Goldman Sachs Ordered to Arbitrate Underwriting Dispute Involving $210M in Auction-Rate Securities

The U.S. District Court for the District of Nevada has rejected Goldman Sachs & Co.’s (GS) bid to arbitrate its dispute with the city of Reno, Nevada. The financial firm had sought to stop a Financial Industry Regulatory Authority proceeding over its underwriting of $210 million in ARS. Per Judge Robert Jones, even though there was no arbitration agreement, that the city paid Goldman to facilitate the securities’ auctions makes Reno a customer of a FINRA firm member for the purposes of arbitration. The case is Goldman Sachs & Co. v. City of Reno.

Recounts the court, Reno had issued about $210 million in auction-rate securities to fund a number of projects in 2005 and 2006. Pursuant to their underwriter and broker-dealer agreements together, Goldman was to underwrite and broker the ARS. While the broker-dealer arrangement included a forum selection clause allowing for any lawsuits stemming from the agreement to be heard in Nevada district court, it did not (nor did the underwriter agreement), come with an arbitration provision.

Reno began FINRA arbitration proceedings against the brokerage firm in early 2012 claiming that Goldman had committed wrongdoing under the terms of the agreements. Goldman countered with this case, requesting that the court find that the FINRA forum was inappropriate for resolving this dispute, per the forum selection clause, and because there was no arbitration clause between the two parties. Goldman also sought preliminary injunction against the proceedings.

The district court said no to the request for relief, observing that a party that wants injunctive relief has to show that success on the merits was likely, which it said Goldman did not do. It also said that, according to FINRA arbitration code, parties have to arbitrate any dispute between a member and its customer that involves the member’s business activities. As for the forum selection clauses found in the broker-dealer agreement, the court said that although these don’t directly address the matter of arbitration, they also don’t disallow for arbitration if that is what is needed.

The court disagreed with Goldman’s contention that FINRA rules don’t apply because the ARS are municipal securities and therefore influenced by Municipal Securities Rulemaking Board rules, which don’t include muni issuers under the customer definition. It pointed out that, according to the SEC, MSRB members are also subject to FINRA arbitration just like FINRA members. Also, Goldman is both an MSRB member and a FINRA member.

Judge Jones noted that even if FINRA finds that Reno’s claims have more to do with the brokerage firm’s underwriting than its auction facilitation services, the issue of arbitrability is for the arbitrator and not the court.

Goldman Sachs & Co. v. City of Reno, D. Nev, Dockets, Justia

Goldman Must Arbitrate Dispute With City of Reno Over ARS Underwriting, Bloomberg BNA, November 30, 2012

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