Judge blocks $13 million arbitration against SunTrust

SunTrust Banks Inc won a court order on Friday preventing a Connecticut-based hedge fund from moving forward with a $13 million arbitration over mortgage-backed securities.

The ruling by District Judge Naomi Reice Buchwald in Manhattan blocks Turnberry Capital Management LP from pursuing a securities arbitration before the Financial Industry Regulatory Authority.

The decision marks the latest in a string of lawsuits filed by banks disputing the ability of investors with big damage claims to have their cases heard by FINRA, a Wall Street industry-funded group. Some plaintiffs who claim large damages prefer FINRA as a venue rather than courts, in part because the arbitration process is considered quicker.

SunTrust filed the lawsuit in February, three months after Turnberry brought its arbitration claim in an effort to recover $13 million plus interest it lost on a 2007 investment in mortgage-backed securities.

The securities were issued by SunTrust. Turnberry, which ceased business in 2008, bought them from broker Raymond James Financial Inc .

In her decision Friday, Buchwald agreed with SunTrust that it could not be forced to arbitrate disputes with Turnberry since the hedge fund was not a "customer" under FINRA rules.

The judge said Raymond James, rather than SunTrust, provided Turnberry the investment services and sold the securities, and the hedge fund "did not receive any other goods or services from SunTrust that would indicate a customer relationship."

Buchwald rejected Turnberry's contention that she should ignore Raymond James' brokerage role because the "economic reality" was that it was just a conduit for selling securities. Raymond James bought the securities from SunTrust the same day it sold them to the hedge fund, the decision said.

Kevin O'Brien, a lawyer for Turnberry at Harris, O'Brien, St. Laurent & Houghteling, said he and his client were "considering our options, and an appeal is very possible."

Hugh Suhr, a spokesman for SunTrust, declined comment.

Representatives for Raymond James, which was also a defendant in the arbitration, declined to comment. The arbitration claims against Raymond James had previously been put on hold by agreement of the parties while SunTrust pursued the lawsuit, O'Brien said.

The case is SunTrust Banks, Inc, et al, v Turnberry Capital Management LP, et al, U.S. District Court, Southern District of New York, No. 13-879.

(Reporting by Nate Raymond; Editing by Leslie Gevirtz)