Home -> Law Blog Directory -> Corporate & Securities Law Blogs -> OverRegd - Securities Regulation and Litigation Blog

Corporate & Securities Law

: OverRegd - Securities Regulation and Litigation Blog

Broker-Dealer Litigation/Arbitration: Preparing for Sunami?

In an apparent effort to address perceived procedural deficiencies, to level the playing field so that customers are not disadvantaged in arbitration, and perhaps in anticipation and preparation for a virtual deluge of new filings, FINRA has revised and/or introduced a number of arbitration-related processes. Included in this revamping are the introduction of special arbitration procedures for use in customer claims for Auction Rate Securities-related investment losses; the imposition of sanctions, and limitations on the filing of Motions to Dismiss before the conclusion of the case-in-chief; and increased thresholds for single arbitrator cases to $100,000. While some question whether these revisions will ultimately serve the best interests of either the aggrieved customer or the accused broker, or effectively streamline the dispute resolution mechanism, time will tell.

Arguably, the special arbitration procedures for ARS-related consequential damages is the most striking of the recent additions to the FINRA arsenal. In connection with ARS cases alone, customers are given the option to elect to employ the special procedures or more traditional procedures, and if the former, are given virtually a free opportunity (sans legal fees) to recoup consequential damages from brokerage firms that are parties to ARS-related settlements with the government, imposing on firms the obligation to assume many of the arbitration costs, including filing and hearing session fees, and all expenses for the arbitrators. By employing these procedures, the customer precludes the ability of the brokerage firm to contest liability with regard to the illiquidity of ARS transactions. The customer bears the burden of proving he/she suffered damages due to an inability to liquidate an ARS position. In such instances, the customer may pursue consequential damages only, which FINRA defines as opportunity costs or losses resulting from the investor's inability to access his/her funds due to the freeze imposed on assets when the ARS market dissolved. Investors seeking punitive or other damages will still have to avail themselves of standard FINRA arbitration procedures. One anticipates that the 'lost opportunity' determinant will be hotly contested, as Claimants' counsel attempt to subsume under this standard a wide array of loses, real and imagined.

The most potentially troublesome of the revisions are new Rules 12504 and 13504, which limit pre-hearing motions to dismiss and impose sanctions when the motion is brought unsuccessfully. Perceived principally as a customer protection provision, the new rule is intended to reduce the number of frivolous and non-meritorious motions brought prior to the presentation of the case-in-chief, and to ensure that customers are provided with an opportunity to be heard by a panel. Designed in an effort to help the customer avoid unnecessary expense, impede efforts to disadvantage unsophisticated claimants, and to expedite hearings on the merits, the movant must first file an Answer. Subsequently, the motion may be brought on one of three grounds:

1) the non-moving party previously released the claims in dispute by a signed settlement agreement and/or written release. Parties seeking this exception should provide arbitrators with valid documents that indicate that the claims in the current dispute have been resolved in a previous dispute. Rules 12504(a)(6)(A) and 13504(a)(6)(A).

2) the moving party was not associated with the accounts, securities or conduct at issue. In essence, there has been a mistake, and the claim has been brought against the wrong person or entity, or a claim names an individual who was not employed by the firm during the time of the dispute or an individual or entity that was not connected to an account, security or conduct during the time of the dispute. Rules 12504(a)(6)(B) and 13504(a)(6)(b).

3) the claim is not eligible for submission to arbitration because six years have elapsed from the occurrence or event giving rise to the claim. Parties seeking this exception should provide arbitrators with valid documents that indicate when the occurrence or event took place. Rules 12206(b)(7) and 13206(b)(7).
Should the panel deny the motion, all motion-related costs must be imposed on the moving party; if the panel views the motion as frivolous, it may also impose costs and attorney fees on the movant and/or impose other sanctions. All of the arbitrators must agree to the dismissal, and explain their decision in writing.

The most glaring infirmity in the motion to dismiss process is the need to file an answer before the submission of the motion. While the new motion requirements may limit the ability of a Respondent to delay inordinately a Claimant's right to be heard by a panel, by requiring that the answer be submitted before filing a motion the rules impose extraordinary additional costs on a Respondent in cases in which there was either no merit to the claim or it was ineligible for arbitration in the first instance. That facet of the rules seems unfair to the prevailing Respondent, since a party should not have to assume the costs and expenses of submitting a defense when there was no basis for the assertion of the underlying claims. There is no express provision within the rule imposing Respondents' costs on the Claimant if the motion is brought successfully. One will have to look to other provisions of the Code in order to obtain such a remedy.

The other significant revision of the Code is the raised threshold for the designation of panels. After March 30, 2009, cases seeking $100,000 or less, exclusive of costs and expenses, will be assigned a one person panel. The panel member must be chair qualified and chosen from the roster of public arbitrators. Upon the joint application of the parties, a three person panel may be designated. In theory this procedure should provide a quicker and more efficient resolution of claims falling within this range of damages. Notably, if the dollar amount of the claim is unspecified, or does not request monetary damages, a three arbitrator panel will designated unless the parties agree in writing to have the case heard before a single arbitrator. The rule does not provide a mechanism for the staff of FINRA to make a determination that an unspecified demand should be assigned to the single person panel. Rules 12401 and 13401.

Will these revisions to the Code of Arbitration Procedure provide an elixir that will advance the interests of FINRA's dual constituency: the investing public and the financial services industry? Will these new rules minimize or avoid log jams if a plethora of new customer cases or intra-broker disputes surface? While in certain instances they may reduce costs to the combatants and expedite the process (e.g. $100,000 threshold rule), the motion practice provisions are unsettling from the defense perspective, necessitating significant and costly procedural steps before having a meritorious and dispositive issue heard. This does not 'level the playing field' or otherwise equally advance the interests of Respondents, but in this market environment no one is going to raise the flag in defense of the industry if to do so may be viewed as customer-phobic. Remarkably, no politician has ever been elected by trumpeting the cause of the industry over the public, and FINRA is not about to buck that trend now.
 

Full post as published by OverRegd - Securities Regulation and Litigation Blog on March 11, 2009 (boomark / email).