SunTrust sues to stop hedge fund’s $13 million FINRA arbitration
SunTrust Banks Inc sued a Connecticut-based hedge fund on Wednesday to block arbitration of a $13 million dispute over mortgage-backed securities.
The lawsuit, filed in U.S. district court in Manhattan, is the latest one brought by a bank to challenge claims by investors that their disputes can be heard and decided by a Financial Industry Regulatory Authority arbitration panel.
FINRA, a Wall Street industry-funded watchdog that runs arbitrations where investor disputes with brokerage firms are often heard, has been increasingly receptive to large arbitrations.
The hedge fund, Turnberry Capital Management LP, filed the arbitration in November to recoup $13 million plus interest that it said it lost on a 2007 investment in mortgage-backed securities, according to a statement of claim filed with FINRA that was provided by the fund’s lawyer.
The securities were issued by SunTrust. Turnberry, which ceased doing business in 2008, purchased them from broker Raymond James Financial Inc.
SunTrust said, however, it never agreed in writing to arbitrate any dispute with Turnberry, which it contended doesn’t constitute a “customer” under FINRA’s rules.
But Kevin O’Brien, a lawyer for Turnberry at Harris, O’Brien, St. Laurent & Houghteling, said it would be a “mere formality” to say his client wasn’t a customer just because SunTrust first sold the securities to Raymond James.
“We believe the bank in this instance had a customer relationship with us because they knew people like us would buy the securities,” he said.
Disputes over who exactly constitutes a customer under FINRA’s rules have become increasingly common as investors seek to recover losses incurred during the financial crisis.
In January 2011, the 2nd U.S. Circuit Court of Appeals allowed a group of West Virginia hospitals to proceed with an arbitration against UBS AG over $329 million in auction-rate debt.
In a similar case, the 4th U.S. Circuit Court of Appeals held last month that UBS and Citigroup Inc had to proceed in arbitration in a case brought by Carilion Clinic, a Virginia-based healthcare organization, over $234 million in auction-rate securities.
“The courts have definitely been following the general proposition that this is an expansionary definition of customer and that you don’t need a customer agreement,” said Philip Aidikoff, a lawyer at Aidikoff, Uhl & Bakhtiari who represents investors.
Last July, FINRA instituted a pilot program to provide more flexibility in disputes with $10 million or more at stake. FINRA at the time said that more than 200 such cases were pending.
In its case, Turnberry said that SunTrust and Raymond James knowingly or recklessly sold it the securities without disclosing “material deficiencies” in the quality of the underlying 5,767 loans, according to the statement of claim.
While the defendants claimed at the time that all but one of the loans were “never delinquent,” in reality delinquencies began piling up soon after the loans were originated, the claim statement said.
Hugh Suhr, a spokesman for SunTrust, declined comment. Representatives for Raymond James did not respond immediately to a request for comment.
The case is SunTrust Banks, Inc, et al, v Turnberry Capital Management LP, et al, U.S. District Court, Southern District of New York, 13-879.