Thursday, January 24, 2013

Court requires Citi and UBS to arbitrate auction rate securties case

Brokerages UBS AG and Citigroup must arbitrate a healthcare organization's $234 million auction rate securities claim in a dispute over who a "customer" is for purposes of securities arbitration, according to the U.S. 4th Circuit Court of Appeals. The claimant, Carilion, a network of hospitals in Virginia, was not found a "customer" of either firm under the Financial Industry Regulatory Authority's (FINRA) securities arbitration rules. The court ruled Carilon bought "commodities or services" from a FINRA member that were regulated by industry rules. Carilion's decision to issue auction rate securities was based on advice from UBS and Citi, who were involved in purchasing and reselling them to investors. The Wall Street firms are being blamed for losses when the auction rate securities market failed. The brokerages argued Carilion was not their customer because claims did not "relate to a brokerage account or investment relationship" at either firm. Auction rate securities were highly liquid short-term instruments similar money markets, though with higher returns. The economic crisis prompted Carilion to file for arbitration. The appeals court ruled that though the parties agreed in their contracts with one another to litigate disputes in a New York federal court, this did not did not displace UBS and Citi's arbitration obligation of the claim filed with FINRA. See story at -