United States District Court, S.D. California
ORDER DENYING MOTION FOR PRELIMINARY INJUNCTION [DOC.
NOS. 5, 10, 11, 14, 17, 18, 20] ORDER LIFTING STAY [DOC. NO.
MARILYN L. HUFF, DISTRICT JUDGE.
the Court is a Motion for Preliminary Injunction brought by
Plaintiff Gregory Garrabrants (“Plaintiff” or
“Garrabrants”). (Doc. No. 5.) Garrabrants seeks
to enjoin Defendant Financial Industry Regulatory Authority
(“Defendant” or “FINRA”) from
compelling him to arbitrate certain counter-claims brought by
Scott Reynolds (“Reynolds”) before FINRA in an
arbitration captioned Spartan Securities Group, Ltd. v.
Reynolds v. Axos Clearing LLC, FINRA Case No. 19-002926
(the “FINRA Arbitration”). (Id.)
March 13, 2019, Axos Clearing LLC (“Axos
Clearing”) filed a complaint in the Southern District
of Florida against Reynolds for breach of the settlement
agreement and fraudulent inducement. Axos Clearing, LLC
v. Reynolds., No. 19-cv-20979-RAR, at 9 (S.D. Fla. Aug.
30, 2019). On March 15, 2019, Axos Clearing filed a motion
for an ex parte writ of garnishment which was verified and
signed by Plaintiff Gregory Garrabrants. (Doc. No. 18. Ex.
4.) The motion sought a bond for fifteen million dollars and
a prejudgment writ of garnishment and attachment for
“$7, 500, 000 against Defendants Reynolds . . .
.” (Id. at 23.) The motion for an ex parte
writ of garnishment described Garrabrants as “CEO of
Axos Financial, Inc., the parent of Axos Clearing Inc., which
is the sole member of Axos Clearing LLC . . . .”
(Id. at 17.) The statement of verification
accompanying the motion and signed by Garrabrants indicated
that as “Chief Executive Officer of Axos Financial,
Inc.”, Garrabrants had authority “to make this
verification on behalf of Plaintiff Axos Clearing LLC.”
(Id. at 23.) These statements were attested and
sworn to under penalty of perjury in federal court. On August
30, 2019, the complaint in the Southern District of Florida
was dismissed for being subject to mandatory arbitration
before FINRA. (Id. at 11.)
around April 3, 2019, Spartan initiated claims in
FINRA arbitration against Reynolds. (Doc. No. 5
at 4.) Spartan asserted claims against Reynolds for breach of
fiduciary duty, fraudulent misrepresentation, negligent
misrepresentation, and breach of contract. Reynolds responded
by including third-party claims in the FINRA Arbitration
against both Axos Clearing LLC and Gregory Garrabrants, the
Chief Executive Officer of both Axos Financial, Inc. and Axos
Bank. (Doc. No. 5. at 3.) Axos Clearing LLC is a member of
FINRA. Gregory Garrabrants, Axos Financial, Inc., and Axos
Bank are not members of FINRA. On August 20, 2019, Plaintiff
Garrabrants filed a complaint seeking declaratory and
injunctive relief before this Court to enjoin FINRA from
hearing Reynolds' counter-claims against him.
September 25, 2019, this Court issued an order to show cause
requesting that FINRA and Reynolds explain why the
third-party claims against Garrabrants should proceed in
arbitration. (Doc No. 7.) On September 30, 2019, Reynolds
responded and requested a formal briefing schedule to address
the issue. (Doc. No. 10.) On October 2, 2019, FINRA responded to
the order to show cause, stating that it would “abide
by this Court's determination” on the question of
arbitrability. (Doc. No. 11.) On October 3, 2019, this Court
issued an order continuing the hearing date on
Plaintiff's motion for a preliminary injunction and
temporarily staying the FINRA arbitration in order to give
Reynolds an opportunity to fully brief the issue. (Doc. No.
12.) On October 21, 2019, Plaintiff filed a reply in support
of his motion for a preliminary injunction. (Doc. No. 17.)
That same day, Reynolds filed his opposition to
Plaintiff's motion for a preliminary injunction. (Doc.
No. 18.) On October 25, 2019, this Court granted leave for
Plaintiff to file a sur-reply. (Doc. No. 19.) On October 28,
2019, Plaintiff filed his sur-reply. (Doc. No. 20.)
Court held a hearing on October 28, 2019. Madalyn Macarr and
Andre Cronthall appeared for Plaintiff Garrabrants. Lori
Werderith appeared for Defendant FINRA. Adam Ford appeared
for non-party Reynolds. For the reasons below, the Court
DENIES the motion for a preliminary
Reynolds was the former head trader at Spartan Securities
Group, Ltd. (“Spartan”) an SEC and FINRA
registered broker-dealer. (Doc. No. 18. at 3.) On March 6,
2019, Spartan allegedly suffered around a $16.5 million loss
because of a decline in the price of Bio-Path Holdings, Inc.
the alleged $16.5 million-dollar loss, according to Reynolds,
Garrabrantscontacted him regarding a possible
settlement of the dispute between Reynolds and Axos Clearing.
(Doc. No. 18. at 6.) According to Plaintiff, Garrabrants was
“designated by Axos Financial, Inc. to assist in
negotiating the settlement Agreement between Axos Clearing
and Reynolds.” (Doc. No. 1. ¶23.) Garrabrants
concedes that he communicated with Reynolds over
“calls, texts, and e-mails.” (Id. at
¶27.) Over the following week, Garrabrants and Reynolds
discussed a possible resolution of the dispute. (Doc. No. 18.
at 8.) On March 8, 2019, Reynolds signed a settlement
agreement with Axos Clearing. (Doc. No. 5-2 Ex. A.) Just five
days later, on March 15, 2019, Axos Clearing filed suit
against Reynolds in the Southern District of Florida,
alleging a breach of the settlement agreement. Axos
Clearing, LLC v. Reynolds., No. 19-cv-20979-RAR, at 9
(S.D. Fla. Aug. 30, 2019). Around June 26, 2019, Reynolds
brought counter-claims in the ongoing FINRA arbitration
against Axos Clearing and Garrabrants, individually, for his
role in negotiating the settlement agreement. (Doc. No. 5 at
4.) On August 30, 2019, the Southern District of Florida
dismissed the complaint for being subject to mandatory
arbitration before FINRA. (Doc. No. 5-2 Ex. 11.) Garrabrants
then filed a complaint before this Court seeking preliminary
injunctive relief to enjoin FINRA from hearing Reynolds'
counter-claims against him. (Doc. No. 3.)
may issue a preliminary injunction, under Federal Rule of
Civil Procedure 65, to preserve the positions of the parties
until a full trial can be conducted. LGS Architects, Inc.
v. Concordia Homes, 434 F.3d 1150, 1158 (9th Cir. 2006).
To warrant such injunctive relief, a plaintiff “must
establish that he is likely to succeed on the merits, that he
is likely to suffer irreparable harm in the absence of
preliminary relief, that the balance of equities tips in his
favor, and that an injunction is in the public
interest.” Winter v. Natural Res. Def.
Council, 555 U.S. 7, 20 (2008). “A preliminary
injunction is an extraordinary remedy never awarded as of
argues that he is likely to succeed on the merits because he
is not an “Associated Person” who would be
subject to arbitration under FINRA's rules, that the
counter-claims raised by Reynolds are not the appropriate
subject of arbitration, and that any Florida based
arbitration would lack jurisdiction over him. (See
Doc. No. 5-1 at 8.) Garrabrants has the burden of
establishing that he is likely to succeed on the merits of
his case. Winter, 129 S.Ct. at 374. The issue
underlying Garrabrants' motion is whether FINRA lacks the
authority to hear a claim against him.
is a matter of contract and a party cannot be required to
submit to arbitration any dispute which he has not agreed so
to submit.” United Steelworkers of America v.
Warrior & Gulf Navig. Co., 363 U.S. 574, 582 (1960).
However, when an agreement to arbitrate exists, federal
courts have long recognized and enforced a “liberal
federal policy favoring arbitration agreements.”
Moses H. Cone Mem'l Hosp. v. Mercury Constr.
Corp., 460 U.S. 1, 24-25 (1983). “Questions of
arbitrability” such as whether an arbitration agreement
exists and whether an arbitration clause covers the dispute
in question-are issues “for judicial determination
unless the parties clearly and unmistakably provide
otherwise.” Rent-A-Center, West, Inc. v
Jackson, 561 U.S. 63, 69 n.1 (2010) (citing AT &
T Techs., Inc. v. Commc'n Workers of America, 475
U.S. 643, 649 (1986)).
is a non-governmental agency and it has no specific grant of
authority from Congress or any other governmental entity to
conduct arbitration proceedings. As such, its authority to
compel arbitration must have some contractual basis, either a
contract between a customer and FINRA member, or an agreement
between the member and FINRA. The FINRA rules provide for
mandatory arbitration of all disputes ...