Finra Panel Orders Fidelity To Pay Ex-Broker $500K In Defamation Case

Finra Panel Orders Fidelity To Pay Ex-Broker $500K In Defamation Case: The panel also ruled that the records of termination are to be expunged.

FINRA Reopens Hearing Locations

Beginning July 5, 2021, FINRA will reopen all of its hearing locations for in-person arbitration and mediation proceedings except for the following: Augusta, Boca Raton, Buffalo, Detroit, Philadelphia, Providence and Wilmington. FINRA DRS has postponed all in-person proceedings in these seven locations through July 30, 2021.

End Mandatory Arbitration?

Elizabeth Warren has once again taken up the charge to end pre-dispute arbitration agreements, which she calls "forced arbitration." I have addressed the topic on numerous occasions and while I am a fan of arbitration, pre-dispute arbitration agreements can be an issue, particularly in consumer cases, such as car rental and credit card agreements.

The process and issues are quite different in the securities dispute area, and we must remember that it was the United States Government that forced all brokers and brokerage firms to arbitrate disputes, whether they agreed to do so or not. The rest of the pre-dispute arbitration issues arise from that unilateral government action.

Alan Wolper, another securities attorney, has an excellent blog post on the topic. In addressing the issue, he says that he would welcome the end of mandatory arbitration. While I suspect Alan is being a bit tongue in cheek, his point is well taken:

I wonder, however, if the claimants’ bar can say the same thing. Some of the Statements of Claim I receive likely could not survive a motion to dismiss for failure to state a claim. (Of course, I can’t file that motion in arbitration, as the Code of Arbitration Procedure doesn’t allow it.) Some could not survive a motion to dismiss based on the statute of limitations (an argument that makes arbitration panels really uncomfortable, for some reason). Some could not survive a motion on the pleadings. Some could not survive a motion for summary judgment. Some might even subject the lawyer who signed it to sanctions under Rule 11, given how far removed some of these things are from the truth. I acknowledge that court will cost my clients more, and will take longer. But, if it means that justice is really served, that the playing field is truly level, and I can go into battle armed with the various procedural devices that don’t exist in arbitration, then I would be all in.

Are We Looking At The End Of Mandatory Arbitration? That’d Be OK With Me

I have been representing investors, financial professionals and firms in securities arbitrations for over 30 years, in over 600 arbitrations. In nearly every case, the process was at least as fair as court litigation, with significant savings in time and money. However, if we want to remove pre-dispute arbitration agreements, and only arbitrate when everyone agrees to do so AFTER the dispute arises, I too am fine with that. My investor clients may not be, as many of them will be shut out from bringing their claims at all. 

The costs of court litigation are simply too high.

Related Commentary:

The End to Mandatory Arbitration?

Opponents of Predispute Arbitration Agreements Seek Neither Fairness Nor Equality; Rather, They Seek An Unfair Strategic Advantage.

State Regulators Attempting to Ban Customer Arbitration

All Mandatory Arbitration Posts from SECLaw.com

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Mark J. Astarita, Esq. represents investors, financial professionals, and financial firms across the country in securities disputes and investigations. He can be reached at mja@sallahlaw.com or by phone at 212-509-6544.

Morgan Stanley Sanctioned THREE MILLION DOLLARS for Discovery Abuse

Finally, a FINRA Arbitration Panel who enforces their discovery award. In a customer arbitration, Morgan Stanley was ordered to produce documents related to the termination of one of its key employees. It did not do so. During the hearing, the Panel issued the same Order as was previously issued by the Chairperson for production of “all” related documents by midnight.

Morgan Stanley did not send the requested documents to Claimants’ counsel by midnight, nor did Respondent’s counsel provide opposing counsel with the courtesy of an email by midnight explaining why “all” the ordered documents were not being produced. The evidentiary hearing was delayed, for a second time, to permit both parties to provide oral argument on Morgan Stanley's claim of “settlement privilege” which, to my knowledge, does not exist, and apparently wasn't claimed prior to the hearing.

Morgan Stanley tried to get the Arbitrators to review the documents "in camera" which would be without the Claimant's counsel seeing the documents, so they can decide if the privilege applied. The Arbitrators refused, ordered the withheld documents to be handed to Claimants’ counsel, and not to the Panel for in camera review.

In its award, the Panel took note of the extreme prejudice Morgan Stanley’s failure of compliance caused Claimants’ counsel in preparing their case and asserting their claims without the withheld  documents which the Panel deemed were highly relevant to the dispute in question, the central figure of which was the terminated employee whose related documents were being withheld.

The Claimants alleged damages of  $2,739,792.00, and the Panel awarded $261,420.63, less than 10% of the amount of damages. We all know that a Claimant's damage claim is the absolute maximum that they can ask for, and probably not the amount they expect to win, but an award of 10%?

But then, The Panel noted that Rule 12506(b)(2) of the FINRA Code of Arbitration Procedure related to parties’ obligation to “act in good faith when complying with subparagraph (1) of this rule. ‘Good faith’ means that a party must use its best efforts to produce all documents required or agreed to be produced. If a document cannot be produced in the required time, a party must establish a reasonable timeframe to produce the document.” The Panel also took note of Rule 12212 of the Code related to sanctions: “(a) The panel may sanction a party for failure to comply with any provision in the Code, or any order of the panel or single arbitrator authorized to act on behalf of the panel. Unless prohibited by applicable law, sanctions may include, but are not limited to:

• Assessing monetary penalties payable to one or more parties; . . .”

The Panel continued and said "[i]n accordance with the above, after due deliberation and upon consideration of the negative effect that Respondent’s noncompliance with the Panel’s Orders had on its efforts to achieve a fair arbitration hearing, the Panel hereby orders Respondent to pay monetary sanctions to Claimants in the amount of $3,000,000.00."

$261,000 in damages, and THREE MILLION in sanctions for discovery violations.

Justice Kavanaugh's First Opinion Upholds Arbitration Agreements

Justice Brett M. Kavanaugh issued his first opinion for the U.S. Supreme Court on Tuesday. The unanimous opinion held that federal judges don’t have the authority to decide whether a dispute can be arbitrated when the contract gives the decision to the arbitrator.

Wells Fargo Wins Bank Arbitrations? Maybe not

The LA Times published this article, based on a study that we can't find.

Admittedly I haven't seen the study, and am only commenting on the article. If anyone has a link to the actual study, I would love to review it.

One more caveat - I don't know anything about these Wells Fargo arbitrations, but I do know something about consumer arbitrations - having represented investors and financial firms in well over 600 such arbitrations over the years.

While the article references a 35% "win" rate for customers, it overlooks the fact that 55% of the arbitrations settled - presumably the customer received a settlement that was satisfactory to him or her.

And, since the article says that the customers won in 35% of the other cases, that indicates that customers received awards or settlements in 70% of the cases that were brought.

The fact is that many customers represent themselves because an attorney won't take the case, and some cases are bad cases. Customers don't lose all of their cases because the process is bad, some, like in court, lose because their claims are bad.

And, the fact that Wells Fargo was awarded damages in some of those cases indicates to me at least, that these weren't all customer claims against the bank - some of them had to be the bank collecting money it was owed by customers.

I am not defending Wells Fargo here - what they did is outrageous - but that is not cause for attacking the arbitration process.
Here's why Wells Fargo forces its customers into arbitration: It wins most of the time 

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Mark Astarita is a securities attorney who has represented parties in over 600 securities arbitrations and countless SEC and FINRA proceedings, across the country for 30 years. He is a partner in the law firm of Sallah Astarita & Cox and can be contacted at mja@sallahlaw.com

FINRA Proposes Expanded Chairperson Qualifications

FINRA has filed a proposed rule change to provide that an attorney arbitrator would be eligible for the chairperson roster if he or she completes chairperson training and serves as an arbitrator through award on at least one arbitration, instead of two arbitrations, administered by a self-regulatory organization ("SRO") in which hearings were held.


Proposed Rule Change: Broadening Chairperson Eligibility in Arbitration 

Status of FINRA Arbitration Recommendations

On September 30, 2016, FINRA published a status report detailing the progress on the FINRA Dispute Resolution Task Force recommendations. As of October 19, 2016, FINRA's Office of Dispute Resolution (ODR) staff had discussed all of the recommendations with the National Arbitration and Mediation Committee (NAMC), FINRA's Board Advisory Committee on the dispute resolution forum. 

The report is available at the FINRA Dispute Resolution website.

Feds Ban PDAAs at Federally Funded Nursing Home Facilities

From the Securities Arbitration Commentator:

 "The Centers for Medicare and Medicaid Services has issued final regulations banning nursing homes and long-term care facilities receiving federal funds from using mandatory predispute arbitration agreements."

Feds Ban PDAAs at Federally Funded Nursing Home Facilities:

FINRA Proposes Change to Arbitrator Chairperson Qualifications

FINRA's recent rule change, which effectively removed every attorney with any relevant securities experience from serving as a Chairperson might be negatively effecting the Chairperson roster.

As we discussed in a posting in March, Customer and Firm Attorneys are No Longer Public Arbitrators, since the Chairperson must be a public arbitrator, most securities attorneys were instantly disqualified from serving as a Chairperson. While FINRA's roster still contains many extremely qualified Chairpersons, the impact on the arbitrator pool has been significant, and placed additional burdens on the remaining qualified Chairpersons.

FINRA has finally filed a proposed rule change to amend  the Code of Arbitration Procedure for both Customer and Industry Disputes which it was discussing back in May of this year. It is proposing to change the rule  to provide that an attorney arbitrator would be eligible for the chairperson roster if he or she completes chairperson training and serves as an arbitrator through award on at least one arbitration, instead of two arbitrations, administered by a self-regulatory organization  in which hearings were held.

This is probably not going to make a significant difference in the Chairperson pool, but it is a start.


SR-FINRA-2016-033 | FINRA.org

A Look at FINRA's Years under Ketchum and What's Ahead

Interesting article at RIABiz regarding the retirement of Rick Ketchum, the fact that there are two outsiders replacing him, and the problems FINRA faces going forward.



What FINRA's CEO shuffle reveals about its waning viability as the self-funded fox guarding the investor henhouse | RIABiz:

Broker Pays the Price for Passing on Arbitration

Lessons Learned: You cannot ignore an arbitration complaint. You will lose, and the award will become a judgment. Plus - FINRA's two year jurisdiction retention does not limit your arbitration agreement.

From the Securities Arbitration Commentator:

The term “customer” in FINRA Form U-4 and FINRA’s Code of Customer Arbitration Rule 12200 includes a member firm’s account-holder victimized by the rogue investment activities of a FINRA registered broker, even with respect to investments made outside the account that do not result in any commissions or fees to the broker.

The court decision affirming the arbitration award is here.

FINRA Proposes Arbitration Changes

The FINRA Board of Governors met this week to discuss a number of issues, including several rulemaking items. A summary of the arbitration rule proposals, as approved by the Board:

Chairperson Eligibility in Arbitration
The Board authorized filing with the SEC proposed amendments to Rules 12400 and 13400 (Neutral List Selection System and Arbitrator Rosters) to revise the arbitration forum chairperson eligibility requirements. Specifically, an attorney arbitrator would be eligible for the chairperson roster if he or she completes chairperson training and serves as an arbitrator through award on at least one arbitration, instead of two arbitrations, administered by a self-regulatory organization in which hearings were held.

Motions to Dismiss in Arbitration
The Board authorized filing with the SEC proposed amendments to Rules 12504 and 13504 (Motions to Dismiss) to provide that arbitrators in its forum may act upon a motion to dismiss prior to the conclusion of a party’s case in chief if the arbitrators determine that the non-moving party previously brought the same dispute against the same party, and the dispute was fully and finally adjudicated on the merits.

Panel Selection in Customer Cases with Three Arbitrators
The Board authorized filing with the SEC proposed amendments to Rule 12403 (Cases with Three Arbitrators) to increase the number of public arbitrators on the list that FINRA sends parties during the panel selection process in customer cases. Specifically, FINRA would increase the number of public arbitrators on the list from 10 to 15. FINRA would also increase the number of strikes to the public list from four to six, to keep the proportion of strikes the same under the amended rule as it is under the current rule.

- See more at: http://www.finra.org/industry/update-finra-board-governors-meeting-17#sthash.yOpUisct.dpuf

Mini-Survey: Customer-Member Punitive Damages in 2015

The Securities Arbitration Commentator has released its 2015 punitive damage award survey. Putting aside the question of whether punitive damages are authorized, or warranted, FINRA arbitrators are making those awards:

"The largest punitive damage award was $1,840,665 in Abel v. Brookville Capital Partners LLC (FINRA ID #13-02540 (NYC, 5/28/15)), followed by $750,000 in Lowery v. John Thomas Financial (FINRA ID #13-02763 (Atlanta, GA)). The median award was $104,000 and the smallest was $15,000. Panels awarded slightly more than $4.6 million altogether ($4,605,586, if you must know), yielding an average* punitive award of $329,000. Interestingly, when arbitrators award punitive damages, they do not necessarily award as much as or a multiple of the compensatory award. Overall, punitives equaled only 28% of the entire damage award and were only 58% the size of the compensatory damage awards."

For the full survey -  Mini-Survey: Customer-Member Punitive Damages in 2015:

UBS Puerto Rico Investment Problems Expand

UBS’ involvement in Puerto Rico investments continues to explode, as the customer arbitrations against the firm start to heat up.  UBS has confirmed that FINRA and the SEC are not only looking into the recommendations of the funds, but now they are investigating the structure of the funds.

This week UBS reported that it is facing criminal investigations into the use of non-purpose loans to invest in closed-end funds, in violation of various agreements and policies.

In 2014 UBS settled allegations with the Office of the Commissioner of Financial Institutions for the Commonwealth of Puerto Rico (OCFI) in connection with OCFI’s examination of UBS’s operations from January 2006 through September 2013. Pursuant to the settlement, UBS contributed $3.5 million to an investor education fund, offered $ 1.68 million in restitution to certain investors and, among other things, committed to undertake an additional review of certain client accounts to determine if additional restitution would be appropriate.

UBS has been defending an onslaught of customer claims from investors in its Puerto Rican bond funds, who claim that the products were improperly structured, and/or were unsuitable for the particular investor.  More information regarding the investigations and arbitration is here.

UBS has been settling the cases with its customers who are making allegations of unsuitable investments; breach of contract and fiduciary duty; negligence; and failure to supervise , as well as violation of Section 10(b) of the Securities Exchange Act, Rule 10b-5 of the Securities Exchange Commission, NYSE and FINRA rules, and the securities laws and other laws and regulations of Puerto Rico; and violation of Article 1802 of the Civil Code of Puerto Rico 31 Laws of Puerto Rico §5141, relating to the purchase and recommendation of UBS’s funds, including Puerto Rico AAA Portfolio Target Maturity Fund and a Note of the Employees Retirement System of Puerto Rico and a variety of Puerto Rico closed-end mutual funds concentrated in Puerto Rico bonds.

For the cases that UBS has not settled, it continues to lose the cases with arbitrators awarding damages to the injured investors.  Just this week a FINRA arbitration panel in San Juan awarded $250,000 to investors against UBS.

Our firm is offering to review the statements, and details regarding these investments from investors and brokers who have been involved with these securities. Call us at 212-509-6544 to see if we can be of assistance.

New Arbitrator Rule - Customer and Firm Attorneys are No Longer Public Arbitrators

The SEC has approved a FINRA rule proposal which will dramatically change the composition of arbitration panels. For years attorneys who solely represent customers have been complaining that there are too many arbitrators with ties to the securities industry. From there, the argument assumes that those arbitrators will violate their duty, their obligations, and their oaths, and rule in favor of the brokerage firm involved in the dispute.

This argument is on its face outrageous, and an affront to the thousands of arbitrators who serve on arbitration panels. Coupled with the fact that customers win a significantly higher percentage of cases in FINRA arbitrations than they do in court, the argument is also specious, and self-serving.

There were hundreds of comment letters submitted, most of them from attorneys who spent their entire careers representing customers - for a percentage of the recovery. Their own bias in the process is clear, and there were many commentators who argued if we are going to assume that a former industry employee or attorney is biased, shouldn't we be assuming that attorneys who spend their time suing firms are also biased?

Let me repeat - I do not agree with this bias argument for a second. I have appeared before hundreds of arbitrators, and with a rare exception, I have found that FINRA arbitrators are dedicated to their role in the process, and are a fair and unbiased as anyone could possibly expect. I have appeared before one or two who seemed to be biased, but I have also appeared before judges who appeared to be biased.

Regardless, FINRA modified its rule proposal, and the SEC approved it. Industry employees are not public arbitrators. Attorneys who represent industry participants, and attorneys who represent customers against industry participants are also not public arbitrators.

Good for the goose is good for the gander? I suppose, but now we have the problem of a lack of qualified arbitrators. Think about it, at the urging of the customer attorneys, FINRA has just lessen the odds of having an attorney who has knowledge of the securities laws as an arbitrator in securities cases.

These attorneys can still serve as arbitrators, if the customer decides to use an industry panel. We will have to see how this plays out, but we can expect to see an increased cost for all parties, as the need for expert witnesses will substantially increase going forward
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The rule approval is available at www.sec.gov/rules/sro/finra/2015/34-74383.pdf
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The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We are all now considered to be non-public arbitrators, despite our decades of experience in securities arbitrations, Fortunately, our expertise is still available to our clients - brokers, advisers, and the truly aggrieved investor. For more information call 212-509-6544 or send an email.

FINRA Proposes Increased Adjournment Fees for Arbitration

FINRA is filing a proposed rule change to amend Rules 12214, 12601, 13124 and 13601 to require that parties give more advance notice before cancelling or postponing a hearing, or be assessed a higher late cancellation fee if such notice is not provided.

For more information, go to SR-FINRA-2015-003 - FINRA

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The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities arbitration, having represented parties in well over 750 arbitrations, nationwide. For more information call 212-509-6544 or send an email.

New Confidentiality Requirement in Customer Discovery and Settlement Agreements

Experienced securities law attorneys know that it is a violation of FINRA rules to include a confidentiality provision in a settlement agreement with a customer that prohibits the customer from discussing the case with a regulator. While we do incorporate confidentiality provisions into our settlement agreements, we are careful to exclude discussions with regulators.

FINRA has now released Regulatory Notice 14-40, which contains something of a trap for the unsuspecting firm, and imposing a new requirement in discovery confidentiality agreements. And they have done it all without following the rule making requirements set by Congress.

In its notice FINRA says that it is simply reminding firms of the violation of FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade) to include confidentiality that prohibit or restrict a customer or any other person from communicating with the Securities and Exchange Commission (SEC), FINRA, or any federal or state regulatory authority regarding a possible securities law violation.

Given the fact that most General Counsels and Compliance Officers are inundated with notices and paperwork, most might stop at the executive summary. However, the Notice makes a substantive change in how these agreements are handled, and includes a requirement that discovery confidentiality agreements must be modified.

Settlement Agreements

The Notice now requires that confidentiality provisions in settlement agreements should be written to expressly authorize, without restriction or condition, a customer or other person to initiate direct communications with, or respond to any inquiry from, FINRA or other regulatory authorities.

FINRA had never required an express authorization in a settlement agreement, but rather simply an exclusion. from the confidentiality provisions.

FINRA has offered the following  an example of an acceptable confidentiality provision in a settlement agreement:

Any non-disclosure provision in this agreement does not prohibit or restrict you (or your attorney) from initiating communications directly with, or responding to any inquiry from, or providing testimony before, the SEC, FINRA, any other self-regulatory organization or any other state or federal regulatory authority, regarding this

settlement or its underlying facts or circumstances.

While some will argue that this is not a dramatic change, many view this as forcing firms to encourage customers to contact regulators.

Discovery Agreements

FINRA has now decided to insert itself in the discovery process and this notice includes a requirement that discovery confidentiality agreements and orders cannot include FINRA or other regulators. FINRA has once again decided that it knows better than its own arbitrators, and that it is going to violate the property rights and constitutional rights of its own members, once again.

Much of what is produced in discovery is confidential. Information regarding other customers is often included. Federal and state law, as well as Regulation S-P prevent the disclosure of such information, without a confidentiality order. Once FINRA mandates that it, the SEC, and the 52 other securities regulators are excepted from the confidentiality provision, they have introduced a huge hole in the protections afforded to customers and third parties by federal and state law.

In addition, some discovery material is proprietary. Compliance manuals, which cost tens of thousands of dollars to prepare and maintain are proprietary. Many surveillance tools are proprietary and confidential - and the public disclosure of such information - such as the parameters which trigger an exception report, could materially harm a firm's ability to detect wrongful conduct.

By forcing an exemption for regulators, FINRA has opened a door to unfettered disclosure of proprietary information. When we deal with FINRA Staff in a regulatory examination, and produce such material, we can rely on the process, and the integrity of the Staff, to protect the confidentiality of that information.

Once you allow customers to send these documents to any person at any regulatory body, the firm has lost control of its proprietary information and the confidentiality of that information is gone, causing material harm to the firm. In addition, this Regulatory Notice allows customers, and their attorneys, to freely distribute information regarding other customer to any regulatory body, for any reason, or no reason.

These new requirements will cause a violation of federal and state law, as well as a violation of the constitutional rights of the parties. It also violates the rule making requirements that Congress set forth in the Exchange Act, and circumvents the entire purpose of the amendment to FINRA Rule 12300(g)(1) as a customer can now take the documents he obtained in discovery and simply forward them, unredacted to any regulatory office he chooses.

FINRA needs to correct this, and needs to do so immediately.

Customer Hit with $80,000 in Respondents' Attorney's Fees

It is not often that a public customer is forced to pay a respondent's attorneys fees, but in a recent FINRA arbitration, that is exactly what happened.

According to the description in the FINRA arbitration award it appears that a public customer, representing herself, filed a claim against UBS for unauthorized transactions, unsuitable recommendations, negligent supervision and violation of FINRA's conduct rules, requesting 2.75 million dollars in damages. UBS denied the allegations and requested expungement for the broker.

A hearing was scheduled, and the Claimant did not appear, and did not request an adjournment. Rather than dismissing the case, the Panel took the extra step of giving the Claimant an additional week to explain her non-appearance and why her claim should not be dismissed.

Claimant did not respond, and UBS filed a request for attorneys fees and costs.

The Panel granted the request, dismissed the complaints, awarded UBS $81,000 in attorneys fees and costs of $9,000, and expunged the matter from the broker's record.

A dramatic result, but one which brings home the point that FINRA arbitrations are a serious matter, and should be treated as such. 

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Mark Astarita is a nationally recognized securities lawyer who has represented parties on over 600 securities arbitrations. If you have a question regarding a securities law issue, email your questions to mja@sallahlaw.com

Third Party Bene is Not a Customer for Arbitration Purposes

A FINRA arbitration panel has dismissed a $32 million claim because the claimant was not a customer of the brokerage firms, and did not have an account with the Respondents.

The Claimant had alleged that he was an undisclosed third-party beneficiary to the investment contract at issue, and was therefore entitled to arbitrate the claims. Without a written agreement, and an admission that he had no dealings with the Respondent, the claim was dismissed.

See, FINRA Arbitration Award 13-02741