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UBS Financial Services, Inc. v. Zimmerman

United States District Court, E.D. North Carolina, Western Division

March 28, 2017



          LOUISE W. FLANAGAN United States District Judge

         This matter is before the court on plaintiff s motion to enforce preliminary injunction, or in the alternative to expand the court's prior preliminary injunction order. (DE 51). Also before the court are defendant's motion for judgment on the pleadings, motion for miscellaneous relief, and motions to strike. (DE 37, 41, 58, 60, 62, 64).[1] The issues raised are ripe for ruling. For the reasons that follow, plaintiffs motion is granted in part and denied in part and defendant's motions are denied.


         This case has a lengthy history that is summarized more fully in the court's prior orders. As pertinent here, on January 6, 2016, defendant initiated an arbitration proceeding against plaintiff and Charles Schwab & Company, LLC ("Schwab"), before the Financial Industry Regulatory Authority ("FINRA") (the "FINRA arbitration"). On April 7, 2016, plaintiff initiated this action against defendant and moved for preliminary injunction, seeking to enjoin defendant from pursing arbitration against it, pursuant to the Federal Arbitration Act ("FAA"), 9 U.S.C. § 4. In response, defendant filed a motion to dismiss, or in the alternative, motion to compel arbitration. Pending resolution of plaintiff s motion for preliminary injunction, the court issued a temporary restraining order, which prohibited defendant from proceeding with the FINRA arbitration. Defendant answered plaintiffs complaint, asserting several counterclaims against plaintiff.

         On June 17, 2016, the court held hearing on plaintiff s motion for preliminary injunction and defendant's motion to dismiss and compel arbitration. At hearing, the court denied defendant's motion and granted plaintiff s motion for preliminary injunction. The court memorialized its rulings from the June 17, 2016, hearing in order dated June 21, 2016. In denying defendant's motion, the court found that defendant could not compel arbitration against plaintiff because he was not plaintiffs customer, a designation necessary to compel arbitration absent written arbitration agreement. Thereafter, defendant filed a first amended counterclaim and status report, which included a motion for clarification.

         Defendant filed the instant motion for partial judgment on the pleadings on July 8, 2016, and motion for miscellaneous relief on July 25, 2016. Plaintiff then moved to dismiss defendant's first amended counterclaim, which the court granted on December 1, 2016.[2]

         Plaintiff, together with the UBS AG, UBS Group, and UBS Securities (together the "other UBS entities"), filed the instant motion to enforce preliminary injunction on November 9, 2016. Plaintiff seeks enforcement of the preliminary injunction granted by this court on June 17, 2016. In the alternative, plaintiff seeks to enjoin defendant from pursuing FINRA arbitration against the other UBS entities.

         Defendant filed his first motion to strike on December 21, 2016. Defendant requests that the court strike plaintiff s complaint and motion to enforce preliminary injunction, as well as certain supporting briefs. Defendant also seeks reconsideration of the court's order granting plaintiffs motion for preliminary injunction. Thereafter, defendant filed three additional motions to strike, which reiterate arguments already before the court.[3]


         The undisputed facts are summarized as follows. Plaintiff is a FINRA member. Plaintiff underwrote and issued an electronically traded note known as the "Monthly Pay 2xLeveraged Exchange Traded Access Security, " referred to by the parties by its call sign, "CEFL" (the "CEFL security") (See Product Supplement, DE 31 at l).[4] The CEFL security is a leveraged debt security that allows investors to experience twice the rate of return of a certain index. (Id. at 5-6). The leveraged aspect of the CEFL security is essentially a loan made by plaintiff to investors in the amount of the security's face value, or $25.00. (See id.). In exchange for the loan's benefits, investors pay to plaintiff monthly fees. (Li at 6). To collect those fees, plaintiff garnishes them from the monthly distributions provided to investors, known as "coupons." (See id. at 23-24, 27, 37) (noting that the coupon amount is determined by the principal, which may be reduced by monthly fees).

         Defendant purchased a number of shares of the CEFL security from Schwab. Defendant does not own an account with plaintiff. After defendant purchased shares of the CEFL security, it declined in value approximately 40%, from $25.00 to $15.00. As a result, defendant lost at least $85, 000.00.


         A. Motion to Enforce Preliminary Injunction

         Where defendant removed plaintiff as party to the FINRA arbitration and the court's order granting plaintiffs motion for preliminary injunction does not specifically enjoin defendant from arbitrating against the other UBS entities, defendant is not in violation of the court's preliminary injunction order. Therefore, the court denies plaintiffs motion to enforce preliminary injunction.

         Plaintiff argues that the court's preliminary injunction encompasses claims against all UBS entities, where the court stated in its July 21, 2016 order: "the court refers to the security's underwriter and issuer as 'plaintiff " (DE 32 at 3, n.2). However, in its July 25, 2016 order, the court declined to address whether defendant was customer of UBS AG or UBS Securities, on the basis that, at that time, defendant had not attempted to arbitrate any claims against those entities. Since the other UBS entities did not appear and join in plaintiffs initial motion for preliminary injunction and nothing in ...

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