By Nate Raymond
NEW YORK, May 15 (Reuters) - A U.S. appeals court on Thursday upheld a decision to prevent a defunct Connecticut-based hedge fund from moving forward with a $13 million arbitration against SunTrust Banks Inc over mortgage-backed securities.
The 2nd U.S. Circuit Court of Appeals in New York affirmed a 2013 injunction that prevented Turnberry Capital Management LP from pursuing a securities arbitration before the Financial Industry Regulatory Authority.
The ruling came in one of what has become an increasing number of lawsuits filed by banks challenging the ability of investors with big monetary claims to have their cases heard before FINRA, a Wall Street industry-funded group.
Some plaintiffs asserting large damage claims have come to prefer FINRA over courts to hear their cases, in part because they view arbitration as quicker.
SunTrust brought the lawsuit in February 2013 to enjoin an arbitration Turnberry launched to recover $13 million plus interest it claimed to have 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 May 2013, U.S. District Judge Naomi Reice Buchwald held that under FINRA rules, Turnberry was not a "customer" of SunTrust. The judge said Raymond James rather than SunTrust provided the hedge fund investment services and sold the securities.
Turnberry on appeal argued Buchwald had defined a "customer" too narrowly by requiring it to directly receive goods or services from SunTrust.
The 2nd Circuit on Thursday said it was "not persuaded by Turnberry's characterization of the district court's decision."
Kevin O'Brien, a lawyer for Turnberry, said he was "obviously disappointed" and said the hedge fund would now arbitrate its case against Raymond James.
Representatives for SunTrust and Raymond James declined comment.
The case is SunTrust Banks Inc, et al, v Turnberry Capital Management LP, 2nd U.S. Circuit Court of Appeals, No. 13-2075.
(Reporting by Nate Raymond in New York; Editing by Sofina Mirza-Reid)