Financial Regulatory Forum

Exclusive jurisdiction clauses fall in the face of FINRA proceedings

By Guest Contributor
July 5, 2012

By Christopher Elias (UK)

LONDON, July 5 (Business Law Currents) – The English courts recently decided that an exclusive jurisdiction clause between Citigroup’s English subsidiary and two corporate vehicles of family trusts belonging to a Saudi Arabian family did not prohibit the Saudi investors from bringing FINRA arbitration proceedings against Citigroup’s U.S. arm.

In Citigroup Global Markets Ltd v Amatra Leveraged Feeder Holdings Ltd, the court was tasked with deciding whether FINRA’s regulatory regime or an English exclusive jurisdiction clause should prevail. The court concluded that Citigroup’s U.S. subsidiary should not be prevented from facing proceedings in the U.S. as the benefit of the exclusive jurisdiction clause applied solely to Citigroup’s English subsidiary.
The decision suggests that exclusive jurisdiction clauses will be no barrier to FINRA arbitration proceedings, even where the negotiating parties both fall outside of the jurisdiction of the United States.

Ultimately the English courts preferred to allow the defendants and Citigroup to work out their differences in the U.S., denying an application from Citigroup to serve the proceedings on the defendants. The case also provided a rare example of an English court granting a stay of proceedings brought in England that are pursuant to an exclusive English jurisdiction clause.

The case could be an important one for U.S. firms conducting transactions through English subsidiaries, as it provides further proof that the English courts will not interfere with litigation brought in the U.S. against other group companies.

Setting exclusive jurisdiction

In May 2006, Citigroup Global Markets Limited (CGML), a company incorporated in England and Wales, entered into two option transaction agreements with the two Saudi-owned trust funds. The agreements provided a trust incorporated in the Cayman Islands and one based in Jersey with “synthetic leveraged exposures to the performance of underlying funds that comprised of investments previously owned by the family.”

The option agreements incorporated the ISDA Master Agreement (2002 version) and recorded the parties election of English law as the governing law.

By virtue of incorporating the ISDA Master Agreement, the parties submitted to the non-exclusive jurisdiction of the English Courts. The ISDA Master Agreement stated:

    • Submits:-

      If this Agreement is expressed to be governed by English law, to (A) the non-exclusive jurisdiction of the English courts if the Proceedings do not involve a Convention Court and (B) the exclusive jurisdiction of the English courts if the Proceedings do involve a Convention Court; or…”

    • “Jurisdiction. with respect to any suit, action or proceedings relating to any dispute arising out of or in connection with this Agreement (“Proceedings”), each party irrevocably:-

    The corporate trusts also entered into “Structuring Services” letters with CMGL, which stated that the agreements were governed by English law, and were subject to the exclusive jurisdiction of the English courts. The contracts stated that:

      “Counterparty and CGML each irrevocably agrees that the courts of England are to have exclusive jurisdiction to settle any disputes which may arise out of or in connection with this letter agreement and accordingly submit to the exclusive jurisdiction of the English courts. Counterparty and CGML each waives any objection to the courts of England on the grounds that they are inconvenient or inappropriate forum.”

    Later on that month CGML and one of the beneficiaries entered into a “non-reliance letter” – a document recording the beneficiaries’ understanding of the transaction. The non-reliance letter included a summary of certain features of the transaction but made no mention of the governing law or jurisdiction of the transaction.

    Over the course of the following three years, the corporate trusts invested $343 million in the option transactions including $198 million of the personal wealth of the family of the two beneficiaries. However, by 2009 the entirety of the $198 million investment had been lost.

    According to the defendants, the Saudi family also entered into a private equity transaction with Citibank Switzerland and made an initial investment of $147 million under it. In March 2007, Citibank Switzerland provided a multi-currency loan and overdraft credit agreement to investment vehicles of the family with the Saudi beneficiaries as guarantors. The $147 million plus further capital injections were also all lost.

    Following the losses, the Saudi family sought to bring FINRA proceedings against Citigroup Global Markets Inc, the American arm of Citigroup, for alleged negligence over the losses. In its application to the English court, Citigroup sought to argue that the defendants should be prevented from continuing the FINRA proceedings by virtue of the exclusive jurisdiction clause entered into with CGML.

    Citigroup argued that Citigroup Global Markets Inc (CGMI), its North American arm, was not party to the transactional documents and that no contractual nexus existed between the defendants and CGMI. As such, according to Citigroup, the proper jurisdiction for the action was in the English courts.

    The court rejected this approach. If found instead that, because the jurisdiction agreements were not with CGMI but CGML, CGMI could not rely on the exclusivity agreed as a bar to the defendants’ FINRA proceedings.

    CGMI, as a non-contracting party, was not entitled to rely on the exclusivity agreement between its English subsidiary CGML and the defendants. The English proceedings brought by CMGL were portrayed as an attempt by Citigroup to use the exclusivity agreed between its English subsidiary and the defendants, to shield its U.S. operations from litigation. Mr. Justice Andrew Smith described it in his decision as “a creature of inappropriate forum shopping, notwithstanding the jurisdiction agreements”.

    No escape from FINRA

    The decision is of significance for those firms operating both in and outside of FINRA’s regime. FINRA is a mandatory regime, and firms are obliged to operate by its rules. A firm cannot contractually fetter the scope of claims that can be advanced by a customer in arbitration. The firm cannot therefore take itself, contractually at least, outside of the scope of FINRA. The English court decision suggests that conducting a transaction through an English subsidiary will be ineffective to take a firm outside the scope of FINRA proceedings, at least from an English law perspective.

    According to the defendants, much of the selling and structuring of the option transactions had been conducted through Citigroup’s New York offices. Meetings leading to the transactions were conducted in New York and it was CGMI, the U.S. arm, which was responsible for monitoring and managing the transactions.

    The fact that an English subsidiary, acting exclusively under English law and under the jurisdiction of the English courts, was ultimately the entity to which the defendants contracted was not sufficient to sever the beneficiaries’ right to bring proceedings in the U.S.

    The decision opens up the way for other aggrieved investors to bring proceedings via FINRA’s arbitration procedure rather than in the English courts, even where transactional documents are governed by English law. It also suggests that English law transactions will not escape the scrutiny of U.S. regulators where a firm operates a U.S. arm.

    (This article was first published by Thomson Reuters’ Business Law Currents, a leading provider of legal analysis and news on governance, transactions and legal risk. Visit Business Law Currents online at http://currents.westlawbusiness.com)

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