Non-Customers of Wachovia Cannot Bring Stock Loan Related Claim to FINRA, Says Court

The U.S. District Court for the Northern District of California has ruled that a married couple and their investment vehicles are not Wachovia “customers” and, therefore, they are not entitled to bring their stock loan related claims against Wachovia Securities Financial Network LLC and financial adviser George Gordon III to Financial Industry Regulatory Authority arbitration. Judge Saundra Brown Armstrong granted Wachovia and Gordon’s request for a preliminary injunction.

Per the statement of claim submitted to FINRA, Gregory and Susan Raifman initiated arbitration as trustees of a family trust, as Gekko Holdings Inc. members, and as the beneficial owners and assignees in interest of Helicon Investments Ltd. The Raifmans accused Wachovia and Gordon of committing securities fraud, breach of fiduciary duties, and violations of the California Securities Act and the rules of both the New York Stock Exchange and National Association of Securities Dealers.

The Raifmans contended that Gekko and Helicon each went into three separate stock loan transactions that Derivium Capital LLC, a third party, had promoted so they could borrow up to 90% of their stock holdings’ value without triggering capital gain on the stock sale. After the three-year loan term ended, the Raifmans were to pay the loan balance and get back or surrender their collateral or renew their loan.

To execute their plan, the Raifmans opened a Wachovia account for the trust in 2003 and transferred nearly $3 million in ValueClick (VLCK) shares into an account owned by a Derivium affiliate. Almost 12 months later, Helicon placed 300,000 ValueClick shares into another Derivium affiliate’s Wachovia account under a 90 percent stock loan agreement. Gekko later deposited 200,000 ValueClick shares in the same account (and also under a 90 percent stock loan agreement).

It wasn’t until 2007 that the Raifmans found out that their Value Click shares had been sold as soon as they were placed in the Derivium affiliates’ accounts. They also had not known that the sales proceeds had been loaned back to them while Wachovia and Derivium kept 10 – 14% of the sales proceeds.

The Raifmans attempted to start the arbitration process in July but Gordon and Wachovia filed their complaint seeking enjoinment against the couple, Helicon, and Gekko. They also requested a stay of the arbitration proceedings. The financial firm and investment adviser contended that they did not have an agreement with the defendants, who were not their customers and therefore not entitled to FINRA arbitration. The district court agreed.

Related Web Resources:
Wachovia Securities LLC v. Raifman

Arbitration and Mediation, FINRA
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