Interactive Brokers LLC v. Delaporte

Background

Interactive Brokers LLC filed this action against Jack Delaporte, Dillon Springer, Helena Yost, Jason Merritt, Jeffrey Rosenthal, Lisa Rosenthal, Brett Leve, David Simkins, Bruce Clay, Matthew Clay, Michelle Simkins Rubell, Taylor Simkins, Dramm, Inc., and Jody Levy. The defendants had begun an arbitration against Interactive Brokers before the Financial Industry Regulatory Authority, or FINRA. Interactive Brokers sought a declaration that it did not have to arbitrate and an injunction preventing the arbitration.

The defendants were investors in funds managed by EIA All Weather Alpha Fund I Partners, LLC. EIA had maintained trading accounts with Interactive Brokers from approximately July 2017 through May 2022. Andrew Middlebrooks signed an institutional customer agreement between EIA and Interactive Brokers. That agreement included an arbitration clause covering disputes between Interactive Brokers and EIA, as well as certain people connected to those parties.

The defendants alleged in their FINRA claim that they had entrusted investment assets to EIA based on representations by Middlebrooks and EIA. They alleged that EIA misled investors, misappropriated their assets, and made payments resembling a Ponzi scheme. They sought to hold Interactive Brokers responsible for damages they attributed to EIA’s and Middlebrooks’ conduct.

Preliminary-injunction standard

To obtain a preliminary injunction, Interactive Brokers had to show irreparable harm, either a likelihood of success on the merits or serious legal questions combined with a strongly favorable balance of hardships, and that an injunction served the public interest. The defendants did not dispute the irreparable-harm, hardships, or public-interest factors. The only disputed factor was whether Interactive Brokers was likely to succeed in stopping the arbitration.

Contract-based arbitration arguments

The defendants did not sign the EIA agreement. They argued that they could nevertheless compel arbitration as third-party beneficiaries. The court rejected that argument. The arbitration clause referred to EIA’s shareholders, officers, directors, employees, associates, or agents, but the defendants described themselves in different parts of the record as investors, clients, or limited partners. The court held that the agreement’s plain language did not include those categories.

The court also rejected the defendants’ argument that limited partners were equivalent to shareholders for this purpose. It explained that New York law treats limited partnerships and corporations as different legal forms. The court concluded that the agreement did not clearly give the defendants a right to compel Interactive Brokers to arbitrate.

The defendants also relied on equitable estoppel. This doctrine can sometimes allow a non-signatory to compel arbitration when the dispute is closely connected to the arbitration agreement and the parties’ relationship makes it appropriate to treat the non-signatory as standing in for a signatory. The court found that the defendants did not address the required relationship between themselves, Interactive Brokers, and EIA. They also did not show that they were subsidiaries, affiliates, agents, employees, or other related business entities of a party that signed the arbitration agreement. The court therefore rejected this argument as well.

FINRA Rule 12200

The defendants alternatively argued that FINRA Rule 12200 required arbitration. That rule requires FINRA arbitration when arbitration is required by a written agreement or requested by a customer, the dispute is between a customer and a FINRA member or associated person, and the dispute arises from the member’s or associated person’s business activities.

The court applied the Second Circuit’s definition of “customer”: a person who is not a broker or dealer and either purchases a good or service from a FINRA member or has an account with that member. The defendants did not argue that they were customers of Interactive Brokers or of an Interactive Brokers associated person. The court also found that they had not shown that they purchased a good or service from Interactive Brokers or maintained brokerage accounts with it. Because they failed to satisfy the customer requirement, the court did not need to decide whether a written agreement independently required arbitration under FINRA’s rules.

Ruling

The court held that Interactive Brokers had shown a likelihood of success on its claim that the defendants could not compel arbitration. It granted Interactive Brokers’ motion for a preliminary injunction under Rule 65(a)(2), enjoining the defendants from pursuing the FINRA arbitration against Interactive Brokers. Judge Naomi Reice Buchwald directed the clerk to close the pending motion.