Texas’ Fifth District Court of Appeals has ruled that a dispute between a licensed securities broker and an investment company must be arbitrated before FINRA rather than the AAA. In Morford v. Esposito Securities, LLC, No. 05-14-01223-CV (Tex. App – Dallas, September 18, 2015), a securities broker and Financial Industry National Regulatory Authority (“FINRA”) member, Esposito, provided a group of customers, Nemaha Water Services, with assistance in locating investors. In exchange for his help, Nemaha agreed to pay Esposito five percent of any funds the company received as a result. As part of the transaction, the parties signed a letter agreement which stated any future disputes would be resolved through arbitration before the American Arbitration Association (“AAA”).

Later, Esposito filed a lawsuit against Nemaha and asked the court to compel arbitration before the AAA. Nemaha countered by filing a motion to compel arbitral proceedings under FINRA Rule 12200. As part of his FINRA membership, Esposito agreed to settle all disputes with his customers through arbitration using FINRA rules. According to Nemaha, the company was the broker’s customer and any arbitration was required to be held before FINRA. The 44th Judicial District Court in Dallas County held that Nemaha was not a customer as intended under the terms of the broker’s FINRA membership agreement. As a result, the court denied the company’s motion and granted Esposito’s request to compel arbitral proceedings before the AAA. After that, Nemaha filed an appeal with Texas’ Fifth District Court of Appeals in Dallas.

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