Resolving Client Disputes

Whether the case is heard in court or in arbitration, personality counts. “Likability is an important factor on both sides,” says David Robbins, a principal at Kaufmann Gildin & Robbins, a New York securities law firm.

That can also put large brokerages at a disadvantage when seated across from small, individual clients. “Brokerage firms have problems with hubris,” Robbins says. “They have issues with being overbearing, trying to litigate cases that should be arbitrated. I don’t know why civility is so hard for people; it’s not a weakness.”

Robbins does believe, however, that Finra arbitration permits too many frivolous claims.

“When, a number of years ago, Finra greatly restricted the grounds for a motion to dismiss, it ended up letting in every kind of case,” he says. “When I say frivolous, I mean that the customer’s loss was not related to any conduct of the broker or the firm.”

But Linda Riefberg, a commercial litigator at New York-based Cozen O’Connor and former chief counsel for Finra’s Department of Enforcement, says the roster of cases look weaker because stronger cases are usually already settled by the brokerages before they even get to arbitration.

“If you look at cases that settle,” Berry says, “you’ll see that almost 81% of all cases close through some way other than award, like settlements. If you add those numbers up, around 75% of all cases brought by investors end up in some kind of monetary recovery for investors.”

But when a company settles, even a frivolous case, it can create extra problems for individual reps, who might be at a disadvantage depending on their arrangements with the settling brokerage firm. “I had a client whose firm preferred to settle a case because the plaintiff was an elderly widow,” says Riefberg, who now primarily represents defendants in Finra disputes. “My client has to pay a big portion of that settlement because that was his arrangement with the firm. I think the case is very defensible, however, and now I have to defend this guy with a settled case.”

Backlog
Finra handles 99% of securities arbitrations. “Finra is significantly faster [than going to court], even though the turnaround time for resolution keeps getting pushed back,” Hyndman says. “It also depends on the state. California courts are really clogged. If I have an option to get out of California state court for arbitration, it’s pretty appealing.”

But the streamlined process purportedly offered by Finra’s arbitration is still frustratingly slow, especially in larger cases. “As cases get bigger, arbitration begins to look a lot like the litigation process,” says Christine Lazaro, director of the Securities Arbitration Clinic at St. John’s University’s School of Law. “There aren’t as many of the traditional benefits that arbitration generally offers in terms of reduced costs and timeliness. Cases are taking a fairly long time, and they’re going to be expensive.”

In 2004, Finra’s predecessor, the National Association of Securities Dealers (the NASD), had 8,201 case filings. In 2014, there were 3,822 new case filings, but the amount of time it took arbitrators to resolve a case came in at 14.2 months. In the absence of the simplified arbitration procedures used for smaller claims, that average balloons to 18.5 months. This year, however, through July, turnaround times have dropped to 14.4 months, with larger decisions taking an average of 17.3 months.

“In 2015, our turnaround times have been dropping, and we’re still faster and less expensive than going to court,” Berry says. “I don’t think there’s a court that can get cases done in that amount of time, and at the end of court cases you have endless appeals that draw out cases as well.”

Arbitrators, sometimes criticized for being unreliable and biased, are divided into two categories: non-public arbitrators, who have served in the financial industry in some capacity, and public arbitrators who have no links to the financial industry. Under current rules, claimants can choose to strike non-public arbitrators from their pool of potential panelists.