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Habliston v. Finra Regulation, Inc.

United States District Court, District of Columbia

January 27, 2017



          AMY BERMAN JACKSON United States District Judge.

         Plaintiffs Anna Morton Young Habliston and Seymour R. Young, Jr. are involved in an arbitration against Wells Fargo Advisors, LLC concerning their deceased parents' brokerage accounts. Apparently, they are extremely dissatisfied with how it is going so far, and they have brought this action against defendant FINRA Regulation, Inc. ("FINRA Regulation").[1] Substitute Am. Compl. [Dkt. # 10] ("Compl.").

         Plaintiffs allege that FINRA Regulation has failed to provide a fair arbitration forum because the arbitrators are biased, and their procedural rulings to date have been unfair;[2] that FINRA Regulation has failed to carry out its regulatory duties properly;[3] and that the binding arbitration provisions contained in the brokerage contracts are void or unenforceable.[4] Plaintiffs also seek damages under 42 U.S.C. § 1983, Compl. ¶ 109, and they ask the Court to appoint new arbitrators to hear the pending arbitration. Id. ¶ 111.

         On July 29, 2016, defendant moved to dismiss the complaint pursuant to Federal Rules of Civil Procedure 12(b)(1), 12(b)(6), 12(b)(7), and 12(h)(3) on multiple grounds. It argues that plaintiffs' claims are not ripe for review since the arbitration is ongoing; defendant is immune from suit under the doctrines of arbitral and regulatory immunity; plaintiffs have failed to name indispensable parties; defendant is not a state actor for purposes of section 1983; the Securities and Exchange Act does not create a private right of action for alleged violations of rules enacted under the Act; and plaintiffs' request that the Court appoint new arbitrators is moot because replacement arbitrators have already been appointed. Mot. to Dismiss the Compl. [Dkt. # 16] ("Def's Mot.") at 1; Mem. of Law in Supp. of Def's Mot. [Dkt. # 17] ("Def's Mem.") at 1-2.

         Plaintiffs failed to oppose many of these arguments, so the motion has been largely conceded. With respect to the open issues, the Court concludes that plaintiffs' claims are not ripe for review, and that defendant is entitled to arbitral immunity. Therefore, the motion to dismiss will be granted.


         Plaintiffs' parents, who are now deceased, maintained investment accounts with Wachovia Securities, Inc., now Wells Fargo Advisors, LLC ("Wells Fargo"), and they were the unfortunate victims of criminal misconduct. Compl. ¶¶ 1, 18. A Wells Fargo broker, Christopher Cunningham, was convicted of taking over $1 million from plaintiffs' parents and other customers. Id. ¶ 2. Thereafter, plaintiffs, acting in their parents' stead, brought suit against Wells Fargo and Fulcrum Services, Inc. ("Fulcrum"), alleging that they knowingly and recklessly allowed the theft to occur, leading to a loss of over $3 million. Id.¶l.

         Under the terms of the account agreements with Wells Fargo and Fulcrum, plaintiffs were required to submit their claims to a binding arbitration proceeding administered by the Financial Industry Regulatory Authority, Inc. ("FINRA"). See Compl. ¶ 4. FINRA is a private, not-for-profit Delaware corporation, id. ¶ 14, and according to defendant, is a self-regulatory organization ("SRO")[5] registered with the Securities and Exchange Commission ("SEC") as a national securities association.[6] Def.'s Mem. at 3. Its wholly owned subsidiary, FINRA Regulation, operates a dispute resolution forum that administers FINRA arbitrations.[7] Compl. ¶ 14. According to defendant, FINRA Regulation's Office of Dispute Resolution appoints arbitrators, maintains the arbitration files, processes pleadings and motions, drafts orders with arbitrator direction, and transmits documents between the parties. Def.'s Mem. at 4.

         Plaintiffs' forty-four page substituted amended complaint is hardly a "short and plain" statement of the claims, Fed.R.Civ.P. 8(a), but it boils down to four counts. See Compl. In Count I, plaintiffs allege that the contractual "FINRA pre-dispute binding arbitration provisions should be vacated or declared void" because they violate plaintiffs' constitutional rights. Id. ¶¶ 89, 95, 97-98. In Count II, they allege that the arbitration provisions should be declared void because FINRA Regulation has materially breached FINRA arbitration rules. Id. ¶ 105. In Count III, plaintiffs bring a claim for damages under 42 U.S.C. §§ 1983 and 1988, alleging that FINRA Regulation acted "under color of law" to deny plaintiffs their constitutional rights under the due process and equal protection clauses. Id. ¶ 107. Specifically, plaintiffs claim that FINRA Regulation "knowingly violated its duty to act objectively and impartially" and acted with the "intent to prejudice" plaintiffs by influencing "the objectivity and impartiality" of FINRA Regulation's arbitrators. Id. ¶ 108. Finally, in Count IV, plaintiffs request that the Court appoint replacement arbitrators under 9 U.S.C. § 5 because they "will be imminently and irreparably harmed" if the Court does not intervene to prevent FINRA Regulation "from violating its arbitrator selection rules" Id.¶¶ 111-12.

         On September 12, 2016, plaintiffs filed an opposition to defendant's motion to dismiss. See Pis.' Mem. in Opp. to Def's Mot. [Dkt. # 21] ("Pis.' Opp."). But plaintiffs failed to address, and thereby conceded, a number of defendant's arguments. Plaintiffs briefed the issues of arbitral immunity and whether FINRA Regulation is a state actor for purposes of their section 1983 claim, and they touched upon defendant's ripeness argument, id. at 8-11, 18-19, but they made no attempt to address any other issues. Instead, plaintiffs devoted approximately six pages to attacking the validity of the arbitration clauses in the brokerage contracts, to which defendant FINRA Regulation was not a party. See Id. at 11-17. Defendant filed a reply to plaintiffs' opposition on September 22, 2016. Reply in Supp. of Def's Mot. [Dkt. # 22] ("Def's Reply").


         I. Subject Matter Jurisdiction

         Under Rule 12(b)(1), the plaintiff bears the burden of establishing jurisdiction by a preponderance of the evidence. See Lujan v. Defs. of Wildlife, 504 U.S. 555, 561 (1992); Shekoyan v. Sibley Int'l Corp., 217 F.Supp.2d 59, 63 (D.D.C. 2002). Federal courts are courts of limited jurisdiction and the law presumes that "a cause lies outside this limited jurisdiction." Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994); see also Gen. Motors Corp. v. EPA, 363 F.3d 442, 448 (D.C. Cir. 2004) ("As a court of limited jurisdiction, we begin, and end, with an examination of our jurisdiction."). "[B]ecause subject-matter jurisdiction is 'an Art[icle] III as well as a statutory requirement ... no action of the parties can confer subject-matter jurisdiction upon a federal court.'" Akinseye v. District of Columbia, 339 F.3d 970, 971 (D.C. Cir. 2003), quoting Ins. Corp. of Ir., Ltd. v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 702 (1982).

         When considering a motion to dismiss for lack of jurisdiction, unlike when deciding a motion to dismiss under Rule 12(b)(6), the court "is not limited to the allegations of the complaint." Hohri v. United States, 782 F.2d 227, 241 (D.C. Cir. 1986), vacated on other grounds, 482 U.S. 64 (1987). Rather, "a court may consider such materials outside the pleadings as it deems appropriate to resolve the question [of] whether it has jurisdiction to hear the case." Scolaro v. D.C. Bd. of Elections & Ethics, 104 F.Supp.2d 18, 22 (D.D.C. 2000), citing Herbert v. Nat'l Acad. of Scis., 974 F.2d 192, 197 (D.C. Cir. 1992); see also Jerome Stevens Pharm., Inc. v. FDA, 402 F.3d 1249, 1253 (D.C. Cir. 2005).

         II. Failure to State a Claim

         "To survive a [Rule 12(b)(6)] motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face." Ashcroft v. Iqbal,556 U.S. 662, 678 (2009) (internal quotation marks omitted); accord Bell Atl. Corp. v. Twombly,550 U.S. 544, 570 (2007). In Iqbal, the Supreme Court reiterated the two principles underlying its decision in Twombly: "First, the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions." 556 U.S. ...

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