An investor who wants to force a financial firm to arbitrate a dispute must first establish that she is a customer of the firm, a federal court in Brooklyn has ruled.
Sagepoint Financial, an investment firm based in Phoenix, cannot be compelled to arbitrate a claim filed by Marcia Small, who allegedly lost $870,000 after investing with Robert Henry Van Zandt, Sr., a financial adviser from the Bronx who in November pleaded guilty to a Ponzi scheme that stole $4.8 million from 29 investors.
Small invested with Van Zandt in 2008, when Van Zandt was registered with GunnAllen Financial, a Tampa-based brokerage firm that shuttered in 2010.
In December, Small filed papers with the Financial Industry Regulatory Authority (FINRA) against brokerage firms that Van Zandt was associated with during the decade that his scheme unfolded. Among them was American General Services, Inc. (AGSI), which Sagepoint acquired in 2006, roughly two years after Van Zandt ended his registration with AGSI.
Small charged that Sagepoint, as successor to AGSI, bears responsibility for AGSI’s failure to supervise Van Zandt with regard to investments he sold, for misreporting the reasons that Van Zandt left the firm, and for the company’s alleged failure to report Van Zandt’s activities properly to regulators. Those obligations, according to Small, required Sagepoint to arbitrate Small’s claim in a forum provided by FINRA.
The court disagreed, pointing to the absence of either a relationship between Sagepoint and Small that would constitute Small’s being a customer of Sagepoint or an agreement between the parties to arbitrate disputes.
“Here, any customer relationship between [Small] and Van Zandt based on investment activity in 2008 arose almost four years after Van Zandt ended his affiliation with AGSI,” U.S. District Judge Dora Irizarry wrote in a ruling published May 15. “Further, [Small’s] claims in the arbitration, whether based on AGSI’s alleged supervisory failures or on Van Zandt’s own misconduct, do not allege any time during which [Small’s] investment activity with Van Zandt coincided with Van Zandt’s affiliation with AGSI.”
“Absent any such temporal nexus, [Small’s] investment relationship with Van Zandt does not provide a basis to compel arbitration against AGSI, or against [Sagepoint] as AGSI’s alleged successor,” Irizarry added.
The ruling illustrates at least one limit on investors’ ability to compel arbitration, which is a contractually agreed-upon procedure to resolve disputes. When one party resists arbitration as part of a push to move a dispute into court, a judge will, as in Small’s case, decide whether the arbitration should proceed.
Small charged Sagepoint with seeking to avoid arbitration because the firm disliked the outcomes of other arbitrations that stemmed from Van Zandt’s conduct. However, Sagepoint’s experience in other cases had no bearing on Small’s charges, according to Irizarry.
Though Irizarry acknowledged Small’s contention that federal law has a presumption in favor of arbitration, Small and Sagepoint were battling over the existence of an obligation to arbitrate, according to the court, and not the scope of an arbitration clause.