United States Court of Appeals

For the Eighth Circuit

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No. 11-2877

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Berthel Fisher & Company Financial Services, Inc.; 

Thomas J. Berthel; Ronald O. Brendengen; 

Shelley Rae Davenport; Frederick P. Fisher; 

Richard M. Murphy; Leslie D. Smith; Daniel P. 

Wegmann; and Thomas R. Biesheuvel

lllllllllllllllllllll Plaintiffs - Appellees

v.

Craig Larmon; Geneva OSWX XXII, LLC, a Delaware limited liability

corporation; Earl Holasek; OSWX XXXVI, LLC, a Delaware limited liability

corporation; Geneva FTCX I, LLC,a Delaware limited liability corporation;

Geneva BCCX XVIII, LLC, a Delaware limited liability corporation; Karen Lane;

Geneva OSWX IX, LLC, a Delaware limited liability company; Declaration of

Trust of Karen Lane dated April 24, 1996; Jack Hoopes; Lorna Hoopes; Geneva

OSWX XIX, LLC, a Delaware limited liability company; Patrick Jordan; Geneva

OSWX XXVII, LLC, a Delaware limited liability company; and Patrick J. Jordan

Trust dated April 6, 1990

lllllllllllllllllllll Defendants - Appellants

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 Appeal from United States District Court 

for the District of Minnesota - Minneapolis

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 Submitted: June 12, 2012

 Filed: October 1, 2012

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Before MURPHY, MELLOY, and COLLOTON, Circuit Judges.

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MELLOY, Circuit Judge.

This case comesto us on appeal from the district court's grant of the plaintiffs' 1

motion for a preliminary injunction and denial of the defendants' motion to compel

arbitration. Because we hold that the district court correctly concluded that the

defendants are not the plaintiffs' "customers" under the Financial IndustryRegulatory

Authority's (FINRA) Code of Arbitration Procedure for Customer Disputes (FINRA

Code) we affirm the judgment of the district court.

I.

This case arises out of securities issued by a group of Minnesota limited 2

liability companies (collectively, Geneva) and purchased by defendants-appellants

(the Investors) in 2007 and 2008. Plaintiff-appellee Berthel Fisher & Company

Financial Services., Inc., et. al (collectively, Berthel), a licensed broker-dealer and

member of FINRA, served as managing broker-dealer for the offering. As managing

broker-dealer, Berthel assembled a group of FINRA-registered

broker-dealers—Selling Group Members, or SGMs—who in turn offered the

securities to their own customers, including the Investors.

The Honorable Ann D. Montgomery, United States District Judge for the

1

District of Minnesota.

The securities in question were tenancy-in-common interests in real estate

2

located in Minnesota and Texas.

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Although Geneva prepared the private placement memoranda (PPMs) to be

provided to prospective purchasers of the securities, Berthel reviewed at least two of

the PPMs, suggesting changes that Geneva adopted. Per the agreement between

Berthel and the SGMs, Berthel collected investor payments from the SGMs and

passed those payments along to Geneva. In addition, the contract between Berthel

and Geneva obligated Berthel and the SGMs to determine each investor's eligibility

to participate in the offering. Because of this, Berthel maintained a file on each

investor that included the investors' names, dates of birth, and contact information.

The securities did not perform as anticipated, leading the Investors to file

FINRA arbitration claims against Berthel. The Investors alleged that Berthel

performed insufficient due diligence on the offering, leading to critical omissions in

the PPMs. After preliminary proceedings before FINRA, Berthel filed suit in the

United States District Court for the District of Minnesota, seeking a declaratory

judgment that the Investors were not Berthel's "customers" under the FINRA Code

and that Berthel was therefore not obligated to arbitrate with the Investors. Further,

Berthel moved for a preliminary injunction enjoining the arbitrations, and the

Investors cross-moved to compel arbitration.

Relying on Fleet Boston Robertson Stephens, Inc. v. Innovex, Inc., 264 F.3d

770 (8th Cir. 2001), the district court held that the Investors did not qualify as

Berthel's customers under the FINRA Code and that the Investors' claims against

Berthel were therefore not arbitrable before FINRA. Accordingly, the court granted

Berthel's motion to enjoin the pending arbitrations and denied the Investors'

cross-motion to compel arbitration.

II.

"We have jurisdiction to review the denial of a motion to compel arbitration as

an interlocutory appeal within the scope of 28 U.S.C. § 1292(a)(1)." McNamara v.

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Yellow Transp., Inc., 570 F.3d 950, 954 (8th Cir. 2009). "We review de novo the

denial of a motion to compel arbitration." CD Partners, LLC v. Grizzle, 424 F.3d

795, 798 (8th Cir. 2005). Likewise, we review de novo the district court's legal

conclusions in granting a motion for a preliminary injunction. Sierra Club v. U.S.

Army Corps of Eng'rs, 645 F.3d 978, 989 (8th Cir. 2011). "When reviewing the

enforcement of an arbitration agreement, we determine only whether there is a valid

arbitration agreement and whether the dispute at issue falls within the terms of that

agreement." Franke v. Poly-America Med. & Dental Benefits Plan, 555 F.3d 656,

658 (8th Cir. 2009).

"[T]he first task of a court asked to compel arbitration of a dispute is to

determine whether the parties agreed to arbitrate that dispute." Mitsubishi Motors

Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626 (1985). The Investors do

not allege that Berthel explicitly agreed to arbitrate; rather, they allege that they

qualify as Berthel's "customers" under the FINRA Code. The FINRA Code, which

Berthel has signed as a FINRA member, constitutes an agreement to arbitrate disputes

between Berthel and its customers. See In re Am. Exp. Fin. Advisors Secs. Litig.,

672 F.3d 113, 128 (2d Cir. 2011) ("Ameriprise does not dispute that, by virtue of its

membership in FINRA, it has consented to arbitrate with its customers."); MONY

Secs. Corp. v. Bornstein, 390 F.3d 1340, 1342 (11th Cir. 2004) (the predecessor to

the FINRA Code "itself constitutes the agreement" to arbitrate.). Rule 12200 of the

FINRA Code, which is the successor to National Association of Securities Dealers

Code of Arbitration Procedure Rule 10301, states:

3

Herbert J. Sims & Co., Inc. v. Roven, 548 F. Supp. 2d 759, 763 n.2 (N.D. Cal.

3

2008) ("Rule 12200 of the Code is an amended version of former Rule 10301 that

went into effect on April 16, 2007. The cases interpreting and applying Rule 10301

apply with equal force to Rule 12200, as the amendment did not effect any

substantive change to the rule.").

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Parties must arbitrate a dispute under the Code if:

• Arbitration under the Code is either:

(1) Required by a written agreement, or

(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 ofthe

member or the associated person, except disputes involving the

insurance business activities of a member that is also an insurance

company.

Here, the Investors have requested arbitration by filing claims with FINRA. 

Further, the dispute "arises in connection with the business activities" of Berthel

because the Investors claim that Berthel failed to conduct adequate due diligence. 

Accordingly, it is undisputed that the question of arbitrability in this case turns on

whether the Investors are Berthel's customers under the FINRA Code.

The FINRA Code defines "customer" in the negative, stating only that "[a]

customer shall not include a broker or dealer." FINRA Rule 12100(i). In Fleet

Boston, we rejected the argument that one may qualify as a customer merely be being

neither a broker nor a dealer. Fleet Boston, 264 F.3d at 772. Instead, we construed

"customer" to "refer[] to one involved in a business relationship with [a FINRA]

member that is related directly to investment or brokerage services." Id.

It is uncontested that the Investors had no contact with Berthel in the course of

investing in the securities at issue. The Investors argue, however, that they qualify

as Berthel's customers under Rule 12200 because Berthel

provided "investment or brokerage services" to the investors in three

ways. First, Berthel Fisher wasresponsible for conducting due diligence

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on the TIC interests. Second, Berthel Fisher was obligated to conduct

a reasonable-basis suitability analysis on the TIC interests. Third,

Berthel Fisher maintained customer files on the investors and was

responsible for protecting the investors' privacy.

The provision of these services in this case failed to transform the Investors

into Berthel's customers, because Berthel provided those services not to the Investors

but instead to the SGMs and Genevea. If the provision of these services formed any

customer relationships at all, itformed thembetween Berthel, Geneva, and the SGMs,

not between Berthel and the Investors.

According to the Investors,Vestax Securities Corp. v. McWood, 280 F.3d 1078

(6th Cir. 2002), establishes that a customer relationship is possible "even in the

absence of a direct transactional relationship with the firm." Id. at 1081. Citation to

Vestax, however, is misplaced. The investors in that case purchased securities from

associated persons of the firm. Id. at 1081–82. Arbitration was therefore required

because Rule 12200 requires arbitration when "[t]he dispute is between a customer

and a member or associated person of a member." Accordingly, that case stands for

the unremarkable proposition that customers of associated persons of a firm may

compel arbitration with the firm. It does not suggest that an investor who interacts

with neither the firm nor its associated persons may nevertheless qualify as a

customer of the firm. Neither party argues that the SGMs are associated persons of

Berthel; accordingly, Vestax is inapposite.

The Investors argue that Fleet Boston requires only "investment or brokerage

related services." But again, the provision of "investment or brokerage related

services" is only half of the picture—not only must the FINRA member firm provide

those services, but also must it provide those services to the customer either directly

orthrough its associated persons. In FleetBoston, we observed that "[a]lthough other

cases interpreting the term 'customer' have in some ways taken a broad view of the

term, in all of these cases there existed some brokerage or investment relationship

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between the parties." Id. at 772 (emphasis added). Simply put, there is no

"relationship" between Berthel and the Investors as required by Fleet Boston. 

Because Berthel did not provide "investment or brokerage related services" to the

Investors, the Investors are not Berthel's customers under FINRA Rule 12200. We

affirm the judgment of the district court.

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