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The Difference Between a Class Action and Securities Arbitration

Before retaining an attorney, an aggrieved investor should consider carefully whether their rights are better pursued through a class action lawsuit or securities arbitration before the Financial Industry Regulatory Authority (FINRA).

Class actions are typically filed by attorneys seeking to represent all investors who have suffered a common wrong or purchased the same investment.

A group of attorneys or a law firm will represent all parties regardless of the particular requirements of the individual investor. Often classes are represented by the investor with the largest claim at stake. Today, this usually means that state pension funds or intuitional investors have the most clout in choosing the attorneys and working on the strategy of the case. On the other hand, arbitration before FINRA is done on an individual basis with the investor having input in the selection of counsel and participating in the litigation of the case. Individual representation is also a better method of ensuring that conflicts of interest do not exist between multiple clients that a law firm represents and that individual investors receive specific counsel relative to their claims.

Class actions also create hurdles to recovery for most individual investor claimants which include depositions and motion practice which are not permitted in securities disputes decided before FINRA.

Class action representation may be attractive where individual losses are small so that one investor may not have an economic interest in pursuing the case. However, investors that have lost more than $50,000 should strongly consider pursuing their rights on an individual basis.

Often class claims are settled for cents on the dollar whereas individual securities arbitration claims are pursued to make the investor whole. Securities arbitration is a superior forum to seek damages that exceed out of pocket losses, interest and attorneys fees.

At times the aggregation of consumer claims may promote efficiency in the legal process and lower the cost of litigation. Thus for investors with claims that share a common question of fact or law and who have small losses a class action lawsuit may be a viable option. Contrariwise, a group of investors with significant losses sustained at a common brokerage firm broker may be better situated by filing a group claim with FINRA.


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