Jefferies Sues To Halt FINRA Arbitration Over Stock Drop

By Sophia Morris
Law360, New York (Feb. 6, 2017, 8:04 PM EST)

“We believe Jefferies owed our investor clients a duty to investigate the investments when Jefferies prepared the offering materials our clients relied on.” –McCathern Attorney Justin N. Bryan

The Jefferies Group investment bank is arguing that shareholders who bought stock in a since-failed biotech company because of the firm’s recommendation cannot force it into arbitration before the Financial Industry Regulatory Authority over the stock’s loss of value, according to a suit filed Friday in Texas federal court.

Thirty-seven investors who purchased shares in Palmaz Scientific Inc., the majority through an entity called Williams Financial Group, say they suffered over $3.2 million in losses when the biotech company declared bankruptcy in 2016. The shareholders blame Jefferies for the stock drop, but the firm says the investors aren’t even Jefferies’ customers.

“Jefferies has never had, and does not have a customer relationship with any of the defendants,” the complaint said.

In their Dec. 20 statement of claim seeking arbitration before FINRA, the shareholders argued that they would never have purchased Palmaz Series B stock if not for a private placement memorandum issued by Jefferies in 2011.

The shareholders contend the Jefferies memorandum gave them confidence in the strength of Palmaz stock. They say that if Jefferies had investigated the financial condition of Palmaz, it would have discovered that despite raising capital, Palmaz had not generated any revenue and was therefore not a sound investment.

“We believe Jefferies owed our investor clients a duty to investigate the investments when Jefferies prepared the offering materials our clients relied on,” Justin N. Bryan, an attorney for the shareholders, told Law360 on Monday.

But Jefferies argued Friday in both a complaint and a motion seeking an injunction that it had no such duty. The lack of a customer relationship between the parties means that Jefferies cannot be compelled to appear before FINRA, it said. The investment bank argued that the shareholders’ claims must be heard in court as the shareholders themselves cannot point to an arbitration agreement or any other form of relationship between the parties.

“They do not claim that Jefferies solicited their investment in Palmaz or ever communicated with them regarding their investment in Palmaz — because it did not,” the injunction motion said.

Arbitrating the dispute would also cause Jefferies “substantial expense” because there is a risk of an unfavorable award against it, and any challenge to the award would result in further arbitration to which Jefferies did not consent, Jefferies said.

Counsel for Jefferies could not be reached for comment on Monday. Jefferies Group is represented by Rick Thompson of Hankinson LLP and Scott Sonny Balber of Herbert Smith Freehills New York LLP.

The shareholders are represented by Justin N. Bryan of McCathern PLLC.

The suit is Jefferies LLC v. WTW Investment Company LTD et al., case number 3:17-cv-00332-D, in the U.S. District Court for the Northern District of Texas.

-Editing by Jill Coffey.