Securities Arbitration Awards: Is It Worth Asking for An Explained Decision?

Tuesday, December 30, 2014

The default in securities arbitration administered by FINRA is that the arbitrators will not explain the reasoning behind their awards.  Among other things, the award identifies the parties, provides a very general description of the claims, and contains an number, starting with zero (all relief denied) to whatever compensation the arbitrators decide to award in favor of the claimant. If the goal is to inform the parties whether they won or lost, the awards do that but not much more.

FINRA Rule 12904(g) provides that parties may require the arbitrators to write an explained decision.  An explained decision is a fact-based award stating the general reasons for the arbitrators' decision. It does not need to include legal authorities and/or damage calculations.  If the parties submit a joint request for an explained decision at least 20 days before the first scheduled hearing date, the chairperson is required to draft an explained decision and will receive an additional honorarium of $400.  

The arbitrators can always decide on their own to write an explained decision, even without such a request.  Any arbitrator may also concur, concur in part, dissent, or dissent in part from an award -- and explain why.  If an arbitrator decides to explain his or her reasons without being asked to do so, FINRA will not pay any additional honorarium.

John Duval suggests that the Rule be amended to allow either party to request an explained award and that a larger body of explained awards would promote transparency.  His view, "What is missing in FINRA Awards is transparency.  When judges instruct juries, there is transparency.  When jurors are interviewed after a court decision, there is transparency.  There should be similar transparency in FINRA Awards."  There is something to this point.  The typical arbitration award in FINRA securities arbitration is opaque: it is often impossible to know how the arbitrators reached a result, particularly how they calculated a damages number.  FINRA has recognized that explained awards can increase investor confidence in the fairness of the arbitration process.  This is true. 
It is also true that many considerations have to be factored into a decision whether to request an explained award.  A major consideration is that an explained award may provide grounds for appeal.   Ultimately, the decision whether to request an explained award is a tactical judgment that should be made by experienced counsel in consultation with the client.

Appeals from FINRA Securities Arbitration Awards: A Proposal for Reform

Monday, December 15, 2014

The arbitrators in your securities arbitration have spoken.  You have an award.  But it's not the award you wanted and, not only that, it's an award the defies common sense, is absurd, and just plain crazy.  It's an award that is the product of outright and undisclosed bias.  It's an award compromised by procedural or evidentiary defects.  The arbitrators refused to compel the production of evidence needed to defend (or prosecute) the claim.  The arbitrators excluded evidence that was not only relevant but of critical importance to establishing your position.  The bottom line is that you want to appeal the award.

Right now you don't have a right to an "appeal" as such -- you have to file a new lawsuit in state or federal court to vacate (toss-out) the arbitration award.  That's a whole new round of litigation, subject to a very exacting standard of review.  The grounds for vacating an arbitration award are narrow and arbitration awards are seldom vacated -- and they shouldn't be vacated lightly, either (but that's another story). 

Is there an alternative to filing a new lawsuit to challenge an arbitration award?  Not right now, but John Duval proposes that FINRA create and administer an in-house arbitration appeal process .  This would be much less expensive, faster, and potentially subject to a different standard of review than what now applies in court.  A FINRA process would be better suited to correcting technical errors in appointment of arbitrators, selection of arbitrators or, more generally arbitrator misbehavior prejudicial enough to compromise the integrity of the process. 

There is ample precedent for arbitration appeals.  The American Arbitration Association offers rules for arbitration appeals.  Federal administrative agencies also build into the administrative decision-making process an appellate stage, for example the Environmental Appeals Board, which handles appeals from administrative law judge decisions in environmental enforcement proceedings.

John's proposal deserves consideration and could be a useful way of giving parties to FINRA securities arbitraiton proceedings a streamlined, expedited, and cost-effective option for correcting serious arbitration errors without going to court.

Reimbursement for Unauthorized Activity by Discount Brokers: Guaranteed or Just an Empty Promise?

Friday, October 10, 2014

All the major discount broker-dealers offer some form of investor protection against unauthorized activity in customer brokerage accounts.  These guarantees protect against theft by cyber criminals and hackers, who might gain access to thousands or even millions of accounts in a single security breach.  They protect against employees of a broker-dealer who might gain access or trade in customer accounts.  These guarantees are also broad enough to protect against one-off criminals who might gain access through phishing or other online identity theft scams, and even rogue family members, such as the the ex-husband or ex-wife who might know enough personal information to gain unauthorized access.

What do these guarantees actually say and how do they compare to one another?  Let's take a look at the key language (for actual terms and conditions follow the link and check your account agreement):

TD Ameritrade -- Asset Protection Guarantee

If you lose cash or securities from your account due to unauthorized activity, we'll reimburse you for the cash or shares of securities you lost. We're promising you this protection, which adds to the provisions that already govern your account, if unauthorized activity ever occurs and we determine it was through no fault of your own.  Of course, unauthorized activity does not include actions or transactions undertaken by or at the request of you, your investment advisors or family members, or anyone else whom you have allowed access to your account or to your account information for any purpose, such as trading securities, writing checks or making withdrawals or transfers.

Fidelity -- Customer Protection Guarantee

Fidelity will reimburse your Fidelity account if we conclude that there was unauthorized activity resulting in a loss and that the activity occurred through no fault of your own. We will also need to ensure that the activity was not initiated by you (the account owner) or by someone you allowed to access your account.

E*Trade -- Complete Protection Guarantee

E*TRADE Securities will restore to your account cash and/or shares of securities equal to the amount of cash and/or shares of securities in your account at the time of any unauthorized activity. "Loss" does not include any tax consequences. Any unauthorized trades will be reversed and positions will be reinstated.

Schwab -- Security Guarantee

We want you to have the highest level of confidence when you do business with Schwab. So we offer you this simple guarantee: Schwab will cover 100% of any losses in any of your Schwab accounts due to unauthorized activity.


Any investor who suspects that his or her account has been compromised by unauthorized activity should immediately report the breach to the broker-dealer, protect the account from any further unauthorized activity, and consider involving law enforcement.  Investors should also seek broker-dealer reimbursement under any available guarantee against unauthorized activity.  There have been reports of broker-dealers honoring their investor guarantees, but there have also been FINRA arbitrations filed where broker-dealers have rejected legitimate requests by investors for reimbursement under a guarantee.  Arbitrators will (after considering the facts and circumstances) hold broker-dealers accountable for not standing behind their guarantees.  

FINRA and other regulators should consider auditing broker-dealers' guarantee programs.  How many claims are reported?  How are they investigated?  How long do investigations take (is reimbursement reasonably prompt)? How many claims are approved and, if approved, how much reimbursement is actually provided (compared against the amount sought)?  For what reasons are claims denied or only partially allowed?  Are these unauthorized activity guarantees empty promises, honored only in the breach, or are broker-dealers providing the robust level of protection they would have investors believe?  At this point no one except the broker-dealers themselves know.

Public Investor Study Finds that FINRA Arbitrator Pool Is Homogenous

Tuesday, October 7, 2014

Earlier today the Public Investors Arbitration Bar Association (PIABA) released a report raising questions about the mandatory arbitration process that virtually every retail investor in America is required to use to resolve disputes with brokerage firms.  That process is administered by the Financial Industry Regulatory Authority (FINRA), which is responsible for recruiting, vetting, training, and appointing (and removing) arbitrators from its roster of arbitrators.  An arbitrator is for all intents and purposes a private judge -- a neutral person who resolves disputes filed with FINRA.

A few key findings in the Report:
  • the recruitment of arbitrators and disclosure of arbitrator bias was not, at all, transparent or reliable;
  • the arbitrator pool is not diverse -- the PIABA analysis showed that the pool is 80% men / 20% women. The average age of the arbitrator in the public pool is 69 years old with over 12% of arbitrators being over 80 years old.
The Report has received substantial news coverage including from (among others): Reuters, Fox News, CNBC, Financial Advisor magazine,  USA Today, and the Wall Street Journal.

FINRA released a statement today defending its efforts to recruit a diverse panel of arbitrators and arguing that it has worked with many organizations, including PIABA, "to recruit the best arbitrators possible."  In defense of the age of the arbitrator pool FINRA accused PIABA of borderline "age discrimination" and wrote that "[i]t stands to reason that a good portion of those able to make [the] time commitment on an ongoing basis for the pay offered [to serve as arbitrators] are likely to be retirees."

The North American Securities Administrators Association ("NASAA") posted this comment on the PIABA Arbitration Study, “NASAA has consistently raised concerns about the mandatory predispute resolution process and the report issued by PIABA notes additional important issues related to arbitrator disclosure and transparency that merit further review. NASAA continues to support the Investor Choice Act, introduced by Rep. Keith Ellison (D-MN) and supported by 30 House members, which would provide investors an opportunity to seek resolution of their claims through the court system.”

Bar Harbor Taxi Business Owner Indicted in Multimillion Dollar Penny Stock Scheme

Friday, September 26, 2014

The Bangor Daily News reports that Joseph Dervali, owner of a Bar Harbor-based taxi company, has been indicted for his alleged involvement in a stock manipulation scheme that defrauded investors of hundreds of millions of dollars.

It is alleged that Dervali, and others, between April 2009 and May 2012, promoted penny stocks while conspiring with individuals in control of public companies to “pump-and-dump” the companies’ stock. Dervali, and others, allegedly controlled numerous penny stock websites, from which they promoted the sale of the stocks to thousands of investors.

These individuals, including Dervali, allegedly acquired public shell companies with which to issue millions of shartes to themselves, associates and family members, in order to control the supply of those shares and drive up the price of the stock. Potential investors were encouraged to purcahse shares. As demand and the price of shares rose, they allgedly "dumped" their shares, causing the stock price to plummet leaving investors with nearly worthless investements.

Dervali was recently arrested by Bar Harbor police at the request of New York City Police. He was extradicted to New York where he plead not guilty to eight counts of scheming to defraud in the first degree and four counts of violating the Martin Act.

SEC Approves FINRA Rule 2081 Regarding Prohibited Conditions Relating to Expungement of Customer Dispute Information

Friday, August 1, 2014

By notice issued Monday July 28, 2014, the SEC approved FINRA Rule 2081 (Prohibited Conditions Relating to Expungement of Customer Dispute Information) to prohibit member firms and associated persons from conditioning settlement of a dispute with a customer on, or to otherwise compensate the customer for, the customer’s agreement to consent to, or not oppose, the request to expunge such customer dispute information from the Central Registration Depository (CRD).

This is the latest step in what has been a longstanding FINRA concern about the practice of firms and associated persons conditioning settlement agreements for the purpose of obtaining expungement relief and, thereby, removing information from CRD that could be useful to investors.  In approving the rule change the SEC concluded that it is “a constructive step to help assure that the expungement of customer dispute information is an extraordinary remedy that is permitted only in the appropriate narrow circumstances contemplated by FINRA rules.”

The CRD contains a variety of licensing and registration information, including disciplinary information about registered personnel.  Information accessible by the public through FINRA’s BrokerCheck comes from the CRD system.

The rule is effective immediately.

Claimants' Perspective: What to Do When FINRA Enforcement Launches Inquiry in Response to Filing an Arbitration Claim

An investor may file a complaint before contacting an attorney.  And every now and then FINRA finds the allegations in an arbitration claim interesting and decides to ask questions and launch an investigation after a claim has been filed.  What considerations should a claimant's attorney (or claimant if representing himself or herself) have in mind when that happens?

1. The claimant may learn important information relevant to a claim by cooperating with FINRA.  Of course, respondent may pick up information too.

2. If FINRA asks questions of the respondent, then the claimant should ask to see the questions and the responses.  I have seen the broker disclose to FINRA information and documents that I had not received (and should have) in discovery.  I have also seen brokers provide such information on request or, if not, panels have ordered that brokers provide information in discovery over objection.  A claimant would be well advised to think hard about putting information in writing in response to a FINRA request.  A  respondent has little choice. but to provide written responses. 
3. Even if FINRA decides not to pursue enforcement or issues a no action letter, FINRA has taken steps to prevent respondents from exploiting that decision to their advantage at arbitraiton hearings.  I recently saw the following language at the end of a 2014 FINRA no action letter:
"It is our view that a determination by FINRA not to take action against a FINRA member or a member's associated person in connection with an examination has no evidentiary weight in any mediation, arbitration or judicial proceeding.  Further, it is inconsistent with just and equitable principles of trade for a FINRA member or a member's associated person to attempt to introduce such a determination into evidence in any of these forums."

FINRA's "Investor Complaint Program" booklet advises that a decision to close an investigation without taking discplinary action "can result from many factors unrelated to the merits of a complaint . . . ."  The same booklet states that it is "inconsistent with" the rules for a brokerage firm or its employees to even "attempt to introduce" a no action determiantion into evidence. 

4. If the claimant does not cooperate FINRA will proceed anyway and draw its own conclusions, possibly conclusions that would have differed if the claimant had been willing to cooperate.  FINRA states, "Without your cooperation we may be unable to take disciplinary action against a brokerage firm or its employees.  A complaint, by itself, without supporting evidence may not be sufficient to prove a rule violation.  That's why it is important that you be willing to speak with FINRA staff, provide documentation or supply a sworn statment of facts supporting your complaint." 
5. "X" factors.  Each case and client is unique. 
Conclusion.  An investor's decision whether to cooperate with FINRA depends on the facts and circumstances of each situation.  If an investor's purpose is recovery money or securities, a complaint to FINRA is not going to accomplish that goal -- a point FINA itself has made: "If your purpose in filing a complaint is to recover money or securities, we suggest that you also consider arbitration, mediation or the courts.  You may want to contact an attorney that specializes in resolving securities complaints to advise you." 

Maine Supreme Court Affirms Revocation of Securities Licenses

Wednesday, June 18, 2014

In North Atlantic Securities, LLC et al. v. Office of Securities, 2014 ME 67, an individual, his son and entities under his control received more than $200,000 in loans from the individual’s mother-in-law, a former client. On at least three occasions, the individual copied and pasted a copy of his mother-in-law’s signature to authorize additional borrowing. During this time, written supervisory procedures were in effect which specifically provided that a Registered Representative may not “Lend[] to or borrow[] from a client” and that forgery “. . . will lead to severe disciplinary action against the employee.”

The Securities Administrator found the individual committed unlawful practices by: (1) borrowing from a client when written supervisory procedures did not permit such loans; (2) using loan proceeds for purposes other than the intended purpose; (3) creating authorization letters that bore forged, cut-and-pasted signatures; and (4) making false statements under oath to the Office of Securities during the disciplinary proceeding. The Administrator revoked the securities licenses of the individual and two related entities.

The Maine Supreme Court affirmed, finding no bias on the part of the Administrator. It also found the penalties imposed were not excessive. Interestingly, the Court afforded little weight to the fact that the individual’s mother-in-law did not object to the conduct or seek sanctions, because he “impermissibly placed his own interests ahead of his client.” The Court found lying under oath and submitting false documents “substantial justification” for harsh sanctions.
North Atlantic Securities demonstrates that conduct by a broker-agent in contravention of written supervisory procedures will inevitably result in disciplinary action. Equally interesting is the severity of the sanctions even in the face of the victim’s sentiment. Clearly, a broker-agent’s engagement in a course of misconduct on more than one occasion, resort to forgery and deception to avoid responsibility are factors likely to result in harsh penalties.

FINRA Arbitrators: "Dubious, Asleep, Sometimes Dead?"

Monday, May 5, 2014

According to a recent Bloomberg News article FINRA arbitrators are "dubious, asleep, sometimes dead."  The article makes the case that FINRA should do more to ensure that its arbitrators are up to snuff.  And FINRA could do more.

But the article contains for the most part anecdotal information.  Little in the way of hard data shows up to support the notion that the horror stories presented in the article are common place.  To be sure such data is hard if not impossible to come by.  Still, reporting that in 1994 nearly 9 out of 10 arbitrators were white men over age 60 is stale news.  The story may be that the only real information on the demographics of FINRA arbitrators is now 20 years old -- but if that is the case the article does not make that absolutely clear.

I cast my vote in favor of arbitrator pools that are larger, more diverse, vetted more carefully, and (as FINRA has recently begun to address) afforded greater compensation.  But for those who prefer the jury system, we have a long way to go before jurors are paid adequately for their time (they are not), and more could be done to ensure diverse and well vetted jury pools as well.  As for federal judges, 70% are white men, although that has been changing.

When criticizing the FINRA arbitration process one would do well to ask, "compared to what?"

New England Securities Arbitration Hearing Locations: Where Are They and How Many Hearings Have Been Held?

Sunday, March 16, 2014

Each New England state has its own securities arbitration hearing location, although the parties can stipulate to change the location (with arbitrator approval) at their cost.  The locations in each of the New England states and the number of awards appearing on FINRA's Arbitration database online for each location are as follows:

Maine: Augusta (8)
Massachusetts: Boston (513)
New Hampshire: Manchester (17)
Vermont: Montpelier (7)
Rhode Island: Providence (18)
Connecticut: Hartford (98)

The Boston location has been in use the longest, and that biases the results but only to a point -- over 200 hearings have been held in Boston since 2006, after all of the other hearing locations in New England had gone live.  The Hartford hearing location came on line in March 2004, followed by Providence (December 2004), and Augusta, Manchester, and Montpelier (March 2005).

What you don't know can't hurt you? -- Gaps in FINRA's BrokerCheck.

Thursday, March 6, 2014

A new study hot off the presses by the Public Investors Arbitration Bar Association (PIABA) raises tough questions about gaps in the Financial Regulatory Authority's BrokerCheck tool for checking the background and credentials of stock brokers and other licensed professionals in the scurities industry.

The PIABA report can be accessed on the organization's website here. The headline on PIABA's press release, "PIABA WARNING: FINRA WITHHOLDS CRITICAL 'RED FLAG' INFORMATION IN BROKER BACKGROUND CHECK DISCLOSURES TO INVESTORS."  The call to action, "It’s Time to Harmonize FINRA and State Disclosures to Public: FINRA’s BrokerCheck Routinely Deletes Information about Bankruptcies, Tax Liens, Firings, Flunked Tests, Sales Practice Abuse Investigations, and Other “Red Flags” for Investors."

The Wall Street Journal has picked up the story here as well, pointing out that its own reporting showed that more than 1,600 brokers' records don't show personal bankruptcies and criminal charges that should be reported.  Investment News published an article covering the story this afternoon here.

There are competing arguments as to how much information ought to be disclosed and whether certain information is actually useful to investors, but I fall in the camp that believes that more information is better.  But wherever you draw the line between privacy and the public's right to know the good the bad and the ugly about investment professionals . . . PIABA reports that state regulators in many jurisdictions make public information that FINRA choses to excise from its BrokerCheck system.  This would seem to undermine any privacy rationale behind FINRA's choice to release less information on BrokerCheck.  If information is available from state regulators is there any good reason not to make that same level of information available to the public through BrokerCheck?


Maine FINRA Arbitration Hearings -- Few & Far Between

Saturday, January 25, 2014

Through the mid-2000s the hearing location for FINRA / NASD arbitrations involving Maine investors was Boston.   FINRA decided to add a hearing location in Augusta, Maine.  How well used has that hearing location been used?  Not very.  I took a look at FINRA awards searching the word "Augusta" -- here's what I found:

        1 customer dispute ($0.00)
        1 customer dispute ($1,000,000)
        1 industry dispute
        1 industry dispute
        1 stipulated award
        1 customer dispute ($0.00)

So, a total of 6 hearings, 3 customer disputes and a win-loss record of 1-2.  The one award in a customer case was $1 million.   I represented an investor with a similar dispute to the one that went to hearing and resulted in a $1 million award (against the same firm and advisor), but I filed my case in Maine Superior Court not in arbitration -- my case settled.

There have been other securities arbitrations involving Maine investors, but the parties have stipulated to move the hearing location to Portland or to Boston. 

FINRA might consider moving the default Maine hearing location to Portland.  The Augusta location does not get much use, Portland is Maine's business capital, most Maine lawyers with securities arbitration experience are clustered in Portland, there are very few FINRA arbitrators in Maine (requiring that the majority of panel members travel up from points south), and Portland is the easiest point of entry for witnesses and counsel traveling "from away."