| NEW YORK
NEW YORK Feb 6 SunTrust Banks Inc sued
a Connecticut-based hedge fund on Wednesday to block arbitration
of a $13 million dispute over mortgage-backed securities.
The lawsuit, filed in U.S. district court in Manhattan, is
the latest one brought by a bank to challenge claims by
investors that their disputes can be heard and decided by a
Financial Industry Regulatory Authority arbitration panel.
FINRA, a Wall Street industry-funded watchdog that runs
arbitrations where investor disputes with brokerage firms are
often heard, has been increasingly receptive to large
The hedge fund, Turnberry Capital Management LP, filed the
arbitration in November to recoup $13 million plus interest that
it said it lost on a 2007 investment in mortgage-backed
securities, according to a statement of claim filed with FINRA
that was provided by the fund's lawyer.
The securities were issued by SunTrust. Turnberry, which
ceased doing business in 2008, purchased them from broker
Raymond James Financial Inc.
SunTrust said, however, it never agreed in writing to
arbitrate any dispute with Turnberry, which it contended doesn't
constitute a "customer" under FINRA's rules.
But Kevin O'Brien, a lawyer for Turnberry at Harris,
O'Brien, St. Laurent & Houghteling, said it would be a "mere
formality" to say his client wasn't a customer just because
SunTrust first sold the securities to Raymond James.
"We believe the bank in this instance had a customer
relationship with us because they knew people like us would buy
the securities," he said.
Disputes over who exactly constitutes a customer under
FINRA's rules have become increasingly common as investors seek
to recover losses incurred during the financial crisis.
In January 2011, the 2nd U.S. Circuit Court of Appeals
allowed a group of West Virginia hospitals to proceed with an
arbitration against UBS AG over $329 million in
In a similar case, the 4th U.S. Circuit Court of Appeals
held last month that UBS and Citigroup Inc had
to proceed in arbitration in a case brought by Carilion Clinic,
a Virginia-based healthcare organization, over $234 million in
"The courts have definitely been following the general
proposition that this is an expansionary definition of customer
and that you don't need a customer agreement," said Philip
Aidikoff, a lawyer at Aidikoff, Uhl & Bakhtiari who represents
Last July, FINRA instituted a pilot program to provide more
flexibility in disputes with $10 million or more at stake. FINRA
at the time said that more than 200 such cases were pending.
In its case, Turnberry said that SunTrust and Raymond James
knowingly or recklessly sold it the securities without
disclosing "material deficiencies" in the quality of the
underlying 5,767 loans, according to the statement of claim.
While the defendants claimed at the time that all but one of
the loans were "never delinquent," in reality delinquencies
began piling up soon after the loans were originated, the claim
Hugh Suhr, a spokesman for SunTrust, declined comment.
Representatives for Raymond James did not respond immediately to
a request for comment.
The case is SunTrust Banks, Inc, et al, v Turnberry Capital
Management LP, et al, U.S. District Court, Southern District of
New York, 13-879.