The United States Court of Appeals for the second circuit ruled this week that a forum-selection clause in Goldman Sachs and Citigroup contracts preempts their responsibility under FINRA rules to arbitrate disputes with a customer. The Appellate Court had consolidated two separate cases brought by Golden Empire Schools Financing Authority and North Carolina Eastern Municipal Power Agency against Goldman Sachs and Citigroup respectively.
The plaintiffs in both cases assert that the firms fraudulently induced them to issue millions of auction rate securities in the years prior to the 2008 financial crisis, during which the auction rate securities market imploded. But as the Second Circuit ruled, the plaintiffs cannot compel arbitration against the financial firms because their broker-dealer contracts included forum selection clauses requiring all disputes to be brought in federal court.
The ruling brings to light a circuit split on the issue. The 4th Circuit reached the opposite conclusion last year in UBS Financial Services v. Carilion Clinic, but a 9th Circuit April precedent conforms to this ruling.
FINRA, of which Goldman Sachs and Citigroup are both members, requires members to arbitrate a dispute if requested to do so by the customer and "the dispute arises in connection with the business activities of the member." But "[b]ased on this Circuit's precedent, we hold that a forum selection clause requiring 'all actions and proceedings' to be brought in federal court supersedes an earlier agreement to arbitrate," U.S. Circuit Judge John Walker wrote on behalf of the three-judge panel.