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Garrabrants v. Financial Industry Regulatory Authority

United States District Court, S.D. California

October 29, 2019

GREGORY GARRABRANTS, an individual, Plaintiff,
v.
FINANCIAL INDUSTRY REGULATORY AUTHORITY, Defendant.

          ORDER DENYING MOTION FOR PRELIMINARY INJUNCTION [DOC. NOS. 5, 10, 11, 14, 17, 18, 20] ORDER LIFTING STAY [DOC. NO. 12.]

          MARILYN L. HUFF, DISTRICT JUDGE.

         Before 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.)

         On 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.)

         On or around April 3, 2019, Spartan initiated claims in FINRA[1] 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.

         On 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.)[2] 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.)

         The 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 injunction.

         Background

         Scott 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. (Id.)

         Following the alleged $16.5 million-dollar loss, according to Reynolds, Garrabrants[3]contacted 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.)

         Discussion

         A court 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 right.” Id.

         Garrabrants 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[4]. (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.

         “[A]rbitration 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)).

         FINRA 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 ...


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