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.

NASAA Pushes to Abolish Mandatory Arbitration

I really am not picking on them, but one more part of today's NASAA story.

The organization of state securities regulators have also raised the "mandatory arbitration is not fair" refrain again. The NASAA incoming president, Denise Voight Crawford is pushing to end mandatory arbitration in the securities industry. Since mandatory arbitration in the securities industry is a creation of the regulators, it is an interesting position for a regulator to take.

Keep in mind, it is the NASD that created mandatory arbitration in the brokerage industry, without a word of protest from the state regulators for some 30 years that brokers have been forced to arbitrate disputes with customers and their employers. The use of arbitration clauses in customer agreements followed the NASD's lead, and individual brokers, as well as customers, are forced to arbitrate their disputes with the firms and each other.

Various publications are quoting the incoming NASAA president as saying “The harmful effects of mandatory arbitration have been well-documented in numerous studies. Both houses of Congress have responded with legislation that would prohibit the use of mandatory arbitration clauses in a wide range of consumer services, including securities. No further studies are necessary.”

I am not sure what studies she is referring to. Sure, there are plenty of studies about the harmful effects of mandagory arbitration in consumer contracts and credit card contracts, but I am not aware of any study that has shown harmful effects of securities arbitration, which is a completely different and highly regulated process.

But that brings us back around to the original problem. If mandatory arbitration is so awful, why do the securities regulators continue to force brokerage firm employees to arbitrate their disputes with their customers and their employers? Is the NASAA taking the position that the FINRA rule requiring brokers and firms to arbitrate with customers and each other should be abolished?  More>>>

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

-----------

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.

The End of Mandatory Arbitration?

Every few years, some group or another starts up the "mandatory arbitration is unfair" argument, and it looks like it is that time again.

CCH Wall Street has a column today regarding Congressional interest in ending mandatory arbitration in the securities industry. I won't repeat the arguments, most of us know them by heart.

There is no doubt that arbitration is a faster and less expensive method of dispute resolution. And there should not be any doubt that faster and less expensive benefits the party with fewer resources and less experience in dispute resolution. In customer arbitrations, that would be the customer...not the brokerage firm.

Of course, there are many benefits to the brokerage firms from arbitration, but my point is that customers benefit as well.

Studies like the one prepared by Daniel Solin and Ed O'Neill (a claimant's attorney and a claimant's expert witness) do nothing to shed light on the issue of "fairness" since they ignore the fact that 70% of all securities arbitrations are resolved by the mutual agreement of the parties.

But the real issue is what is the alternative to mandatory arbitration? Arbitration is a creature of contract. Without the agreement of both sides to arbitrate, there can be no arbitration. If Congress forces the industry to abandon arbitration clauses in customer agreements, will it also force the NASD and the NYSE to abandon their requirements that firms arbitrate disputes at the request of the customer?

We can't have it both ways. Either arbitration is mandatory for all parties, or it is not. It seems to me that investor groups want it both ways. They want to arbitrate when it suits them, and they want to go to court when that suits their needs better.

That is not the law of arbitration, nor should it be. If we are going to do away with mandatory arbitration, we should do away with it completely.

Of course that leaves us with the problem of the investor with $100,000 in losses who is forced to bring a court case, and can't, because the court process is too expensive.

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

The headline comes from a well researched and well reasoned white paper on securities arbitration, produced by the Compliance and Legal Division of SIFMA, the brokerage industry's trade association.

While I would not have said it so bluntly, the comment hits the nail on the head. For years the claimant's bar and other "pro-consumer" organizations have been attempting to alter securities arbitration to the advantage of the customer, and by some measures, have been successful.

At the same time, the proponents of giving a customer a choice while denying brokers and firms the same choice, ignore the interests of the consumer, being blinded by their desire for an advantage over their adversary.

For example, in the pending legislation that I referred to in an earlier post, Congress has premised the need for legislation on a supposed problem - forcing consumers to litigate in far away cities. Obviously the sponsors of the bill have no idea what is involved in securities arbitration, for those are held in a large city closest to where the customer lives. The customer does not travel to a far away city, the broker does.

Advantage for the customer? Of course it is, and Congress admits that is an advantage to the party who does not have to travel. But what happens when we abolish arbitration? The customer travels to the city where the broker-dealer is located, the exact evil that Congress is attempting to address. Although the NASD unilaterally, and without a rule amendment, altered the law of venue, in court, venue provisions are enforced. Customer agreements contain venue provisions and choice of law provisions that typically put the hearing in the broker-dealer's home state, using the law of that state. (Before someone screams about this provision, that is true in virtually every contract ever written, from automobile leases, to softwar leases, to computer purchase agreements, to employment contracts).

Even assuming the customer agreement did not contain a venue clause, traditional considerations for venue, used by the courts for decades, will result in the trial being held in the broker-dealer's city, not the customer's home town.

There is quite a bit more food for thought in the white paper, and it was heartening to see someone take the time and effort to document what those of us practicing securities arbitration have known for decades - arbitration is less expensive (by at least $25,000 per case), faster (by at least 40%) and equally "fair" however you define the term.

Proponents of the abolishment of arbitration often cry that customers have been forced to give up their right to a trial by jury. That is an interesting thought and an emotional battle cry. Unfortunately, it is meaningless, as less than 2% of all civil cases go to a trial. Less than 2%. One should not be heard to complain that he gave up something that he had absolutely no chance of ever receiving.

The paper examines all of these issues, in a well documented and well written discussion of the arbitration process.

One additional note for those of you who believe that the industry created mandatory arbitration, another false battle cry. The government created mandatory arbitration, by forcing brokers and brokerage firms to arbitrate disputes with their customers, at the demand of the customer. That was in 1972, long before there were pre-dispute arbitration clauses in wide spread use, and over a decade before Shearson vs. McMahon.

At the same time I won't object to the abolition of mandatory arbitration, so long as the mandatory part of the concept is removed for all parties - including the firms and brokers. If customers want to spend the time, and the money, litigating their claims in court, so be it. The benefit goes to the defendants, not the claimant. The party with more money always benefits in litigation. Always.

The other benefits are numerous - small cases will never be brought, because no one will be able to afford to bring those cases (even in arbitration, claimant's attorneys are reluctant to take cases where the damage is less than $100,000).

There is also the benefit of having case law to guide decisions, the right to appeal adverse decisions, the advantage of years rather than months, to pay an award, and on and on. In fact, is was all of these advantages that caused the government to force the industry to arbitrate disputes over 30 years ago. Not that much has changed in this regard, and the advantages remain.

So, abolish mandatory arbitration - for all parties.

State Regulators Attempting to Ban Customer Arbitration

According to InvestmentNews.com, state securities regulators are seeking federal legislation that would ban investment advisers from forcing their clients to use mandatory arbitration to settle claims against them. They also are urging Congress to prod the Securities and Exchange Commission to propose regulation that would ban pre-dispute arbitration clauses in brokerage contracts or to pursue legislation that would codify that change.

This new push to end arbitration is curious for two reasons First, it completely ignores the fact that it is the SEC which created the setting for mandatory arbitration of customer disputes. In the 1970s, the SEC approved a rule by the NASD which required all brokerage firms, and all individual brokers, to arbitrate their disputes with each other, and with any customer. The SEC thereby created a system where a customer could force a firm to arbitrate, but the firm, and its employees, did not have the same right. As a reaction to that government mandate, the industry began using predispute arbitration agreements, which the United States supreme Court has ruled are valid.

The second problem with the proposal is the fact that while the state administrators are supposedly concerned about investors' rights to trials and "fair" hearings, they have completely ignored the fact that the SEC and FINRA require over 600,000 brokerage firm employees to arbitrate their disputes with customers and with their employers. I am unawre of any other industry where the government requires employees to arbitrate their disputes with their employer.

Not really a surprise though, as the NAASAA is apparently a bit out of touch. Consider this quote from the same InvestmentNews.com article, and keep in mind that the markets are hitting record highs:

In discussing the misquided attempt to ban arbitration agreements, the head of the Arkansas Securities Commission said that allowing investors flexibility in settling claims is central to increasing their confidence in the financial markets.

“Harmed investors should be able to seek relief in any forum and not be forced into an expedited arbitration that could foreclose their ability to obtain relief . . . Investors aren't going to invest if they can't sue if they're defrauded. It's as simple as that.”

Putting aside the mistaken notion that "expedited arbitration" forecloses the ability to obtain relief, one has to wonder with the market hitting record highs, which investors the spokesman thinks are not investing because they might have to arbitrate if they have a dispute.

Two additional points - lets focus here - there are millions of investors with millions of accounts. There were less than 5,000 arbitrations filed last year. The percentage of investors who are impacted by this is miniscule.

Second, the fact that arbitration is more efficient and reaches resolution in less time than a court case does not make arbitration "expedited" and certainly does not mean that investors cannot obtain relief. Arbitration panels award millions of dollars to investors every year.

Are taxpayer dollars really going to be used to enact legislation that affects a handful of people to prevent the uses of agreements that the Supreme Court has already ruled are valid and constitutional?

More...

The attorneys at my firm represent investors, brokers and firms in securities arbitrations and in securities enforcement proceedings. For a free telephon consultation regarding your securities law issue, call us at 212-509-6544 or send an email to astarita@beamlaw.com

The IAA Favors Banning Mandatory Arbitration

I am constantly amazed at the positions people take on issues when they haven't thought the entire issue through. The Investment Adviser Association, a trade association of investment advisers,  supports the Obama's administration's efforts to ban mandatory arbitration clauses in securities contracts.

That is an easy position to take when it doesn't affect you, and when it damages your competitors. Arbitration clauses are so widespread in customer agreements because the government forces broker-dealers and individual brokers to arbitrate their disputes with customers. In order to level the playing field, firms started including arbitration agreements in their customer agreements, so that they had the ability to force a customer to arbitration.

Of course, the government does not force investment advisers to arbitrate their disputes with their customers; yet.

If pre-dispute arbitration clauses are banned, there will be no impact on the members of the IAA - no one will be able to force them to arbitrate a claim, since there is no rule that requires them to do so; yet. However, banning pre-dispute arbitration clauses, without addressing the government-forced arbitration clause for brokers, creates a one way street - customers can force brokers to arbitrate, but brokers cannot force customers to arbitrate.

How is that fair, just, or equitable? Clearly it is not.

The IAA thinks it is a good idea to ban such agreements and to create a one way arbitration agreement for their competitors? I'll be here to remind them of this position when the government combines the regulations for advisers and brokers, and forces investment advisers to arbitrate their disputes, as they currently force brokers and broker-dealers to arbitrate.

If arbitration is unfair, then let's ban it. It if is unfair  then the rule should be that no one can be forced to arbitrate a dispute before it arises. Ban pre-dispute arbitration agreements, and ban agency rules which force over 650,000 employees to arbitrate their disputes with their employers and their customers.
 
The Investment News article on the IAA position is here.

General Mills Reverses Itself - No Mandatory Arbitration

Reversing a policy that was an abuse of arbitration policy. legally unenforceable and a complete public relations disaster, General Mills has changed its mind, removed its silly mandatory arbitration policy, and has gone back to its original legal terms, without mandatory arbitration.

“Because our concerns and intentions were widely misunderstood, causing concerns among our consumers, we’ve decided to change them back to what they were,” Mike Siemienas, a company spokesman, wrote in the email. “As a result, the recently updated legal terms are being removed from our websites, and we are announcing today that we have reverted back to our prior legal terms, which contain no mention of arbitration.”

For more information, General Mills Reverses Itself on Consumers’ Right to Sue - NYTimes.com

---

The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the defense of enforcement actions and insider trading trials. We represent investors, financial professionals and investment firms and brokers nationwide. For more information contact Mark Astarita at 212-509-6544 or email us.

The Next Big Thing? Mandatory Arbitration in Corporate Bylaws

While the masses complain about mandatory arbitration, Attorney Claudia Allen examines the legal and policy issues raised by arbitration bylaws, whether adopting such bylaws would be attractive to public companies, likely reaction from stockholders and opportunities for private ordering.

Since arbitration is a creature of contract, this article argues that there are opportunities for corporations to craft bylaws that take into account company-specific issues, while responding to many likely criticisms. However, the inherent bias of some stockholders and corporations against arbitration is likely to make experimentation in this area slow and difficult.

For more information - Bylaws Mandating Arbitration of Stockholder Disputes? by Claudia H Allen


---
The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the defense of enforcement actions and representation of investors, financial professionals and investment firms, nationwide. For more information call 212-509-6544 or send an email.

Court Confirms Scope FINRA Arbitration Jurisdiction

The federal appellate court in New York has rules that an issuer who used UBS' auction rate securities services can force UBS to arbitrate a dispute over those services under the mandatory arbitration provisions under FINRA's rules.

The securities industry is the only industry in the United States where its firms and employees are forced to arbitrate disputes with their customers, and between themselves, by government regulation. This decision clarifies the scope of that requirement, which only requires a firm to arbitrate disputes with "a customer."

Some commentators, including my friends at the ADRProfBlog, are calling the decision an expansion of FINRA arbitration jurisdiction. I don't agree, and do not believe there was ever a serious dispute over the definition of "customer" in the FINRA rules. As the Court pointed out, every definition of "customer" is basically one who purchases goods or services. The Isssuer in the case was clearly purchasing UBS' services in connection with the maintenance and operation of its auction rate securities auctions, and as an underwriter, was a customer.

There is a more interesting aspect to this decision however. The Issuer filed a FINRA arbitration against UBS alleging fraud in connection with the auction rate securities program organized and operated by UBS. UBS is losing arbitration claims left and right, over auction rate securities and Lehman Principal Protection Notes. UBS did not want to go to a FINRA arbitration, and filed in Court to stop the arbitration. The Federal District Court denied the request, ruling that the Issuer is a customer. UBS appealed again, to the Second Circuit, which again ruled that the Issuer was a customer. Which, as noted above, was the only answer that the Court could reach under these circumstances.

Is this a case of UBS attempting to run up its adversary's legal costs in order to achieve a result to which it would not obtain from a court? Perhaps, and in this case the adversary had the funds to fight. What happens when they engage in such conduct with an employee, or a customer? 

 

 

 

Second Circuit expands FINRA’s arbitration jurisdiction

Does Liking a Brand Void Your Right to Sue?

The New York Times has an interesting article on a new twist on mandatory arbitration. General Mills has added language to its website that claims that consumers give up their right to sue the company if they download coupons, “join” it in online communities like Facebook, enter a company-sponsored sweepstakes or contest or interact with it in a variety of other ways. Instead, anyone who has received anything that could be construed as a benefit and who then has a dispute with the company over its products will have to use informal negotiation via email or go through arbitration to seek relief, according to the new terms posted on its site.

It is hard to imagine how General Mills thought this was going to be successful, and why it decided to risk the wrath of consumers with an unenforceable arbitration "agreement." A basic principle of arbitration law is that in order to force someone to arbitrate there needs to be a valid and binding agreement to do so. While there are any number of ways to create that agreement, or for the law to find that such an agreement exists, Mrs. Jone's purchase of a box of Betty Crocker cake mix is not one of the
m.
"Liking" their Facebook page won't ring the arbitration bell either.
The ADR Professor Blog has commentary on the clause, and has the full text of the arbitration clause at their site.

When ‘Liking’ a Brand Online Voids the Right to Sue 
---
The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including securities arbitration. Mark Astarita has represented parties in over 600 securities arbitrations, has litigated motions to compel arbitrations in the state and federal courts.  For more information contact Mark Astarita at 212-509-6544 or email us.

End Mandatory Arbitration?

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 t...
-----
Coast-to-coast representation of investors and financial professionals - Securities Lawyer

FINRA Amends the Discovery Guide...Again

FINRA Dispute Resolution runs the largest arbitration forum for the resolution of securities disputes in the country. Virtually every customer-broker dispute is resolved at FINRA, which makes their rules regarding arbitration an important consideration for anyone involved in a dispute.

In 1999 FINRA adopted what it called a Discovery Guide, a series of lists of documents which were presumptively discoverable in specific classes of cases. The Discovery Guide was overhauled in 2011. FINRA has announced another Discovery Guide amendment, which will be effect for cases filed after December 2, 2013.

The Guide, which is often controversial, was an attempt to streamline the discovery process, but in doing so, it shifted the burden of proof in a discovery dispute from the party making the request, to the party receiving the request. Customers complained that their financial records had to be turned over to the other side in every case, firms complained about turning over internal policy documents, personnel files and similar documents.

The reality is that as time went on, the process did become streamlined, and while a Guide will never remove discovery disputes, many category of documents have been removed from such disputes. There is no doubt that there are some individual items in the Guide that are troublesome, but  in those instances, the parties have the ability to file and objection and make an argument to the Chair of the arbitration panel.

Last week FINRA made two new additions to the Discovery Guide - one for electronic discovery, and the other for product cases. The first should not bee too controversial, and conforms to the way these issues aer handled in practice. The second is going to create some issues, as it vastly expands the discovery obligations of broker-dealers in cases where a particular product or security is at issue - such as the Lehman Note Cases against UBS, or the Auction Rate Securities case, or any of the private placement cases of recent years.

E-discovery

The guide’s introduction states that electronic files are documents within the meaning of the guide and that arbitrators decide any disputes that arise about the form in which a party produces a document. FINRA amended the guide to provide that parties are encouraged to discuss the form in which they intend to produce documents and, whenever possible, to agree to the form of production. The provision requires parties to produce  electronic files in a “reasonably usable format.” The term reasonably usable format refers, generally, to the format in which a party ordinarily maintains a document, or to a converted  format that does not make it more difficult or burdensome for the requesting party to use  in connection with the arbitration.

The guide instructs arbitrators who are resolving contested motions about the form of production, to consider the totality of the circumstances, including, among other matters, the following three factors:

• for documents in a party’s possession or custody, whether the chosen form of production is different from the form in which a document is ordinarily maintained;
• for documents that must be obtained from a third party (because they are not in a party’s possession or custody), whether the chosen form of production is different from the form in which the third party provided it; and
• for documents converted from their original format, a party’s reasons for choosing a particular form of production; how the documents may be affected by the conversion to a new format; and whether the requesting party’s ability to use the documents is diminished by a change in the documents’ appearance, searchability, metadata or maneuverability.

Product Cases

FINRA amended the guide’s introduction to add guidance on product cases. Product cases are unique customer cases that differ from other customer cases in several ways. The amended text provides that a product case is one in which one or more of the asserted claims centers around allegations regarding the widespread mismarketing or defective development of a specific security or specific group of securities. It enumerates some of the ways that product cases are different from other customer cases, including that:

• the volume of documents tends to be much greater;
• multiple investor claimants may seek the same documents;
• the documents are not client specific; 
• the product at issue is more likely to be the subject of a regulatory investigation; 
• the cases are more likely to involve a class action with documents subject to a mandatory hold;
• the same documents may have been produced to multiple parties in other cases involving the same security or to regulators; and
• documents are more likely to relate to due diligence analyses performed by persons who did not handle the claimant’s account.

The new Discovery Guide explains that the two existing Document Production Lists may not provide all of 

the documents parties typically request in a product case relating to these issues, and emphasizes that, in a product  case, parties are not limited to the documents enumerated in the lists. 

The new Discovery Guide will create new issues and new areas of dispute within the arbitration process. Readers care cautioned to choose their arbitration counsel wisely, as securities arbitration is not the typical arbitration process. For questions about the process, or about securities arbitration in general, call our office at 212-509-6544.

Related Items:

2nd Circuit Vacates Arbitration Award for Capping Attorneys Fees

Under the Federal Age Discrimination in Employment Act, a successful plaintiff is entitled to an award of attorneys fees. When an NASD arbitration panel denied a successful claimant's request for attorneys fees, a federal judge ordered the panel to do so.

The second time around, the employer's firm argued to the arbitrators that since the plaintiff's attorney was being paid on a contingency, that the fee award should be capped at that contingency.

I attempted to make the same argument to an arbitration panel many years ago, and my research found that such an argument was not supported by the case law. The underlying concept is that the agreement between the attorney and his client has no bearing on the statutory award of reasonable fees to a prevailing party.

The federal courts in New Yorka agree, because when, on the second time around, the arbitrators capped the legal fee at the amount of the contingency, the claimant moved to vacate again. The Second Circuit hedl that although deference is given to the decisions of arbitrators, decisions which are in manifest disregard of the law cannot be sustained. According to the Second Circuit, attorneys fees are mandatory in such a manner. Further, the US Supreme Court has previously held that a contingent fee agreement between a successful plaintiff and his attorney cannot be used as a cap on a statutory award of attorneys fees. BLANCHARD v. BERGERON, 489 U.S. 87 (1989) .

The Second Circuit vacated the award.

Another interesting aspect of the case. Accordig to the Law.com article, in awarding a sum which was the rough equivalent of the contingent fee, the arbitration panel also ordered the claimant's law firm to return the fees the claimant had previously paid. There have been prior court decisions holding that an arbitration panel has no jurisdiction over the attorneys who represent parties before them (as there is no agreement to arbitrate by the attorneys, only their clients have agreed to do so), but the Second Circuit when further.

Porzig's attorney was not before the arbitration panel in any manner other than as Porzig's counsel; Porzig was not before the Panel with respect to his relationship with his attorney; and neither Porzig nor Attorney O'Donnell had agreed to arbitrate a dispute, if in fact there was one, over their fee dispute," Hall wrote for the court in Porzig v. Dresdner Kleinwort, 06 Civ. 1212.

"The Panel here was plainly without jurisdiction to order Porzig's lawyer to pay back to his client the specified contingency fee."

Interesting case, although the decision is not on line, and curiously enough, the NASD ...err, FINRA, does not have either arbitration award online.

Lawmakers Push Back on Potential SEC Mandatory Arb Clauses | ThinkAdvisor

Lawmakers Push Back on Potential SEC Mandatory Arb Clauses | ThinkAdvisor:

"Twenty-six Democratic members of the House Financial Services Committee pressed Securities and Exchange Commission Chairman Jay Clayton Monday to not reverse the commission’s longstanding policy of prohibiting public companies from including mandatory arbitration clauses in their corporate governance documents.

Reps. Carolyn Maloney, D-N.Y., and Maxine Waters, D-Calif., both members of the Subcommittee on Capital Markets and Government-Sponsored Enterprises, told Clayton in a Monday letter that Congress has repeatedly passed laws recognizing that private securities fraud class actions are “an indispensable tool with which defrauded investors can recover losses without having to rely upon government action.”

 As a matter of public policy, the lawmakers wrote, “there is a strong public interest in ensuring that shareholders have access to the courts to resolve their claims,” which includes “the ability to participate in securities class-action lawsuits.”"

---
Investors with claims against public companies need representation by experienced securities attorneys. Sallah Astarita & Cox have that experience - call today to see if they can help you with your securities law issues - 212-509-6544

SEC Issues Policy Statement Clarifying that Mandatory Arbitration Provisions Will Not Affect Effectiveness of Registration Statements

The Securities and Exchange Commission today published a policy statement to announce that decisions about whether to accelerate the effectiveness of a registration statement will not be affected by the presence of a provision requiring arbitration of…

More information at SECLaw.com Read the Full Press Release

---

Have a securities law question? Call New York Securities Lawyers at 212-509-6544.

SEC Approves New NASD Arbitration Code

The NASD announced today that its new and improved arbitration and mediation code have been approved by the NASD. The new code adds some new rules, and reoganizes the code intothree parts: the Customer Code, the Industry Code, and the Mediation Code. The organization of the code as always been a source of confusion for new entrants to the field, and the NASD hopes that maintaining separate codes eliminates confusion regarding which rules apply to which disputes. To make it easier to find specific rules, the code is now organized to follow the sequential order of a typical arbitration.

The new code also makes it mandatory that parties must produce (or formally object to producing) documents requested in the discovery process. In addition, the code codifies the ability of arbitrators to sanction parties for non-compliance with the discovery rules or orders of the panel. Collectively, these changes should significantly reduce the number of discovery disputes in NASD arbitrations involving customer disputes. The new rules also establish uniform procedures for filing, responding to and ruling on motions in NASD arbitrations.

There is also a change to arbitrator selection. In a customer arbitration, the parties will receive three randomly generated lists - a public arbitrator list, a public chair-qualified arbitrator list and a non-public arbitrator list, each containing eight names. Gone will be the practice of striking all of the names on the list - parties will be able to only strike four of the eight names on the list. The list is also now generated randomly, rather than rotationally.

The new arbitrator selection process goes into effect immediately, for any case where arbitrators have not yet been selected We predict some problems with the new procedure, specifically the ability to only strike 4 of the 8 proposed arbitrators. Claimant's attorneys are going to have a problem when 5 former inhouse counsel show up on that industry list, and the defense side will have a similar problem when 5 PIABA attorneys show up on the public arbitrator list.

The reality is that arbitrator selection is undoubtedly an overblown "controversy." Arbitrators are professionals in their "other" life, and while we all bring our own experience to the process, in the end, the decision making process should be fair. We have all had experiences with apparently bad or prejudiced arbitrators, but those are extremely rare - if they exist at all.

The new code as approved is not at the NASD web site as of today, but they promise that it will be availalbe at the site, and in hard copy for those who request it.

Judge Rakoff Questions the SEC's Overuse of Administrative Proceeding

Judge Jed Rakoff, of the Southern District of New York, is a frequent critic of the Securities and Exchange Commission. Last week he gave the keynote address at the Practicing Law Institute's Securities Regulation Conference.

Judge Rakoff shared his concerns about the increased use of administrative proceedings by the SEC, concerns that myself, and other practicing attorneys have voiced in recent months. See, SEC's Use of Administrative Hearings Under Fire,  The SEC's Use of the Rocket Docket is Challenged and At the SEC, a question of Home Court Edge.

The address, titled "Is the SEC Becoming a Law Unto Itself" starts with an explanation of how we got to this place, where an administrative agency can sue anyone, internally, before its own judges, under its own rules, without a jury, or a constitutionally appointed judge. According to Judge Rakoff, this change has come about almost entirely at the request of the S.E.C., usually by tacking the provisions authorizing such expansion onto one or another statute enacted in the wake of a financial scandal.

There are serious, and undisputed problems with the SEC administrative proceedings. First, the SEC appoints, chooses, and pays the administrative law judge who hears and decides the case. Now, there is no doubt that these officers are diligent, honest and hard working. That is not the point. The point is that for all of their honesty and hard work, they have ruled nearly 100% of the time in favor of the SEC. That is a simple fact.

Judge Rakoff makes an excellent point, that is a bit less personal for our readers, but what should be of interest to everyone. The use of these administrative hearings is hindering the development of the securities laws. This is the same problem that has been created by mandatory arbitration - there are less cases in court, less judicial decisions by judges who are appointed pursuant to our constitutional mandate, in a constitutionally acceptable, and often very public manner.

What this means is that whatever law is developed is going to be developed by SEC administrative judges, not federal court judges who are independent, and whose decisions are easily reviewed by the courts.

At Judge Rakoff points out - whatever one might say about the SEC's quasi-judicial functions, the continued use of administrative judges instead of the federal courts is not going to lead to balanced, careful and impartial interpretations, as would result of those cases were brought in federal court.
Read my article, the Rocket Docket article and Judge Rakoff's speech for the details of all that is wrong with this system.

Judge Rakoff's speech is available at https://securitiesdiary.files.wordpress.com/2014/11/rakoff-pli-speech.pdf

--- The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the defense of enforcement actions and representation of investors, financial professionals and investment firms, nationwide. For more information call 212-509-6544 or send an email.

SEC Office of the Investor Advocate Publishes Its Policy Recommendations on Mandatory Arbitration and Registered Index-Linked Annuities Research

The Office of the Investor Advocate of the Securities and Exchange Commission today published its Report on Activities for the Fiscal Year 2023 to Congress. The report highlights the work of the Office during the fiscal year. Notable highlights from the…

Read the Full Press Release

---

Have a securities law question? Call New York Securities Lawyers at 212-509-6544.

SEC Investor Advisory Committee to Examine Mandatory Arbitration Clauses in Adviser Agreements and Alternative Assets and Retail Investors at December 10 Meeting

The Securities and Exchange Commission’s Investor Advisory Committee will hold a virtual public meeting on Dec. 10, 2024, at 10 a.m. ET. The meeting will be webcast on the SEC website. The committee will host two panels: Examining the Use of…

More information at SECLaw.com Read the Full Press Release

---

Have a securities law question? Call New York Securities Lawyers at 212-509-6544.