Goldman, Citi Contracts Stymie Arbitration

(CN) - A forum-selection clause in Goldman Sachs and Citigroup contracts supersedes their obligation under FINRA rules to arbitrate disputes with a customer, the 2nd Circuit ruled.

The 2nd Circuit consolidated two cases brought by public financing authorities, Golden Empire Schools Financing Authority and North Carolina Eastern Municipal Power Agency, against a financial services firm, Goldman Sachs and Citigroup, respectively.

Both plaintiffs claim the financial services firms fraudulently induced them to issue millions of auction rate securities in the years before the 2008 financial crisis, when the auction rate securities market collapsed.

However, the public authorities cannot compel Goldman Sachs and Citigroup to arbitrate their claims in a Financial Industry Regulatory Authority (FINRA) proceeding, because their broker-dealer contracts include forum selection clauses requiring all disputes to be brought in federal court, the 2nd Circuit ruled Thursday.

The ruling enhances a circuit court split on the issue. The 4th Circuit reached the opposite conclusion last year in UBS Financial Services v. Carilion Clinic, but a 9th Circuit April precedent conforms to this ruling.

FINRA, of which Goldman Sachs and Citigroup are both members, requires members to arbitrate a dispute if requested to do so by the customer and "the dispute arises in connection with the business activities of the member."

But "[b]ased on this Circuit's precedent, we hold that a forum selection clause requiring 'all actions and proceedings' to be brought in federal court supersedes an earlier agreement to arbitrate," U.S. Circuit Judge John Walker wrote on behalf of the three-judge panel.

Although defendants had already provided some services when the broker-dealer agreements were signed, "the broadly worded forum selection clause encompasses 'all actions and proceedings arising out of ... any of the transactions contemplated' by the broker-dealer agreements, which plainly include Golden Empire's and NCEMPA's

ARS [auction rate securities] issuances," Walker said.

In addition, the term "proceeding" clearly covers arbitration as the word is generally understood, the court ruled.

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