By: Dana N. Pescosolido
Claimants represented by counsel in fully contested cases heard on the merits that “went to award” in 2015 and 2016 in California and Florida won damage awards 36% more often than Claimants in New York and the Midwest.
In previous articles that we authored and that were published in the Securities Arbitration Commentator, we made the observation that in fully contested cases tried to three-member panels, where the Claimant was represented by counsel, Claimants won an award of compensatory damages about 53% of the time for 2015 and 2016 combined (182 out of 342 cases). FINRA issued more customer-case awards than that, but we focused on cases that had the following characteristics:
- They had to be retail customer cases
- They had to be fully contested on the merits through hearing, with both sides appearing
- Claimant had to be represented by counsel (we reported pro-se cases separately)
The idea was to focus only on those cases that most attorneys handle and negotiate, and to eliminate the influence of large “institutional” cases.
The next logical question to ask was: was the win rate of 53% distributed evenly throughout the U.S., or were some states or regions more “customer friendly” than others? And what about recoveries as a percentage of the compensatory claim? Did they seem to vary by state or region? In a nutshell, “win rates” varied significantly in different states. However, when Claimants did win, it didn’t matter as much where the case was heard – recovery rates diverged less than win rates.
One example: California and Florida vs. New York. In cases heard in California, for example, Claimants won in 53% of the cases. Florida had a virtually identical “win rate” of 52%. But in New York, they only won something 39% of the time. Put another way, Claimants in California and Florida enjoyed a “win rate” that was 36% higher than Claimants in cases tried to New York panels.
A word of warning. These statistics are based on small data sets, and there are only four states (and Puerto Rico) that accounted for as many as 20 awards each. We aggregated Ohio, Indiana, Illinois and Michigan to come up with 39 awards. We also aggregated Maryland, DC, Virginia and West Virginia but only got 17 awards from those states, and we aggregated the New England states, but the New England states only accounted for 12 awards. A number of states are not represented in this study because they issued no awards or only a few awards and didn’t seem a “natural” for aggregation with other states. In all, this study captured 279 of the 342 awards covered by the previous 2015 and 2016 studies, so we got most of them.
Puerto Rico “blew the roof” off the survey. Granted, Puerto Rico only had 20 awards in this study, but Claimants won something in 17 of them – a win rate of 85%. Obviously, this is a reflection of the large number of cases involving leveraged closed end funds that invested in Puerto Rican bonds, and suffered significant losses when the crisis hit in August 2013. Obviously, Claimants have been very successful in prosecuting those cases thus far, at least against the sponsors/underwriters of those funds. Whether the trend continues, and whether cases against non-sponsors will be as successful, remains to be seen. The impact of the very high win rate in Puerto Rico adds about 2% to the overall nationwide win rate cited above of 53%. Without Puerto Rico, the overall win rate for 2015 and 2016 would have been 51%.
The following table shows the “win rates” by state or region. Obviously, the fewer the awards, the less meaningful the results become.
|Number of Awards||Claimant “Wins”||“Win Rate”|
So, what do these numbers mean? With small data sets, it can be easy to read too much into the data. For example, we know that if we flip a coin a million times, you’re going to get about 500,000 heads and 500,000 tails. But if you flip it just 20 times, you could easily get 15 heads and 5 tails, or vice versa. In this study, consider that a state with just 20 awards would see its “win rate” jump by 5% with just one Claimant’s award. But when you get to the number of awards that California, New York, Florida and the Midwestern states have, the data is a bit more reliable.
The win rates in the table above raise the question: is there a reason why the 49 panels in New York awarded money to Claimants only 39% of the time, while the 60 panels in California awarded damages 53% of the time and Florida 52%? The difference between 39% and 53% is significant – it means that the California panels awarded damages 36% more often the New York panels (53/39 = 1.3589). Is it possible, or likely, that the next 60 panels in California are going to “flip” and only award damages 39% of the time, or that the next 49 panels in New York are going to “flip” and award damages 53% of the time? Possible but highly unlikely. With over 100 cases (60 plus 49, plus 29 if you include Florida), the law of averages begins to take hold.
Why is it, then, that Claimants in California and Florida fared so much better than Claimants in New York? After all, arbitration cases are not “coin flips”. One case is not the same as the next, facts govern outcomes, lawyering governs outcomes, sometimes luck governs outcomes, and the arbitrators selected to decide the cases govern outcomes. One would be hard put to declare that there were meaningful differences in the overall facts in these cases (unlike the case with Puerto Rico), or that Claimants’ attorneys in New York are not as good as their colleagues in California and Florida (same as to Respondents’ counsel), or that California/Florida Claimants are “luckier” than New York Claimants. All three states are governed by pretty much the same legal standards, aren’t they? While the statutes may differ, most of these cases have the same sets of “usual” claims. Are brokers less honorable in California and Florida than in New York? Probably not.
That suggests that the “difference” might lie with the pools of arbitrators in the three states. Here, we have to be careful of stereotypes, but perhaps the arbitrator pool in New York has more conservative and cynical arbitrators than California and Florida have. Maybe California and Florida arbitrators, on average, are more liberal and consumer-oriented. Maybe the high percentage of retirees in Florida impacts the sympathies of panels. If readers of this paper would like to weigh in on why they think the differences exist, please share your thoughts with me. If I get enough responses, I will put them together and issue a follow-up paper.
It isn’t just New York that has a low win rate. Look at the Midwestern states (OH, IN, IL and MI) – where the aggregated win rate was only 41%. And if you threw Pennsylvania in with those four states, the combined win rate would be 39% — only 22 of 56 awards resulted in a damage award.
There probably aren’t enough awards in the mid-Atlantic states or New England to be meaningful. But if you aggregate the Midwestern states with New York, the aggregate win rate would be just 39% — and that’s for a total of 105 awards. If you aggregate California and Florida, a total of 89 awards, the win rate is 53%.
Conclusion on “Win Rates”. What we see here is that, in states with pro-consumer reputations, the win rates are significantly higher than in the states with more conservative reputations, based on the 194 awards issued in those states in 2015-2016. But here is the caution – look at Texas. Just 24 awards, but 14 that awarded damages. A win rate of 58%. My friends in Texas tell me that there is no a priori reason to think that arbitrators in Texas are especially liberal or generous to Claimants. Indeed Texas’ reputation is fairly conservative, or at most, neutral. And with such small numbers, a few decisions can significantly alter the win rate. For example, if just three cases in Texas had gone the other way, the win rate would be below 50%.
In negotiating or mediating cases, however, the tendencies displayed in the aggregated numbers for New York, and the Midwestern states vs. Florida and California do suggest that they should at least be taken into consideration. The overall win rate of 53% for 2015 and 2016 was not distributed evenly across the U.S.
Recoveries as a percentage of the compensatory claim did not diverge as much as the win rates, and did not necessarily follow the same pattern as the win rates — bottom line: where the case was heard didn’t matter as much once the panels decided to award damages.
For any case where the compensatory damage claim is set out in the Award, one can calculate what percentage of that claim the panel awarded in compensatory damages, and what percentage of the compensatory claim the total award represented (including attorneys’ fees, punitive damages, non-forum costs (usually expert fees) and pre-award interest). Here, arbitration panels seemed to behave more consistently. Ignore the states where fewer than 10 “wins” were recorded – they are simply too small a data set to consider.
What we found here was that the average compensatory awards expressed as a percentage of the compensatory claims fell within a fairly narrow band – from a low of 46% in Texas to a high of 55% in Florida. And the average “total recoveries” also fell within a narrow band – a low of 61% in the Midwestern states to a high of 72% in Texas.
Because of distortions caused by a few very high percentage awards (usually a large punitive damage award) we also calculated an “adjusted” total recovery percentage. In doing so, we eliminated any awards where the total recovery exceeded 200% of the compensatory claim. This presents a more normalized outcome for cases where punitive damages are really not “in the cards.” One can debate whether the “Adjusted” percentage is a better measure of average recovery rates, but we present both for consideration. On the one hand, one could argue for the raw Total Recovery rate, because it includes the propensity of panels to award sweeteners, including punitive damages. A professional golfer who scores a 13 on a hole doesn’t get to adjust his score just because it is a statistical outlier. On the other hand, one could argue that with small data sets, one huge award could substantially skew the average. An amateur golfer who scores a 13 on a hole, in recording his score for handicap purposes, must adjust his score downward to his “maximum” allowed score (it’s called Equitable Stroke Control, so think of the “Adjusted” column below as Equitable Stroke Control for arbitration awards.) Look, for example what eliminating “jumbo” awards did to the Total Recovery rates for California, New York and Texas (compare columns 3 and 4).
2015-2016 RECOVERIES AS PERCENTAGE
OF COMPENSATORY CLAIM
|State and number of damage awards||Column 1
Average Comp Award as % of Claim
Median Comp Award as % of Claim
Average Total Recovery as % of Comp Claim
“Adjusted” Total Recovery as % of Comp Claim
Median Total Recovery as % of Comp Claim
|New York (19)||47%||41%||70%||47%||43%|
|Puerto Rico (17)||51%||57%||71%||62%||64%|
|New Jersey (8)||39%||34%||39%||39%||34%|
|New England (7)||60%||57%||92%||70%||65%|
Note: The “Adjusted” Total Recovery percentages eliminate from the calculation any award with a total recovery greater than 200% of the compensatory claim, as even one large punitive award can skew the raw percentages shown in column three, especially where the data set is so small.
Although we show the medians in this table (the median award is the one where half are for more and half are for less), we caution that with so few damage awards, medians are less descriptive than averages. For example, the table shows that the median compensatory award in Texas was 43% of the amount claimed. However, the next higher award was for 53% of the claim and the next lower award was for 26% of the claim. If there were 100 awards to look at, the median might be more meaningful.
What we found most interesting about these statistics was that, although New York and the Midwestern states had significantly lower win rates, when panels did award money, they awarded roughly the same. If you look at the Average Total Recovery (Column 3), New York actually “outscored” California by a little, and its “Adjusted” Total Recovery Rate (Column 4) was almost exactly the same as California’s. While the Midwestern states lagged, they lagged only a little, and their rates were the same as Florida’s.
One final metric – the “slugging percentage”
In baseball, statisticians no longer just calculate batting averages and ERA. Now they have stats like WHIP (walks and hits per inning pitched), and “slugging percentage” (a statistic that combines batting average with power numbers – it’s the total number of bases reached on hits divided by the number of at bats). Here, one can calculate a “slugging percentage” for arbitration cases by multiplying the win rate by the recovery rates. This combines the likelihood of winning the case with the average recoveries when wins happen. One way to look at this metric is as an “actuarial” value — if you have a 50% chance of winning 90% of what you are seeking, your actuarial value is .450 (.5 x .9 = .450).
Let’s see how the concept applies to the six jurisdictions with at least 14 damage awards – we are including Puerto Rico (a special situation) only to show what can happen when specific products or practices are the target of a large of group of Claimants.
|State||Compensatory Slugging %||Total Recovery Slugging %||“Adjusted” Total Recovery Slugging %|
No one column in the above table is necessarily better than any other, and the raw Total Recovery Slugging Percentages for California, New York and Texas are higher because of very high (in excess of 200%) awards, which did not occur in Florida and the Midwestern states. New York and the Midwestern states scored lowest in all three columns, but this was driven by their low win rates. Texas had the highest slugging percentage for Total Recovery, but when you “adjust” out ultra-high awards, Florida overtook it (barely).
The bottom line conclusion is that in 2015 and 2016 combined, Florida, California and Texas had significantly more favorable results for Claimants than did New York and the Midwestern states. While the data sets were small, the differences, at least with respect to the win rates, were meaningful. Attorneys who are negotiating settlements in cases may want to factor in the reality that, while we have reported overall win rates of about 53% for those two years, the wins were not evenly distributed across the United States. For Claimants’ counsel who might have a choice of hearing venue based on the customer’s residency status, this data would suggest that California or Florida might be more “friendly” than, say, New York, although nothing is more important than the selection of the actual arbitrators in any particular case.
*Dana N. Pescosolido is a recently retired securities litigator who now offers his services as a mediator. He is available to mediate customer cases, recruiting and raiding cases, employment disputes and promissory note cases. His website is www.PescoMediation.com, and he can be reached by email at [email protected]. He welcomes comments and questions about his articles and papers.