Tuesday, June 30, 2009

Finally, a Rational Analysis of "Mandatory" Arbitration

While his brethren at the claimant's bar shout for the end of mandatory arbitration in securities disputes, Seth Lipner, a well known and respected customer attorney,former PIABA President, and law professor, has entered the "mandatory" arbitration fray, and hit the nail on the head in his column at Forbes.com.

In his column, Should Securities Arbitration be Mandatory? Seth is correct, and not just because he agrees with me. I have sung the praises of securities arbitration for decades, and have blogged about the recent move to end securities arbitration and problems with the process as FINRA tinkers with it. The posts here, here, here, here and here. Or just click on the "Arbitration" category in the right hand margin for all of the posts.

Mandatory arbitration in the securities industry did not start with Shearson vs. McMahon. It started with an NASD rule, approved by the SEC and Congress, that required all registered persons and firms to arbitrate disputes among themselves, and with their customers. The use of arbitration agreements in customer agreements was a direct result of the one sided (and short sighted) government mandate. Customers could force brokers to arbitrate, but brokers did not have the same right. Enter the pre-dispute arbitration agreement in customer agreements to level the playing field.

In the world of "mandatory" arbitration, there is virtually no case as mandatory as the situation in which stock brokers find themselves. They aren't forced to arbitrate their disputes because they didn't read a contract. Stock brokers are forced to arbitrate their disputes because the US Goverment says they have to arbitrate their disputes.

Stock brokers are forced to arbitration if they want to have a job. All of the arguments against mandatory arbitration apply with equal force for stock brokers. They have absolutely no choice; except to give up their careers.

So, should Congress end mandatory arbitration, it will also end mandatory arbitration for stock brokers. Brokers will be free to sue in court, and will be free to be sued in court. So will their employers, the brokerage firms.

As Seth points out, securities arbitration is a different animal, and in many ways, given the government oversight and the fact that it is in large part paid for by the securities industry, a significant advantage to the investor, and the employee.

Removing the requirement that brokers must arbitrate means that all of the costs and delays of court litigation are back in play. Firms will decide which cases they want to go to court, and the tough ones will go to court, where the party with more money has a significant advantage.

Remove arbitration and everyone goes to court; along with motions to dismiss, depositions, interrogatories, formal discovery motions, interlocutory appeals, motions for summary judgment, and more appeals from final judgments. Plus a three or four year wait to be heard.

For what? So that customers get a jury? Let's be realistic; no one gets a jury trial in this country except for criminals and personal injury plaintiffs. Everone else, including burned investors and employees, settles or is thrown out before a trial. Less than 5% of all non-personal injury suits actually go to a trial, and a smaller percentage go to a jury.

Congress needs to carefully consider what it is doing. Removing pre-dispute arbitration agreements will harm thousands of investors every year. Right now investors with claims for less than $100,000 are virtually locked out of meaningful arbitration,because they can't afford an attorney.

Remove arbitration, and investors with claims for less than $200,000 will not find an attorney willing to foot the bill for a contingency fee.

I have been at this for over 25 years. So has Seth. Read Seth's column, and let me know where we are wrong.





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