# U ni te d S ta te s Co ur t of A pp ea ls For the Eig hth Circu it

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Bert he l Fi sh er & C om

pa ny Fin an ci al Serv ic es , Inc .; Tho m as J. Be rth el ; Ro na ld O. Bren de ng en ; Sh el le y Rae Dav en po rt; Fred eri ck P. Fis he r; Ri ch ard M. Mu rp hy; Lesl ie D. Sm it h; Dani el P. W eg m an n; an d Th om as R. Bie sh eu ve l

ll ll ll ll ll ll ll ll ll ll l Pla in ti

ff s - Ap pe ll ees

v.

Crai g Lar m on ; Gen ev a OSWX XXII, LLC, a Delawa re l im it ed li ab il it y
co rp or at io n; Earl Ho la se k; OSW X XXXVI, L LC, a Dela ware l im it ed li ab il it y
co rp or at io n; Gene va FTCX I, LLC,a Dela ware l im it ed li ab il it y co rp or at io n; Gen ev a BCC X XVIII, LLC, a Delawa re l im it ed li ab il it y co rp or at io n; Karen Lane ; Gen ev a OSWX IX, LLC, a Delawa re l im it ed li ab il it y co m pa ny; Decl arat io n o f Trus t o f Karen Lane da te d Ap ril 24 , 19 96 ; J ack Hoo pe s; Lorn a Hoo pe s; Gene va OSW X XIX, LL C, a Del aware li m it ed li ab il it y co m pa ny; Pat ric k J or da n; Gene va OSW X XXVII, LLC, a Delaware li m it ed li ab il it y co m pa ny; an d P at ric k J . Jo rd an Trus t d at ed Apri l 6 , 19 90

ll ll ll ll ll ll ll ll ll ll l Defe nd

an ts - App el la nt

s

__ __ __ __ __ __ App eal fro m

Uni te d S ta te s Di st ric t Co ur t fo r th e Dis tri ct of M in ne so ta - Mi nn eap ol is

__ __ __ __ __ __ Su bm it te d: Ju ne 12 , 20 12 Fil ed : Oct ob er 1 , 20 12

__ __ __ __ __ __Befo re MUR PHY, MELLOY, an d C OLLOTO N, Circ ui t J ud ge s.

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MELLOY, Circu it Ju dg e.

Thi s cas e co m es to us on ap pe al fro m th e di st ric t co ur t's gr an t of th e pl ai nt iff s' 1

m ot io n fo r a pr el im in ary in jun ct io n an d de ni al of

th e d efen da nt s' m ot io n to co m pe l arb it rat io n. Bec au se we ho ld th at th e di st ric t co ur t c o rrec tl y co nc lu de d th at th e de fen da nt s are no t th e pl ai nt iff s' "cu st om ers " un de r th e Fi na nc ia l In du st ry Reg ul at or y Aut ho rit y 's (FINRA) Co de of Arb it rat io n Pro ced ur e fo r Cu st om er Dis pu te s (FINRA Co de ) we affi rm

th e jud gm en t o f th e d is tri ct co ur t.

I.

Thi s cas e ari se s ou t of se c u r i t i e s i ss ue d by a gr ou p of Mi nn es ot a li m it ed 2
l i ab il it y co m

pa ni es (co ll ect iv el y , Gen ev a) an d pu rch as ed by de fen da nt s- ap pe ll a n t s (th e I n v e s t o r s) in 20 07 an d 20 08

. Pl ai nt iff -ap pe ll ee Bert he l Fi sh er & Co m pa ny Fi na nc ia l Serv ic es ., In c., et

. al (co l l e c t i v e ly, Bert he l), a li cen se d br ok er-d eal er an d

m em be r of FINRA, se rv ed as m an ag in g br ok er-d eal er fo r th e of feri ng

. As m an ag in g b r o k e r

- d e a l e r , B e r t h e l a s s e m b l e d a g r o u p o f F I N R A

- r e g i s t e r e d br o k e r

- d eal ers —Se ll in g Gro up Mem be rs , or SGMs —wh o in tu rn of fere d th e

se cu rit ie s t o t he ir o wn cu st om ers , in cl ud in g t he Inv es to rs

.

The Hon or ab le Ann D. Mon tg om ery, Uni te d S ta te s Di st ric t J ud ge for th e 1 Dis tri ct of M in ne so ta

. The sec ur it ie s i n q ue st io n wer e te na nc y -in -co m m on in te res ts in real est at e 2 lo cat ed in Mi nn es ot a an d Tex as

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-A l t h o u g h Gen ev a pr ep ared th e pr iv at e pl acement m em or an da (PPM s) to b e

pr ov id ed to pr os pe ct iv e pu rch as ers of th e se cu rit ie s, Bert he l rev ie wed at le as t two of th e PPM s, su gg es ti ng ch an ge s th at Gen ev a ad op te d. Per t h e a g r e em en t be twee n Bert he l an d th e SGMs , B e rth el co ll ect ed in ve st or pa y m en ts fro m th e SGMs an d
pa ss ed th os e pa y m en ts al on g to Gen ev a. In ad di ti o n , th e co nt ract be twee n Bert he l

an d Gen ev a ob li ga te d Bert he l an d th e SGMs to de te rm in e each in ve st or 's el ig ib il it y to pa rti ci pa t e i n t h e of

feri ng

. Bec au se of th is
, Bert he l m ai nt ai ne d a fil e on each in ve st or th at in cl ud ed th e in ve st or s' n am es , dat es of b irt h, an d c on ta ct in fo rm at io n.

The se cu rit ie s di d no t pe rfo rm as an t i c i p a te d, le ad in g th e In ve st or s to fil e FINRA arb it rat io n c l a i ms ag ai ns t Bert he l. The In ve st or s al le ge d th at Bert he l
pe rfo rm ed in su ffi ci en t du e di li ge nc e on th e of feri ng , le ad in g to cri ti cal om is si on s in th e P P M s. Afte r pr el im in ary pr oc eed in gs be fo re FINRA, Bert he l fil ed su it in th e Uni te d St at es Dis tri ct Co ur t fo r th e Dis tri ct of M i n n e s o t a, se ek in g a de cl arat or y jud gm en t th at th e In ve st or s were no t Bert he l's "cu st om ers " un de r th e F I N RA Co de

an d th at Bert he l was th eref or e no t ob li ga te d to arb it rat e wit h th e In ve st or s. Fu rth er, Bert he l m ov ed fo r a pr el im in ary in jun ct io n en

joi ni ng th e arb it rat io n s , a nd th e In ve st or s cr os s- m ov ed to co m pe l ar bi tra ti on

.

Rel y in g o n F le et Bo st on Ro be rts on St ep he ns , I nc . v . I nn ov ex , I nc ., 2 64 F.3d
77 0 (8 th Ci r. 20 01 ), th e di st ric t co ur t he ld th at th e In v e s to rs di d no t qu al ify as Ber th el 's cu st om ers un de r th e FINRA Co de an d th at th e In ve st or s' cl ai m s ag ai ns t Bert he l were th eref

or e no t arb it rab le be fo re FINRA. Acco rd in gl y , th e co ur t gr an te d
Bert he l ' s mo t io n to en

joi n th e pe nd in g arb it rat io ns an d de ni ed th e In ve st or s'

cro ss -m ot io n t o c om

pe l ar bi tra ti on

.

II.

"We ha ve juri sd ic ti on to rev ie w th e de ni al of a m ot io n to co m pe l arb it rat io n as

an in te rlo cu to ry

ap pe al wit hi n th e sc op e of 28 U.S.C. § 1 29 2( a)(1 )." Mc Nam ara v

.

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-Yell ow Tran sp ., In c., 57 0 F.3 d 9 5 0, 95 4 (8 th Ci r. 20 09 ). "We rev ie w de no vo th e

de ni al of a m ot io n to c o mpel arb it rat io n." CD Part ne rs , LLC v. Griz zl e, 42 4 F.3 d 79 5, 79 8 (8 th Ci r. 20 05 ). Lik ew i s e , w e r e v i ew de no vo th e di st ric t co ur t's le ga l

co nc lu si on s in gr an ti ng a m ot io n fo r a pr el im in ary in jun ct io n. Si erra Cl ub v. U.S. A r m y Co rp s of Eng 'rs , 64 5 F.3 d 97 8, 98 9 (8 th Ci r. 20 11 ). "When rev ie w i n g t h e

en fo rcem en t of an arb it rat io n ag reem en t, we de te rm in e on ly whe th er th ere is a va li d arb it rat io n ag reem en t an d whe th er th e d is pu te at i ss ue fal ls wit hi n th e te rm s of th at
ag reem en t." F r a n k e v

. Po ly-Am eri ca Med

. & Den ta l Ben efi ts Pl an , 55 5 F.3 d 65 6, 65 8 (8 th Cir . 20 09 ).

"[T]he fir st ta sk of a c o ur t as ke d to co m pe l arb it rat io n of a di sp ut e is to de te rm in e whe th er th e pa rti es ag reed t o a r b it rat e th at di sp ut e." Mi ts ub is hi Mo to rs Co rp

. v. So le r Ch ry sl er-P lym ou th
, In c., 47 3 U.S. 61 4, 62 6 (1 98 5)

. The In ve st or s do

no t al le ge th at Bert he l ex pl ic it ly ag reed to arb i t r at e; rat he r, th ey al le ge th at th ey qu al ify as Be rth el 's " cu st om ers " u nd er t he FINRA Co de

. The FINRA Co de , whi ch
Bert he l ha s si gn ed as a FINRA m em be r, co ns ti tu te s an ag reem en t to arb it rat e di sp ut es be twee n Bert he l an d it s cu st o mer s

. See In re Am

. Exp

. Fi n. Adv is or s Secs

. Lit ig
., 67 2 F.3 d 11 3, 12 8 (2 d Ci r. 20 11 ) ("Am eri pr is e do es no t di sp ut e th at , by vi rtu e of it s

m em be rs hi p in FINRA, i t h a s c on se nt ed to arb it rat e wit h it s cu st om ers ."); MONY Secs . C or p. v. Bo rn st ei n, 39 0 F.3 d 13 40 , 1 34 2 (1 1 t h Ci r. 20 04 ) (th e pr ed eces so r to th e FINRA Co de "i ts el f co ns ti tu te s th e ag reem en t" to arb it rat e.). Ru le 12 20 0 of th e FINRA Co de , wh ic h is t h e s u c c es so r to Nati on al Ass oc ia ti on of Secu rit ie s Deal ers Co de of Arb it rat io n P ro ced ur e Ru le 10 30 1, st at es : 3

Herb ert J. Si m s & Co ., In c. v. Ro ve n, 54 8 F. Su pp

. 2d 75 9, 76 3 n.2 (N.D. Cal

. 3 20 08 ) ("R ul e 12 20 0 of th e Co de is an am en de d ve rs io n of fo rm er Ru le 10 30 1 t ha t

wen t in to effe ct on Apr il 16 , 20 07

. The cas es in te rp ret in g and ap pl y in g Rul e 10 30 1

a pp ly wit h eq ua l fo rce to Ru le 12 20 0, as th e am en dm en t di d no t effe c t a n y
su bs ta nt iv e ch an ge to th e ru le .").

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-Part ie s m us t ar bi tra te a di sp ut e u nd er t he Co de if:

• Arb it rat io n u nd er t he Co de is eit he r:

(1 ) Req ui red by a writt en ag reem en t, o r (2 ) Req ue st ed by the cu st om er;

• The di sp ut e is be twee n a cu st om er an d a m em be r or as s oc ia te d pe rs on of a m em

be r; a nd

• The di sp ut e ari se s in co nn ect io n wit h th e bu si ne ss act iv it ie s of th e
m em be r or th e as so ci at ed pe rs on , ex cep t di sp ut es in vo lv i n g th e in su ran ce bu si ne ss act iv it ie s of a m em be r th at is al so an in su ran ce
co m pa ny.

Here, th e In ve st or s ha ve req ue st ed arb it rat io n by fil in g cl ai ms w i t h FINRA. Fu rth er, th e di sp ut e "ar is es i n c on ne ct io n wit h th e bu si ne ss act iv it ie s" of Bert he l be cau se th e In ve st or s cl ai m th at Bert he l fai le d to co nd uc t ad eq ua te du e di li ge n c e. Acco rd in gl y , it is un di sp ut ed th at th e qu es ti on of arb it rab il it y in th is cas e tu rn s on whe th er t he Inv es to rs are Be rth el 's c us to m ers un de r th e FINRA Co de

.

The FINRA Co de de fin es "cu st om er" in th e ne ga ti ve , st a t i n g o nl y th at "[a ]

cu st om er sh al l no t in cl ud e a br ok er or de al er." FINRA Ru le 12 10 0( i). In Fl eet Bo st on , we reject ed th e arg um en t th at on e m ay qu al ify as a cu st om er m erel y be be in g

ne it he r a br ok er no r a de al er. Fl eet Bo st on , 26 4 F.3 d at 77 2. In st ead
, we co ns tru ed "cu st om er" t o " r efer [] to on e in vo lv ed in a bu si ne ss rel at io ns hi p wit h [a FINRA]

m em be r th at is rel at ed di rect ly to i nv es tm en t o r br ok erag e se rv ic es ." Id

.

It is un co nt es te d th at th e In ve st or s ha d no co nt act wit h Bert he l in th e co ur se of in ve st in g in th e se cu rit ie s at is su e. The In ve st or s arg ue , h owe ve r, th at th ey qu al ify

as Bert he l's cu st om ers un de r Ru le 12 20 0 b ecau se Bert he l

pr ov id ed "i nv es tm en t or br ok erag e se rv ic es " to th e i nv es to rs in th ree way s. Fi rs t, Bert he l Fi sh er was respons ib le fo r co nd uc ti ng du e di li ge nc e

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-on th e TIC i nt eres ts

. Seco nd , B ert he l Fi sh er was ob li ga te d to co nd uc t

a reas on ab le -b as is su it ab il it y an al y si s on th e TIC in te res ts

. Thi rd
, B e r t h e l Fi sh er m ai nt ai ne d cu st om er fil es on th e in ve st or s an d wa s
res po ns ib le for pro te ct in g t he in ve st or s' p riv acy.

Th e pr ov is io n of th es e se rv ic es in th is cas e fai le d to tra ns fo rm th e In ve st or s in to Bert he l's cu st om ers , be cau se Bert he l pr ov id ed th os e se rv ic es no t to th e In ve st or s bu t in st ead to th e SGMs an d Gen ev ea. If th e pr ov is io n of th es e se rv ic es fo rm ed an y

cu st om er rel at io ns hi ps at al l, it fo rm ed th em be twee n Bert he l, Gen ev a, an d th e SGMs ,
no t b et ween Bert he l an d t he Inv es to rs

.

Acco rd in g to the In ve sto rs , V es ta x Secu rit ie s Co rp

. v. McWoo d, 28 0 F.3 d 10 78 (6 th Ci r. 20 02 ), es ta bl is he s th at a cu st om er rel at io ns hi p is po ss ib le "ev en in th e ab se nc e of a di rect tra ns act io na l rel at io ns hi p wit h th e fir m ." Id

. at 10 81

. Ci ta ti on to Ves ta x, ho wev er, is m is pl aced

. The in ve st or s in th at cas e pu rch as ed se cu rit ie s fro m

as so ci at ed pe rs on s of th e fir m

. Id

. at 10 8 1

– 8 2

. Arb it rat io n was th eref or e req ui red be cau se Ru le 12 20 0 re qu ire s ar bi tra ti on whe n "[t ]he di sp ut e is be twee n a cu st om er

an d a m em

be r or as so ci at ed pe rs on of a m em be r." Acco rd in gl y , th at cas e st an ds fo r th e un rem ark ab le pr op os it io n th at cu st om ers of as so ci at ed pe rs on s o f a fir m m ay

co mpel arb it rat io n wit h th e fir m

. It do es no t su gg es t th at an in ve st or who in te ract s

w it h ne it he r th e fir m no r it s as so ci at ed pe rs on s m ay ne ve rth el es s qu al i f y a s a

cu st om er o f th e fi rm

. Neit he r pa rty arg ue s th at th e SGMs are ass oc ia te d per so ns of Bert he l; acco rd in gl y , Vest ax is in ap po si te

.

The In ve st or s arg ue th at Fl eet Bo st on req ui res on ly "i nv es tm en t or br ok erag e rel at ed s e r vi ces ." Bu t ag ai n, th e pr ov is io n of "i nv es tm en t or br ok erag e rel at ed

se rv ic es " is on ly ha lf of th e pi ct ur e—n ot on ly m us t th e FINRA m em

be r fir m pr ov id e th os e se rv ic es , bu t al so m us t it pr ov id e th os e se rv ic es to th e cu st ome r ei th er di rect ly

or th ro ug h it s as so ci at ed pe rs on s. In Fl eet Bo st on , we ob se rv ed th at "[a ]lth ou gh ot he r

cas es in te rp ret in g th e te rm 'cu st om er' ha ve in so m e way s ta ke n a b r o a d v i e w o f th e
t e r m , in al l of th es e cas es th ere ex is te d so m e br ok erag e or in ve st m en t re la ti on s h i p

-6

-be twee n th e pa rti e s." Id

. at 77 2 (em ph as is ad de d)

. Si m

pl y pu t, th ere is no "re la ti on sh ip " be twee n Bert he l an d th e In ve st or s as req ui red by Fl eet Bo st on

. Bec au se Bert he l di d no t pr ov id e " in ve st m en t or br ok erag e rel at ed se rv ic es " to th e In ve st or s, th e In ve st or s are no t Bert he l's cu st om ers un de r FINRA Ru le 12 20 0. W e affi rm th e jud gm en t o f th e d is tri ct co ur t.

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