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 - Securities Act of 1933
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1. Introduction

Nearly all brokerage account agreements contain an arbitration clause.  The arbitration clause requires brokerage account holders to file any dispute they may have with their broker in arbitration rather than in a court of law.   

Arbitrations are different from court trials in several respects.  In arbitration, the Plaintiffs are called Claimants and the Defendants are called Respondents.    Arbitration is a private forum, meaning people who are not parties to the matter cannot attend hearings.   Further, motion practice, which takes up considerable court time, is limited in arbitration.

The discovery of documents and information in arbitration is also more limited than in court.  Depositions are rare and interrogatories are replaced with simple requests for information such as the identification of people and places.

Judges and juries are replaced by Arbitrator(s).   Arbitrators are individuals who may or may not have specific knowledge of the stock market.  Arbitrator’s decisions are final and appeals are extremely limited.  Because of the finality of arbitrators' decisions and limited discovery, most arbitration matters are resolved much faster than if they were tried in court.  While there are exceptions, and depending on complexity, the entire arbitration process can last between 9 to 18 months from the date the statement of claim is filed.

Since most securities matters between Claimants and Respondents are filed with the Financial Industry Regulatory Authority (FINRA) the rest of this article will explain the FINRA arbitration process.

2. Investigation

The first step in the arbitration process is investigation by our office.  We will interview you at length concerning your matter.  You will be asked to provide certain documents that substantiate your claim such as your brokerage statements and correspondence between you and the brokerage firm.  In addition, a profit and loss analysis of your account may be needed to determine the type of trading in your account as well as the damages you may have suffered.

Upon completion of our investigation, we will make a decision as to whether it makes sense from a legal and economic perspective to proceed with your matter. 

3. Preparation of the Statement of Claim

After investigating your matter and if it makes sense to proceed, we will draft a Statement of Claim. The Statement of Claim sets forth the facts of your matter, the claims you are making and the damages you are seeking.  The Statement of Claim is filed with the arbitration forum administrating your matter along with your agreement to be bound by rules of that forum.   Typically the forum will be FINRA.

4. Respondent’s Answer or Reply to the Statement of Claim

FINRA serves the Statement of Claim on the Respondent.  Respondents are required to provide an answer or reply to the Statement of Claim within 45 days of the Statement of Claim.   The answer contains the Respondent’s facts and defenses.  Not surprisingly, the answer will almost certainly disagree with the Statement of Claim. 

5. Arbitration Panel Selection

            Shortly after the Respondent files an answer, FINRA will send a letter to both parties stating that the dispute is ready for arbitrator selection.  Accompanying FINRA’S letter will be a list containing the names of potential arbitrators. 

            For matters with damages over $25,000.00 the list will contain three sections.  Each section contains 8 possible arbitrators.  The first section of the list contains the names of public arbitrators or arbitrators not affiliated with the securities industry.  The second section contains the names of potential chairpersons who are also not affiliated with the industry.  The third section contains names of arbitrators who are affiliated with the securities industry. Each party will rank the arbitrators in each section in order of preference.  Each party also has a right to strike up to 4 names in each section.  Anyone struck by either party is not eligible to sit on the panel.  The lists are sent back to FINRA who adds the rankings from both parties.  Those arbitrators who have the highest combined ranking are selected for the panel.  If not enough arbitrators are ranked as a result of the either party striking the opposing parties ranked arbitrators, then FINRA will randomly select arbitrators to sit on the panel.  

            The arbitrator selection process will result in a panel of three arbitrators. If your matter does not settle, the panel will hear your claim against the brokerage house and a make a determination as to culpability and your entitlement to damages, if any.   

6. The Prehearing  Tele-Conference

            After the panel has been selected, a initial prehearing tele-conference will be held.  This conference is attended by the attorneys for both parties and the full arbitration panel.  During this conference the dates for future hearings, including the time and location of the final hearing, are set. The final hearing date is usually set within 6 to 12 months after the prehearing conference.  The date depends on the parties and arbitrators' availability.  The location is typically held in a city closest to where the Claimant lives or where the dispute arose.  In addition, other procedural matters specific to your case may be considered and ruled upon. Such matters may include initial discovery and or whether briefs will be filed. 

7. Discovery

            The parties may start the discovery process of exchanging documents and information after the answer is received by the Claimant.  This process is governed by the FINRA discovery guide.   Certain documents listed in the guide are deemed presumptively discoverable.  This means that a party in possession of a document listed in the guide must turn the document over to the opposing party unless that party has a good faith objection for not producing the document.  Additional requests may be made for documents not otherwise listed in the discovery guide.   Again, unless there is a good faith objection, additional documents must also be produced. 

            The party against whom an objection is made can file a motion to compel documents. The chairperson, rather than the whole panel, usually rules on such motions and other discovery related issues.

8. Mediation

            At some point during the arbitration process, the parties may attempt to settle the matter.  Sometimes this is accomplished between the attorneys for the parties and sometimes at mediation.  All offers of settlement will be communicated to you.  No offer will be accepted or rejected without your permission.

            Mediation is an informal confidential process where the parties meet face to face to hear each other’s point of view on the case.  Mediations are conducted by a Mediator.  The Mediator is trained to help parties find resolution to conflict.

            Mediations typically begin with an open session.  The mediator and the parties gather in a conference room.  During the open session, the mediator speaks first.  The mediator explains his\her experience and qualifications to be a mediator as well as any other professional and educational experience they may have.  They will remark on the mediation process generally and its applicability to your matter.

            After the mediator’s opening remarks, the attorneys for each party will have an opportunity to make opening statements.  The attorney’s statements usually describe the party’s respective positions on the case. This is your first opportunity to hear the opposing party’s position on the facts.

            After the opening remarks, the parties will separate and proceed to separate conference rooms and hold what is called closed door caucuses.  In these closed caucuses, the mediator engages in a form of shuttle diplomacy.  The mediator goes back and forth between the parties rooms listening and commenting on each side’s position.   The mediator’s comments usually point out the parities respective strong and weak points.   Since it’s a confidential process, the mediator will never disclose anything to the other side that is discussed during the closed sessions unless you direct otherwise.  

            At some point during the closed caucuses, one of the parties may make an offer of settlement to the other party.  This offer is given to the mediator.   The mediator will communicate the offer to the other side.   You are free to accept the offer, turn it down, or make a counter offer.  The offer and counter offer process can go back and forth until one side decides that they will not make any more offers to settle.  At that point the last offer  becomes “a take it or leave it” amount.  If you take it, you will be required to sign documents putting an end to your case upon payment.  If you “leave it” the case goes on as if the mediation never happened.  Regardless of whether the case settles, anything that is said at mediation is made in confidence and cannot be repeated.

9. The Twenty Day Exchange of Documents, Information and Witnesses.

            Assuming your matter hasn't settled, twenty days prior to the final hearing both parties must exchange a list of witnesses who may testify and documents that will be offered into evidence.  Usually the list of witnesses include the Claimant, the Stock Broker, the Stock Broker’s mangers, individuals who have knowledge of the facts at issue and expert witnesses if retained by any party.  Most of the documents that will be offered into evidence have already been exchanged between the parties.

10. Expert Witnesses

            If we deem it necessary we may decide to hire an expert witness.  An expert witness is a witness, who by virtue of education, training, skill, or experience, has knowledge in a particular subject beyond that of the average person, so that the panel may legally rely upon the witness's specialized opinion about the evidence or fact issue within the scope of their expertise referred to as the expert opinion. A Expert Witnesses could be a current or former stock broker, investment manager, branch manager or a compliance manager.  

            In securities arbitration an expert witness may testify to issues including, the suitability of investments, damages claimed, procedures of the brokerage firm, the supervision of the stock broker and or compliance with the rules and regulations of the securities industry.

11. The Final Hearing.

            The final hearing is the trial. Both parties put on witnesses and present their evidence.  It is conducted in a conference room large enough to accommodate all of the parties, witnesses, attorneys and arbitrators. The Claimant presents its case first and the Respondents second.  Each side makes an opening and closing statement, direct examination of witnesses and cross examination of the opposing parties’ witness.   

            Typically hearings last between 3 to 5 days depending on the complexity of the matter.   Hearings with multiple Claimants and Respondents may last several weeks and may be on non-consecutive days. 

            After all the witnesses have been heard and all the documents have been offered into evidence the panel will close the hearing, proceed to deliberate on your matter and render an award.

12. The Award

Within 30 days after the close of the final hearing, you will be notified of the Panel’s decision, normally called an award.   The award is the final document of the panel.  It may be unanimous or a majority decision.  The award sets the names and parties, the rulings the panel may have rendered during the proceedings, the amount of the award, if any, and how the costs of the proceedings are to be split.  The award is final.  Once the award is rendered the arbitrators cannot look at any additional evidence. Assuming a monetary award is made, the respondent has three choices; pay the award, appeal the award or close their doors.

13. Payment of Award

The Respondent will have 30 days to pay unless the award is appealed.  If the Respondent fails to pay the award, FINRA can suspend their license to act as a broker dealer.  Therefore if the Respondent wants to continue doing business, they will pay the award within 30 days.

14. Appeal

Appeals from arbitration awards take the form of Motions to Vacate or Motions to Modify award. The Motions are filed in either state or federal court.  Appeals by Claimant(s) and Respondent(s) .are rare, and are rarely successful.    

15. Bankruptcy

If the broker or brokerage firm enters bankruptcy, your likely hood of collecting is slim.  You will become just one of the many creditors of the firm seeking to collect a debt.   Even large broker dealers can go bankrupt.  For example, Gruntal  was a large broker dealer when it went bankrupt.  As a result of Gruntal's bankruptcy many Claimants were left holding worthless claims and awards.  This is one of the many reasons to act on your claims immediately.


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