August 1, 2014 / 9:32 PM / 3 years ago

U.S. appeals court blocks $383 mln arbitration against Citigroup

NEW YORK, Aug 1 (Reuters) - A Saudi investor who accused Citigroup Inc of “virtually wiping out” his family’s fortune cannot pursue a $383 million arbitration case filed against the bank, a U.S. appeals court ruled.

The 2nd U.S. Circuit Court of Appeals in New York said Ghazi Abbar could not pursue a Financial Industry Regulatory Authority (FINRA) arbitration he initiated in 2011 against a New York subsidiary of Citigroup because Abbar was a customer of a United Kingdom subsidiary, not the New York affiliate.

“Citi NY employees certainly provided services to Abbar,” wrote Circuit Judge Dennis Jacobs for a unanimous three-judge panel. “However, Abbar did not purchase those services from Citi NY. His investment agreements were with Citi UK, and the fee for all services ... was paid to Citi UK.”

The decision, which upheld a 2013 ruling by U.S. District Judge Louis Stanton, is the latest to analyze what constitutes a “customer” under rules for securities arbitration before FINRA, the financial industry’s self-regulator. Legal battles over the issue have become commonplace as plaintiffs seek to recover losses stemming from the financial crisis.

Some plaintiffs prefer FINRA arbitration rather than the court system, where lawsuits can get bogged down in years of litigation. But banks have filed a series of lawsuits challenging investors’ ability to do so.

The ruling was the first time the 2nd Circuit has defined a “customer” under FINRA regulations.

“We hold that a ‘customer’ under FINRA Rule 12200 is one who, while not a broker or dealer, either (1) purchases a good or service from a FINRA member, or (2) has an account with a FINRA member,” Jacobs wrote.

A Citigroup spokeswoman said the bank was pleased with the ruling. A lawyer for Abbar did not respond to a request for comment.

Abbar and his father brought the arbitration in August 2011 against Citigroup Global Markets Inc, a New York subsidiary of the bank.

The Abbars said that after Ghazi Abbar’s private banker moved from Deutsche Bank AG to Citigroup in late 2005, the Abbars bought several complex options from Citigroup Global Markets Ltd, a United Kingdom subsidiary.

Under the structure, created by the bank, the Abbars contributed $343 million in hedge fund investment assets as part of a leveraged transaction.

The investment eventually collapsed during the financial crisis, causing $383 million in losses, including a failed private equity loan deal, the Abbars said.

The elder Abbar died last year, but Ghazi Abbar continued to pursue the case, claiming the bank deceived them about the investments’ quality.

Citigroup filed the lawsuit seeking to block the arbitration soon after it was initiated, and Stanton ruled in the bank’s favor after an eight-day non-jury trial.

The case is Citigroup Global Markets, Inc v. Abbar, 2nd U.S. Circuit Court of Appeals, No. 13-2172. (Reporting by Joseph Ax; Editing by Tom Brown)

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