FINRA Arbitration Stats Through June

FINRA just released its 2022 Arbitration Statistics.

New cases are down over last year, only 781 Customer cases, and 479 Industry cases filed so far this year.

Interesting that there were 54 Regulation BI Cases filed, we expect to see that increase going forward. Breach of Fiduciary Duty and Negligence are the largest number of customer claims.

And settlements are still the largest method of closing cases. So far in 2022 67% of the cases that are closed were settled between the parties, or by mediation. Only 14% resolved by arbitrators.

https://www.finra.org/arbitration-mediation/dispute-resolution-statistics#arbitrationstats

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Mark J. Astarita is a national securities attorney who has represented parties in over 600 securities arbitrations in 23 states. Have a question? Give him a call at 212-509-6544, or read his commentary at The Securities Law Home Page.

 

JAMS Arbitration Better Than FINRA?

All of our readers know that I am a big fan of arbitration, and despite its flaws, a fan of FINRA arbitration, for both my investor and industry clients. As I have written dozens of times, FINRA arbitration is faster, less expensive, and at least as fair as court proceedings.

That is not to say that it does not have its flaws. Scheduling hearings is often a mess, too often arbitrators don't want to make decisions, and the certainty of evidentiary rulings is iffy, at best.

I have represented parties in other forums, notably the NYSE when it was conducting arbitrations and some of the commodity exchanges. Those all have similar issues.

I have also represented parties in AAA arbitrations, both in the securities and non-securities industries. While the experience at AAA is much smoother than FINRA, there is a significant cost difference. Arbitrations at AAA can cost thousands of dollar more than a FINRA arbitration

I have never conducted a hearing through JAMS, but Alan Wolper, of Ulmer & Berne has written a blog post regarding his recent experience at JAMS. He points out the problems with FINRA arbitration that do not exist at JAMS and gives his JAMS experience a positive review.

AAA and JAMS are more expensive, and sometimes significantly more expensive. However, you often get what you pay for.

Alan's post is at JDSupra.

Court Rejects Legal Challenge to Virtual FINRA Arbitration Hearings

FINRA just administratively postponed live arbitration hearings, again, and it is a virtual guarantee that they will administratively order virtual hearings in all cases.

Of course, they will need a rule change, and SEC approval, which will take months, but it is going to happen. Arbitration hearings have been postponed for months, and the backlog is huge.

There are serious concerns regarding virtual hearings, and while some of the improvements in virtual conferencing software have addressed those concerns, they abound. For example - showing a witness documents on cross examination. It is very difficult to be cross-examined about a multipage document on a computer screen. When we do hearings in person, the witness can read the entire document, or at least skim through it, before being asked about a particular page or paragraph. With conferencing software, the examiner is displaying the page he wants to ask about. The witness does not have the entire document.

Of course, that is resolved by sending the witness the documents in advance, but that undermines cross-examination and witness impeachment strategies.

There are other issues, but suffice to say most, if not all attorneys do not want to conduct trials by video conference.

But it looks like we may not have a choice. In Boca Raton, Florida, when an arbitration panel decided to hold a hearing virtually, the defendant filed in court to halt the proceeding, arguing that the hearing was too complex  — the witness lists included dozens of witness and at least six experts — and included customer-claimants who required an English translator.

The court denied the injunction, ruling that the hearings could proceed virtually, according to Financial IQ.

Now we will have to deal with arbitrators, and perhaps even witnesses, forgetting that they are at a hearing, and walking away from the screen, as one juror did in a virtual jury trial a few months ago.

https://financialadvisoriq.com/c/2851663/351723/court_rejects_legal_challenge_virtual_finra_arbitration_hearings

FINRA Expands Arbitration Hearing Postponements

FINRA has decided to administratively postpone all in-person arbitration and mediation proceedings scheduled through May 31, 2020. If you have an in-person hearing or mediation session that is postponed as a result of this decision, you will be contacted by FINRA staff to reschedule or discuss remote scheduling options.

Please note that this decision does not affect other case deadlines. All case deadlines will continue to apply and must be timely met unless the parties jointly agree otherwise.

If you need help with an arbitration, or simply have a question, call Mark Astarita at 212-509-6544. With 30 years of FINRA arbitration experience in over 600 arbitrations, he probably knows the answer.

FINRA Postpones In-Person Arbitrations and Mediations

In response to the evolving coronavirus disease 2019 (COVID-19), FINRA has decided to administratively postpone all in-person arbitration and mediation proceedings scheduled through May 1, 2020. If you have an in-person hearing or mediation session that is postponed as a result of this decision, you will be contacted by FINRA staff to reschedule or discuss remote scheduling options.

Please note that this decision does not affect other case deadlines. All case deadlines will continue to apply and must be timely met unless the parties jointly agree otherwise.

We recognize that this decision may cause inconvenience and we do not make it lightly. We are taking this preventative action out of an abundance of caution, in the interest of public safety. The well-being of our FINRA employees, arbitrators, stakeholders and communities is of paramount importance.

https://www.finra.org/rules-guidance/key-topics/covid-19

Simplified FINRA Arbitration Guide

By: Michael D. Handelsman, Esq.
Sallah Astarita & Cox, LLC

The concept behind FINRA arbitration was to offer participants in the financial industry a quicker, low cost alternative to proceeding in Court. However, even with the lower costs of arbitration, the costs associated with pursuing a case make it prohibitive for customers seeking to recover relatively low losses.

Very often, individuals seeking to recover minimal damages will find it very difficult to find an attorney to represent them. The hourly fees charged by most attorneys will often eclipse the damages sought, making arbitration unattractive to the potential client. Or, the potential recovery for these low damage cases makes it difficult for attorneys to proceed under a contingency agreement.

What resulted was a significant issue that needed to be addressed. Individuals with legitimate claims were unable to find counsel to represent them and their claims were going un-pursued.

As a result, FINRA has instituted a Simplified Arbitration process for individuals seeking damages of less than a threshold amount, currently $50,000.

There a number of differences between a Simplified Arbitration and what I will refer to as a traditional arbitration. For example, all Simplified Arbitrations before FINRA are heard by a single arbitrator panel, while most traditional arbitrations before FINRA are heard by a three person panel.

The biggest difference between the Simplified and traditional arbitration is that a party filing a Simplified Arbitration has the option of having the issue decided without a final hearing, and the significant costs associated therewith.

Some of the costs avoided by not conducting a final hearing include, but are not limited to: no live witness preparation, no travel, no live expert witness testimony or travel, no preparation of exhibits for the hearing and the significant expenses associated with preparation of same, reduced attorneys’ fees (no appearances at final hearing), more limited motion practice, and no required discovery obligations. Each of these differences should greatly reduce the cost of a simplified arbitration when compared to traditional arbitration.

Instead of final hearing where witnesses are questioned and evidence submitted to the Panel, a simplified arbitration is decided based entirely on final written submissions submitted by the parties. The final submission is comprised of the parties’ arguments in favor of their positions. Parties also include copies of documents referenced in the written submission, as well as any affidavits that have been prepared by individuals with knowledge of the case, in lieu live testimony.

While these final written submissions require significant preparation and are substantial, the costs associated with preparing a final submission are insignificant when compared to the costs of preparing for, and participating at, hearings in a traditional arbitration.

Another major difference in Simplified Arbitration is the discovery process (the exchange of documents and information relevant to the matter). In a traditional arbitration, documents identified within the FINRA Discovery Guide are presumptively discoverable. Within 60 days of the date the last answer is due, the parties are required to produce the documents referenced in the FINRA Discovery Guide or otherwise object to their production. The FINRA Discovery Guide is not used in Simplified Arbitrations.

In traditional arbitrations, parties are allowed to make additional discovery requests outside of the FINRA Discovery Guide. These requests seek the production of documents and information that are relevant to the claims, but not covered by the FINRA Discovery Guide.

Parties to Simplified Arbitration are also allowed to make discovery requests. However, the time limits related to discovery are altered in a Simplified Arbitration. In a traditional arbitration, the parties conduct a prehearing conference with the Arbitrators, where a schedule is created. Included in this schedule is a deadline by which parties must file any additional discovery requests outside of the FINRA Discovery Guide. Often this date is months in the future and allows the parties ample time to prepare for discovery, both as the requesting and producing party.

No prehearing conference is held in a Simplified Arbitration, unless the party initiating the arbitration requests that an in person hearing be held. Instead, all discovery requests must be made within 30 days of the date the last answer is due in a simplified arbitration, greatly decreasing the time that parties have to prepare their discovery requests.

While the breath of discovery in a Simplified Arbitration is not limited by FINRA Rules, arbitrators hearing disputes over discovery requests in a Simplified Arbitration are likely to limit the parties in discovery in an effort to streamline the process. As a result, parties should focus on preparing well-crafted discovery requests that are limited in their breath and ambiguity.

Also, the time for responding to discovery requests in a Simplified Arbitration is drastically different. Parties in a traditional arbitration have 60 days from the date they receive a parties discovery requests to provide responses and objections to same, unless otherwise ordered by the Panel. In a Simplified Arbitration, the parties have 10 days from that date they receive another parties’ discovery requests to provide responses and objections. As a result, if you are involved in a Simplified Arbitration, it is advisable to have all documents and information relevant to the dispute ready for production as soon as possible. It is advisable that your attorney be provided with these documents prior to preparation of the complaint, if you are the Claimant, and answer, if you are a Respondent.

While there are significant differences in the process, the end result is the same. After weighing the submissions by the parties, a Panel presiding over a simplified arbitration reviews the parties’ written submissions and the evidence, and issues an enforceable award.
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If you are considering initiating a FINRA Arbitration under the simplified arbitration rule, or have been named as a Respondent in a simplified arbitration, contact Sallah Astarita & Cox, LLC at (973) 559-5566 and we will be happy to address your questions or concerns regarding the process.

Can Claims Regarding False Criminal Report be Forced to FINRA Arbitration?

A New Jersey pastor who was falsely arrested because of errors made by Wells Fargo employees may be forced to resolve legal claims against the bank in arbitration, renewing questions about banks' use of the process.

According to press reports, Jeff Edwards, the pastor of Parsippany United Methodist Church for the past 29 years, sued Wells Fargo in May to recoup costs related to his arrest, which was eventually dismissed after it became clear the bank had mistakenly identified the wrong person related to cashing fraudulent checks.

Wells Fargo is seeking to move the case out of court, arguing that the pastor is bound by an arbitration clause he signed when he opened his account with First Union 22 years ago.

As I have discussed many times, those arbitration agreements are binding, but the exact language of the agreement is going to be significant. While all of the brokerage firms use similar language in their arbitration agreements, there are some differences. It will be interesting to

In addition, according to the article, the arbitration agreement was signed 22 years ago. FINRA has specific requirements as to the terms and conditions of such agreement, and the agreement may not be enforceable if those terms and conditions are not met. Many of those conditions were imposed in recent years, as the rule was amended at least 5 times in the last 30 years.

https://www.americanbanker.com/news/wells-fargo-pushes-wrongly-accused-nj-pastor-toward-arbitration

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.

FINRA Arbitration Filings Increase in 2018

FINRA has released its latest arbitration statistics, showing  4,325 cases filed in 2018, 63% of them customer cases, 38 % industry disputes with a 15 month average time frame, start to finish.

A continued interesting statistic is the fact that only 14% of the cases were resolved after a hearing, with 67%  being resolved in mediation or by direct settlement between the parties.

Customers continue to win 40% of the cases that go to hearing. Adding in the settlements, which we can assume was a "win" for the customer since they agreed to settle the case, customers "win" nearly 75% of the time a case is filed.

Now, we can dispute what a "win" means, and the significance of the statistic, clearly customers are getting results in arbitration.

The full statistics are online at http://www.finra.org/arbitration-and-mediation/dispute-resolution-statistics

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Mark Astarita is a nationally recognized securities attorney who has represented investors, financial professionals and investment firms in over 700 securities arbitrations. To find out if he can assist you in resolving a securities dispute, call him at 212-509-6544 or email him 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.

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

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:

FINRA Panel Crushes UBS in Puerto Rico Case -

UBS is defending against hundreds of customer complaints and arbitration claims, collectively seeking $1.5 billion in damages, relating to its sale and promotion of Puerto Rican bonds and funds invested in those bonds.

Having already paid over $280 million in settlements for their disaster in Puerto Rico, UBS has just been slammed by another FINRA arbitration panel, and have been ordered to pay an investor $1.4 million which included $249,000 in attorney's fees.

Puerto Rico bonds were sold to investors in Puerto Rico and in the States as safe and low-risk, tax free, investments. However, with poor economic conditions in Puerto Rico, the bonds were actually near junk levels.

While UBS is thought to be the largest broker-dealer promoting these bonds, other bond funds contain these bonds and may be the cause of significant losses for investors.

If you lost money in Puerto Rico bonds, or in your stock or bond portfolio, those losses may be recoverable. Call 212-509-6544 to speak to an experienced securities attorney at Sallah Astarita & Cox, LLC to discuss your claims and potential recovery on a contingency basis.

Related articles

• UBS Puerto Rico Investment Problems Expand 
• Pain of Puerto Rico's Debt Crisis Is Weighing on the Little Guy, Too 
• UBS Puerto Rico Bond Debacle Continues to Unfold 
• Puerto Rico Lays Out 5-Year Plan for Restructuring Its Debts 

The Historical Basis of Securities Arbitration as an Investor Protection Mechanism by Jill Gross :: SSRN

Well researched essay on the history of arbitration by Professor Jill Gross of Pace Law School - the point of which is "[r]ather than depicting FINRA arbitration as an alternative dispute resolution process offering a level playing field, FINRA, as well as industry and investor advocates, should recall and reinforce the historical basis of securities arbitration as a mechanism to protect investors."



To learn the genesis of the process, the purpose of the arbitration requirements, and general history, take a few moments to review the essay



The Historical Basis of Securities Arbitration as an Investor Protection Mechanism by Jill Gross :: SSRN:

New Rules for Federal Court Discovery Coming!

Discovery, the process of asking for and producing documents and testimony before trial, is a huge part of the cost of litigation and arbitration. Huge. Significant. Extremely costly.

Of course, despite the New York Times article, the situation is much worse in court, where a single deposition can cost $1,500 for the transcripts, plus attorneys fees, and document discovery is lengthy and costly.

A large part of the problem is the "fishing expedition" where a party asks for documents that have little bearing on the issues, if they exist at all.

The Federal Rules of Civil Procedure are designed to put some limits on discovery, but the rules have not solved the problem. The basic rule has been in Rule 26, the relevant portion is as follows:


Scope in Generall  Unless otherwise limited by court order, the scope of discovery is as follows: Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party’s claim or defense and including the existence, description, nature, custody, condition, and location of any documents or other tangible things and the identity and location of persons who know of any discoverable matter.  For good cause, the court may order discovery of any matter relevant to the subject matter involved in the action.  Relevant information need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence.  All discovery is subject to the limitations imposed by Rule 26(b)(2)(C).

The rule will change December 1, and the new rule will be:

Scope in Generall  Unless otherwise limited by court order, the scope of discovery is as follows: Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party’s claim or defense and proportional to the needs of the case, considering the importance of the issues at stake in the action, the amount in controversy, the parties’ relative access to relevant information, the parties’ resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit. Information within this scope of discovery need not be admissible in evidence to be discoverable. — including the existence, description, nature, custody, condition, and location of any documents or other tangible things and the identity and location of persons who know of any discoverable matter.  For good cause, the court may order discovery of any matter relevant to the subject matter involved in the action.  Relevant information need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence.  All discovery is subject to the limitations imposed by Rule 26(b)(2)(C).


By making specific reference, in the rules, to proportional needs, the amount in controversy, and the burden and expense, we can hope that the will be a reduction in discovery requests which ask for any and all documents relating to every issue and potential issue in the case.

And maybe this will encourage FINRA arbitrators to stop ordering all parties to produce all documents requested. That is not a resolution of a discovery problem, that is compounding the problem.

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.