Auction Rate Securites
Broker-Dealer Regulation
August 4, 2008
Court Refuses to Dismiss Proceeding to Attach UBS Assets to Secure Pending FINRA Arbitration Award
Source: Bloomberg Law Report
The U.S. District Court for the District of Connecticut denied UBS Financial Services, Inc.’s (UBS) motion to dismiss an action by Arnold Chase Family, LLC and others seeking attachment of $150 million in UBS assets pending the resolution of plaintiffs’ arbitration claim against UBS before the Financial Industry Regulatory Authority (FINRA). Noting that UBS’s motion and plaintiffs’ request for a prejudgment remedy “raise an interesting and apparently undecided issue regarding arbitration of securities claims under [FINRA rules],” the Court held that FINRA Rule 12209 does not preclude all judicial proceedings during a pending arbitration and that, therefore, plaintiffs’ attachment action could proceed.
Background
Plaintiffs initiated a FINRA arbitration claim against UBS on April 15, 2008, alleging
that UBS induced them to invest in securities that were supposedly “cash alternatives”
but which were, in fact, auction rate securities. Plaintiffs claim they suffered
financial losses as a result of these investments. On April 17, 2008, plaintiffs
filed this action, seeking a prejudgment remedy of attachment of $150 million to
secure any arbitration award they might receive. UBS moved to dismiss the action,
arguing that FINRA rules, and FINRA Rule 12209 in particular, “prohibit judicial
proceedings concerning matters pending in arbitration.” UBS also argued that prejudgment
attachment was unnecessary because, under FINRA Rule 12904(i), a party is required
to pay any arbitration award within thirty days of its issuance.
Motion to Dismiss Denied
FINRA Rule 12209 states that “[d]uring an arbitration, no party may bring any suit,
legal action, or proceeding against any other party that concerns or would resolve
any of the matters raised in the arbitration.” UBS argued that this language bars
any legal proceeding related to the arbitration. The Court rejected this argument,
giving four reasons.
Second Circuit Precedent
First, the Court noted that Second Circuit law does not prohibit it from considering
prejudgment remedies while an arbitration is pending. The Court pointed to a string
of Second Circuit cases decided between 1984 and 2004 holding that “the Court has
both the power and the duty to entertain a motion for preliminary injunction pending
the results in [an] arbitration.” The Court then noted that the Second Circuit has
taken the view that prejudgment remedies complement the desire for prompt arbitration
decisions, citing a 1944 decision by Judge Learned Hand in which the Second Circuit
allowed a district court to proceed with a prejudgment attachment while the related
arbitration was pending. The Court concluded that Second Circuit courts “have historically
entertained requests for provisional remedies during the pendency of arbitrations
and have viewed the judicial consideration of such requests as consistent with,
and not contrary to, the spirit of the Federal Arbitration Act and a party’s right
to submit a dispute to arbitration.”
No Support for a Broad Reading
Second, the Court stated that, while parties may contract away their right to have
courts provide provisional remedies while an arbitration is pending, there is no
indication that FINRA intended Rule 12209 to prohibit judicial intervention. The
Court explained that nowhere in FINRA’s guidance and interpretation on Rule 12209
“does FINRA ever say that Rule 12209 bars all judicial proceedings while an arbitration
is pending, let alone that the intent of Rule 12209 is to prevent customers from
invoking the historic powers of courts to provide provisional remedies in aid of
arbitration.” Indeed, said the Court, UBS acknowledged that FINRA has never provided
clear guidance on which judicial proceedings are prohibited by Rule 12209. Pointing
out that UBS conceded that parties to a FINRA arbitration often request courts to
compel parties to participate in the arbitration, the Court stated that “despite
its arguments about the breadth of the language of Rule 12209, UBS cannot seriously
maintain that the rule bars any and all judicial action.”
Attachment is not a “Matter Raised in Arbitration”
Third, according to the Court, Rule 12209 can be strictly interpreted to bar only
judicial proceedings regarding “matters raised in arbitration,” which would not
prohibit plaintiffs’ attachment action. In support, the Court cited its recent decision
in Bahrain Telecommunications Co. v. DiscoveryTel, Inc., 476 F. Supp 2d 176, 182
(D. Conn. 2007) in which it found that “[a] prejudgment remedy does not interfere
with the arbitral process but merely ensures that there will be assets available
to satisfy any judgment the arbitrators themselves may render.” Reading Rule 12209
to permit these types of proceedings, said the Court, would “still give meaning
to the rule’s language.”
Provisional Remedies May be Necessary
Finally, the Court rejected UBS’s argument that attachment wasunnecessary due to
the requirement in FINRA Rule 12904(i) that a party pay any arbitration award within
thirty days. The Court acknowledged that, while UBS is a large financial institution
and appears to have sufficient assets to pay any arbitration award that may be rendered,
this may not always be the case for smaller FINRA members. Noting that even large
institutions may have liquidity issues, the Court stated that “one only has to recall
what happened recently with Bear Stearns to understand why some customers might
like to have the security of knowing that if they prevail in arbitration, assets
will be available to satisfy any award.”
Source: Bloomberg Law Report, August 18, 2008.