NYLIFE Securities, LLC v. Duhame

Background

Ron Duhame, Uliyan Koytchev Koev, and Kamran Sotoodeh initiated Financial Industry Regulatory Authority (FINRA) arbitration against NYLIFE Securities, LLC and its former registered agent, Felix Chu. Their arbitration claims included breach of fiduciary duty, negligence, fraud, and violations of federal and state securities laws. They alleged that Felix Chu recommended investments in promissory notes issued by his son Derek Chu and that NYLIFE was responsible for failing to supervise Felix Chu.

The defendants stated that they invested in the promissory notes between 2016 and 2018 and that Koev entered a joint venture involving Derek Chu and Suitelife Norcal, LLC. They claimed to have lost $1,215,000. NYLIFE filed this action seeking to stop the arbitration and then moved for a preliminary injunction.

Legal Standard

A preliminary injunction is temporary court relief issued before a final decision. The party requesting one must show a likelihood of success on the merits, likely irreparable harm without the injunction, that the balance of hardships favors the requested relief, and that the injunction serves the public interest.

Court’s Analysis

The court held that NYLIFE was likely to succeed in showing that FINRA Rule 12200 did not require arbitration. That rule requires arbitration in qualifying disputes between a customer and a FINRA member or associated person when the dispute arises from the member’s or associated person’s business activities.

Relying on Ninth Circuit precedent, the court explained that a customer is a non-broker or non-dealer who purchases commodities or services from a FINRA member in the course of the member’s regulated investment-banking or securities business. The court found that the defendants had no relationship with NYLIFE and that Felix Chu was merely a friend from a local café who recommended a bad investment. The defendants had invested directly with Felix Chu’s son and had not purchased the promissory notes or another service from NYLIFE or Felix Chu.

The court also found unrebutted evidence that the type of investment involved was not offered by NYLIFE. It found no evidence that Felix Chu made the investment appear connected to NYLIFE’s business. Accordingly, the court concluded that the defendants were not customers of NYLIFE or of its associated person for purposes of FINRA Rule 12200.

The court further found that NYLIFE would suffer irreparable harm if forced to participate in arbitration that it had not agreed to undertake. The balance of the equities favored NYLIFE because the injunction would delay, rather than permanently prevent, arbitration if the defendants later prevailed on the arbitrability issue. The court also concluded that allowing arbitration to proceed without an agreement to arbitrate would not serve the public interest.

Disposition

Judge Jacqueline Scott Corley granted NYLIFE’s motion for a preliminary injunction. The defendants were enjoined from pursuing the FINRA arbitration against NYLIFE Securities. The court also granted the defendants’ unopposed motion to supplement their opposition exhibits. The order disposed of Docket Nos. 12 and 19.