Monday, October 22, 2007

FINRA Proposes to Ban Dispositve Motions in Arbitration

I have spend my entire career in the SRO arbitration forums, and have witnessed many improvements to the process, and some steps backwards, but this one has to be at the top of the list. Well, it is not the top - the top of the backwards steps was the NASD's decision to appoint one of the public arbitrators as the Chairperson, regardless of their qualifications. You have not lived until you have had a real estate broker, who has only seen a handful of arbitrations try to decide evidentiary objections.

FINRA's proposal (the link is in the headline) is to once again limit the power of their own arbitrators. Like they did with expungement, when they effectively told their own arbitrators that they could not be trusted to enter an expungement order, and that FINRA was going to ignore such orders, FINRA is doing it again.

FINRA is proposing to limit motions to dismiss in arbitration proceedings, and to limit them in such a way that there will be no motions to dismiss. Every respondent will be forced to go to a hearing on claims that have no legal basis to be heard at all.

Under FINRA's proposal applies in all cases where a party files a dispositive motion before a claimant finishes presenting its case. I presume that is FINRA's clever way of saying a prehearing motion to dismiss.

So, in the case of a prehearing motion to dismiss, an arbitration panel will not be permitted to dismiss a case unless one of three findings were made (1) the parties settled the dispute in writing; (2) there was "factual impossibility," meaning the party could not have been associated with the conduct at issue; or (3) the existing 6-year time limit on the submission of arbitration claims. The rule proposal also would require that arbitrators hold a hearing on such motions and that any decision to grant a motion to dismiss be unanimous, and be accompanied by a written explanation.

While I suppose that we should be thankful that FINRA is allowing its arbitrators to dismiss claims that have been settled, the limitation to "factual impossibility" and the 6 year eligibility rule forces dozens, if not hundreds, of cases to hearing that should not go to hearing because the claimaint could not possibly win.

I am not talking about motions for failure to state a claim, which probably do not belong in arbitration. But how about a claim, under New York law, for defamation on a U-5 when damages are the only relief sought? It is legally impossible for a claimant to prevail on such a claim, and FINRA is going to force the parties to a hearing?

A more important example - the running of the statute of limitations. While FINRA may not realize it in its rush to bend over backwards to appease the claimant's bar, there are many statutes of limitation that are shorter than 6 years. In fact MOST statutes of limitation are shorter than 6 years.

So, hypothetically, a customer brings a claim for violation of a wrap fee agreement, claiming that he was overcharged. He closed his account in 2002, and he files his claim in 2007. That case is within the 6 year eligibility rule, but the statute of limitations, which in most states is 4 years for a breach of contract, has run. State law BARS the claim. The Claimant cannot possibly win, yet FINRA is going to force the parties to arbitrate that dispute.

Or another case - two customers join together and sue to different brokerage firms in the same arbitration. A violation of the NASD's own rules on consolidation, and one of those claims must be dismissed, but there will be no way to dismiss that claim. Or two claimants joint together and sue a firm, but factually one of the claimants is simply mistaken in his facts. No dismissal of that claim either.

What are we going to do with the Claimants who think it is clever to name every executive in a brokerage firm as a respondent. When a claimant names Stan O'Neal in his churning case, the new rule will prohibit a motion to dismiss, since it is not "factually impossible" for Mr. O'Neal to have been liable for events that occurred at Merrill during his tenure as CEO - in fact, it is legally and factually possible. However, Mr. O'Neal has a near perfect defense to such a claim. FINRA is going to force him to a hearing? FINRA is not going to allow its arbitrators to make a decision regarding the possibility of Claimant proving a claim against Mr. O'Neal? How about when a claimant names every executive at a brokerage firm. We are not going to allow a panel to decide who goes and who stays? How about a churning case where the chief financial officer is named?

FINRA claims that it is proposing this new rule based on an allegation that "[i]n many instances dispositive motions were being used to needlessly delay arbitration hearings, which resulted in investors not getting cases heard on a timely basis and incurring extra costs," said Linda Fienberg, President of FINRA Dispute Resolution. "We believe the proposed revisions will curb any abuses and ensure that investors maintain the right to have their arbitration claims heard."

If I didn't have so much respect for Ms. Feinberg, I would think she was joking. I sincerely doubt that anything is being delayed because someone filed a motion to dismiss. If hearings are being delayed, the problem is in Ms. Feinberg's office. Remember, we are talking about motions filed before the close of Claimant's case, i.e., pre-hearing. Hearings are held 14 to 18 months after a statement of claim is filed. Motions to dismiss are typically filed on a schedule set by the arbitration panel, and are fully submitted months before any hearing is scheduled.

The filing of a motion to dismiss does not delay a hearing. FINRA's sometimes inability to schedule a hearing date for the motion is a problem however. I have been involved in cases where motions to dismiss were filed, and fully briefed, and FINRA Arbitration simply could not manage to schedule a date for oral argument. In fact, I have one such case right now where the parties have fully briefed the issues, and despite the passage of 4 weeks, no hearing has been held.

And on the topic of delays, why does it take FINRA months to schedule a prehearing conference? MONTHS. If we are concerned about delays, lets work on getting the arbitrator selection process started on time, arbitrators selected on time, and a prehearing conference held before the next two full moons appear.

Motions to dismiss are not causing delays in arbitration, they are causing frivolous and spurious claims to be dismissed. Since that is not good for the claimants who simply wish to name every person they can name, suddenly it is a problem?

If we are concerned about the delays in hearing a motion to dismiss, we might as well ban discovery motions - heck, they delay proceedings even longer (particularly when arbitration panels insist that a motion filing date of 30 days before a hearing is plenty of time to address the issues and get documents produced. But that is a rant for another day).

But with all due respect to Ms. Feinberg, I don't believe for a second that motions to dismiss are delaying arbitration hearings in any significant way, or in any significant number of cases. With a 14 to 18 month lead time from filing to hearing, there is plenty of time for a panel to hear and decide a motion to dismiss without delaying the hearing.

I will be urging the SEC to have Ms. Feinberg provide evidence of this alleged delay, and for her to demonstrate how many of the 4,000 cases are delayed because of a prehearing motion to dismiss. It will be interesting to see how many there are.

The reality is that the rule is being proposed to address alleged delays, frivolous motions and abusive motions. If that is the conduct that we are seeking to stop, then address that conduct. Assess costs against the party making such a motion. Assess attorneys fees against such a party. Or a truly novel concept - deny the motion.
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