Citi and UBS must arbitrate auction rate case: court

Thu Jan 24, 2013 1:59pm EST
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By Suzanne Barlyn

(Reuters) - Two Wall Street brokerages must arbitrate a healthcare organization's claim stemming from $234 million in auction rate securities in a dispute over who is considered a "customer" for purposes of securities arbitration, a federal appeals court panel has ruled.

Brokerage units of UBS AG and Citigroup Inc failed to convince the U.S. 4th Circuit Court of Appeals that Carilion Clinic, based in Roanoke, Virginia, was not a "customer" to either firm under the Financial Industry Regulatory Authority's (FINRA) securities arbitration rules, according to an opinion on Wednesday.

The court ruled that Carilion bought "commodities or services" from a FINRA member that were regulated by industry rules.

The case stems from Carilion's decision to issue more than $234 million in auction rate securities in 2005 - a move based on advice from UBS and Citi, according to the opinion. The two firms also performed other roles for Carilion related to the securities, including purchasing them and reselling them to investors. Carilion, which operates a network of hospitals, blamed the firms for millions of dollars in losses when the auction rate securities market failed in 2008.

UBS and Citi spokespeople declined to comment.

The court's decision turned on a controversial argument: Citi and UBS argued that Carilion was not their customer because Carilion's claims did not "relate to a brokerage account or investment relationship" at either firm - a phrase that appeared in 2001 federal court interpretation of the term "customer."

While securities industry rules require brokerages to arbitrate claims with "customers," FINRA's definition of that word is vague. Brokerages often argue that the term does not apply to their circumstances and ask courts to hear the complaint instead.

A court case can drag on much longer and cost more than resolving the dispute in arbitration, which could pressure some customers to abandon their claims.   Continued...

The offices of Swiss bank UBS are seen in New York December 19, 2012. REUTERS/Andrew Burton