Recently in Securities Arbitration Category

November 3, 2012

FINRA's Securities Arbitration Program to be More Available to Investment Advisors

The Financial Industry Regulatory Authority ("FINRA") is taking steps to broaden the scope of their securities arbitration program to include more investment advisors. FINRA administers the single largest dispute resolution program for investors and securities firms. In 2011, there were 4,729 securities arbitration cases filed with FINRA. However, not all financial advisors are alike. FINRA's arbitration program is mandatory, but only for stockbrokers and their customers. Investment advisors are not FINRA members--at least not yet. If a customer has a dispute with their investment advisor, they will need to pursue a lawsuit in court, unless the investment advisor included an arbitration clause in their advisory agreement. Many advisory agreements obligate customers to resolve disputes through the American Arbitration Association ("AAA"), which can be a costlier alternative to FINRA's arbitration forum.

Voluntary Arbitration Program: FINRA has always offered up their arbitration program to investment advisors on a voluntary basis. FINRA has not established any new rules or procedures for arbitrating investment advisors disputes. FINRA did, however, recently issue "guidance" discussing the availability of their program. I am happy to see FINRA offer more competition in the arbitration field, especially because participation in the arbitration program is totally voluntary. In my opinion, FINRA's entire arbitration program should be non-mandatory. Granting any one organization a monopoly over investor disputes is fundamentally unfair. Competition will help insure that the rights of financial services consumers are not diminished. Investors should be allowed to freely choose between arbitration and litigation.

Court vs. Arbitration:
For the time being, only investment advisor customers have the opportunity to choose between going to court or arbitration. Each alternative has its benefits and drawbacks. When weighing which course of action to take, it is best to consult with a knowledgeable securities attorney who can thoroughly explore and discuss all available options.

More information:

Frequently Asked Questions About Securities Arbitration

November 1, 2009

Encouraging News for Securities Arbitration Claimants?

Although my earlier blog posting about securities arbitration results in San Francisco was less rosy, today's Wall Street Journal article, "Investors Win More Broker Cases," did contain a bit of encouraging news for brokerage firm customers who may be considering whether to file a securities arbitration claim. The article noted that customers who went all the way to hearing before the Financial Industry Regulatory Authority (FINRA) have prevailed 45% of the time so far this year compared to just 37% in 2007. In other words, investors are winning a larger percent of cases than they did in the past, but they are still losing 65% of the time. The WSJ article also noted that awards to investors for claims under $1 million were averaging about 50% of the damages requested.

[Blogger's note: See my year-end update, "Securities Arbitration Award Results for 2009 Better Than Expected for San Francisco Investors"]

Most Investor Claims Involve Mutual Funds

The WSJ article also makes a point of saying that a "good chunk" of the cases filed in the last two years involve auction rate securities. FINRA started keeping track of ARS cases on January 1, 2008. A total of 299 ARS cases were filed in 2008. This year, there have been 215 ARS cases filed through September 2009. A significant trend that was overlooked in the WSJ article is the fact that disputes involving mutual funds are the most frequently arbitrated type of securities product. This year, there have already been 1,272 mutual fund cases filed through September 2009--an amount that eclipses the total number of mutual fund cases filed in 2007 and 2008 combined.

Most Investor Claims Allege Breach of Fiduciary Duty and Misrepresentation

According to FINRA, the two most common types of customer complaints for 2009 are breach of fiduciary duty and misrepresentation. However, there are limitations to FINRA's statistics. For example, FINRA only includes four claim types for every case that is filed. This may explain why unsuitability--a widely alleged customer complaint--did not rank as high as it probably should have.

October 5, 2009

FINRA Dispute Resolution Expands Pilot Program for Securities Arbitration Panels

Here is a bit of good news for investors with securities arbitration claims against 14 of the largest brokerage firms, including Merrill Lynch, Morgan Stanley Smith Barney and Wells Fargo. The Financial Industry Regulatory Authority (FINRA) has agreed to extend its year-old pilot program established to give investors the option to request an arbitration panel composed entirely of arbitrators that are not affiliated with the securities industry. Currently, a 3-person arbitration panel must include one industry arbitrator and two public arbitrators. The pilot program was created in response to criticism over whether an industry arbitrator, such as a stockbroker or branch manager, can act impartially when a customer is complaining about securities fraud or account mismanagement by their broker. I've participated in arbitrations with both good and bad industry arbitrators. The trouble is, allowing an industry arbitrator to sit on a panel gives the appearance of bias and takes away from the legitimacy of the proceedings. That should be reason enough to dump the industry arbitrator. My California securities law firm is in favor of the pilot program and we have been actively encouraging clients to participate whenever possible.

The brokerage firms who have agreed to participate in the pilot program are:

Ameriprise Financial Services
Charles Schwab
Chase Investment Services
Citigroup Global Markets
Edward Jones
Fidelity Brokerage Services
LPL Financial
Merrill Lynch
Morgan Stanley Smith Barney
Oppenheimer
Raymond James
TD Ameritrade
UBS Financial Services
Wells Fargo Advisors / Wachovia Securities

Each of the above firms has committed to participate in a limited number of cases under the program on a first come, first served basis. The pilot program will end on October 5, 2010. Since the average arbitration hearing takes 14 ½ months to conclude, most cases in the pilot program have not gone to hearing yet. FINRA plans to compare the results of the pilot program cases with non-pilot cases. Of the 396 arbitration cases that have been decided this year, only 139 (45%) recovered anything at all. Hopefully, the arbitration award results for cases in the pilot program will be much better. If the pilot program results in more awards in favor of customers, will the brokerage industry lobby to keep the industry arbitrator? Let's hope not.

September 3, 2009

Expedited Arbitration Procedures for Senior Citizens and Seriously Ill Investors

At the University of San Francisco Law School's Investor Justice Clinic, where I am an adjunct professor and supervising attorney, I am seeing a disproportionately large number of senior citizens who are victims of securities fraud and account mismanagement. The oldest client at the clinic is in her 90's. Elderly clients and those who are seriously ill have unique needs that require swift justice.

The typical securities arbitration claim filed with the Financial Industry Regulatory Authority (FINRA) takes about 1.25 years to complete. Fortunately, investors who are 65 years or older or seriously ill can request an expedited hearing under a program that was established in June 2004. So far, 701 customers have participated in FINRA's expedited program and, according to FINRA, their cases have been resolved 31% sooner.

For eligible cases, FINRA assures investors that its staff will administer the hearing in an expeditious manner. This program is not specifically covered in the arbitration rules; however, FINRA has amended the Arbitrator's Reference Guide to remind the arbitrators that they should avoid unnecessary postponements or do anything to delay the proceedings. In my experience, the program has been helpful but the expedited procedures should be included in the arbitration code. As it now stands, the burden rests on the investor's attorney to insist on getting the earliest possible hearing dates while allowing enough time to adequately prepare the case.

July 9, 2009

Why Having a California Licensed Securities Arbitration Lawyer is So Important

Today, anyone with a website can tout themselves as a "California securities arbitration lawyer" or "California securities fraud lawyer" even though the attorney or law firm does not actually have an office located in California. The World Wide Web's lack of oversight creates an environment where attorneys--and non-attorneys--are able to circumvent California laws that were designed to prevent deceptive legal advertising.

calif-flag.jpgSearching for a securities arbitration attorney is not the same as shopping online for the best deal on a GPS device. Most clients would be better severed by dealing with an attorney that knows the local rules and customs and has an office nearby where they can meet face-to-face. Securities arbitration before the Financial Industry Regulatory Authority (FINRA) is serious business. As any lawyer that regularly handles arbitration cases in San Francisco can attest, the local arbitrators are sometimes hard to please. Currently, I am acting as local counsel for out-of-state attorneys who have California clients with arbitration claims. When handled properly, this type of arrangement works out well for everyone involved.

California does not allow out-of-state attorneys to represent clients in securities arbitration proceedings within the state. California Code of Civil Procedure Section 1282.4, requires non-California lawyers to associate with a California attorney who will serve as the attorney of record. Section 1282.4 was enacted in January 2007 in response to Birbrower, Montalbano, Condon & Frank v. Superior Court, 17 Cal. 4th 119 (1998), which held that non-California attorneys who appear in California arbitration proceedings are engaged in the unauthorized practice of law.

FINRA has also adopted strict guidelines and procedures to ensure that attorneys are in compliance with Section 1282.4. FINRA may deny an out of state attorney's request for qualification to participate in the arbitration if the non-California attorney has repeatedly appeared in California arbitration cases.

July 7, 2009

About the Financial Industry Regulatory Authority (FINRA)

The Financial Industry Regulatory Authority (FINRA) was established in July 2007 when the National Association of Securities Dealers (NASD) and the New York Stock Exchange (NYSE) were consolidated. FINRA is responsible for overseeing regulation and compliance of more than 4,800 brokerage firms and nearly 650,000 stockbrokers.

FINRA's Investor Complaint Program

FINRA's Investor Complaint Program investigates complaints against brokerage firms and their employees. Where appropriate, FINRA will take disciplinary action against brokers. Sanctions can include fines, suspensions and disbarment from the securities industry. FINRA's Investor Complaint Program is a disciplinary program that is separate from FINRA's Dispute Resolution Division. Whenever a disciplinary investigation is started, FINRA often sends investors a standard letter with the following disclaimer:

"Please understand that we are not representing you individually in this matter. There is no assurance that any action will result in the return of funds or securities to you. If you feel you are entitled to monetary relief, you may wish to initiate an individual action, such as mediation or arbitration. FINRA provides a forum for resolving individual disputes through its Dispute Resolution Division."

FINRA's Dispute Resolution Division is responsible for overseeing the arbitration and mediation of disputes between investors and stockbrokers. When a customer opens a brokerage account with a brokerage firm that is a member of FINRA, the customer is obligated to submit any dispute to arbitration in accordance with the rules and procedures of FINRA Dispute Resolution.

Arbitration of Securities Disputes

large_chess.jpgClaims seeking damages of $25,000 or less are usually decided under the "simplified arbitration" procedures in which a single arbitrator decides the case based on the written record without the need for a hearing. Larger claims are decided by a panel of either one or three arbitrators, depending upon the dollar amount involved. A total of 7,173 securities arbitration cases went to hearing during the 5-year period from 2003 to 2008. Customers prevailed in 3,295 of those cases--or just 45% of the time. Securities arbitration is often misperceived as an informal proceeding; however, securities arbitration is a highly specialized area of the law and there are many qualified attorneys who focus exclusively on representing either customers or brokerage firms. When going to arbitration, customers need to be well prepared.

Mediation of Securities Disputes

Mediation is an alternative method of resolving a securities dispute that can be initiated at any stage of the arbitration process. Because participation in mediation is voluntary, both parties must agree to submit a case to mediation. Mediation begins with the selection of a trained mediator whose function is to help the parties negotiate a settlement. Mediation is non-binding, so the dispute will go to arbitration if the parties are unable to reach a settlement.

July 1, 2009

San Francisco, California, Securities Arbitration Award Results During First Half of 2009 Are Well Below FINRA's Nationwide Average

large_san_fransico.jpgHere are the results from my analysis of securities arbitration awards made in San Francisco, California, during the first half of 2009 before the Financial Industry Regulatory Authority (FINRA). The claimants that did the worst were the ones who handled their own cases on a pro se basis. Pro se is Latin for "on one's own behalf." I could find only one instance where a pro se claimant recovered anything at all during the first half of 2009. In that case, the claimant, who was asking for $37,500 in damages, was awarded a mere $792.

Excluding pro se cases, claimants who went to hearing before San Francisco arbitrators in the first half of 2009 with an attorney prevailed 37.5% of the time. This is well below the national average reported by FINRA. According to FINRA, claimants received favorable awards in 47% of all arbitration hearings held during the first half of 2009.

Another telling statistic is the amount recovered by claimants who did win. After weeding out claims with questionable or uncertain damage claims, I found that claimants who won in San Francisco received awards that averaged 59% of their claimed damages during the first half of 2009. Choosing the right arbitrators can have a large impact on the outcome of a case. In reviewing awards, I notice that some San Francisco arbitrators who sat on multiple cases consistently ruled against claimants.

One final note: In each of the cases where the claimants did quite well, they were represented by an experienced securities arbitration attorney. Retaining a knowledgeable securities attorney and having fair-minded arbitrators appointed to a case can have a huge impact on the success or failure of a securities arbitration proceeding--especially in San Francisco where every little bit helps.