NEW YORK (Dow Jones)–When investor Chuck Highbaugh had a dispute with his broker, it took the efforts of a mediator to literally bring him back to the table.
When Highbaugh accused his broker of placing him in unsuitable investments, they agreed to meet at a mediator’s home in Beverly Hills. At an impasse, Highbaugh followed his lawyer out of the home, packing boxes of documents into a car and climbing in to leave.
The mediator came out to the car, saying: “‘Let’s go back and give this another try,'” Highbaugh recalled. He reached a settlement later that day.
Mediation of brokerage industry disputes appears to be an increasingly popular alternative to arbitration, which customers and brokerage industry employees must use to resolve disputes with the industry, instead of suing in court.
Mandatory arbitration remains under scrutiny by investors’ attorneys and members of Congress who argue that investors and employees should have a choice between arbitration and the courts.
Mediation can provide a safe alternative to arbitration: after all, the parties can walk out if they don’t like the outcome and continue to arbitration. But if the case returns to arbitration, mediation may be no more than an added step, and one in which the parties may have disclosed their legal strategies.
The Financial Industry Regulatory Authority dispute resolution numbers actually show a drop-off in settlements achieved via mediation, but the numbers might not tell the full story: Some lawyers on both sides say they often bypass the FINRA process and go straight to mediators they respect. FINRA counts those instances as “direct settlement by parties,” a category that has grown to more than half of all closed cases from 36% in 2003.
For example, UBS AG (UBS) offers to pay for mediation when employees have disputes with the firm, as long as the employee chooses a mediator from an agreed-upon forum, which doesn’t have to be FINRA.
Arbitration can take a long time: Year-to-date through August, it took an average of 13.3 months for an arbitration claim to make its way through the system, FINRA reports.
FINRA mediation cases during that period closed in an average of just over 4 months.
“It’s faster and much less expensive than protracted litigation, and in cases where the clients and we agree to mediate, it has a fairly high likelihood of successfully resolving the issues,” said Mark Herr, a spokesman for Merrill Lynch & Co. (MER). When faced in the late 1990s with more than 900 discrimination claims from women employees, Merrill settled many of them through mediation.
To boost participation and awareness in the FINRA mediation program, the self-regulator is offering discounted fees during October, which is Mediation Settlement Month. For more information, see http://www.finra.org.
How It Works
At any point during a dispute, the parties can agree to try mediation without interrupting the arbitration process.
They must agree on a mediator. At FINRA, they receive a full list of mediators available in the area and get summaries of each person’s background, experience and prices. They can also agree to use a non-FINRA mediator.
Once the parties and the mediator pick a date – scheduling tends to go faster than it does in arbitration, which involves coordinating more people – the mediator will review documents from both sides, and may contact the parties to learn more about their cases.
On mediation day, the two parties meet. The mediator may explain the process, then the parties may tell their sides of the story before they split into different areas. The mediator typically goes back and forth between the sides, assessing the strengths and weaknesses of each party and relaying messages about and possibly suggesting settlement ideas.
About 80% of the time, the parties reach an agreement, said Ken Andrichik, senior vice president and director of mediation and business strategies at FINRA. Many settle in a day, and some continue their conversations after the mediation session and reach a settlement later. Others don’t settle, and move on to arbitration.
Pros and cons
One downside to mediation, said investors’ lawyer Steven Caruso, president of the Public Investors Arbitration Bar Association, is the potential conflict of interest for mediators who see brokerage firms often. “They want to do a fair job, but they’re going to get more business from the brokerage firm than the claimants’ attorneys,” he said.
However, lawyers on both sides say they know plenty of mediators who they and their opponents trust.
For intra-industry disputes, mediation may not be worth the tactical disadvantage of showing your hand early, said Brian Hamburger, a defense lawyer who also runs MarketCounsel, a consulting firm.
But mediation can also be a chance to test a case.
“If I have a gaping hole in my case I haven’t seen, I want to know about it” before presenting it to a hearing panel, said Phil Aidikoff, an investors’ attorney whose firm represented Highbaugh.
Another benefit to having a mediator may be bringing an investor’s expectations back to earth.
When “the customer thinks he’s going to get a gazillion dollars, that’s a lawyer who calls me” about trying mediation, said Matt Farley, a defense lawyer at Drinker Biddle & Reath. Although he’d rather try to settle without a middleman, Farley said, “a day at mediation is better than a week at hearing.”
But perhaps the biggest benefit to mediation is the degree of control the parties have, from picking the mediator to accepting or rejecting a settlement.
“It makes sense for even an adversary to say ‘Can we solve this in a less adversarial manner and can we keep control of the outcome?'” Andrichik said.
For Highbaugh and his wife, who live in Sacramento, the emotional toll of their dispute was bad enough without risking a loss in arbitration.
So when his lawyer suggested mediation, he was open to it. Highbaugh said he was happy with the mediator, who he said had a calming demeanor and listened to both sides.
Although Highbaugh and his wife had a moment of disappointment after they settled – the terms of the deal are confidential – he also felt “relief it was over,” he recalled. “We just felt grateful we did get some of our money back.”