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Law360's FINRA Arbitration Survival Guide


Just because the Financial Industry Regulatory Authority’s dispute resolution process promises to be quicker, cheaper and simpler than heading to federal court doesn’t mean it is a walk in the litigation park, experts say. Instead, the forum has its own idiosyncrasies that can sink even seasoned trial lawyers.

A forum unlike others, FINRA arbitration is the place where investors have to go to resolve grievances with brokerages and registered representatives. If they believe their account has been churned or they were sold unsuitable investments, chances are FINRA arbitration or mediation is the only way they will be able to get some relief for their losses.

The same goes for representatives who feel they were unfairly fired or denied pay, and for firms looking to claw back sign-on bonuses they paid out to financial advisers who flew the coop.

Thousands of arbitrations are handled each year via FINRA at sites around the country, as well as in Puerto Rico and London. And while it is an established process for resolving industry disputes, attorneys who are veterans of FINRA arbitration say there are challenges, from picking fact-finders to preparing for a hearing without all the tools one might have in district court.

Here, Law360 provides tips from veteran lawyers to avoid the forum’s pitfalls.

Pick Your Panel Wisely

The quality of an arbitration panel can make or break your case, attorneys say, so it’s important to pick the best one you can.

“You can be a great lawyer, have great facts, but it can all go to waste if you have a lousy panel,” said Alan Wolper.

Panels will consist of three arbitrators whenever the case involves more than $100,000 under controversy. It will be headed by a chair, who has a certain amount of experience in FINRA arbitration, and a public and a nonpublic member — unless the claimant requests an all-public panel.

Under FINRA rules, arbitrators can only be considered public if they’ve never worked in the financial sector or have taken some time out from representing investors in legal matters. Chairs of panels are always public members.

To select panels, claimants and respondents are each handed a list of 30 randomly generated candidates, divided into the categories of public, nonpublic and chair. For each spot, both sides strike four candidates and then rank the remaining six in order of preference. If it is an all-public panel, the parties work off only the list of public members. FINRA then makes a panel from the top-ranked arbitrators.

Vetting potential arbitrators is a challenge, attorneys say, because FINRA provides only bare-bones information on them. But it’s possible to research on FINRA’s website any previous cases an arbitrator were involved in and how these were decided. Services such as the Securities Arbitration Commentator also keep databases on decisions and arbitrators.

Even still, the quality of arbitrators can be pretty uneven, attorneys say, given the dearth of candidates around the country and the fact they don’t have to be lawyers or experts to serve on a panel. And both claimants and respondents are trying to knock out arbitrators who appear to be most sympathetic to their opponent, which creates another obstacle to getting the strongest panel.

“You’re left with sometimes the worst of the lot,” Wolper said.

Uncover What You Can Discover

After the panel is picked and a prehearing conference call is held, it’s time for discovery. The process is a limited one. While FINRA publishes a guide that discusses which categories of material are presumptively discoverable, there is no room for depositions or interrogatories.

“What attorneys need to do is pay more attention to written discovery,” said Mark Astarita.

Attorneys say it is particularly important to understand the rules around the brokerage business and what they say about the documentation that needs to be kept with respect to trading and other activity. Astarita says a common mistake he sees in discovery is around claims of churning, or excessive trading in an account that’s used to generate commissions for the broker.

Claimants may ask for their own account statements and calculate their turnover rate, but they may fail to examine how that compares with rates for the broker’s other clients. Asking for the broker’s production run can show whether the claimant’s trading was truly aberrational or not, Astarita said.

“People are going to fight you for it, but if you don’t ask for it, you’re not going to get it,” he said.

And if you don’t ask for it, a broker could raise the defense that he or she only dealt with active traders, or those who hop in and out of positions, which could potentially undermine the customer’s claim that his or her account was being churned for commissions.

Another important reason to know record-keeping rules of the broker-dealer business is it will help you figure out what documents are missing when discovery is produced, said Philip Aidikoff of Aidikoff Uhl & Bakhtiari.

“If you don’t know what to ask for and what should be there, you’re going to be at a disadvantage,” he said.

Prep for ‘Trial by Ambush’

Because there are no depositions and no interrogatories in FINRA arbitration, heading into a hearing can feel like a bit of a blind fight to some lawyers.

“I call FINRA ‘trial by ambush,’” said Jacob Zamansky, who represents claimants in arbitration hearings. “Documents are flying at you that you’ve never seen before.”

The lack of depositions leading into a hearing can really throw off even experienced trial lawyers, Wolper said. That’s particularly true for those who live by the adage, “Don’t ask a question you don’t know the answer to.”

“It’s an art to essentially blind cross a witness,” he said.

Wolper recalls one arbitration he went through where he faced off with a lawyer who was supposedly an ace because he was a former assistant U.S. attorney. But when the hearing got underway, the former prosecutor was completely out of his element because he hadn’t been able to depose those whom he was cross-examining, Wolper recalled.

“This guy may have been a fabulous lawyer in a courtroom, but he sucked in an arbitration,” he said.

Hearings present other challenges. Arbitration hearings are organized like normal trials, in that there is a period for opening arguments, examinations and cross-examinations. But the rules of evidence are looser, as arbitrators have it within their discretion to consider things like hearsay. And because arbitration is an equitable forum, arbitrators don’t have to follow the law strictly when ruling on matters.

Keeping an arbitration panel engaged is another matter. Wolper recalls a hearing where two out of the three arbitrators fell asleep in the middle of a presentation.

“One, you expect,” he said.

The third panelist, who was a member of the industry, gave Wolper a look that it was his problem to solve, the lawyer recalls.

“We end up dropping a set of books on the floor to wake them up,” Wolper said.

Schedule Enough Time

While it is true that four out of five arbitration claims will never go into a hearing, it’s important to schedule enough time for those that do. Astarita recommends setting aside at least a week.

Some attorneys don’t pay attention to that, and it can be a costly mistake to make. An arbitration that goes over the allotted time will be rescheduled at the convenience of everyone else, Astarita said.

Given the shortage of arbitrators, that could mean three or four or five months before a hearing gets restarted, he said. And because arbitrators will forget things, it’ll be necessary to order transcripts or tapes of the earlier session, which just creates further expense and inconvenience, he said.

“That’s one of the things that people who don’t do [arbitrations] don’t think about,” Astarita said.

Know Your Overseas Rules

While FINRA arbitration has a distinctly American feel, claims can come from overseas investors or involve matters that are also subject to the laws of a jurisdiction outside the United States. In those instances, it pays to be prepared for these distinctions in law.

Although it is not international per se, Puerto Rico is the source of a significant volume of FINRA arbitration claims, given how hard the island’s the bond crisis has hit ordinary investors. And the unique laws of the commonwealth play a big role in how these cases are resolved.

“They have a higher legal standard. By statute, brokers [in Puerto Rico] owe customers a fiduciary duty. There is no similar duty in the U.S.,” Zamansky said.

“That actually favors the claimants,” he said. “These guys owe a fiduciary duty.”

But Wolper, who represents broker-dealers, also notes that Puerto Rico’s unique tax code has encouraged retail investors to pile into the island’s municipal bond funds, which in turn can undercut investor claims that they were overconcentrated in the security.

Attorneys have to be prepared to educate an arbitration panel on these unique aspects of the law overseas, whether it is on the fundamentals of Venezuelan bonds or the operation of broker-dealer branch offices in Buenos Aires.

Another tip claimant attorneys had for overseas work was to develop strong ties with local counsel. They’re not just an excellent funnel for future case referrals; they’re also crucial for helping U.S.-based attorneys break through one fundamental barrier, Zamansky notes.

“Once you get through the language barrier, investors understand,” he said. “Investors I find, and brokers, speak the same language.”