Monday, November 2, 2009

Getting Arbitration Facts Wrong

Litigation 2009 - Home Court Disadvantage at American Lawyer attempted to put together an article about the large cases being won before FINRA arbitration panels, but in doing so demonstrates a marked bias in the media against arbitration. Or, perhaps just an abject failure to fact check.

The article correctly points out that there have been some significant cases won in arbitration, multimillion dollar verdicts in favor of investors, but in the course of reaching that conclusion makes a number of flagrantly wrong, and significantly misleading, statements regarding FINRA arbitration.

For example

FINRA's reputation for siding with the securities industry was long lamented and well-known to even casual investors

Long lamented? Perhaps. At least one party to every litigation proceeding is unhappy with the outcome. Sometimes even both sides. But "well-known?" Hardly. Ask any experienced securities attorney, and the key word is "experienced" and they will agree that while their might be a panel here and there over the thousands of arbitration panels that have decided cases, there is no institutional bias in favor of the industry, and certainly no reputation for siding with the industry. There are no statistics, studies or reports which demonstrate any bias in securities arbitrations for the industry. Customers settlement rates and “win” rates are well over 75%, and “win” rates are consistently higher in arbitration than in comparable court proceedings.


Attorneys for investors point out that from 2003 to 2008, customers won damages in only 27 percent of cases filed

I don't know which attorneys for investors they spoke to, but the statement is simply wrong. Incredibly wrong. According to FINRA’s statistics, over 50% of the cases that are concluded are resolved by a settlement. Of the remaining 50% that go to a hearing, customers won 44% of the time from 2003 to to 2008. That puts a customer win rate at something on the magnitude of 70%, assuming of course that a customer did not settle a case without getting some compensation.


FINRA and its predecessors have long been the financial services industry's preferred venue for claims.

FINRA requires, by regulation, that all members of the financial services industry arbitrate all claims against them at FINRA arbitration. It is not the firms preferring the venue, it is the venue forcing firms to use its forum; by force of law.

FINRA arbitrations don't provide for discovery, which could also be a challenge for investors' lawyers, due to the complexity of the products at issue

Incredibly wrong again. FINRA arbitration procedures have virtually unlimited document discovery. FINRA arbitration proceedings do not have depositions, which at a cost of a couple of thousand dollars a day, are a significant cost for an investor in a court litigation. Further, the parties have the ability to request depositions, and whatever other discovery devises they need. And, if justified, the arbitration panel can order depositions.

…nonpublic arbitrator--the slot that, according to investors' lawyers, usually favors securities firms.

In 25 years of representing parties in securities arbitration I never heard an investors' attorney make this claim. "Usually favors securities firms" is a libel of the thousands of nonpublic arbitrators, and there are no studies or reports to support such an outrageous claim. In fact, there are reports that show that there is no difference in a customer award rates between public and nonpublic arbitrators.


FINRA arbitration certainly isn't perfect, but repeating misstatements without fact checking, in a legal publication, does nothing to correct the problems that do exist, and actually hampers the efforts of those who are attempting to make the process better for all participants.
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