Today, Malecki Law, won a court appeal to allow an international investor to proceed in his securities lawsuit against Lek Securities Corporation and its principals (Samuel Lek and Charles Lek), allowing the case to go forward and be decided by a panel of arbitrators in the dispute resolution forum provided by the Financial Industry Authority (FINRA). Today’s court order, which was issued by New York’s Appellate Division, First Department, reversed the July 19, 2019 order of the lower court (Supreme Court, New York County), which improperly granted Lek Securities a permanent stay (i.e., a halt) from arbitrating the dispute in FINRA. The outcome of today’s decision is important because it adds color to the legal definition of who is a “customer” and, thus, who is eligible to bring their claims in FINRA arbitration.
Lek Securities is a U.S. brokerage firm regulated by the enforcement arm of FINRA – the largest independent regulatory body for securities trading and securities firms operating in the United States. Within the fine print of their new account forms, all investors who open retail brokerage accounts with U.S. brokerage firms waive their rights to court and are, instead, required to arbitrate any disputes in FINRA. However, FINRA provides a cost-effective arbitration forum that allows retail customers of brokerage securities firms to recover their lost investments much faster, and for far less money, than they would typically be able to in court. This is due in part to arbitrations generally not being subject to appeal and arbitration having far less onerous discovery requirements, including not allowing depositions, generally speaking. Arbitration in FINRA is also advantageous to investors because firms that lose in arbitration are incentivized to pay awards to customers within 30 days or otherwise have their brokerage licenses revoked. While the firm is still operational, and while this case was waiting for the appeal to be decided, the owner of Lek Securities, Samuel Lek, who is also named in the instant lawsuit, was barred from the securities industry by FINRA and the Securities and Exchange Commission (SEC) in December of 2019.
In reversing the lower court’s decision, today’s order by the First Department holds that there was a customer relationship established between the investor and Lek Securities under the FINRA rules and in accordance with the law established in Global Mkts. Inc. v. Abbar, 761 F.3d 268 (2d. Cir. 2014) – a seminal case in which Malecki Law’s founder, Jenice Malecki, was instrumental in shaping and arguing before the Second Circuit. The law in Abbar requires that to be a customer (and to therefore be eligible to arbitrate against a firm in FINRA), the investor must have either had an account or purchased a good or service from the firm. In its court papers, Lek Securities claimed that the international investor had an account with the firm’s UK operations (LekUK), which is not subject to regulatory oversight in the United States, and that LekUK, in carrying out brokerage services for the investor, transferred the investor’s assets to the subject U.S. affiliate, and that any payment received by the Lek entity in the United States was incidental, and not received directly from the investor, but paid internally by LekUK.
The First Department, however, agreed with the arguments put forth by Malecki Law, which was that this case was distinguishable and on point with the law established in Triad Advisors, Inc. v. Siev, 60 F. Supp. 3d 95 (E.D.N.Y. 2014), which held that the source of a firm’s compensation from a customer’s business is immaterial: “It either comes directly from the customer or indirectly through the third party…but in either situation, it is the customer that pays it….,” further noting that FINRA Regulatory Notice 12-55 defines “customer” as one who purchases a security for which the brokerage firm receives compensation “directly or indirectly.”
FINRA Rule 12200 also defines customer quite broadly, stating that “[t]he term ‘customer’ shall not include a broker or dealer.” That leaves just about everyone else, yet brokerage firms facing lawsuits in FINRA will occasionally try to escape arbitration by arguing that their clients were technically not customers as defined by FINRA. It is usually a failing, last-ditch argument that brokerage firms will sometimes employ to escape liability. But here, it ultimately failed, with the Appellate Division’s decision to reverse the lower court’s order, and rightfully side with the investor and Malecki Law, who are now permitted to resume the lawsuit against Lek Securities in FINRA arbitration.