Friday, April 10, 2015

Stanford Investors Stuck with Pershing’s Injunction Against Arbitration

By Anne Sherry, J.D.

Victims of the Stanford Ponzi scheme lost their appeal seeking to compel Pershing, L.L.C., to submit to FINRA arbitration of their claims against the clearing broker. The investors’ lack of any contractual relationship with Pershing precluded the application of two estoppel-based exceptions to the general rule that Pershing could not be compelled to arbitrate (Pershing, L.L.C. v. Bevis, April 8, 2015, per curiam).

Background and relationship among parties. After the collapse of the Stanford Ponzi scheme, a group of 100 investors initiated an arbitration proceeding against Pershing before FINRA, alleging that Pershing played a material role in defrauding them. Of the 100, 84 investors had used Pershing’s services in the course of purchasing CDs from Stanford Group Company and had signed client and margin agreements with Pershing, which contained arbitration provisions. Because Pershing directly contracted with these investors, it did not challenge their right to arbitrate. However, it secured an injunction preventing the remaining 16 investors (the “Bevis Investors”) from asserting claims in FINRA arbitration on the basis that it had no contractual relationship with them and they could not establish a relationship through any estoppel theory.

Compelling arbitration. Absent an exception, the general rule that a party cannot be compelled to arbitrate unless it agreed to would hold. The investors argued that two theories of equitable estoppel—alternative and direct-benefit estoppel—acted as such exceptions. But the court rejected both theories as applied to the facts.

Alternative estoppel. Alternative estoppel permits a nonsignatory to an arbitration agreement to compel a signatory to arbitrate a claim in two situations: first, where the signatory has asserted a contractual claim against a nonsignatory and then refused to honor an arbitration provision contained in that contract, and second, where the signatory asserts a claim of “substantially interdependent and concerted misconduct” by the nonsignatory and another signatory. Neither of these situations was germane. Pershing explicitly disclaimed any contractual relationship with the investors and did not bring any contract-based claims against them, nor had it raised allegations of interdependent and concerted misconduct between the investors and a contract signatory.

Direct-benefit estoppel. The second estoppel argument would hold if the investors could establish that they are party to a contract containing an arbitration clause which Pershing “embraced,” even though it was a non-signatory. Pershing executed an agreement to provide clearing services to the Stanford Group Company between 2005 and 2009, but had no relationship with any other Stanford entity. Even if the court were to assume that the investors could pierce the corporate veil to establish their own contractual relationship with Stanford Group Company, and therefore establish that they were party to a contract containing a FINRA arbitration clause, the direct-benefit estoppel argument would still fail because Pershing neither knowingly exploited nor directly benefited from that contract.

The case is No. 14-30525.