Appeal from a judgment of the United States District Court for the Southern District of New York, Laura Taylor Swain, Judge, dismissing complaint that sought an injunction against a FINRA arbitration, and granting defendant's motion to compel arbitration on the ground that defendant, in a credit default swap agreement, was a customer of the entity with which it negotiated part of the agreement but which was a nonparty to the agreement. See 2010 WL 1222026.
The opinion of the court was delivered by: Kearse, Circuit Judge:
Wachovia Bank v. VCG Special Opportunities Master Fund, Ltd.
Before: KEARSE, POOLER, and LYNCH, Circuit Judges.
8 Plaintiffs Wachovia Bank, N.A. ("Wachovia Bank" or the "Bank" or "WB"), and 9 Wachovia Capital Markets, LLC (or "WCM"), which formerly were owned by Wachovia Corporation 10 ("Wachovia") and now are wholly-owned subsidiaries of Wells Fargo & Company, appeal from a 11 judgment of the United States District Court for the Southern District of New York, Laura Taylor 12 Swain, Judge, dismissing their action seeking to enjoin an arbitration proceeding brought by defendant 13 VCG Special Opportunities Master Fund, Ltd., formerly known as CDO Plus Master Fund Ltd. 14 (collectively "VCG"), before the Financial Industry Regulatory Authority, Inc. ("FINRA"), against 15 WCM in connection with a credit default swap (or "CDS") transaction between VCG and Wachovia 16 Bank. Plaintiffs asserted that there was no arbitration agreement between VCG and WCM. The 17 district court granted VCG's motion for an order compelling arbitration and dismissed the complaint, 18 ruling that the FINRA Code of Arbitration Procedure for Customer Disputes ("FINRA Code") 19 provides for arbitration of disputes between a FINRA member and its "customer[s]," and that, as 20 WCM was a FINRA member and negotiated part of the CDS agreement entered into by VCG and 21 Wachovia Bank, VCG should be considered a customer of WCM within the meaning of the FINRA 22 Code. On appeal, plaintiffs contend that the district court erred in ruling that VCG was a customer 23 of WCM. For the reasons discussed below, we agree and reverse the judgment.
2 In this dispute as to whether VCG was a "customer" of WCM within the meaning of 3 the FINRA Code with respect to the credit default swap in question, both sides moved for summary 4 judgment. The following facts are drawn largely from the parties' pleadings and their summary 5 judgment filings and, unless otherwise noted, are not in dispute. 6 A. The Credit Default Swap Agreement 7 At the times pertinent to this action, WCM was a registered broker-dealer and a 8 member of FINRA (or of one of its predecessor organizations, see Part II.B. below). Wachovia Bank 9 was a national banking association and not a member of FINRA. VCG was a hedge fund with, by 10 July 2007, more than $58 million in assets under management. VCG was run by a board of directors 11 but had no employees; services were provided to VCG by Vanquish Capital Group LLC ("Vanquish 12 Capital"), whose chief executive and investment officer was VCG board member Donald Uderitz.
13 VCG's investments were managed by Vanquish Advisors LLC ("Vanquish Advisors"), which was 14 principally owned by Uderitz. 15 In May 2007, Vanquish Capital employee Jonnathan Wong, acting on behalf of VCG, 16 contacted Scott Williams, a WCM employee, to initiate negotiations for a credit default swap 17 agreement between VCG and Wachovia Bank with respect to a collateralized debt obligation 18 ("CDO"), to wit, notes issued by Forge ABS, LLC ("Forge"), an unrelated entity. See generally 19 Eternity Global Master Fund Ltd. v. Morgan Guaranty Trust Co., 375 F.3d 168, 171-72 (2d Cir. 2004) 20 (a credit default swap, "the most common form of credit derivative, [is a] contract which transfers 1 credit risk from a protection buyer to a credit protection seller" (internal quotation marks omitted)).
2 The eventual credit default swap agreement between VCG and Wachovia Bank (the "Trade" or 3 "Agreement" or "2007 credit default swap agreement") required the Bank (the protection buyer) to 4 pay a fixed, periodic fee to VCG (the protection seller) over the term of the CDO in exchange for 5 VCG's agreement to make payments to the Bank upon the occurrence of certain events, including a 6 default by Forge on the CDO. VCG was required to deposit $750,000 with Wachovia Bank as 7 collateral security for VCG's obligations.
8 The Agreement was memorialized in four separate documents. Three dated May 4, 9 2007, were documents using International Swaps and Derivatives Association ("ISDA") templates, 10 to wit (1) an ISDA Master Agreement that set the general trading terms between the parties to govern 11 their anticipated credit default swap, (2) an ISDA Master Agreement Schedule ("ISDA Schedule") 12 that altered or supplemented the standard ISDA Master Agreement terms to fit the parties' 13 specifications, and (3) a Credit Support Annex to the ISDA Master Agreement ("Credit Support 14 Annex") that provided the terms under which the parties would exchange collateral as part of the 15 credit default swap. The fourth document was a Trade Confirmation dated May 30, 2007 ("Trade 16 Confirmation") that confirmed the specific terms of the parties' Forge credit default swap--which had 17 taken place on May 21, 2007; the Trade Confirmation incorporated by reference the terms of the three 18 previously executed documents. The ISDA Master Agreement provided that all of these Trade 19 documents would constitute a single agreement between VCG and Wachovia Bank.
20 On behalf of VCG, the terms of the ISDA Master Agreement, the ISDA Schedule, and 21 the Credit Support Annex were negotiated by Vanquish Capital's General Counsel, and those 22 documents were executed by Uderitz. On behalf of Wachovia Bank, the terms of those three 1 documents were negotiated by Alexis S. Alpert, a Wachovia Bank vice president, who also executed 2 those documents on behalf of the Bank. The Trade Confirmation was executed by Uderitz on behalf 3 of VCG and by Wachovia Bank employee Tracey Bissell on behalf of the Bank. The terms of the 4 Trade Confirmation had been negotiated by Wong on behalf of VCG and by WCM employees 5 Williams, Thomas Edwards, and William McAndrews. Williams and Edwards were directors of 6 WCM's CDO Trading Desk who reported to Sergei Zagin, the head of that Desk; McAndrews was 7 both a director with WCM and an officer of Wachovia Bank; all four had authority to negotiate credit 8 default swaps on behalf of the Bank. Plaintiffs contend that Williams, Edwards, and McAndrews 9 negotiated the terms of the Trade Confirmation on behalf of the Bank. Although VCG refused to 10 admit that those three had negotiated on behalf of the Bank, VCG did not point to evidence calling 11 that contention into serious question. There is no dispute, for example, that "WCM's CDO desk was 12 regularly engaged in trading credit default swaps on CDOs," and that the party "on one side" of "such 13 trades" was "Wachovia Bank." (VCG's Statement of Material Facts Pursuant to Rule 56.1, ¶ 11, in 14 support of its motion for summary judgment; see Plaintiffs' Response to Defendant's Statement of 15 Material Facts ¶ 11, admitting this portion of VCG's ¶ 11 assertion.) Wong, who had initiated 16 discussions for the Forge credit default swap on instructions from Uderitz and another VCG board 17 member, testified in deposition that he had contacted Williams because Williams was a friend he had 18 known prior to working for VCG. Before that call to Williams, Wong had had no interaction with 19 anyone at Wachovia with respect to the credit default swap. Wong knew Williams was employed by 20 Wachovia but did not know by which Wachovia entity. After contacting Williams, Wong dealt 21 principally with Edwards and McAndrews; Wong also did not know which Wachovia entity employed 22 Edwards or McAndrews. Wong testified in part as follows:
1 Q. In the course of your employment with Vanquish Capital, do you 2 know whether you ever interacted with Wachovia Capital Markets, LLC? 3 A. I don't know if I ever interacted with Wachovia Capital Markets, 4 LLC. I was never really sure what entity I was essentially dealing with. 5 Q. Do you know what entity was the counter party to the CDS trade? 6 A. From the document, Wachovia Bank.
8 Neither Vanquish Capital, which had negotiated the terms of all four Trade documents 9 on behalf of VCG, nor WCM, which had participated in the negotiation of the Trade Confirmation's 10 terms, was a party to the credit default swap or any of the four documents. 11 The ISDA Master Agreement, which contained a section detailing what "[e]ach party 12 represent[ed] to the other party" (ISDA Master Agreement § 3), was augmented by the ISDA 13 Schedule, which added, inter alia, a "Section 3(g)," in which each party disclaimed any reliance on 14 the other party, or on any of the other party's affiliates, in deciding to enter the Trade (the "Disclaimer 15 Clause"): 16 (g) Non-Reliance. For any Relevant Agreement: [the party] 17 acknowledges that the other party acts only at arm's length and is not its agent, 18 broker, advisor or fiduciary in any respect, and any agency, brokerage, 19 advisory or fiduciary services that the other party (or any of its affiliates) may 20 otherwise provide to the party (or to any of its affiliates) excludes the Relevant 21 Agreement, . . . [that] it is relying solely upon its own evaluation of the 22 Relevant Agreement . . . [and that] it understands the Relevant Agreement and 23 those risks, has determined they are appropriate for it, and willingly assumes 24 ...