-00188-WKW-TFM Document 36 Filed 12/24/08 Page 21 of 35
 The court also found that the relationship “plac[ed] Nicholsberg in much the same practical 22

position that would be occupied by a branch manager.” First Liberty Inv. Group, 145 F.3d at 652.

 The NASD acknowledged, albeit by implication, that it construes the definition of “associated 23

person” broadly “as it must in order to take regulatory action in circumstances where a person’s

connection with a member firm implicates the public interest.” Dist. Bus. Conduct Comm. v. Paramount

Invs. Int’l, Inc., No. C3A940048, 1995 WL 1093392 (NASDR Oct. 20, 1995) (affirming the District

Business Conduct Committee’s decision, which the NASD noted, included the observation that it “had

always construed [the ‘associated person’] definition broadly”). 

 The Eleventh Circuit has addressed NASD language only briefly. It found an individual, 24

Riccard, “was a natural person engaged in the securities business who was controlled by member

Prudential at the time of the 1995 events giving rise to the dispute,” and thus, was an associated person

under the NASD By-Laws. Riccard v. Prudential Ins. Co., 307 F.3d 1277, 1287 n.6, 1288 n.7 (11th Cir.

2002). The parties had considered Riccard an employee of Prudential at all relevant times. Id. at 1286

n.3.

22

The total relationship amounted to at least “indirect control.” First Liberty Inv. 22

Group, 145 F.3d at 642. The court highlighted the following underlying facts and provisions

of the agreement: (1) First Liberty’s provision of facilities to Nicholsberg for executing

transactions; (2) First Liberty’s appointing Nicholsberg’s office to offer and solicit sales of

securities; (3) First Liberty’s giving Nicholsberg geographic exclusivity; (4) Nicholsberg’s

agreeing to comply with First Liberty’s manual; (5) Nicholsberg’s agreeing to First Liberty’s

prior approval before he sent correspondence or caused advertising pertaining to securities

solicitation; and (6) Nicholsberg’s promising not to engage in a security transaction with any

other individual or broker-dealer. Id. Underlying those factors was also a policy concern.

If First Liberty could “escape the NASD arbitration requirements simply by calling someone

acting in Nicholsberg’s capacity an independent contractor, [it] could easily frustrate

NASD’s firm policy of submitting industry disputes to binding arbitration.” Id. 

23 24

Case 1:08-cv-00188-WKW-TFM Document 36 Filed 12/24/08 Page 22 of 35
 FINRA, Current Uniform Registration Forms for Electronic Filing in Web CRD, Form BD, 25

http://www.finra.org/web/groups/industry/@ip/@comp/@regis/documents/appsupportdocs/p005260.pdf

(last visited Dec. 23, 2008).

 NASD, Interpretive Ltr. (Feb. 3, 2003), http://www.finra.org/Industry/Regulation/ 26

Guidance/InterpretiveLetters/P002661 (last visited Dec. 23, 2008).

23

Though FINRA has not provided clear guidance on what control means, it has

provided some signals as to its meaning. FINRA’s Uniform Application for Broker-Dealer

Registration (Form BD) defines control as “power, directly or indirectly, to direct the

management or policies of a company, whether through ownership of securities, by contract,

or otherwise.” But that definition begs the question of what directing management or 25

policies entails. Furthermore, the question of whether an individual is controlled by a brokerdealer is not presumptively synonymous with the definition of control for purposes of

registration. 

An NASD interpretive letter’s discussion of “associated persons” under the NASD

By-laws, although not binding, targets some relevant indicia of control. In a letter to Pamela

M. Krill, the NASD commented on a proposed arrangement not entirely dissimilar to the

arrangement here. CAI was an insurance agency that intended to register as a broker-dealer 26

and become a member of the NASD. CAI asked the NASD whether in that event, CAI could

pay commissions from sales of variable annuity products and mutual funds shares to its

insurance agent employees, who, by agreement, would become registered representatives at

Case 1:08-cv-00188-WKW-TFM Document 36 Filed 12/24/08 Page 23 of 35
In our case, certain facts are distinguishable – AXA Distributors had already registered as an 27

NASD Member prior to the agreement with the broker-dealer of the registered representatives and the

registered representatives were not employees of AXA Distributors but insurance agents of AXA

Equitable. The discussion of control, however, is still applicable.

24

the same time of another broker-dealer and NASD member. In determining whether the 27

registered representatives were under the control of CAI and thus, deemed associated persons

of CAI as well, the court looked to several indicia of control, some of which pertain

specifically to the registered representatives’ status as CAI’s employees, but others that did

not. The NASD noted how CAI would maintain control over the employee-registered

representatives’ commission payments, would issue paychecks to them, determine their

benefits levels, help determine which securities products they would offer, and provide office

space for securities-related activities. These factors for the most part relate to control CAI

would have as an employer over the agent-representatives. The interpretive guidance

continued, however, by noting other factors of control: (1) that CAI would retain a portion

of the securities commission revenues; (2) that the other broker-dealer would receive only

a flat fee for supervising, training, and providing administrative services to the agentsrepresentatives; (3) that CAI “potentially could have a greater financial interest in the

securities-related activities of the registered representatives” than the other broker-dealer; and

(4) that the registered representatives appeared to be selling the products on behalf of CAI.

In a separate interpretive letter, in a factual situation less on point but still relevant,

the NASD declined to find that one member broker-dealer (Firm A) controlled the

representatives of another (Firm B) based on these factors: (1) Firm B’s representatives

Case 1:08-cv-00188-WKW-TFM Document 36 Filed 12/24/08 Page 24 of 35
 NASD, Interpretive Ltr., Apr. 22, 1998, http://www.finra.org/Industry/Regulation 28

Guidance/InterpretiveLetters/P005274 (last visited Dec. 23, 2008). 

The National Adjudicatory Council’s decision in Department of Enforcement v. Respondent 1,

29

No. CAF000029, 2002 WL 970381 (NASDR Mar. 21, 2002) also addressed the meaning of “associated

person.” The facts in that case, however, are so distinguishable that extrapolating from its findings does

not aid the analysis. 

25

“perform[ed] their functions solely as salaried employees” of Firm B; (2) Firm B’s

representatives did not “solicit securities transactions or make other recommendations”; and

(3) Firm B’s representatives did not “retain ownership or control of accounts opened and

forwarded” to Firm A. Importantly, the NASD also stated: “Since the activities of [Firm

28

B’s] registered representatives on behalf of [Firm A] occur pursuant to a contract between

the two members, [Firm B’s] registered representatives are not employed, directly or

indirectly, outside the scope of their relationship with their employing member [Firm B]” and

do not receive compensation outside that scope. Id. The contract between the outside firm

and employing firm helped to buffer the employing firm’s employees from being deemed

“controlled” by the outside firm.29

The word “control” comes up in analogous contexts under the Exchange Act. The

Exchange Act defines “associated persons,” in relevant part as “any person directly or

indirectly controlling, controlled by . . . such broker or dealer.” 15 U.S.C. § 78c(a)(18)

(omitting distinguishable language). In a case applying this definition to the relationship

between a securities broker barred from the U.S. market and a U.S. securities broker, Sec.

Exch. Comm’n v. Zahareas, 272 F.3d 1102, 1004 (8th Cir. 2002), the Eighth Circuit chided

the district court for “judicially grafting onto the statute . . . an expansive clause.” Id. at

Case 1:08-cv-00188-WKW-TFM Document 36 Filed 12/24/08 Page 25 of 35
 Admittedly, the opinion was tied to the statute’s express purpose, as well as the statute’s plain

30

language. Zahareas, 272 F.3d at 1106.

26

1106. Specifically, the circuit court declined to include in the definition of “associated

person,” “registered representative.” Id. at 1107. The court also noted there was no

precedent that “providing and verifying paperwork” amounted to control. Id. at 1106.

Instead, the court focused on the lack of evidence that the broker-dealer controlled

Zahareas’s means and manner of performance. Id. The broker-dealer “knew little about how

[he] conducted his business . . . [,] provided none of the workplace instruments such as

telephones or computers” and did not hire or monitor his employees. Id. Judge Bright, in

dissent, listed other factual circumstances that persuaded him of the opposite conclusion –

that under Black’s Law Dictionary’s definition of control, the broker-dealer exercised

control. Id. at 1108 (Bright, J., dissenting). Zahareas steered Greek investors to the brokerdealer, those customers received account numbers and materials from the broker-dealer, it

provided Zahareas with its account opening materials, applications, tax forms, and margin

agreements, and it reviewed and approved new account information from him on the new

customers. Id. All of those factors, however, were not enough to convince the majority that

the broker-dealer controlled an individual. Id. at 1106. 30

In a federal district court case from the Southern District of New York, the court listed

various facts in support of its finding that the defendant violated an SEC order by willfully

associating with various broker-dealer firms. Sec. Exch. Comm’n v. Telsey, Fed. Sec. L. Rep.

(CCH) ¶ 95,871 (Mar. 13, 1991). With one broker-dealer, Tesley had his own telephone and

Case 1:08-cv-00188-WKW-TFM Document 36 Filed 12/24/08 Page 26 of 35
 The court also noted that the SEC’s more specific definition of control, promulgated as a 31

regulation, “like the statute, does not attempt to formulate a precise definition of ‘control’ applicable to

all cases, but is intended only to provide some guidance, leaving a determination of whether control

exists dependent on the particular factual circumstances of each case.” Laperriere, 526 F.3d at 723. The

regulation defines control as “the possession, direct or indirect, of the power to direct or cause the

direction of the management and policies of a person, whether through ownership of voting securities, by

contract, or otherwise.” 17 C.F.R. § 230.405 (West 2008). 

27

desk, solicited accounts for the broker-dealer, prepared order tickets, filled out account

forms, used the broker-dealer’s NASDAQ machine to trade on behalf of the broker-dealer’s

proprietary account, quoted bids and offers when asked, traded in stocks for the brokerdealer, went into its offices almost daily during business hours, had a registered

representative number for identifying his customer’s order tickets so that he could receive

commissions, and was compensated for his association with the broker-dealer. Id. He was

also associated with other broker-dealers based on those and additional facts including

describing himself as a “principal” of the broker-dealer and bringing in new customers. Id.

The Exchange Act also uses “control” in defining control liability. The Exchange Act

imposes liability on “[e]very person who, directly or indirectly controls any person liable

under any provision” of the pertinent chapter, rule, or regulation unless the controlling person

acted in good faith. 15 U.S.C. § 78t(a). The Eleventh Circuit recently has expounded on this

language. See Laperriere v. Vesta Ins. Group Inc., 526 F.3d 715 (11th Cir. 2008) (per

curiam). In discussing the definition of controlling person, the court explained that

“Congress recognized that it would be difficult, if not impossible, to enumerate or anticipate

the many ways in which actual control may be exercised and expressly declined to define the

term ‘control,’ leaving courts free to decide issues of control on a case by case basis.” Id. 31

Case 1:08-cv-00188-WKW-TFM Document 36 Filed 12/24/08 Page 27 of 35
 The company tried to contract away supervision by stating it had “no right to control or direct”

32

the sales contractor, “‘not only as to the result to be accomplished by the work but also as to the details

and means by which the result is accomplished,’” except for oversight and instructions required for legal

compliance, and left the contractor “‘completely free’” to control the results and means. Hollinger, 914

F.2d at 1574 n.7 (quoting the contract).

 For instances in which control is defined, in the SEC regulation for example, the definition of 33

control includes a reference to both “direct” and “indirect” embedded in the definition of control. It is

unclear, in those instances, whether “direct” or “indirect” within the definition of “control” sufficiently

address what direct and indirect control mean.

28

at 722-23. As the Ninth Circuit announced, control for purposes of control liability, like

control under the Rules and the then-NASD By-Laws, is not limited to the relationship of

employees or agents, and employers, but includes independent contractors. Hollinger v.

Titan Capital Corp., 914 F.2d 1564, 1574 (9th Cir. 1990) (en banc). To limit control by

excluding independent contractors would “frustrate Congress’s goal of protecting investors.”

Id. The court made a point of tying control to supervision. Id. (In describing the outcome 32

had it not found that independent contractors could be associated persons, the court noted the

broker-dealer could have thereby “avoid[ed] a duty to supervise simply by entering into a

contract that purports to make the representative . . . an ‘independent contractor.’” (emphasis

added)). 

Control that triggers liability can be indirect as well, though the difference between

direct and indirect control remains largely unexplained. The Eighth Circuit approached a 33

definition of “indirect control” in Martin v. Shearson Lehman Hutton, Inc., 986 F.2d 242 (8th

Cir. 1993). There, it held that control liability “reaches persons who have only ‘some indirect

means of discipline or influence’ less than actual direction.” Id. at 244 (quoting Myzel v.

Case 1:08-cv-00188-WKW-TFM Document 36 Filed 12/24/08 Page 28 of 35
 The contract between AXA Distributors and Raymond James states that “[n]othing [therein]

34

shall constitute [Raymond James] or any agents or representatives of [Raymond James] as employees of

[AXA Equitable] or [AXA Distributors]” (Distribution Agreement § 2.7), and Raymond James is an

independent contractor and not employee under the contract (Distribution Agreement § 2.7). Contractual

language, however, is not dispositive of whether AXA Distributors controlled the Raymond James

representatives. Determining control depends the factual details of the relationship, as well as the

agreement. 

29

Fields, 386 F.2d 718, 738 (8th Cir. 1967)); accord Harrison v. Dean Witter Reynolds, Inc.,

974 F.2d 873, 880-81 (7th Cir. 1992) (quoting the Eighth Circuit). The Seventh Circuit

describes control that is indirect as the potential to control. The culpable party must have

“possessed the power or ability to control the specific transaction or activity upon which the

primary violation was predicated, whether or not that power was exercised.” Id. at 882; see

also Rochez Bros., Inc. v. Rhoades, 527 F.2d 880, 890-91 (3d Cir. 1975). The distinction

between direct and indirect control otherwise must be gleaned by deciphering a distinction

between the two from the facts of cases that interpret control. 

3. Application: AXA Distributors Did Not Directly or Indirectly Control the

Raymond James Representatives

AXA Distributors did not control the Raymond James representatives by any of the

foregoing definitions of control. Two features of this relationship account predominantly 34

for why AXA Distributors did not control the Raymond James representatives: (1) the

contractual relationship, which was between AXA Distributors and Raymond James, not its

registered representatives; and (2) the separation of AXA Equitable from AXA Distributors.

It is significant that it was Raymond James, and not its registered representatives, that entered

into a contract with AXA Distributors, and that Raymond James retained control over its

Case 1:08-cv-00188-WKW-TFM Document 36 Filed 12/24/08 Page 29 of 35
 Although Ms. Holman and Ms. Chappell stated that AXA Distributors provided the training 35

for the Accumulator, that training was not at AXA Distributors’ facilities, nor was any of the business

solicitation. (See Holman Aff. & Chappell Aff.)

30

registered representatives. It is also significant that any control the AXA entities retained

over the Raymond James representatives was lodged in AXA Equitable. 

AXA Distributors’ sales agreement was with Raymond James, not its registered

representatives. (Distribution Agreement 1.) Raymond James sold products of other

companies. (Distribution Agreement § 2.7.) The registered representatives did not use AXA

Distributors’ facilities for their sales. (See Holman Aff. ¶ 4; Chappell Aff. ¶ 3.) Raymond 35

James retained the duties to train and supervise the registered employees more generally, and

to be fully responsible for their solicitation activities. (Distribution Agreement § 4.1.)

Raymond James provided the seminar where Ms. Holman and Ms. Chappell were trained by

AXA Distributors on the Accumulator (Chappell Aff. ¶ 4); they otherwise were not trained

at AXA Distributor’s facilities. Raymond James agreed that its representatives who were

appointed AXA Equitable’s agents would not solicit applications for contracts without

certain materials and would only make statements with that information, and that AXA

Distributors would be responsible for supplying the relevant materials. (Distribution

Agreement, §§ 5.1(b), 6.1, 6.2.) Even if AXA Distributors conducted the actual training for

Ms. Holman and Ms. Chappell, that factor alone is not enough to determine that AXA

Distributors controlled them, especially in light the intermediary contractual party Raymond

James.

Case 1:08-cv-00188-WKW-TFM Document 36 Filed 12/24/08 Page 30 of 35
31

Additionally, though both AXA entities stood to gain by the arrangement, Raymond

James directly received payment to distribute to its brokers and retained a portion for itself.

To the extent that the agreement between AXA Distributors and Raymond James dictated the

representatives’ actions, that was an agreement that the supervising broker-dealer entered

into and the supervisory broker-dealer retained responsibility over the representatives’

actions, not to mention, the power and responsibility to discipline the representatives.

(Distribution Agreement §§ 4.1, 4.9.) The factual circumstances of the arrangement do not

undermine these roles. Ms. Holman and Ms. Chappell have attested only to constant

communication with and assistance from AXA Distributors. (See Holman Aff. & Chappell

Aff.) But AXA Distributors’ control of the information for selling the products is not the

same as control of Ms. Holman and Ms. Chappell in the brokering activities. 

Also important to finding that AXA Distributors did not control the Raymond James

registered representatives is the fact that AXA Equitable, and not AXA Distributors, retained

control over the sales arrangement. AXA Equitable had discretion to refuse to appoint a

proposed agent or to terminate her with or without cause, and to reject applications or

premiums. (Distribution Agreement §§ 2.3, 2.5.) AXA Distributors did not retain any

commissions on the sales. (Miller Supplemental Aff. ¶ 10.) Instead, it received an annual

allowance from AXA Equitable “for its distribution activity,” based in part on volume, and

that allowance was a “pass-through for compensation” to brokers like Raymond James.

(Miller Supplemental Aff. ¶ 10.) Raymond James paid out the commissions due to its

Case 1:08-cv-00188-WKW-TFM Document 36 Filed 12/24/08 Page 31 of 35
32

brokers, retaining the portion to which it was entitled. (Miller Supplemental Aff. ¶ 10; see

also Distribution Agreement, §§ 7.1, 7.5; Defs.’ Reply Ex. A at 15 of original.) Registered

representatives forwarded premiums and loan repayments to AXA Equitable, not to AXA

Distributors. (Distribution Agreement § 4.5.) 

AXA Distributors’ business was to distribute securities on a wholesale basis to other

broker-dealers, not to enter into relationships directly with registered representatives of other

broker-dealers. (NASD Agreement.) The circumstances of the relationship bear this out, and

the relationship does not amount to control. To the extent that the Raymond James

representatives steered customers to AXA Equitable, to the extent that AXA Distributors

provided the materials and applications for that business, and to the extent that those entities

were involved in reviewing and approving that business, at least one circuit has found that

those factors alone do not amount to “control,” at least with respect to control liability.

Furthermore, AXA Distributors only provided the materials and applications. It was, in

effect, a marketing entity segmented off from AXA Equitable. 

This arrangement may permit an entity like AXA Distributors, or AXA Equitable for

that matter, to avoid responsibilities under the FINRA Rules, but that is a policy matter for

other institutions to address. Based on the facts submitted by the parties, along with their

briefs, and on an institutional reticence to transform a complicated business arrangement into

a nefarious web of evasion, this court finds AXA Distributors did not control the registered

representatives of Raymond James. Because Ms. Holman and Ms. Chappell were not

Case 1:08-cv-00188-WKW-TFM Document 36 Filed 12/24/08 Page 32 of 35
 AXA Advisors is not entitled to preliminary injunctive relief for the reasons discussed in this 36

analysis.

33

“associated persons” of AXA Distributors, Defendants were not customers of AXA

Distributors, and therefore, the FINRA Rules do not govern. Defendants have no agreement

with Plaintiffs to arbitrate. Thus, the Motion to Dismiss or in the Alternative, Motion to

Compel Arbitration (Doc. # 9) is due to be denied. 

4. Preliminary Injunctive Relief

AXA Distributors also requests preliminary and permanent injunctive relief to restrain

Defendants from proceeding with their claims against AXA Distributors, which are currently

in FINRA arbitration. (Verified Compl. ¶¶ 27-30.) A federal court may issue three types 36

of injunctions: (1) “a ‘traditional’ injunction, which may be issued as either an interim or

permanent remedy for certain breaches of common law, statutory, or constitutional rights”;

(2) a statutory injunction; or (3) an injunction under the All Writs Act. Klay v. United

Healthgroup, Inc., 376 F.3d 1092, 1097, 1098 & 1099 (11th Cir. 2004) (footnote omitted).

AXA Distributors requests a “traditional” injunction. (See Pls.’ Mot. for Prelim. Inj. ¶ 1.)

The type of injunction at issue in this case, however, is not a traditional injunction.

Klay, 376 F.3d at 1098. A party requesting injunctive relief against defendants who have

initiated (or presumably continued in) arbitration even though a federal court denied their

motion to compel arbitration on those claims, “[has] no cause of action against the

defendants upon which the injunction [would be] based.” Id. “‘Wrongful arbitration’ . . .

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is not a cause of action for which a party may sue.” Id. Thus, a plaintiff seeking this relief

must proceed under a different type of injunction. Id.

The parties in this case have not argued that relief is appropriate as a matter of

statutory law, and as the Eleventh Circuit has not resolved the availability of statutory

injunctive relief for enjoining arbitration, Klay, 376 F.3d at 1099, injunctive relief on this

basis will not be awarded. Injunctive relief is also unavailable under the All Writs Act, 28

U.S.C. § 1651(a). Klay, 376 F.3d at 1099, 1113. The All Writs Act codifies the “traditional,

inherent power” of courts to protect their jurisdiction derived from another source, and

allows courts to “safeguard not only ongoing proceedings, but potential future proceedings,

as well as already-issued orders and judgments.” Id. at 1099 (footnotes omitted). Arbitrating

nonarbitrable claims, however, is “a pointless endeavor” and for that reason, “does not

threaten or undermine” a district court’s order that denies a motion to compel or that court’s

jurisdiction over pending cases. Id. at 1113. The arbitrators lack jurisdiction over

nonarbitrable issues, so a ruling would have no impact on a federal action, and parties would

be unable to enforce any ruling in their favor. Id. Thus, preliminary injunctive relief is not

appropriate. Id. “The defendants remain free to arbitrate the nonarbitrable claims in what

will be nothing more than a moot court session.” Id.

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V. CONCLUSION

For the foregoing reasons, it is ORDERED that:

(1) Defendants’ Motion to Dismiss or in the Alternative, Motion to Compel

Arbitration (Doc. # 9) is DENIED;

(2) Plaintiffs’ Motion for Preliminary Injunction (Doc. # 12) is DENIED; and

(3) Defendants’ Motion to Strike Affidavit of John E. Pinto (Doc. # 29) is

DENIED as moot.

Done this 24th day of December, 2008.

 /s/ W. Keith Watkins 

UNITED STATES DISTRICT JUDGE

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