Michael Morford D/B/A Nemaha Water Services v. Esposito Securities, LLC

Opinion

ACCEPTED 05-14-01223-CV FIFTH COURT OF APPEALS DALLAS, TEXAS 2/19/2015 11:44:54 PM LISA MATZ CLERK

No. 05-14-01223-CV ________________________________________________________ FILED IN 5th COURT OF APPEALS IN THE COURT OF APPEALS DALLAS, TEXAS 2/19/2015 11:44:54 PM FIFTH DISTRICT OF TEXAS AT DALLAS LISA MATZ ________________________________________________________ Clerk

MICHAEL MORFORD d/b/a NEMAHA WATER SERVICES, GEOFFREY ARNOLD MCFALLS d/b/a NEMAHA WATER SERVICES, NEMAHA WATER SERVICES, L.P., NEMAHA WATER SERVICES GP, LLC, NEMAHA WATER SERVICES OK-1702, LLC, and NEMAHA WATER SERVICES HOLDING COMPANY, LLC, APPELLEES, v. ESPOSITO SECURITIES, LLC, APPELLEE. ________________________________________________________ APPEAL FROM 44TH DISTRICT COURT DALLAS COUNTY, TEXAS ________________________________________________________

APPELLEE’S FIRST AMENDED BRIEF ON THE MERITS ________________________________________________________ Sean Modjarrad David Jefrie Mizgala State Bar No. 24027398 State Bar No. 24031594 smodjarrad@modjarrad.com david@mizgalalaw.com Rhiannon Kelso MIZGALA LAW PLLC State Bar No. 24080636 2101 Cedar Springs Road, rkelso@modjarrad.com Suite 1050 M|A|S LAW FIRM Dallas, Texas 75201 212 W. Spring Valley Road Tel: 214-238-4800 Richardson, Texas 75081 Fax: 214-238-4801 Tel: 972-789-1664 Fax: 972-789-1965

COUNSEL FOR APPELLEE ORAL ARGUMENT CONDITIONALLY REQUESTED STATEMENT REGARDING ORAL ARGUMENT

Appellee does not believe oral argument will significantly aid

the Court’s decisional process. Besides being wholly unsupported by

competent evidence or controlling legal authority, Appellants’

Motion to Compel Arbitration and Stay Proceedings is fatally

undermined by the open-court admissions Appellants made

throughout the underlying proceedings.

However, to the extent the Court grants Appellants’ request

for oral argument, Appellee requests an opportunity to present

argument also. TEX. R. APP. P. 38.1(e), 39.7.

i TABLE OF CONTENTS

STATEMENT REGARDING ORAL ARGUMENT ................................... i TABLE OF CONTENTS ........................................................................... II INDEX OF AUTHORITIES...................................................................... V I. RESTATEMENT OF FACTS .......................................................... 1 A. THE PARTIES’ PRE-DISPUTE ARBITRATION AGREEMENT. ....... 1 B. THE DISPUTED TRANSACTIONS. .............................................. 2 C. APPELLANTS’ POST-DISPUTE ATTEMPT TO SQUIRM OUT OF THEIR PRE-DISPUTE ARBITRATION AGREEMENT. ................... 4 II. STANDARD OF REVIEW ............................................................... 7 A. SETTLED TEXAS LAW ESTABLISHES THIS COURT’S REVIEW OF THE TRIAL COURT’S ORDER IS GOVERNED BY THE NO- EVIDENCE STANDARD OF REVIEW. .......................................... 7 B. APPELLANTS’ ARGUED-FOR APPLICATION OF THE DE NOVO STANDARD OF REVIEW IS CONTRARY TO TEXAS LAW. ............. 9 III. SUMMARY OF ARGUMENT ....................................................... 11 IV. ARGUMENT .................................................................................. 12 A. THE TRIAL COURT PROPERLY REFUSED TO GRANT APPELLANTS’ FACTUALLY DEFICIENT AND LEGALLY UNSUPPORTED MOTION TO COMPEL ARBITRATION .............. 12 1. Appellants’ Motion to Compel Arbitration Is Completely Devoid of Evidentiary Support and Thus Fails On Its Face. ....................................................... 12 2. Appellants’ Motion to Compel Grossly Misconstrues FINRA Rules. ............................................................. 15 3. Appellee’s Argument before the trial court: A Rule 12200 “customer” of a FINRA member can only demand arbitration before FINRA absent a separate arbitration agreement. ............................................... 18 B. RECENT (AUGUST 21, 2014) SECOND CIRCUIT DECISIONS HOLD FORUM SELECTION CLAUSES SUPERSEDE ANY ARBITRATION AGREEMENT CREATED BY FINRA RULE 12200.................................... 22

ii 1. Goldman, Sachs & Co. v. Golden Empire Schs. Fin. Auth., 764 F.3d 210, 2014 U.S. App. LEXIS 16155 (2d Cir. 2014): An Agreement to Arbitrate Under FINRA may be declared unenforceable upon such grounds as exist at law or in equity for the revocation of any contract. ...................................................................... 23 2. Status as a “customer” for purposes of FINRA Rule 12200 has never been determined by merely examining “the face of the Agreement..” .................... 30 3. Federal Appellate Courts Have Rejected Appellants’ Contention that there is a presumption favoring FINRA Arbitration. .................................................... 31 C. GENERAL RULES OF CONTRACT INTERPRETATION FAVOR ARBITRATION BEFORE THE AMERICAN ARBITRATION ASSOCIATION (AAA). ............................................................. 34 1. Precedent does not exist requiring construing facts in favor of finding a party is a “customer” for purposes of FINRA Rule 12200. .................................................... 38 D. APPELLANTS DO NOT PRESENT A VIABLE ARGUMENT THAT APPELLANTS ARE CUSTOMERS FOR PURPOSES OF FINRA RULE 12200 AND APPLICABLE CASE PRECEDENTS. . 39 2. Cases cited by Appellants involve Financial Agreements for the issuance and underwriting of Auction Rate Securities (ARS) ................................... 44 3. Other cases cited by Appellants present factual circumstances wholly distinguishable from the case at bar. .............................................................................. 49 4. APPELLANTS CITE IRRELEVANT FINRA RULES AND IRRELEVANT FACTS THAT FAIL TO SAVE APPELLANTS ARGUMENT THAT THEY ARE “CUSTOMERS” FOR PURPOSES OF FINRA RULE 12200 ........................................................................... 53 5. Appellants attempt to analogize legal contingency fee agreement. ................................................................... 56

iii iv INDEX OF AUTHORITIES

Page(s)

CASES

Applied Energetics, Inc. v. NewOak Capital Mkts., LLC, 645 F.3d 522 (2d Cir. 2011) .................................................. 24, 25

Bensadoun v. Jobe-Riat, 316 F.3d 171 (2d Cir. 2003) ........................................................ 28

Charles Schwab & Co. v. Fin. Indus. Regulatory Auth. Inc., 861 F. Supp. 2d at (N.D. Cal. 2012) ............................................ 54

Citigroup Global Mkts. Inc. v. Abbar, 761 F.3d 268 (2d Cir. 2014) ...................................... 28, 29, 48, 49

Citigroup Global Mkts. Inc. v. Abbar, 943 F. Supp. 2d 404 (S.D.N.Y. 2013) .......................................... 17

Citigroup Global Mkts., Inc. v. VCG Special Opportunities Master Fund Ltd., 598 F.3d 30 (2d Cir. 2010) .......................................................... 28

Credit Suisse Sec. (USA) LLC v. Sims, Civ. Action No. H-13-1260, 2013 U.S. Dist. LEXIS 143712 (S.D. Tex. Oct. 4, 2013) ............................................ 17, 35

In re Crosstex CCNG Processing Ltd, No. 05-08-01091-CV, 2008 Tex. App. LEXIS 8391 (Tex. App.—Dallas Nov. 7, 2008, no pet.) (mem. op.).......... 32, 33

EEOC v. Waffle House, Inc., 534 U.S. 279 (U.S. 2002) ............................................................. 25

First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995) ..................................................................... 31

v Goldman, Sachs & Co. v. Golden Empire Schs. Fin. Auth., 764 F.3d 210, 2014 U.S. App. LEXIS 16155 (2d Cir. 2014) ................................................................................ 21, 22, 24

J.P. Morgan Secs. Inc. v. La Citizens Prop. Ins. Corp., 712 F. Supp. 2d 70 (S.D.N.Y 2010) ........................... 21, 34, 41, 42

Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Williams, No. 05-97-01481-CV, 1998 WL 155454 (Tex. App.— Dallas Apr. 6, 1998, no pet.) (not designated for publication) .................................................................................. 11

Mitsubishi Motors Corp. v. Soler Chrysler–Plymouth, Inc., 473 U.S. 614 (1985) ..................................................................... 31

Morgan Keegan & Co., Inc. v. Garrett, 816 F.Supp.2d 439 (S.D. Tex. 2011) ................................ 43, 44, 45

Morgan Keegan & Co. v. Silverman, 706 F.3d 562 (4th Cir. 2013) ................................................. passim

In re Nat’l Health Ins. Co., 109 S.W.3d 552 (2002) ................................................................ 32

Patten Secs. Corp. v. Diamond Greyhound & Genetics, Inc., 819 F.2d 400 (3d Cir. 1987) ............................................ 21, 40, 42

Phillips v. ACS Mun. Brokers, Inc., 888 S.W.2d 872 (Tex. App.—Dallas 1994, no writ) ............ 7, 8, 13

Raymond James Fin. Servs. v. Cary, 709 F.3d 382 (4th Cir. Va. 2013) ................................................. 17

Tex. Capital Bank, N.A. v. Automaker, Inc., No. 14-94-0069-CV, 1995 WL 472346 (Tex. App.— Houston [14th Dist.] Aug. 10, 1995, no writ) (not designated for publication) .......................................................... 12

vi Tradestation Secs., Inc. v. Capone, 2014 U.S. Dist. LEXIS 51876 (W.D.N.C. Apr. 10, 2014) ............................................................................................ 17

In re Trammell, 246 S.W.3d 815 (Tex. App.—Dallas 2008, no pet.)............. 7, 8, 16

UBS Fin. Servs., Inc. v. Carilion Clinic, 706 F.3d 319 (4th Cir. 2013) ....................................................... 35

UBS Fin. Servs., Inc. v. W. Va. Univ. Hosps., Inc., 660 F.3d 643 (2d Cir. 2011) ...................................... 21, 22, 41, 43

Wachovia Bank, Nat. Ass’n v. VCG Special Opportunities Master Fund, Ltd., 661 F.3d 164 (2d Cir. 2011) .................................................. 28, 34

Zarecor v. Morgan Keegan & Co., Inc., No. 4:10-cv-01643 (SWW), 2011 WL 5592861 (E.D. Ark. July 29, 2011) ................................................................. 45, 46

STATUTES

9 U.S.C. § 2 ................................................................................. 23, 30

16 C.F.R. § 240.15C3-3(a)(1) ........................................................... 54

Dodd-Frank Wall Street Reform and Consumer Protection Act .............................................................................. 51

Securities Exchange Act of 1934 ....................................................... 54

TEX. CIV. PRAC. & REM. CODE § 171.001(a) ...................................... 30

TEX. CIV. PRAC. & REM. CODE ANN. § 171.021(a)(1)-(2) ........... 31, 32

OTHER AUTHORITIES

FINRA Rule 2268 ................................................................. 52, 53, 55

vii FINRA Rule 4000 ............................................................................. 47

FINRA Rule 4530 ............................................................................. 47

FINRA Rule 12000 ..................................................................... 47, 52

FINRA Rule 12200 ..................................................................... passim

FINRA Rule 12200’s .................................................................... ix, 16

SECONDARY AUTHORITIES

Teresa J. Verges, Opening the Floodgates of Small Customer Claims in FINRA Arbitration: FINRA v. Charles Schwab & Co., Inc., 15 CARDOZO J. CONFLICT RESOL. 623 (2014)........................................................................................... 19

viii ABBREVIATIONS AND RECORD REFERENCES

Abbreviations “Appellants” The terms “Appellants,” “Defendants,” and “Appellants-Defendants” are used interchangeably herein to refer collectively to MICHAEL MORFORD d/b/a NEMAHA WATER SERVICES, GEOFFREY ARNOLD MCFALLS d/b/a NEMAHA WATER SERVICES, NEMAHA WATER SERVICES, L.P., NEMAHA WATER SERVICES GP, LLC, NEMAHA WATER SERVICES OK-1702, LLC, and NEMAHA WATER SERVICES HOLDING COMPANY, LLC. “Appellee” The terms “Appellee,” “Plaintiff,” and “Appellee- Plaintiff” are used interchangeably herein to refer to ESPOSITO SECURITIES, LLC. “Agreement” The term “Agreement” r e f e r s h e r e i n t o the May 1, 2013 engagement letter between Nemaha Water Services and Esposito Securities, LLC. “Arbitration The term “Arbitration Order” refers to the trial Order” court’s “Order Granting Plaintiff’s Motion to Compel Arbitration,” dated August 28, 2014.

Record References

References to the reporter’s record in the form: [Vol] RR at [page #];

References to the clerk’s record are in the form: 1 CR at [page #]

ix RESTATEMENT OF THE CASE

Nature of the Appellee-Plaintiff initiated the underlying action— Case: styled, Esposito Securities, LLC v. Michael Morford d/b/a Nemaha Water Services et al., Cause No. DC-14-05795, In the 44th District Court, Dallas County, Texas—to enforce a pre-dispute arbitration agreement. 1 CR at 27-108; 2 RR at 20:11-16; 3 R at 19:7-10. Appellants-Defendants conceded the underlying dispute must be arbitrated; however, they resisted the contractually specified arbitration forum (the American Arbitration Association). 2 RR at 7:10-19. In response to Appellee-Plaintiff’s Motion to Compel Arbitration before the AAA, Appellants-Defendants filed a separate cross-motion to compel arbitration before Financial Regulatory Authority (FINRA). 1 CR at 136-41. Course of The trial court held two hearings before deciding the Prior issues presented in the parties’ competing motions to Proceedings: compel. See generally RR Vols. 1-3. Thereafter, the court conducted another hearing to consider on Appellants-Defendants’ Motion to Reconsider Order Grating Plaintiff’s Motion to Compel Arbitration to AAA. 1 CR at 298-301; see also generally RR Vol. 4. District The trial court granted Appellee-Plaintiff’s Motion to Court’s Compel Arbitration before the AAA, 1 CR at 292-94, Disposition: and impliedly denied Appellants-Defendants’ motion to reconsider that order, 1 CR at 362.

x RESTATEMENT OF ISSUE PRESENTED

Appellants-Defendants admit below, in their FINRA Statement of Claim, and on appeal: (1) only a FINRA member’s “customers” may invoke FINRA Rule 12200’s mandatory arbitration procedures; (2) a FINRA member’s “customers” are “persons” who purchase FINRA-regulated goods or services from a FINRA member; and, (3) in this case, the lone claim they seek to compel Appellee-Defendant to arbitrate before FINRA pertains to a transaction Appellants conducted entirely independent of, and without in any way relying on, any FINRA-regulated goods or services from Appellee.

On this state of the appellate record, did Appellants satisfy their burden to prove there is no evidence to support the trial court’s determination that Appellants-Defendants failed to prove the disputed transaction is subject to FINRA’s mandatory arbitration procedures?

xi I. RESTATEMENT OF FACTS

This case is about Appellants’ discontent with the trial court’s

order enforcing their pre-dispute arbitration agreement to resolve

“[a]ny claim or controversy arising out of or relating to” their

contract with Appellee-Plaintiff by binding arbitration before the

American Arbitration Association.

A. The Parties’ Pre-Dispute Arbitration Agreement.

Appellants-Defendants and Appellee-Plaintiff executed the

letter agreement (the “Agreement”) from which the underlying

dispute arises on May 1, 2013. 1 CR at 32-38. Pursuant to that

Agreement, Appellants-Defendants and Appellee-Plaintiff

provisionally agreed:

(1) For an initial 6-month term, and thereafter until terminated by either party with 30 days prior written notice;

(2) Appellee-Plaintiff would, if requested by Appellants- Defendants, provide Appellants-Defendants certain enumerated services; and

1 (3) Appellants-Defendants would compensate Appellee- Plaintiff for any requested services in accordance with the Agreement’s “Fees and Expenses” provision.

1 CR at 32-33, ¶¶ A-B, D. The parties unconditionally agreed,

however, that “any claim or controversy arising out of or relating to

th[e] Agreement, or the breach thereof, shall be settled by binding

arbitration in accordance with the Commercial Arbitration Rules of

the American Arbitration Association[.]” 1 CR at 35, ¶ K.

B. The Disputed Transactions.

In mid-to-late February 2014, Appellants-Defendants revealed

to Appellee-Plaintiff, for the first time, that they (Appellants-

Defendants) had secretly been working with a third party to secure

approximately $8,100,000.00 financing to purchase a substantial

portion of another company’s assets (the “Transaction”).1 1 CR at

1 By the Agreement’s express terms, Appellants-Defendants agreed Appellee-Plaintiff would “serve as the exclusive financial advisor of the Company with respect to a possible sale or recapitalization of the Company that is accomplished in one or a series of transactions involving … “any exchange or tender offer, merger, consolidation or other business combination involving the Company; or any recapitalization, reorganization, restructuring or other similar transaction involving the Company.” 1 CR at 32.

2 100-01, ¶ 19 (Affidavit of Jared Behnke); 1 CR at 115, ¶¶ 4-6

(Defendants’ Original Counterclaim).

After learning about the Transaction, Appellee-Plaintiff

notified Appellants- Defendants that, because it occurred within the

contract term, 2 the Transaction entitled Appellee-Plaintiff to “a

Transaction fee [] equal to five percent (5%) of the [Transaction’s]

total consideration[.]” 1 CR at 33, ¶¶ B, D; 1 CR at 100-01, ¶¶

19-22; see also Appellant’s Brief at 4 (“After learning of this deal,

2 Paragraph D of the Agreement provides, in relevant part: [Appellee-Plaintiff] shall be entitled to the full amount of the Transaction Fee in the event an agreement is entered into with respect to a Transaction at any time within one year from the date of any such expiration or termination with any party (i) identified in writing by [Appellee-Plaintiff] as a potential party to a Transaction during Esposito Securities' engagement hereunder, (ii) with whom the [Appellants- Defendants] had any discussions regarding a potential Transaction during [Appellee-Plaintiff’s] engagement hereunder regardless of whether such discussions were initiated by [Appellee-Plaintiff], or (iii) who proposed or to whom the Company proposed a Transaction during Esposito Securities' engagement hereunder. 1 CR at 33, ¶ D.

3 Esposito sent Nemaha a demand for $405,000, claiming it was

entitled to such fee under the Agreement ….”).

C. Appellants’ Post-Dispute Attempt to Squirm Out of Their Pre-Dispute Arbitration Agreement.

When Appellants-Defendants balked on their contractual

payment obligation, Appellee-Plaintiff initiated the underlying trial

court proceedings to enforce the Agreement’s pre-dispute arbitration

clause. 1 CR at 6, ¶ 1 (“Plaintiff submits this action for the purpose

of compelling arbitration[.]”); 1 CR at 27-108 (“Motion to Compel

Arbitration and Stay Proceedings”).

Appellants-Defendants refused to abide by their pre-dispute

commitment to resolve the disputed Transaction in binding

arbitration before the AAA; instead, they:

(1) first, filed a “Statement of Claim” with the Financial Industry Regulatory Authority (“FINRA”), a self- described “forum for securities dispute resolution … involving customers of brokerage firms and disputes between brokerage firms and their employees[,]” 1 CR at 230;

(2) then, more than a month later, moved the trial court to compel Appellee- Plaintiff to abandon the AAA

4 arbitration in favor of Appellants-Defendants’ later-filed FINRA action, 1 CR at 131-35 (“Defendants’ Response to Plaintiff’s Motion to Compel Arbitration and Stay Proceedings”), at 136- 41(“Defendants’ Motion to Compel Arbitration and Stay Proceedings”); see also Appellant’s Brief at 5 (“In response to [Appellee- Plaintiff’s] suit,” [Appellants-Defendants] “filed a declaratory judgment action before FINRA” and “moved for arbitration before [] FINRA.”).

In alleged support of the foregoing filings, Appellants-

Defendants generally cite FINRA Rule 12200 as the source of their

purported right: (1) unilaterally to vitiate their pre-dispute

commitment to arbitrate before the AAA; and (2) judicially force

Appellee-Plaintiff to: (a) abandon its earlier-filed AAA action, and

(b) settle the underlying dispute in an entirely different arbitral

forum, governed by entirely different rules, than the parties’

Agreement requires. 1 CR at 132-33, 137-39, 226, 243.

During the three hearings before the trial court, however,

Appellees- Defendants conceded:

(1) contracting parties may effectively agree to “opt out” of Rule 12200’s mandatory FINRA arbitration provision, 2 RR at 20:3-16;

5 (2) they signed the Agreement containing the pre-dispute arbitration clause without objection, 2 RR at 11:23-25;

(3) to invoke Rule 12200’s mandatory arbitration provision, claimants must be “customers” complaining of a dispute arising from the business activities the named FINRA member(s), 4 RR at 19:2 – 20:17;

(4) persons who do not purchase goods or services from, and do not have a brokerage account with, a FINRA member does not qualify as that member’s “customers,” as that term is contemplated by FINRA’s Rules, 3 RR at 21:18- 23; 4 RR at 24:14-16; and

(5) the Statement of Claim Appellants-Defendants filed with FINRA avows the disputed Transaction did not involve the purchase of any goods or services from Appellee- Plaintiff or a brokerage account, as Appellants- Defendants never opened such an account, 3 RR 20:22 - 21: 23; 4 RR 25:6 - 33: 18.

After considering the parties’ cross-motions, responses,

pleadings on file, and arguments of counsel, the trial court granted

Appellee-Plaintiff’s Motion to Compel Arbitration, and order the

parties’ dispute to be determined by arbitration before the AAA. 1

CR at 292-94. Appellants-Defendants did not request, and the trial

court did not make or enter Findings of Facts and Conclusions of

6 Law in support of its arbitration order. See generally 1 CR at 2-4

(Index of Clerk’s Record).

This appeal/alternative mandamus action followed.

II. STANDARD OF REVIEW

A. Settled Texas Law Establishes This Court’s Review of the Trial Court’s Order Is Governed By the No-Evidence Standard of Review.

This Court reviews trial-court orders denying motions to stay

litigation and compel arbitration under the “no evidence” standard.

Phillips v. ACS Mun. Brokers, Inc., 888 S.W.2d 872, 874 (Tex.

App.—Dallas 1994, no writ) (citing Hearthshire Braeswood Plaza

Ltd. P’Ship v. Bill Kelly Co., 849 S.W.2d 380, 384 (Tex. App.—

Houston [14th Dist.] 1993, writ denied)).

Under that standard, this Court must credit the favorable

evidence if a reasonable fact-finder could and disregard the contrary

evidence unless a reasonable fact-finder could not. In re Trammell,

246 S.W.3d 815, 820 (Tex. App.—Dallas 2008, no pet.) (citing

Kroger Tex. Ltd. v. Suberu, 216 S.W.3d 788, 793 (Tex. 2006)

7 (legal sufficiency review of jury verdict); City of Keller v. Wilson, 168

S.W.3d 802, 807 (Tex. 2005) (legal sufficiency review of

summary judgment)).

Appellants-Defendants’ no-evidence point of error must be

overruled unless they demonstrate: (1) there is a complete absence

in the record of evidence of a vital fact; (2) the rules of law or of

evidence bar the Court from giving weight to the only evidence

offered to prove a vital fact; (3) the evidence offered to prove a vital

fact is no more than a mere scintilla; or (4) the evidence

conclusively establishes the opposite of the vital fact. Id. (citing

Marathon Corp. v. Pitzner, 106 S.W.3d 724, 727 (Tex. 2003); City

of Keller v. Wilson, 168 S.W.3d at 809).

When, as here, the record contains no findings of fact and

conclusions of law, the Court may affirm the trial court’s judgment

on any legal theory the evidence supports. Phillips v. ACS Mun.

Brokers, Inc., 888 S.W.2d at 874 (citing Lute Riley Motors, Inc. v.

8 T.C. Crist, Inc., 767 S.W.2d439, 440 (Tex. App.—Dallas 1988,

writ denied); Hearthshire Braeswood, 849 S.W.2d at 384).

B. Appellants’ Argued-For Application of the De Novo Standard of Review Is Contrary to Texas Law.

Appellants-Defendants expressly acknowledge the foregoing

deferential standard of review generally governs appellate courts’

review of trial-court orders denying motions to compel arbitration.

See Appellants’ Brief at 9 (citing Schlumberger Technology Corp.

v. Baker Hughes Inc., 355 S.W.3d 791, 800 (Tex. App.—

Houston [1st Dist.] 2011,no pet.)). Nonetheless, they urge this

Court to review the trial court’s complained-of order de novo.

Appellants’ Brief at 9.

According to Appellants-Defendants, the de novo standard is

appropriate in this case because they indisputably (allegedly) proved

themselves to be “customers” of a FINRA member within the

contemplation FINRA Code of Arbitration Procedure; thus, contend

Appellants-Defendants, “the only disputed question before this

[C]ourt is purely legal in nature.” Appellants’ Brief at 9.

9 Tellingly, but problematically, Appellants-Defendants make no

attempt to support their bald proposition with record references or

citations to legal authority. See Appellants’ Brief at 9. What’s

more, they ignore their counsel’s express acknowledgment in open

court: (1) there is no “overriding law of the land” for determining

whether someone qualifies as a “customer,” 2 RR at 35:11 – 36:7;

(2) such determinations have been historically resolved on an ad hoc,

case-by-case basis, 2 RR at 36:5-78; (3) precedent exists which

limits the meaning of “customer” to instances in which the would-be

customer actually purchases FINRA-regulated goods or services

from, or opens a brokerage account with, a FINRA member, 3 RR at

10:18 – 11:6; and (4) the Statement of Claim Appellants-Defendants

filed to initiate a FINRA arbitration against Appellants-Defendants

specifically disavows they were in any way involved with the

Transaction they want the FINRA arbitrator to resolve, 1 CR at 241-

56.

10 III. SUMMARY OF ARGUMENT

Appellants-Defendants attack the trial court’s Arbitration

Order on the limited ground that “the trial court erred in finding

Appellants were not ‘customers’ of Appellee under the Rules of the

Financial Industry National Regulatory Authority (FINRA), and

[thus] erred in denying Appellants’ motion to compel arbitration on

that basis[.]” Appellants’ Brief at xii; see also Appellant’s Brief at

9 (“The dispositive question before this Court is whether the trial

court erred in denying Appellants’ motion to compel arbitration

based on a finding that [they were] not [] ‘customer[s].’”).

Not only does the record support the trial court’s conclusion

about Appellants-Defendants’ failed to prove their alleged FINRA-

customer status, it establishes the trial court’s judgment is

sustainable on numerous grounds Appellants-Defendants do not

challenge. Accordingly, as explained more fully below, Appellants-

Defendants’ appeal/alternative mandamus petition must fail.

11 IV. ARGUMENT

A. The Trial Court Properly Refused To Grant Appellants’ Factually Deficient And Legally Unsupported Motion To Compel Arbitration

On August 19, 2014, Appellants-Defendants filed two separate

documents, respectively titled, Defendants’ Response to Plaintiffs’

Motion to Compel and Defendants’ Motion to Compel Arbitration

and Stay. 1 CR at 131-35, 136-41. Notwithstanding their different

titles, both documents requested the same relief, to-wit: an order

refusing to enforce the parties’ pre-dispute arbitration clause. 1 CR

at 131-35, 136-41

1. Appellants’ Motion to Compel Arbitration Is Completely Devoid of Evidentiary Support and Thus Fails On Its Face.

Texas law is well settled: “To compel arbitration, a party must

establish: (1) the existence of a valid agreement to arbitrate and (2)

the claims asserted [] are within the scope of the arbitration

agreement.” Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Williams,

No. 05-97-01481-CV, 1998 WL 155454 (Tex. App.—Dallas Apr.

6, 1998, no pet.) (not designated for publication).

12 In this case, Appellants-Defendants moved to compel

arbitration with FINRA in response to, and as an attempt to defeat,

Appellee-Plaintiff’s Motion to Compel Arbitration before the AAA.

See Appellants’ Brief at 5 (“In response to Esposito’s suit, Nemaha

move for arbitration before [] FINRA.”). Thus, to prevail in the trial

court proceedings, Appellants-Defendants bore the burden to

“controvert the [Appellee-Plaintiff’s] claims by presenting affidavits

or other such evidence as would generally be admissible in a

summary proceeding.” See Tex. Capital Bank, N.A. v. Automaker,

Inc., No. 14-94-0069-CV, 1995 WL 472346, at *2 (Tex. App.—

Houston [14th Dist.] Aug. 10, 1995, no writ) (not designated

for publication) (citing Prudential Secs. Inc. v. Banales, 860 S.W.2d

594, 597 (Tex. App.—Corpus Christi 1993, orig. proceeding)).

Nowhere in Appellants-Defendants’ Motion to Compel do they

cite or otherwise attempt to incorporate any evidence of an

agreement between the parties to arbitrate any dispute with FINRA.

13 1 CR at 136-41. Instead, Appellants- Defendants merely point to

FINRA Rule 12200 and contend:

As Plaintiff is a members of FINRA and/or associated persons of a member at the time of the issues that are the subject of this claim, the Defendants are customers, the dispute is in connection with the business activities of the member and associated persons that does not involve insurance and the customer is requesting arbitration under the Code, the parties must arbitrate under the Code. 1 CR at 137-38, ¶ 4 (emphasis in orig.).

This Court’s precedent makes plain, however, that Appellee-

Plaintiff’s obligation to arbitrate with a customer in accordance with

FINRA Rule 12200 is not a proxy for, and thus does not establish,

the existence of an independent and valid written agreement

between Appellee-Plaintiff and Appellants-Defendants to arbitrate

before FINRA. See Phillips v. ACS Mun. Brokers, Inc., 888 S.W.2d

872, 875-76 (Tex. App.—Dallas 1994, no writ).

Because Appellants-Defendants fail to allege the existence of

any other agreement to arbitrate before FINRA, it is axiomatic that

their motion to compel fails on its face. See generally discussion

supra.

14 2. Appellants’ Motion to Compel Grossly Misconstrues FINRA Rules.

But even supposing, for argument’s sake alone, FINRA Rule

12200 could serve as a surrogate arbitration agreement, Appellants-

Defendants readily admit that Rule only applies to disputes: (1)

between a FINRA member and its customers; and (2) which arise

“in connection with the business activities of the member[.]”

Appellants’ Brief at 10 (quoting FINRA Rule 12200). Accordingly,

insofar as FINRA Rule 12200 applies, Appellants-Defendants could

not prevail on their motion to compel without first establishing: (1)

they are Appellee-Plaintiff’s “customers”; and (2) the disputed

Transaction “arises in connection with [Appellee-Plaintiff’s]

business activities.” See id. They failed conclusively to establish

either.

a) Appellants’ Argued-For Interpretation of “Customer” Belies Their Result-Oriented Analysis.

Appellants-Defendants purportedly recognize that arbitration

rules are interpreted according to ordinary contract construction

15 principles. Appellants’ Brief at 11. In seeking to ascertain whether

they qualify as “customers” under FINRA’s Rules, however,

Appellants-Defendants do not begin their analysis by examining

FINRA’s Rules’ actual text. Appellants’ Brief at 12. Instead, they

begin with the wholly unsupported assumption that their

“customer” status must be ascertained from “the face of the

Agreement.” Appellants’ Brief at 12 (citing nothing).

With those parameters set, Appellants-Defendants next

disavow the Rules’ text for being insufficiently explicit before finally

settling on a recent Second Circuit decision that “broadly define[s]

‘customer’ [a]s ‘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.” Appellants’ Brief at 12

(emphasis by Appellants) (quoting Citigroup Global Markets Inc. v.

Abbar, 761 F.3d 268, 275 (2d Cir. 2014)).

Without further analysis or authority, Appellants declare that

the “disjunctive” word “or” is somehow “instructive and leaves no

16 doubt that [they] w[ere] [] customer[s] because, under the

Agreement[, they were] purchasing a service from [Appellee-

Plaintiff], even though [they] did not have an investment or trading

account there.” Appellants’ Brief at 13 (citing nothing).

Besides constituting little more than Appellants-Defendants’

ipse dixit, the foregoing analysis completely disregards the applicable

standard of review.

b) More than a scintilla of record evidence supports the trial court’s determination Appellants are not “customers,” as defined by FINRA’s Rules.

When, as here, the trial court conducted evidentiary hearings

on a disputed issue of fact, the question on appeal is whether—

viewed in the light most favorable to the judgment—there is more

than a scintilla of evidence to support the trial court’s judgment. In

re Trammell, 246 S.W.3d 815, 820 (Tex. App.—Dallas 2008, no

pet.) (citing Kroger Tex. Ltd. v. Suberu, 216 S.W.3d 788, 793

(Tex. 2006) (legal sufficiency review of jury verdict); City of Keller

17 v. Wilson, 168 S.W.3d 802, 807 (Tex. 2005) (legal sufficiency

review of summary judgment)).

In the proceedings below, in response to the trial court’s

questioning, Appellants-Defendants expressly admitted:

(1) the disputed Transaction that is the subject of Appellants-Defendants’ FINRA statement of claim does not involve the purchase of any goods or services from Appellee-Plaintiff, 4 RR at 17:4-7; and

(2) Appellants-Defendants do not know of a single case in which a person was determined to be a “customer” without actually purchasing goods and services from the FINRA member, 3 RR at 20:9-17.

Because these admissions are some evidence that Appellants-

Defendants do not satisfy FINRA Rule 12200’s definition of

customer, the trial court’s judgment must be sustained.

3. Appellee’s Argument before the trial court: A Rule 12200 “customer” of a FINRA member can only demand arbitration before FINRA absent a separate arbitration agreement.

Essentially, The Code of Arbitration Procedure

contained in the FINRA Rules (the Code) provides in Rule 12200

that parties must arbitrate a dispute if certain conditions are met.

However, in addition, the United States Courts of Appeals for the

18 Second and Fourth Circuits further expanded said conditions. In

February of 2013, the Second Circuit held that a party can only

compel a FINRA member to FINRA arbitration under Rule 12200,

absent a separate arbitration agreement. Morgan Keegan & Co. v.

Silverman, 706 F.3d 562, 565 (4th Cir. 2013).

First, Appellants’ brief conveniently leaves out the 4th

Circuit’s opinion, which was issued nearly two years ago, has no

negative analysis, and has been cited by Federal district courts and

appellate courts across the country. See Raymond James Fin. Servs. v.

Cary, 709 F.3d 382 (4th Cir. Va. 2013); Credit Suisse Sec. (USA) LLC v.

Sims, 2013 U.S. Dist. LEXIS 143712 (S.D. Tex. Oct. 4, 2013);

Citigroup Global Mkts. Inc. v. Abbar , 943 F. Supp. 2d 404 (S.D.N.Y.

2013); Tradestation Secs., Inc. v. Capone, 2014 U.S. Dist. LEXIS 51876

(W.D.N.C. Apr. 10, 2014).

Second, Appellants make a patently false statement in their

Brief that “it has been long established that under FINRA Rule

12200, a dispute between a FINRA member and a customer grants

19 the customer, as a matter of contract, the option to select FINRA as

an arbitral forum regardless of whatever might be provided in the

agreement.” See Appellant’s Brief at 11, ¶ 2.

Third, Appellants actually go on to claim, “[t]his matter of law

was not contested below.” Appellant’s Brief at 11, ¶ 2. This

matter of law was brought to Appellant’s attention at the initial

hearing on August 22, 2014 and at the Re-hearing on August 26,

2014.

In Appellee’s Brief in Support of Plaintiff’s Response to

Defendant’s Motion to Compel, Appellee submitted the following

argument to the 44th District Court on August 26, 2014 prior to the

re-hearing, “[i]n Morgan Keegan & Co. v. Silverman, the United States

Court of Appeals for the Fourth Circuit, stated that:

‘in the absence of a separate arbitration agreement, a party can compel a Financial Industry Regulatory Authority (FINRA) member to participate in FINRA arbitration if: (1) the party is a “Customer” of the FINRA member; and (2) there is a dispute between the “Customer” and the FINRA member, or the member's associated person, arising in connection with the

20 business activities of the FINRA member or a member's associated person.’”

1 CR at __ (quoting Morgan Keegan & Co., 706 F.3d at 563).

In this cause, Appellants have stipulated on the record that

they signed and entered into the May 1, 2013 contractual

Agreement. See generally RR Vol. 2. Said Agreement, and the

arbitration agreement therein, constitute a separate arbitration

agreement. See Exhibit B, para.K The FINRA Office of Hearing

Officers has expressly recognized that FINRA's arbitration rules

"themselves constitute an agreement to arbitrate that is covered by

the FAA, even separate from a customer-member agreement,"

essentially recognizing that such an agreement can exist. Teresa J.

Verges, Opening the Floodgates of Small Customer Claims in FINRA

Arbitration: FINRA v. Charles Schwab & Co., Inc., 15 CARDOZO J.

CONFLICT RESOL. 623 (2014) (citing Complaint and Request

for expedited Hearing 12-14, FINRA Office of Hearing Officers,

Dep’t of Enforcement v. Charles Schwab & Co., Disciplinary

Proceeding No. 2011029760201 (Feb. 1, 2012), available at,

21 http://disciplinaryactions.finra.org/viewdocument.aspx?DocNB=29

288).

The Court in Morgan Keegan, expressly recognized that a party,

specifically a party that qualifies as a “customer” under FINRA Rule

12200, may only compel a FINRA Member to FINRA Arbitration,

absent an arbitration agreement separate from the arbitration

agreement automatically created by FINRA’s arbitration rules. Here,

the parties are not absent a separate agreement, see Ex. B, para. K,

and as per the ruling of the Fourth Circuit Court of Appeals,

Nemaha Defendants cannot compel FINRA Member Esposito to

FINRA Arbitration. Morgan Keegan & Co., 706 F.3d at 563.

B. RECENT (AUGUST 21, 2014) SECOND CIRCUIT DECISIONS HOLD FORUM SELECTION CLAUSES SUPERSEDE ANY ARBITRATION AGREEMENT CREATED BY FINRA RULE 12200.

The initial hearing on the parties’ cross-Motions to Compel

Arbitration was held before the 44th District Court on August 22,

2014, the re-hearing was held on August 26, 2014 and the

Appellant-Defendant’s Motion to Reconsider the Order Compelling

22 the parties to Arbitration before the A.A.A., was held on September

9, 2014. The below cases were decided on August 21, 2014, prior to

the initial hearing, but the decision was not published until (waiting

on lexis to advise date).

1. Goldman, Sachs & Co. v. Golden Empire Schs. Fin. Auth., 764 F.3d 210, 2014 U.S. App. LEXIS 16155 (2d Cir. 2014): An Agreement to Arbitrate Under FINRA may be declared unenforceable upon such grounds as exist at law or in equity for the revocation of any contract.

The Second Circuit’s single opinion (disposing of two cases on

August 21, 2014) on the issue of separate forum selection

agreements in cases involving FINRA arbitration demanded by Rule

12200 “customers,” held that FINRA arbitration rules may be

superseded by forum selection clauses. See, Goldman, Sachs & Co. v.

Golden Empire Schs. Fin. Auth., 764 F.3d 210, 2014 U.S. App. LEXIS

16155 (2d Cir. 2014) (Hereafter “Golden Empire Schools”).

In both district court cases, the status of the non-FINRA

member party as a Rule 12200 “customer” was undisputed. Where

the FINRA members had been retained to (and in fact did) issue

23 millions of dollars in Auction Rate Securities (“ARS”), the parties

were indeed deemed Rule 12200 “customers.” Issuance and

underwriting of ARS has long been held to establish a member-

customer relationship for purposes of 12200. See, Patten Securities

Corp. v. Diamond Greyhound & Genetics, Inc., 819 F.2d 400, 402 (3d Cir.

1987); UBS Fin. Servs., Inc. v. W. Va. Univ. Hosps., Inc., 660 F.3d 643,

652 (2d Cir. 2011); and, J.P. Morgan Securities Inc. v. Louisiana Citizens

Property Insurance Corp., 712 F. Supp. 2d 70 (S.D.N.Y 2010).

The Second Circuit examined both forum selection clauses in

the two separate contractual agreements existing between FINRA

Member Goldman Sachs and its undisputed Rule 12200 “customer,”

Golden Empire, and FINRA Member Citigroup Global Markets, Inc.,

and its undisputed Rule 12200 “customer,” North Carolina Eastern.

Both forum selection clauses stated, “all actions and

proceedings… shall be brought in the United States District

Court…” Golden Empire Schs. Fin. Auth., 764 F.3d 210, at 212 (2d Cir.

2014).

24 After Golden Empire and North Carolina Eastern commenced

separate actions before FINRA alleging their respective FINRA

members had fraudulently induced them to issue the ARS, the

FINRA members separately sought declaratory and injunctive relief

against FINRA arbitration in federal district court. Neither FINRA

member disputed that for purposes of general contract

interpretation, FINRA Rule 12200 creates a written agreement to

arbitrate with their “customers” that is “enforceable, save upon such

grounds as exist at law or in equity for the revocation of any

contract.” Id., at 214, citing, 9 U.S.C. § 2; see, UBS Fin. Servs., 660 F.3d

at 648-49.

Indeed this is a long settled principle of contract interpretation

and the Supreme Court of the United States recently re-asserted the

use of same, citing “[t]he final phrase of 9 U.S.C.S. § 2 of the Federal

Arbitration Act,” and holding:

“A written provision in… a contract evidencing a transaction

involving commerce to settle by arbitration a controversy thereafter

25 arising out of such contract or transaction . . . shall be valid,

irrevocable, and enforceable, save upon such grounds as exist at law

or in equity for the revocation of any contract.” Id., at 1745.

The contract interpretation principal relied upon by the Second

Circuit in interpreting the enforceability and revocability of an

agreement to arbitrate arising out of FINRA Rule 12200, is thus

applicable to the same matter when raised before this Honorable

Court in the state of Texas.

Challenges to the validity of arbitration agreements "upon such

grounds as exist at law or in equity for the revocation of any

contract" can be divided into two types. One type challenges

specifically the validity of the agreement to arbitrate. Buckeye Check

Cashing, Inc. v. Cardegna, 546 U.S. 440 (U.S. 2006) –

Goldman, Sachs & Co. v. Golden Empire Schs. Fin. Auth., 764

F.3d 210, 2014 U.S. App. LEXIS 16155 (2d Cir. 2014): An “all

inclusive” and “mandatory” superseding arbitration clause is

26 grounds for revocation of the contractual agreement to arbitrate

created by FINRA Rule 12200

An agreement to arbitrate is superseded by a later-executed

agreement containing a forum selection clause if the clause

“specifically precludes” arbitration. While there is no requirement

that the later forum selection clause mention the prior arbitration,

the forum-selection clause must be “all-inclusive” and “mandatory.”

Id., at 215, citing Applied Energetics, 645 F.3d at 525 (2d Cir. 2011).

To be found “all-inclusive” and “mandatory,” later forum-

selection clauses “need only be sufficiently specific to impute to the

contracting parties the reasonable expectation that they would

litigate any disputes in federal court, thereby superseding the default

obligation to arbitrate under FINRA Rule 12200.” Id., at 216, citing

Applied Energetics, 645 F.3d at 525-526 (2d Cir. 2011)

Second, the Court, which had previously addressed this issue

in Applied Energetics, compared the forum-selection clause between

the parties in that case, versus the forum selection clause before it in

27 the Golden Empire Schools cases, thoroughly analyzed the use of the

terms “all actions and proceedings.”

The Court specifically pointed out that although the terms

used in Golden Empire Schools, “all actions and proceedings” was

narrower than the terms “any dispute” used in Applied Energetics, it

held that the “forum selection clause at issue is plainly sufficient

to supersede FINRA Rule 12200.” Id., at 217.

The forum selection clause between Appellants and

Appellee uses the terms “any claim or controversy,” which

under the broader standard in Applied Energetics and the narrower

standard in Golden Empire Schools, is plainly sufficient to supersede

FINRA Rule 12200.

Finally, in 2002, the Supreme Court of the United States

described a mandatory arbitration clause as one using the terms

“any dispute or claim” followed by “shall be settled by binding

arbitration.” EEOC v. Waffle House, Inc., 534 U.S. 279, at 282-3 (U.S.

2002).

28 Thus by the Second Circuit’s standard and the standard

outlined by the United States Supreme Court, the arbitration clause

between the parties at bar qualifies as a ‘mandatory’ arbitration

clause, and same reads, as follows:

“K. Arbitration of Disputes. Any claim or controversy arising out of or relating to this Agreement, or the breach thereof, shall be settled by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association.”

See Appellants Brief, Tab 2, the Agreement, Paragraph 2.

Thus, Appellants’ conclusion, after their gross

mischaracterization of both existing precedent and the record in this

cause, that it is an “undisputable fact” that “[a]s a matter of federal

law and regulation, a FINRA customer’s Rule 12200 right to

arbitrate before FINRA cannot be waived or abrogated by contract,”

is patently false. See Appellant Brief, page 7, no. 4 (see also

Morgan Keegan).

29 2. Status as a “customer” for purposes of FINRA Rule 12200 has never been determined by merely examining “the face of the Agreement..”

Appellants’ unsupported and conclusory statement that, “the

only issue to be determined is whether, on the face of the

Agreement, Nemaha can be deemed a “customer” of Esposito for

FINRA purposes,” is incorrect. See Appellant Brief, page 12.

Appellants have not cited a single provision or precedent (nor has

Appellee found one for that matter) wherein a court determined

whether a party is a FINRA member’s “customer” for purposes of

Rule 12200 by examining “the face of the agreement,” as Appellant

has insinuated is the only proper path here.

Rather, as Appellee presents in detail to the Court below,

federal appellate courts examine the fact pattern in each case, with

particular attention to the nature of the relationship between the

parties, which always includes either 1) an account, or 2) a

purchased good or service, and a sustained financial loss to the non-

FINRA member (see subsection X, page X of Appellee’s brief below).

30 3. Federal Appellate Courts Have Rejected Appellants’ Contention that there is a presumption favoring FINRA Arbitration.

Appellants claim that interpretation of FINRA’s arbitration

rules is similar to contract interpretation and that in accordance with

long-standing federal policy, any doubts concerning the scope of

arbitrable issues should be resolved in favor of arbitration (Appellee

can only assume Appellants mean in favor of FINRA Arbitration as

opposed to arbitration under the parties’ written agreement). See

Appellant Brief, Page 11, citing, Wachovia Bank, Nat. Ass’n v. VCG

Special Opportunities Master Fund, Ltd., 661 F.3d 164, 171 (2d Cir.

2011), also citing Bensadoun v. Jobe-Riat, 316 F.3d 171, 176 (2d Cir.

2003).

First, Appellee notes the multiple cases rejecting this

contention. See Wachovia, 661 F.3d at 170-71; Citigroup Global Mkts.,

Inc. v. VCG Special Opportunities Master Fund Ltd., 598 F.3d 30, 39 (2d

Cir. 2010) cf. Bensadoun, 316 F.3d at 176 (classifying John Hancock's

suggestion that presumption in favor of arbitration applies as

"dicta"). In the case cited by Appellants to rely on the presumption

31 in favor of resolving the present dispute in favor of FINRA

arbitration, that very court explicitly rejected that very contention.

In Abbar, the Court found that where “the parties are disputing

the existence of an obligation to arbitrate, not the scope of the

arbitration clause, the general presumption in favor of arbitration

does not apply. Citigroup Global Mkts. v. Abbar, 761 F.3d 268, 273 (2d

Cir. N.Y. 2014) (affirmed district court decision that where Abbar

held investments with foreign entity, Abbar was not a “customer” of

N.Y. based FINRA member and could not compel FINRA

arbitration), citing Applied Energetics, Inc. v. NewOak Capital Mkts., LLC,

645 F.3d 522, 526 (2d Cir. 2011) (("While doubts concerning the

scope of an arbitration clause should be resolved in favor of

arbitration, the presumption does not apply to disputes concerning

whether an agreement to arbitrate has been made.").

In Abbar, at issue was whether Abbar was a Rule 12200

“customer” having the right to request FINRA arbitration, and thus

the ultimate issue of “the existence of an agreement to arbitrate, not

32 the scope of the arbitration clause.” 31 Here, and at the trial court

level, Appellee has disputed Appellants’ claims that they are a

“customer” for purposes of FINRA Rule 12200. Appellee thus

disputes whether an obligation to arbitrate ever arose out of FINRA

Rule 12200.

As per the Abbar and other decisions cited herein by Appellee,

Appellants’ suggestion that the presumption in favor of arbitration

results in a presumption in favor of arbitration before FINRA is

completely misapplied. Appellants have failed to identify a single

case where the existence of a “customer,” and thus whether an

agreement to arbitrate before FINRA existed at all, was in dispute,

wherein the Court cited the presumption in favor of arbitration as

grounds for requiring the parties to arbitrate before FINRA. In the

present matter, there is no presumption in favor of arbitration before

FINRA, the presumption in favor of arbitration does not apply to the

questions of arbitrability that was presented to the trial court and is

before this Honorable Court now.

33 Finally, it would appear Appellants’ argument suggests this

Court should only apply principles of contract interpretation to

FINRA’s arbitration rules but not to the actual contractual

agreement expressly entered into between the parties. Id. As to

Abbar and Energetics, see also Agreement

C. General Rules of Contract Interpretation Favor Arbitration Before the American Arbitration Association (AAA).

The Texas Civil Practice & Remedies Code provides, “[a]

written agreement to arbitrate is valid and enforceable if the

agreement is to arbitrate a controversy that: . . . arises between the

parties after the date of the agreement.” TEX. CIV. PRAC. & REM.

CODE ANN. § 171.001(a).

Similarly, the Federal Arbitration Act provides that a written

arbitration provision is valid, irrevocable, and enforceable. 9 U.S.C.

§ 2 (2006).

Appellee would note that Supreme Court precedent holds that

the question of arbitrability is for a court to determine. In Howsam v.

Dean Witter Reynolds, Inc., the Supreme Court’s holding was

34 unambiguous: “[t]he question of whether the parties have submitted

a particular dispute to arbitration, i.e., the ‘question of arbitrability,’

is ‘an issue for judicial determination [u]nless the parties clearly and

unmistakably provide otherwise.’” Id. at 83 (quoting AT&T

Technologies, Inc. v. Communications Workers, 475 U.S. 643, 649

(1986)); see also First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938,

943 (1995) (“If, on the other hand, the parties did not agree to

submit the arbitrability question itself to arbitration, then the court

should decide that question just as it would decide any other

question that the parties did not submit to arbitration, namely,

independently.”); Mitsubishi Motors Corp. v. Soler Chrysler–Plymouth,

Inc., 473 U.S. 614, 626 (1985) (“[T]he first task of a court asked to

compel arbitration of a dispute is to determine whether the parties

agreed to arbitrate that dispute.”).

Proceedings to compel arbitration must be conducted in

accordance with the procedure outlined in § 171.021 of the Texas

35 Civil Practice and Remedies Code. TEX. CIV. PRAC. & REM. CODE

ANN. § 171.021(a)(1)-(2).

Under this provision, a court must order arbitration on

application of a party showing: (1) an agreement to arbitrate; and (2)

the opposing party’s refusal to arbitrate. Id. The arbitration

agreement provides the AAA with authority to administer the

arbitration.

Importantly, once a court determines that a matter is subject to

arbitration, it has no discretion to modify the parties’ agreement. See

In re Nat’l Health Ins. Co., 109 S.W.3d 552, 556 (2002) (holding that a

court cannot change an arbitration agreement because it or one of

the parties comes to dislike its provisions or thinks that something

else is needed in it).

Indeed, it is an abuse of discretion to order parties to an

arbitration not administered by the AAA when they have agreed to

arbitrate under the AAA rules. See In re Crosstex CCNG Processing Ltd,

2008 Tex. App. LEXIS 8391, *6 (Tex. App.—Dallas 2008) (mem.

36 op.) (“[the] trial court failed to correctly analyze and apply the law

when it altered the agreement [calling for arbitration in accordance

with the Patent Arbitration Rules of the AAA] by ordering the

parties to submit to an arbitration not administered by the AAA.

The trial court’s failure to analyze and apply the law constitutes an

abuse of discretion”).

Appellee would point to a 2008 ruling by this Honorable

Court, wherein the Court of Appeals, Fifth District, Dallas, stated

“[a]rbitration agreements are interpreted by applying contract

principles[,]” and “a court cannot change an arbitration agreement

because it or one of the parties comes to dislike the provisions of the

arbitration agreement or thinks that something else is needed.” Id.

The Court further stated that “the trial court failed to correctly

analyze and apply the law when it altered the agreement by ordering

the parties to submit to an arbitration not administered by the

AAA[,]” and that “[t]he trial court’s failure to analyze and apply the

law constitutes an abuse of discretion.” Id.

37 Thus, the 44th District Court of Dallas County would have in

fact abused its discretion had that court changed the parties’

expressly entered into pre-dispute arbitration agreement because

Appellants came to dislike the provision or thought something else

was needed.

1. Precedent does not exist requiring construing facts in favor of finding a party is a “customer” for purposes of FINRA Rule 12200.

Citing a single case, LA Citizens, JP Morgan Sec. v. La. Citizens

Prop. Ins. Corp., 712 F. Supp. 2d 70 (S.D.N.Y. 2010), see Appellant

Brief, page 12 Appellants contend that “courts” (as in plural) have

advised that any question as to whether a party is a “customer” for

purposes of FINRA Rule 12200 should be construed in favor of

finding that the party is a “customer.” Id. at 77. The LA Citizens

decision came out of the United States District Court for the

Southern District of New York in 2010. However, later, in 2011, the

Second Circuit Court of Appeals held in VCG Special Opportunities that

38 “terms such as ‘customer’ should be construed in a manner

consistent with the ‘reasonable expectations’ of FINRA members,”

making no mention of a presumption in favor of finding a party is a

“customer” for purposes of FINRA Rule 12200. Wachovia Bank, N.A.

v. VCG Special Opportunities Master Fund, Ltd., 661 F. 3d 164, at 171

(2d Cir. 2011), citing, Wheat, First Securities, Inc. v. Green, 993 F.2d 814,

820 (11th Cir. 1993).

2. APPELLANTS DO NOT PRESENT A VIABLE ARGUMENT THAT APPELLANTS ARE CUSTOMERS FOR PURPOSES OF FINRA RULE 12200 AND APPLICABLE CASE PRECEDENTS.

Federal circuit courts across the nation, and even the United

States District Court for the Southern District of Texas, have rejected

the argument that everyone is a “customer” except a broker or a

dealer. Credit Suisse Sec. (USA) LLC v. Sims, 2013 U.S. Dist. LEXIS

143712, *4 (S.D. Tex. Oct. 4, 2013) (citing Berthel Fisher & Co. Fin.

Servs., Inc., 695 F.3d at 752); Morgan Keegan & Co., 706 F.3d at 565-

66.

39 The term “customer” in FINRA Rule 12200 refers to “an entity

that is not a broker or dealer, who purchases commodities or services

from a FINRA member in the course of the member's business

activities, namely, the activities of investment banking and the

securities business.” Morgan Keegan & Co., 706 F.3d at 565-66, see

also, UBS Fin. Services, Inc. v. Carilion Clinic, 706 F.3d 319, 328-29 (4th

Cir. 2013).

The plain meaning of the word “purchase,” is to “to buy

(property, goods, etc.)” or “to get (something) by paying money for

it.” Morgan Keegan & Co., 706 F.3d at 565-66.

All relevant case law, found by Appellee to date, wherein the

issue before a district court of competent jurisdiction is whether a

party wishing to compel a FINRA Member to FINRA Arbitration

qualifies as a “customer” for purposes of Rule 12200, the party

moving to compel arbitration has, at a minimum, held an account

with or purchased commodities or services from a FINRA member.

40 Appellants have never held an account with or purchased

commodities or services from FINRA Member Esposito (Appellee).

Nevertheless, Appellants make several unsupported,

uncited, and fairly indecipherable claims as to why Appellants

should be found to be “customers” for purposes of FINRA Rule

12200, Appellee shall address these in turn.

a) The unexplained “disjunctive” between account holders and purchases of goods and services.

Citing Abbar, Appellants allege that because parties are found

to be a “customer” for purposes of FINRA Rule 12200, either

because the party is an account holder, or because the party has

purchased goods and services, same creates an “instructive”

“disjunctive” that leaves “no doubt” that Appellants were Rule

12200 “customers.” See Appellants’ Brief, page 12. Appellants’

proffered rationale is seemingly that Appellants must have been

purchasing a service because they did not have an investment or

trading account there, and evidently, a party interacting with a

41 FINRA member at all, must be doing one or the other. See

Appellants’ Brief, page 12

First, and plainly, Appellee finds this reasoning difficult to

follow as written. Second, as Appellants have not cited a single case

wherein the supposed disjunctive between the only two bases for

identifying a party as a Rule 12200 “customer” was in fact the reason

for finding the party was a Rule 12200 “customer,” Appellee will not

address this contention further.

b) Appellants state, but do not support, the contention that the contingent nature of the parties payment agreement is irrelevant for purposes of determining whether Appellants are Rule 12200 “customers.”

Appellants state that the “contingent nature of payment does

not negate the fact that Esposito obtained a 5% interest in exchange

for the provision of services.” See Appellants’ Brief, page 12.

However, Appellants do not cite a single case wherein, a party

who had a contingent payment agreement, or wherein a FINRA

member’s obtained interest in exchange for provision of services,

42 was the basis for finding that the party was a Rule 12200

“customer.” Accordingly, Appellee will not address this matter

further.

c) There is no case law, much less a “superabundance of case law” holding financial agreements similar to that between Appellants and Appellee are sufficient to create a customer-member relationship for FINRA Arbitration purposes.

Appellants have cited federal appellate court decisions holding

that a party who purchased goods or services from a FINRA member,

in a context beyond a classic investor-broker relationship, were

“customers” for purposes of FINRA Rule 12200. Appellee does not

dispute the existence of these cases. Further, Appellee does not

dispute that in general, where a dispute arose over whether a party

was a “customer” for purposes of FINRA 12200, courts have found

parties to be customers and forced FINRA members to FINRA

Arbitration.

However, Appellee would point out, that Appellants non-cited

general summary that “similar financial services agreements as

43 involved here – be it for raising money, identifying transactions such

as mergers and acquisitions, or other financial service[sic] that are

clearly within the ‘business activities’ of a FINRA member – are

sufficient to create a customer-member relationship for FINRA

Arbitration purposes,” see Appellant Brief, page 14, is a blatantly

unsupported misstatement of the law, and yet another attempt to

mislead this Honorable Court.

3. Cases cited by Appellants involve Financial Agreements for the issuance and underwriting of Auction Rate Securities (ARS)

The “superabundance” of case law cited includes three cases

wherein the FINRA Member acted as an issuer of auction rate

securities (“ARS”). See Appellant Brief, page 14, citing.

Additionally, in each case, the party ultimately found to be a

“customer,” alleged an actual financial loss as a result of the FINRA

Member’s business activities, and thus was the party bringing the

action, not the FINRA member. In the present matter, the FINRA

Member (Appellee Esposito) did not underwrite ARS for the other

party (Appellants Nemaha) and the other party has not alleged, nor

44 is there a record of, a financial loss at the hands of FINRA member

Esposito. Finally, FINRA Member Esposito initially brought this

action against Nemaha, not vice versa. The facts at bar are wholly

distinguishable from the facts presented in the three ARS cases cited

by Appellants. Herein, Appellee addresses the three ARS cases by

Appellants in support of this similar financial service agreements

contention.

a) Patten Securities Corp. v. Diamond Greyhound & Genetics, Inc., 819 F.2d 400 (3d Cir. 1987).

First, Appellants cite Patten Securities, a case wherein a

corporation contracted a FINRA member to serve as underwriter

for the sale of the corporation’s shares and warrants. Patten

Securities Corp. v. Diamond Greyhound & Genetics, Inc., 819 F.2d 400, 402

(3d Cir. 1987).

When the proposed deal was not consummated, the non-

FINRA member corporation demanded arbitration before FINRA, for

damages it sustained as a result of the FINRA Member’s refusal to

45 purchase the securities and damages arising from same. Id., at 402-

403.

The Third Circuit, held the corporation was the FINRA

member’s Rule 12200 “customer,” relying on an interpretive

statement from the NASD’s National Arbitration Committee that

stated, “an issuer of securities should be considered a public

customer of a member firm where a dispute arises over a proposed

underwriting.” Id., at 402-403.

In the present matter, Appellee Esposito was never contracted

to serve as underwriter for Appellants’ shares and warrants and

Appellants only brought an action before FINRA (seeking declatory

judgment that it was either not liable to Esposito under the

Agreement, or that the Agreement was fraudulently induced) until

after Appellee FINRA Member brought an action for damages before

the A.A.A under the arbitration clause in the parties’ agreement.

See Appellant Brief Tab B, the Agreement, Paragraph K, see

46 also Appellants’ Brief, page 5, citing CR 245. Appellants do not

dispute the validity of these facts.

b) UBS Fin. Servs., Inc. v. W. Va. Univ. Hosps., Inc., 660 F.3d 643, 652 (2d Cir. 2011) and J.P. Morgan Securities Inc. v. Louisiana Citizens Property Insurance Corp., 712 F. Supp. 2d 70 (S.D.N.Y 2010).

Next, Appellants cite West Virginia University Hospitals58 and

Louisiana Citizens, J.P. Morgan Securities Inc. v. Louisiana Citizens

Property Insurance Corp., 712 F. Supp. 2d 70 (S.D.N.Y 2010) two

cases which present largely identical facts. In both cases, the FINRA

Member had served as a broker-dealer to the other party at some

point, and the relevant dispute arose out of the issuance of ARS.

In Louisiana Citizens, the FINRA member served both as

underwriter and remarketer of the bonds, in said capacity, Citizens

contended they suffered economic loss as a result of J.P. Morgan’s

(the FINRA member) manipulation of the relevant market. Id.

Citizens then sought to arbitrate the dispute before FINRA.

The Southern District of New York cited the Third District’s decision

47 in Patten, noting, “although the relationship [in Patten] was not a

broker/investor relationship, [the issuer/underwriter relationship]

still related directly to the issuance of securities, rather than banking

advice.” Id., (alteration in the original, emphasis added) (quoting Fleet

Boston Robertson Stephens, Inc. v. Innovex, Inc. 264 F.3d 770, 773 n.3

(8th Cir. 2001))

The court concluded that issuers are Rule 12200 “customers”

of underwriters and could demand arbitration before FINRA of their

disputes. Id., at 74-79. Appellants were never issuers for Appellee

Esposito, and Appellee Esposito never provided underwriting

services for Appellants. See Appellants’ Brief, Tab B, the Agreement.

Appellants do not dispute the validity of these facts. The

circumstances surrounding the parties’ relationship in LA Citizens

are wholly distinguishable than that between Appellants and

Appellee here.

In West Virginia University Hospitals, the Second Circuit limited

its finding that WVUH was a “customer” under FINRA 12200 to the

48 fact that WVUH had paid for UBS to perform broker-dealer services.

See, 660 F.3d 643 at 648 (2d Cir. 2011).

It is not contested, and indeed Appellants have conceded the

fact that Appellee Esposito was not performing broker-dealer

services for Appellants, nor had Appellants paid any monies to

Appellee Esposito. ** CITE RECORD

4. Other cases cited by Appellants present factual circumstances wholly distinguishable from the case at bar.

a) Morgan Keegan & Co., Inc. v. Garrett, 816 F.Supp.2d 439 (S.D. Tex. 2011).

Appellants cite Garret as an alleged member of the

“superabundance” of case law establishing that the Agreement

between the parties at bar establishes that Appellants are Rule

12200 “customers.” See Appellant Brief, page 14.

Appellants do not include an in-text citation to the case, but

merely list the case in a footnote with no parenthetical explanation

as to its analysis or holding. Id.

49 Appellee has examined this approximately two-page case in

detail and can find no reference to a financial services agreement.

However the court does specifically point out that, “[c]laimants and

Morgan Keegan agreed to arbitrate before the National Association

of Securities Dealers, Inc., or the New York Stock Exchange, Inc. –

both follow Financial Industry Regulatory Authority rules.” Morgan

Keegan & Co., Inc. v. Garrett, 816 F.Supp.2d 439, 441 (S.D. Tex. 2011).

As to those claimants, they had an agreement to arbitrate using

FINRA arbitration rules, and therefore, as per the text of FINRA

Rule 12200, their status as a Rule 12200 “customer” was irrelevant,

their right to a FINRA arbitration arose out of their written

agreement to do so. FINRA Rule 12200 (Parties must arbitrate

a dispute under the Code if arbitration under the Code is either

required by a written agreement, or requested by the customer…).

Two Claimants did not have a written agreement to arbitrate

with Morgan Keegan, and when the Court found that these two

claimants “bought shares in the fund from third-party brokers on the

50 secondary market” and that these two claimants “never gave money

to Morgan Keegan,” the Court found that these two Claimants were

not Rule 12200 “customers” and “could not compel Morgan

Keegan to arbitrate.” Garrett, 816 F.Supp.2d 439, at 441 (S.D. Tex.

2011)

Appellants cited a case that fails on its face to support

Appellants’ generally cited summary regarding alleged financial

service agreements underlying other cases. Further, Appellants

actually cited a case which furthers Appellee’s argument that absent

a written agreement to arbitrate with FINRA, one must be a

“customer,” to demand arbitration before FINRA, and one is a Rule

12200 “customer” if they hold an account and / or have “purchased

goods or services from the FINRA member relating to banking and

securities activities.”

51 b) Zarecor v. Morgan Keegan & Co., Inc., No. 4:10-cv- 01643 (SWW), 2011 WL 5592861 (E.D. Ark. July 29, 2011);

Appellants cite Zarecor as an alleged member of the

“superabundance” of case law establishing that the nature of the

Agreement between the parties at bar establishes that Appellants are

Rule 12200 “customers.” See Appellant Brief, page 14

Appellants do not include an in-text citation to the case, but

merely list the case in a footnote with no parenthetical explanation

as to its analysis or holding. Id., footnote citation no. 34

Appellee has examined this case in detail and does not find a

single reference to an underlying financial services agreement.

Further, Appellee does not find reference to any of the following

terms; FINRA, customer, or arbitration. It appears the suit in

Zarecor, brought before federal district court in Tennessee, involves a

decision from a “Judicial Panel on Multidistrict Litigation” and is

wholly unrelated, incomparable, and irrelevant to matters raised to

52 this Honorable Court by virtue of Appellants’ appeal. Accordingly,

Appellee will not address this case further.

5. APPELLANTS CITE IRRELEVANT FINRA RULES AND IRRELEVANT FACTS THAT FAIL TO SAVE APPELLANTS ARGUMENT THAT THEY ARE “CUSTOMERS” FOR PURPOSES OF FINRA RULE 12200

a) FINRA Rule 4530 – Not a Provision of the FINRA Code of Arbitration Procedure for Customer Disputes (FINRA Rule 12000, et al).

Appellants have cited FINA Rule 4530,72 which is not a

provision of the FINRA Code of Arbitration Procedure for Customer

Disputes (FINRA Rule 12000, et al). Specifically, Rule 4530 falls

under FINRA Rule 4000, et al., regarding “Financial and Operational

Rules” and relates to reporting requirements and customer

complaints involving investments. See FINRA Rule 4000, et al.

First, the predicate to Rule 12100’s definitions states, unless

otherwise defined in the Code, terms used in the Rule and

interpretive material, if defined in the FINRA By-Laws, shall have

the meaning as defined in the FINRA By-Laws. FINRA Rule 4530 is

not a part of the FINRA By-Laws. Second, the case at bar does not

53 involve a reporting requirement, nor a complaint involving an

investment. The term “customer” is defined in the Code.74 FINRA

Rule 4530 is wholly inapplicable here and should be disregarded by

this Honorable Court.

b) Appellant again misstates the contents of the Second Circuit’s decision in Abbar, which held that a party who received services from a FINRA member, but that had not paid any fees to said FINRA member, had not purchased a good or service, and was thus not a FINRA Rule 12200 “customer.”

Appellants have cited text from Abbar as follows:

“By agreeing to accept “[sic]a fee for its services” or by selling securities to an entity, a FINRA member understands that it may be compelled to arbitrate if a dispute arises with that entity. This may not be a “comprehensive definition of the term,” but it captures virtually all customer relationships.[sic]

Appellants suggest same establishes that a mere agreement to

accept services, which the court recognizes as “captur[ing] virtually

all customer relationships,” makes a party who enters an agreement

with a FINRA member a “customer” for purposes of FINRA Rule

12200. Appellants have conveniently left out the later text from the

54 same case, which unequivocally establishes that the party in that

case that did not pay the FINRA member actual fees was found NOT

to be a “customer” for purposes of FINRA 12200.

In Abbar, the Second Circuit’s analysis is as follows:

“Citi NY employees certainly provided services to Abbar: they helped structure and manage the option transactions. However, Abbar did not purchase those services from Citi NY. His investment agreements were with Citi UK, and the fee for all services rendered by Citigroup personnel and offices was paid to Citi UK. While Abbar was certainly a "customer" of Citi UK, that relationship does not allow Abbar to compel arbitration against its corporate affiliate [Citi NY].”

Abbar, 761 F.3d at 275

“In most cases, this definition of "customer" can be readily

applied to undisputed facts. That is so in this case: Abbar never

held an account with the FINRA member [Citi NY] and

(notwithstanding his argument to the contrary) never purchased any

goods or services from it.” Id., at 276.

“The only relevant inquiry in assessing the existence of a

customer relationship is whether an account was opened or a

55 purchase made; parties and courts need not wonder whether myriad

facts will ‘coalesce into a functional concept of the customer

relationship.’" Id., at 276, citing, CGMI v. Abbar, 943 F. Supp. 2d at

407.

Similar to the situation between the parties in the present

matter, the FINRA member in Abbar agreed to provide services,

however, the FINRA was never paid any fees. The Second Circuit

held that Abbar was not a “customer” for purposes of Rule 12200.

For the same reasons, Appellants here are not “customers” for

purposes of Rule 12200.

6. Appellants attempt to analogize legal contingency fee agreement.

Appellants state that when a person employs an attorney on a

contingent fee basis the person becomes a client (for assumingly the

purpose of having standing to bring an action against the attorney,

but Appellants do not elaborate). Appellants then conclude that said

analogy establishes that the Agreement between the parties here

makes Appellants a client of Esposito. Appellees would merely point

56 out that shall the issue before this Honorable Court come down to

whether or not Appellants are “customers” of Appellee for purposes

of FINRA Rule 12200, the only scenarios that should be considered

are those involving FINRA members, and the rules and legal

precedent surrounding same. Given Appellants have not provided

any legal citations as to this analogous suggestion, Appellee will not

address it further.

a) Appellants raise direct privet by contract; note that under Appellee’s scenario, FINRA member could not bring action before FINRA.

Appellants find it worth noting that direct privet of contract

upholds Appellants as a customer (Appellants have yet to establish

Appellants are “customers” for purposes of FINRA Rule 12200)

despite fraudulent inducement or non-performance under a contract.

Appellants then suggest that if direct privet of contract does not

accomplish same, “then it is difficult to imagine any breach of

contract or fraud claim that could be brought before FINRA because

57 a member could never bring a FINRA claim against a client for

failure to pay.” See Appellants’ Brief, page 20

Appellees would politely point out, that a FINRA member can

never bring a FINRA claim against a customer, client, or otherwise,

ever, because Rule 12200 only allows a Rule 12200 “customer” to

request FINRA arbitration under Rule 12200. “It is important to

note that only the customer can compel arbitration under 12200, the

option is unavailable to the member firm.” See Catherine Moore,

The Effect of the Dodd-Frank Act on Arbitration Agreements: A

Proposal for Consumer Choice, 12 PEPP. DISP. RESOL. L. J. 503,

511 (2012), note 5, at 508-509.

In consideration of the following: 1) privity of contract was not

discussed before the trial court, 2) privity of contract has no effect on

a FINRA member’s ability to bring a claim before FINRA because

the member does not have, and has never had that option, and 3)

Appellants have utterly failed to explain the relevancy of these

58 statements to the matters pending before this Honorable Court,

Appellee will not address this further.

b) FINRA Rule 2268 Applies to Agreements with Account Holders (ONLY) not the Relevant Dispute OR the Relevant Pre-Dispute Arbitration Agreement

Appellants raise FINRA Rule 2268, which is not part of the

FINRA Code of Arbitration for Resolving Customer Disputes (Rule

12200, et al.). See FINRA Rule 2268 and FINRA Rule 12000, et al.

Appellee would note that the title of FINRA Rule 2268 is as

follows: “Requirements When Using Predispute Arbitration

Agreements for Customer Accounts.” Appellants have admitted,

and do not dispute, that they have never held a customer account, or

any account with Appellee. Appellee will nevertheless address the

other glaring problems with attempting to raise this rule in the

manner in which Appellants have raised it.

Appellants begin by citing subsection (d)(1), which they

apparently have not realized is part of the form language that is to be

included in any pre-dispute arbitration agreement with a holder of an

59 account. Rule 2268 begins with subsection (a), which says “[a]ny

predispute arbitration clause shall be highlighted and shall be

immediately preceded by the following language in outline form.”

Rule 2268, regarding customer accounts, then goes on to provide

seven hundred and eighty three (783) words of text, including the

eleven (11) words which Appellants have completely taken out of

context and cited in their Brief, to wit “Rule 2268(d)(1) expressly

prohibits member firms from placing ‘any condition’ in a pre-dispute

arbitration agreement that ‘limits or contradicts the rules of any self-

regulatory organization.’” See Appellants’ Brief page 22, citing

FINRA Rule 2268(d)(1).

In addition, Appellant claims that Rule 2228 requires that any

pre-dispute arbitration clause be preceded by the highlighted text

found therein. In Appellee’s pleading to the trial court, to wit:

Plaintiff’s Brief in Support of Plaintiff’s Reply to Defendant’s

Amended Response to Plaintiff’s Motion to Compel Arbitration,”

Appellee specifically eliminated any shred of applicability this Rule

60 could have to the pre-dispute arbitration agreement between the

parties at bar.

c) The definition of “Customer Account,” is provided by the SEC, which regulates FINRA Rules. Nemaha Appellants do not hold a “Customer Account” with FINRA Member Esposito.

“Customer Account” is not given a definition in the FINRA

Rules. As Plaintiff previously stated, the SEC defines “customer

account” as accounts held by retail and institutional customers. SEC

Rule, 16 C.F.R. § 240.15C3-3(a)(1) (emphasis added) This SEC

definition can be found on FINRA’s official website at:

http://www.finra.org/Industry/Compliance/MarketTransparency/IN

SITE/FAQ/P005933.

FINRA has regulatory power, delegated from Congress through

the SEC in the Securities Exchange Act of 1934 ("Exchange Act"),

over broker-dealer firms registered pursuant to Section 15 of the

Exchange Act and their registered associated persons. SEC Rule, 16

C.F.R. § 240.15C3-3(a)(1) (emphasis added).

61 The Exchange Act gives FINRA the power to propose rules for

the conduct and governance of its regulatory functions, and the

Exchange Act also regulates those rules. Charles Schwab & Co., 861 F.

Supp. 2d at 1065.

As per the SEC definition of “customer account,” cited on

FINRA’s official web site, Nemaha Appellants do not currently, nor

have they ever, related to the contractual Agreement between the

parties or otherwise, held any kind of an account, be it as retail or as

an institutional customer.

d) Appellee Esposito maintains a form for opening customer accounts, which complies with Rule 2268, this form was never provided to Nemaha Appellants because they never opened a “Customer Account.”

FINRA Rule 2268 went into effect on December 1, 2011. Since

that time, Esposito has maintained a document, which Esposito has

used in the regular course of business, entitled “New Account Form

(instructions).” At the trial court level, William D. Martin, Chief

Compliance Officer of Esposito Securities, LLC (Appellee) executed

62 a Business Records Affidavit regarding this document, verifying that

Esposito is not only aware of Rule 2268, but fully complies with the

Rule when necessary.

V. CONCLUSION AND PRAYER

For the foregoing reasons, Appellee respectfully requests the

Court to overrule the sole issue Appellants-Defendants present on

appeal and affirm the trial court’s judgment. Appellee-Plaintiff

further requests all other relief to which it is entitled.

63 Respectfully submitted,

MIZGALA LAW PLLC

/s/ David J. Mizgala David Jefrie Mizgala State Bar No. 24031594 david@mizgalalaw.com Rosewood Court 2101 Cedar Springs Road, Ste 1050 Dallas, Texas 75201 (214) 238-4800 (direct dial) (214) 238-4801 (direct fax)

—and—

M|A|S LAW FIRM RHIANNON KELSO Texas Bar No. 24080636 rkelso@modjarrad.com SEAN S. MODJARRAD Texas Bar No. 24027398 smodjarrad@modjarrad.com 212 W. Spring Valley Road Richardson, Texas 75081 Tel. (972) 789-1664 Fax. (972) 789-1665

Counsel for Appellee-Plaintiff

64 CERTIFICATE OF SERVICE

I, the undersigned counsel , certify on February 19, 2015, Appellee’s First Amended Brief on the Merits was served on the following counsel of record through the undersigned counsel’s electronic filing service provider:

Mazin Sbaiti mazin@stecklerlaw.com Sean R. Cox sean@stecklerlaw.com STECKLER, LLP 12720 Hillcrest Road, Ste. 1045 Dallas, TX 75230

Richard A. Lewins rlewins@lewinslaw.com LEWINS LAW 7920 Belt Line Road, Ste. 650 Dallas, Texas 75248

/s/ David J. Mizgala David Jefrie Mizgala

65 CERTIFICATE OF COMPLIANCE

In accordance with the Texas Rules of Appellate Procedure, I certify that APPELLEE’S FIRST AMENDED BRIEF ON THE MERITS contains 10,155 words, exclusive of the caption, identity of parties and counsel, statement regarding oral argument, table of contents, index of authorities, statement of the case, statement of issues presented, statement of jurisdiction, statement of procedural history, signature, proof of service, certification, certificate of compliance, and appendix.

/s/ David J. Mizgala David Jefrie Mizgala