UBS Financial Services Inc. v. Carilion Clinic: FINRA Arbitration Ordered in ARS Case

In UBS Financial Services Inc. v. Carilion Clinic, Civil Action No. 3:12cv424–JAG, 2012 WL 3112010 (E.D. Va. July 30, 2012), the United States District Court for the Eastern District of Virginia denied plaintiffs’ motion for a preliminary injunction prohibiting arbitration with the Financial Industries Regulation Authority (“FINRA”).

Defendant Carilion Clinic (“Carilion”) is a non-profit healthcare organization operating eight hospitals in Virginia. It entered into a business relationship with UBS Financial Services (“UBS”) and CitiGroup Global Markets, Inc. (“Citi”) (collectively, “Plaintiffs”) through two sets of documents: the Underwriter Agreements and the Broker-Dealer Agreements. Carilion then issued about $234 million in auction rate securities (ARS), allegedly at the recommendation of UBS and Citi, to fund expansion of its facilities. ARS “are bonds for which the variable interest rate is determined through a periodic auction.”  UBS and Citi allegedly bid in these auctions along with investors to ensure the auctions did not fail. When the ARS market crashed in 2008, UBS and Citi discontinued auction bidding; the auctions failed, resulting in a loss of millions of dollars by Carilion. Carilion initiated arbitration in FINRA in February 2012.

In order to be successful on their motion for a preliminary injunction, Plaintiffs must prove the following: “(1) they are likely to succeed on the merits; (2) they are likely to suffer irreparable harm in the absence of preliminary relief; (3) the balance of equities tips in [their] favor; and (4) an injunction is in the public interest.”

Plaintiffs first argued that Carilion is “an issuer of securities, not a customer,” and therefore, Carilion did not have a right to arbitration under FINRA. The court defined “customer” as “one that purchases some commodity or service.” The court reasoned that Carilion was a customer because it paid for financial services, such as underwriting, administrative auction fees, and financial advice. Accordingly, the court ruled that Plaintiffs were not likely to succeed on the merits of arguing Carilion was not a customer.

Next, Plaintiffs argued that Carilion waived any right to arbitration by agreeing to a forum selection clause in the Broker-Dealer Agreements. The court stated that the Federal Arbitration Act “requires any ambiguities in contract to be resolved in favor of arbitration.” The court found that the language of the forum selection clause stated that “all actions and proceedings” were to be brought in New York and it “did not directly address arbitration.” Plaintiffs were also on notice of a potential arbitration requirement because their status as FINRA members required arbitration in certain circumstances. Accordingly, the court ruled that Plaintiffs were unlikely to succeed on the merits of their claim that the forum selection clause waived arbitration.

The court also found that Plaintiffs could not show they would be irreparably harmed, the balance of equities was not in Plaintiffs’ favor, and the public interest favored arbitration.

The primary materials for this case may be found on the DU Corporate Governance website.

Susan Beblavi