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Securities Arbitration Archives

February 15, 2009

Securities Litigators Suggest It Pays To Fight Proceedings Brought By SEC/FINRA

Two broker-dealer side securities litigators from Sutherland Asbill & Brennan LLP conducted a study that concluded broker-dealers can benefit from fighting proceedings brought by the SEC and FINRA. The study says that firms who fought proceedings brought by the SEC won a dismissal 19% of the time and FINRA complaints that were fought were dismissed 15% of the time. With regard to fines, respondents to SEC charges convinced the judge to lower the fines 83% of the time and FINRA respondents succeeded in reducing fines roughly 50% of the time.

Another interesting but not surprising statistic published by the study is that respondents who hired counsel were overwhelmingly more successful than those that did not. SEC respondents represented by counsel succeeded in getting approximately 22% of charges dismissed, and FINRA respondents with counsel succeeded in getting approximately 19% of charges dismissed. SEC and FINRA respondents without counsel went 0-for-16 from January 2006 through December 2007.


Clearly, the terrible rate of success for pro-se respondents is a testament to the unfortunate pay-to-play factor in our justice system that favors those with resources to hire a lawyer. However, another possible factor not discussed in the study is that a respondent who believes he or she is guilty or liable, may be less likely to fight or spend money on counsel. If true, this factor would slightly skew the pool of pro-se respondents towards a lower “success” rate.

Read the study results here.

Written by David Welch, Esq.

February 18, 2009

SEC Approves New FINRA Rule Requiring Arbitrators to Provide Explanation

Written by David Welch, Esq.

Under the new rule, parties to an arbitration may require an arbitrator to provide an explanation of decision if the request is made jointly (by both parties) 20 days prior to the first scheduled hearing date. An arbitrator must provide a fact-based award stating the general reason(s) for the arbitrator's decision. However, the rule does not require the arbitrator to include legal authorities and/or damage calculations.

The chairperson required to write the explained decision will receive an additional honorarium of $400 and will allocate the cost to one party or between/among all parties. The 20 day deadline coincides with the time that parties must exchange documents and identify witnesses they intend to present at the hearing. In FINRA's view, this establishes a clear deadline, gives the parties sufficient time to request an explained decision, and provides notice to the arbitrators that an explained decision will be required before the hearing begins.

The new rule is likely an attempt by FINRA to appease a common perception among customers that the arbitration process favors the industry. Although FINRA has conducted studies and published results that tend to discredit the validity of industry favoritism, FINRA maintains that the mere perception of inequity is a concern that they are taking steps to eradicate.

March 2, 2009

FINRA Fines Brokerage Firm For Reverse Churning

FINRA fined Robert W. Baird & Co. $500,000 for supervisory violations relating to its fee-based brokerage accounts and ordered the company to return $434,510 in fees to 154 customers. FINRA found that customers were charged fees in accounts that were not generating any activity, otherwise known as “reverse churning.”

According to FINRA Baird failed to adequately review or supervise its fee accounts and allowed numerous customers to remain in the program despite conducting no trades for at least eight consecutive quarters. These accounts paid over $269,000 in fees during the inactive quarters.

According to Andrew Stoltmann at Investmentfraud.PRO, this type of fee based account has become more prevalent in the past 7 years and Baird is only one firm out of many who engaged in so-called reverse churning. Recent actions involving firms such as AXA Advisors, Morgan Stanley, SunTrust Investment and Wachovia Securities ranged from $700,000 to $6.1 million.

Written by David Welch, Esq.

March 23, 2009

FINRA Proposes Clarification to Tolling Rules

Written by Christine Lazaro, Esq.

FINRA filed a proposed rule change with the SEC on March 11, 2009, seeking to amend the Code of Arbitration Procedure for Customer Disputes (Rule 12206) and the Code of Arbitration Procedure for Industry Disputes (Rule 13206), to clarify that the rules toll the applicable statutes of limitation when a person files an arbitration claim with FINRA.

Current Rule 12206(a) provides that “no claim shall be eligible for submission to arbitration under the Code where six years have elapsed from the occurrence or event giving rise to the claim.” Rule 12206(c) provides that “The rule does not extend applicable statutes of limitations…However, where permitted by applicable law, when a claimant files a statement of claim in arbitration, any time limits for the filing of the claim in court will be tolled while FINRA retains jurisdiction of the claim.” Rule 13206 contains identical language. FINRA has proposed deleting the phrase “where permitted by applicable law” from Rule 12206(c) and Rule 13206(c).

Continue reading "FINRA Proposes Clarification to Tolling Rules" »

May 1, 2009

Fifth Circuit Rejects Manifest Disregard of the Law

Written by Lauren Buonome*

The Fifth Circuit Court of Appeals issued an opinion on March 5, 2009 (revised on March 18, 2009), Citigroup Global Markets v. Bacon, vacating and remanding a district court opinion that granted Citigroup Global Market’s (“Citigroup”) motion to vacate an arbitration award. The arbitration claim, brought by Debra Bacon (“Bacon”), was filed in 2004 against Citigroup. Bacon asserted her husband had withdrawn funds from her account without authorization, totaling $238,000, and that Citigroup was liable for permitting such unauthorized withdrawals. The arbitration panel found for Bacon, awarding her $218,000 in damages and $38,000 in attorney fees. Consequently, Citigroup filed in the district court to vacate the award, citing § 10 of the Federal Arbitration Act (“FAA”).

Continue reading "Fifth Circuit Rejects Manifest Disregard of the Law" »

August 4, 2009

New FINRA Rule on Panel Composition, Effective August 31, 2009

The amendments to Rules 13402, 13403 and 13406 of the Arbitration Code for Industry
Disputes (Industry Code) change the criteria for determining panel composition when
the claim involves an associated person in industry disputes. Specifically, the
amendments to the rules of the Industry Code:

- require that the parties receive a majority public panel for all industry disputes
involving associated persons (excluding disputes involving statutory employment
discrimination claims, which require a specialized all public panel);

- clarify that in disputes involving only member firms, parties will receive an all
non-public panel; and

- provide that if a party amends its pleadings to add an associated person to a
previously all-member firm case, parties will receive a majority public panel.

The full text of the new rules can be read here.

September 21, 2009

Control Person Liability

Written by David Welch, Esq.

As a general rule, when there is a significant and sustained drop in the stock market, there is a significant increase in law suits and arbitration claims against stock brokers. In addition to stock brokers, plaintiffs’ lawyers will often try to name “control persons” individually to increase the settlement pool or insulate the viability of their claim against a possibly insolvent broker. Control person liability claims in the realm of broker-dealers are typically brought under §20(a) of the Securities Exchange Act. Interestingly, in a recently settled case brought by the SEC against Nature's Sunshine Products, Inc. (not a broker-dealer), the SEC named individual executives of the company under §20(a) and did not alleged that the executives had personal knowledge of the underlying Foreign Corrupt Practices Act (“FCPA”) violations.

This is noteworthy because there is somewhat of a split among the courts about what needs to be alleged under §20(a) to bring a control person into a case or arbitration. Generally, the courts are divided between one standard that requires some level of participation on the part of the control person, and another that maintains that participation is not required. Thus, it will be interesting to see if plaintiffs’ attorneys, who advocate for the broadest of standards, will try to use the SEC’s decision not to allege knowledge as support for their control liability claims. Although it is plausible that they will try to do so, that fact remains that such an argument would be without merit because, among other reasons, the FCPA is an entirely different animal than the typical violations brought against brokers.

Control person liability is defined under §20(a) as:

Continue reading "Control Person Liability " »

February 22, 2010

FINRA Proposes to Further Expand BrokerCheck

Written by Christine Lazaro, Esq.

On February 17, 2010, FINRA announced that it will submit a proposal to further expand BrokerCheck to the SEC shortly. FINRA describes BrokerCheck as a free tool offered by FINRA which allows investors to check the professional background of current and former FINRA-registered securities firms and brokers.

In the press release, FINRA explains that the proposal would increase the number of customer complaints reported publicly; extend the public disclosure period for the full record of a broker who leaves the industry from two years to 10 years; and, make certain information about former brokers available permanently, such as criminal convictions and certain civil and arbitration judgments.

Continue reading "FINRA Proposes to Further Expand BrokerCheck" »

April 8, 2010

FINRA Amends its Rules Regarding the Selection of Hearing Locations

Written by Brent A. Burns

On April 1, 2010, FINRA announced it is amending its rules regarding the selection of hearing locations to allow customers and associated persons more flexibility. The effective date of the amendments is May 3, 2010.

Under the current customer code, Rule 12213(a), the Director of FINRA Dispute Resolution selects the hearing location closest to the customer’s residence at the time of the events giving rise to the dispute. Under the amended rule, a customer will now also be able to request a hearing location in the state where the customer resided at the time of the event giving rise to the dispute.

Continue reading "FINRA Amends its Rules Regarding the Selection of Hearing Locations" »

June 8, 2010

SEC Approves Proposal to Eliminate the Inability-to-Pay Defense in Expedited Proceedings

Written by Christine Lazaro, Esq.

On June 2, 2010, the SEC approved FINRA's proposed changes to Rule 9554, eliminating the inability-to-pay defense in the expedited proceedings context when a member or associated person fails to pay an arbitration award to a customer. FINRA is required to consider the defense in disciplinary cases, however, the SEC pointed out that the reasons present that require FINRA to consider the defense in disciplinary cases are not present in expedited cases.

Continue reading "SEC Approves Proposal to Eliminate the Inability-to-Pay Defense in Expedited Proceedings" »

July 19, 2010

SEC Approves Further Changes to FINRA’s BrokerCheck

Written by Christine Lazaro, Esq.

On July 8, 2010, the SEC approved FINRA’s proposal to expand BrokerCheck. Once implemented, the changes to BrokerCheck will result in an increase in the number of customer complaints reported publicly because all historic complaints against a broker dating back to 1999, when electronic filing of broker information began will now be reported. Additionally, FINRA has extended the public disclosure period for the full record of a broker who leaves the industry from two years to 10 years. Additionally, FINRA is making certain information about former brokers available permanently, such as criminal convictions and certain civil injunctive actions and arbitration awards against the broker.

Continue reading "SEC Approves Further Changes to FINRA’s BrokerCheck " »

SEC Approves FINRA Rule Proposal to Expand the Arbitrator Lists

Written by Christine Lazaro, Esq.

On July 9, 2010, the SEC approved FINRA’s proposal to increase the number of arbitrators on lists generated by the Neutral List Selection System (NLSS) under FINRA Rules 12403, 12404, 13403 and 13404. The lists of arbitrators presented to parties in arbitrations before FINRA will be expanded from eight names to ten names, but the number of strikes available to each party will remain the same.

Continue reading "SEC Approves FINRA Rule Proposal to Expand the Arbitrator Lists" »

August 19, 2010

FINRA Proposes New Discovery Guide for Customer Arbitrations

Written by Nancy Campanozzi, Esq.

On July 12, 2010, FINRA filed the Notice of Proposed Rule Change Amendments to the Discovery Guide and Rules 12506 and 12508 of the Code of Arbitration Procedure for Customer Disputes with the SEC.

The Amendments to the Discovery Guide, (Guide) proposes to replace the 14 current Lists of “presumptively discoverable documents” with two lists.

The Guide’s Introduction would be revised to expand the guidance given to parties and arbitrators on the discovery process generally and provide clarification as to how arbitrators should apply the Guide in arbitration proceedings. In addition to the section of the Introduction that states that arbitrators can order parties to produce documents that are not on the lists or alter the parties’ production schedule, the proposed rule would add flexibility to the arbitrators by enabling them to order that parties do not have to produce certain documents.

Continue reading "FINRA Proposes New Discovery Guide for Customer Arbitrations" »

September 28, 2010

FINRA Rule Proposal to Allow Investors to Choose Arbitration Panel with No Industry Participants

Written by Brent Burns, Esq.

Today FINRA announced that it will be filing a rule proposal next month that will allow investors filing arbitration claims the ability to select an all-public panel, “greatly increasing investor choice in the FINRA arbitration program.” If approved by the SEC, investors will still be allowed to choose a panel consisting of one industry and two public arbitrators, but they will also now have the option of choosing a panel consisting of three all-public arbitrators. The press release quotes Richard Ketchum, the FINRA Chairman and Chief Executive Officer, explaining that the new option for investors will “increase the perception of fairness in the FINRA process. . . All investors will have greater freedom in choosing arbitration panels, and any investor will have the power to have his or her case heard by a panel with no industry participants.”

A copy of the FINRA News release can be found here.

October 22, 2010

Non-Signatory Compelled to Arbitrate

Written by Charles Hecht, Esq.

Last week, in In the matter of the Application of Samuel Belzberg et al. v. Verus Investments Holdings, Inc., Justice Kornreich issued an important decision concerning when a non-party to a customer's agreement may be compelled to arbitrate.

We represented Verus, who was a named respondent in the arbitration before FINRA. Verus filed a third-party claim against several parties. Third-party Respondent, Samuel Belzberg, then moved in New York state court for a permanent injunction on the grounds that none of the third-party respondents were signatories to the Customer Agreement between Verus and the Claimant broker dealer. We cross moved to compel arbitration on the grounds that these persons were customers of the broker dealer under the broad definition of FINRA Rule 12200, or alternatively that they were equitably estopped because they received a direct benefit from the Customer Agreement. The court disagreed with us as to the definition of a customer but agreed with us on the doctrine of equitable estoppel. It granted the cross-motion as to one third-party respondent without hearing and ordered a hearing for two other third-party respondents on the issue of receiving direct benefits.

Continue reading "Non-Signatory Compelled to Arbitrate" »

January 14, 2011

Curbing Discovery Abuse: No Laughing Matter

By Edward Pekarek, Esq.* and Christian Obremski

Funnymen Larry David and Will Ferrell were not laughing after a crushing securities arbitration defeat in late 2010. The "Seinfeld" creator and "Elf" star sought rescission in a dispute with JPMorgan related to various securities transactions totaling more than $18 million. Due to what the panel determined were discovery abuses, coupled with a failure to comply with the forum's discovery rules and procedures, the arbitration was dismissed with prejudice.[1] The panel added to the sting of dismissal, by ordering the celebrated claimants to pay roughly $600,000 in respondent costs and fees, as well as an additional $22,500 sanction for discovery abuses and disregard for FINRA discovery rules.[2] The potential sanctions a party may face as a result of a strategic misstep, intentional misconduct or even a lack of due diligence can be substantial as this recent arbitration award demonstrates.

Continue reading "Curbing Discovery Abuse: No Laughing Matter" »

February 2, 2011

Is the Sophisticated Investor Theory Still Relevant?

By Edward Pekarek, Esq.* and Christian Obremski


The "sophisticated investor" theory, as it applies to securities arbitration, is derived from the notion that an investor's level of knowledge, experience, wealth and general intelligence has an effect on how panels award damages.[1] The doctrine is typically employed by a respondent as an affirmative defense to suitability claims, designed to persuade the panel the customer-claimant has an appropriate level of knowledge and experience to be capable of evaluating risks associated with investing[2] and was able to properly evaluate the risks of any particular disputed transaction(s).[3] Once an investor is portrayed as "sophisticated," it has the potential to diminish the burden a respondent must meet to establish the customer-claimant was provided a suitable investment recommendation, based on investment objectives, financial needs and other customer based considerations.[4]

Continue reading "Is the Sophisticated Investor Theory Still Relevant?" »

October 19, 2011

Pace Law Wins FINRA/St. John's National Securities Moot Court Competition

winners group photo_NYSBA.jpg

WHITE PLAINS -- Two teams represented Pace Law School last weekend in a "triathlon" that had nothing to do with swimming, cycling or running--and emerged victorious. One of Pace's teams won the third annual FINRA / St. John's Securities Dispute Resolution Triathlon. Held in the shadow of the new World Trade Center "Freedom Tower" at St. John's University's Manhattan campus, the national competition field featured 24 teams from 17 schools, hailing from as far west as Texas and as far south as Florida.

The two-day event, sponsored by the Financial Industry Regulatory Authority (FINRA) features three individual rounds of competition in negotiation, mediation and arbitration, the primary areas of dispute resolution. The Pace team, comprised of Pace Investor Rights Clinic (PIRC) students, 3Ls David Haimi, Kristen Mogavero and Genavieve Shingle, went home with the championship trophy and an individual event medal. The victorious Pace team prevailed as the winner of the arbitration round, and were narrowly edged out of yet another award in the mediation round by a team representing William and Mary Law School, from Williamsburg, Virginia.

Pace also fielded a second team for the event, comprised of 3Ls Katerina Davydov, Eleanor Osmanoff and Jay Park. All six students are current or summer student interns with PIRC. The teams were coached by PIRC Assistant Director and Visiting Professor Ed Pekarek, who served as faculty advisor and coach, with assistance from coaches Christine Goodrich '11 and Bryn Fuller '11 during the competition, and by Chris Bloch '10 in the days preceding the annual event. Adjunct Professor Louis Fasulo and PIRC Director Jill Gross each provided key skills-based training sessions as part of the teams' preparation.

mediation feedback_NYSBA.jpgPekarek noted that as a result of what they are learning in their clinical studies, each Pace Law competitor "possesses dispute resolution skills that will permit them to be zealous advocates in securities dispute resolution if they choose that career path." He added, "as a result of their assigned casework, all six Pace students were more prepared and less nervous than their opponents, in no small part because they have already represented real clients in securities disputes, and in some instances against seasoned opposing counsel." Shingle noted that this event was a great warm-up for her role in the Willem C. Vis competition in the spring and Haimi observed, "this is truly a great day for Pace."

The Negotiation medal winner was a first-time entrant, Florida International University, coached by Robert "Bert" Savage. The Mediation medal went to William & Mary, and the Advocate's Choice award went to West Texas University. Prior champions are Seton Hall (2010) and St. John's (2009).

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