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Goldman, Sachs & Co. v. North Carolina Municipal Power Agency Number One

United States District Court, Second Circuit

December 9, 2013

GOLDMAN, SACHS & CO., Plaintiff,
v.
NORTH CAROLINA MUNICIPAL POWER AGENCY NUMBER ONE, Defendant.

OPINION AND ORDER

PAUL A. CROTTY, District Judge.

This case involves a dispute over what forum is appropriate to resolve an underlying dispute concerning the issuance by Defendant North Carolina Municipal Power Agency Number One ("NCMPAI) of $149.7 million in auction rate securities ("ARS") in which Goldman, Sachs & Co. ("Goldman") acted as the underwriter and broker-dealer for the issuance. Goldman argues that this Court has exclusive jurisdiction under an applicable forum selection clause; NCMPAI argues that arbitration before the Financial Industry Regulatory Authority ("FINRA") is the appropriate forum to settle the parties' dispute. On December 12, 2012, NCMPAI initiated an arbitration in North Carolina against Goldman before FINRA to settle disputes arising from the issuance. On February 27, 2013, Goldman tiled a complaint against NCMPAI in this Court seeking a declaration that the FINRA arbitration was an inappropriate forum for the dispute and an enjoinment of the arbitration. Before this Court is Goldman's motion for a preliminary injunction and NCMPAI's motion to dismiss the complaint or, alternatively, to transfer for improper venue.

Very similar issues, indeed identical issues, were recently litigated before U.S. District Judge Richard J. Sullivan ( Goldman, Sachs & Co. v. Golden Empire Schs. Auth., 922 F.Supp.2d 435, 440-41 (S.D.N.Y. 2013)) and U.S. District Judge Jesse Furman ( Citigroup Global Mkts., Inc. v. N.C. E. Mun. Power Agency, No. 13 CV 1703 (S.D.N.Y. May 3, 2013), Dkt. No. 30). Both judges enjoined the FINRA arbitrations and held that under the Forum Selection Clause in the broker-dealer agreements, this Court had exclusive jurisdiction over any dispute. The Court agrees with their analysis and reasoning' and applies them here. Accordingly, the Court GRANTS Goldman's motion for a preliminary injunction; and DENIES NCMPAI's motion to dismiss the complaint or, alternatively, to transfer the case to the Eastern District of North Carolina.

BACKGROUND

On April 11, 2003, NCMPAI issued $149.7 million in ARS in order to raise funds to refinance existing debt. ARS are "long-term bonds and stocks whose interest rates or dividend yields are periodically reset through auction." Ashland Inc. v. Morgan Stanley & Co. , 652 F.3d 333, 335 (2d Cir. 2011). The concept is to finance long term debt at short term rates. At each periodic auction, ARS investors submit bids for the number of ARS they wish to purchase, hold, or sell at an auction and the lowest rate they will accept. Id. If the buy/hold orders meet or exceed sell orders, then the auction succeeds. Id. Alternatively, if the supply exceeds demand, the auction fails and "the issuer is forced to pay a higher rate of interest in order to penalize it and to increase investor demand." Id. The concept appeared to work well until the recession began in 2007-2008.

NCMPAI selected Goldman as the sole underwriter and broker-dealer for the ARS. Compl. ¶ 14. Goldman and NCMPAI signed an underwriter agreement (the "Underwriter Agreement") describing Goldman's duties to purchase NCMPAI's ARS and to distribute them to interested investors as bona fide securities. Compl. ¶ 14; see id., Ex. 5. The Underwriter Agreement did not contain an arbitration clause and provided that North Carolina law govern its validity, interpretation, and performance. Comp. ¶ 17; see id., Ex. 5, at 19. Contemporaneously, the patties also signed a broker-dealer agreement (the "Broker-Dealer Agreement") setting forth Goldman's duties regarding management of the auctions and oversight of the bidding process. Compl. ¶ 15; see id., Ex. 3. The Broker-Dealer Agreement provided that New York law would govern, waived jury trial, and sped lied the following forum selection clause ("Forum Selection Clause"):

The parties agree that all actions and proceedings arising out of this Broker-Dealer Agreement or any of the transactions contemplated hereby shall he brought in the United States District Court in the County of New York and that, in connection with any such action or proceeding, submit to the jurisdiction of, and venue in, such court.

Compl. ¶ 16; id., Ex. 3, at 14. The Broker-Dealer Agreement also contained a merger clause (the "Merger Clause") providing as follows:

This Broker-Dealer Agreement, and the other agreements and instruments executed and delivered in connection with the issuance of the [JARS, contain the entire agreement between the parties relating to the subject matter hereof, and there arc no other representations, endorsements, promises, agreements or understandings... between the parties relating to the subject matter hereof.

Compl. ¶ 19; id., Ex. 3, at 13.

The market for ARS collapsed in the recession that started in 2007-2008. See UBS Fin. Sews., Inc. v. W.Va. Univ. Hasps., Inc., 660 F.3d 643, 646 (2d Cir. 2011). On December 21, 2012, NCMPAI instituted a FINRA arbitration in Raleigh, North Carolina against Goldman by filing a Statement of Claim ("SOC"), pursuant to FINRA Rule 12200. Compl. ¶ 20; see id., Ex. 2. FINRA Rule 12200 requires that FINRA members arbitrate a dispute when a customer requests arbitration and the dispute arose in connection with the business activities of a FINRA member. In its SOC, NCMPAI alleged that Goldman created the artificial appearance of an efficient market for ARS by placing its own bids in every auction in which it was lead broker-dealer. Compl. ¶ 21-23; see id., Ex. 2. Further, NCMAPI claims that Goldman did not disclose its full use of these bids, known as "cover bids, " and therefore made material misrepresentations and/or omissions. Compl. ¶¶ 21-23; see id., Ex. 2. On February 27, 2013, Goldman filed a complaint in this Court seeking declaratory relief and an injunction against the FINRA Arbitration.

On April 26, 2013, NCMPAI moved to dismiss Goldman's complaint or, alternatively, to transfer the case to the U.S. District Court for the Eastern District of North Carolina pursuant to Federal Rule of Civil Procedure 12(b)(3).[1] NCMPAI argues that this Court lacks the authority to enjoin an arbitration pending in a different district. On the same day, Goldman moved for an order preliminarily enjoining NCMPAI from pursuing its claims against Goldman in the FINRA arbitration.[2] Goldman alleges that the parties agreed to bring all disputes relating to the ARS issuance to this Court pursuant to the Forum Selection Clause in the Broker-Dealer Agreement.

DISCUSSION

I. Legal ...


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