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Securities Arbitration Is Not An Ideal World

On July 16, 2012, Stephen J. Choi, Professor of Law, New York University, Jill E. Fisch, Professor of Law, University of Pennsylvania, and A.C. Pritchard Professor of Law, University of Michigan, released their Draft Paper: THE INFLUENCE OF ARBITRATOR BACKGROUND AND REPRESENTATION ON ARBITRATION OUTCOMES.

As stated in their paper, the professors noted that the Supreme Court’s expansive reading of the FAA and its approval of alternative dispute resolution have resulted in a deferential approach to judicial review of arbitration awards. Under the Court’s interpretation of the FAA, courts are not permitted to overturn arbitration awards on the basis that the arbitrators misinterpreted or applied applicable law.

Review of Arbitration Awards is Narrow

We know this, because as one court noted, “short of trial by ordeal, or more doubtfully by a panel of monkeys”… “the review of arbitration awards is so narrow, it ought to be called no review at all.” Coincidentally, the losing lawyer for the Appellee in that case was not other than Barack H. Obama.

The Arbitrators Who Issue Decisions

In any event, as the law professors properly observed, although FINRA releases the written decisions issued after arbitration hearings, it does not disclose the details of the claims filed or background information on the arbitrators who issue these decisions. Also, FINRA arbitration rules require the arbitrators to announce only bare-bones information in their awards.

As they noted “Arbitration decisions rarely report details of the underlying claim, providing researchers with little basis for assessing case merits.”

Also not surprisingly, they expressly found that arbitrator background is correlated with arbitration outcomes. Specifically, industry experience, prior experience as a regulator, and status as a professional arbitrator are correlated with statistically significant differences in arbitration awards.

Although in approximately 90% of all cases, claimants are represented by counsel, it seems the professors sought to ameliorate their bleak findings by testing for any difference where claimant is represented by counsel. Notwithstanding that Penn and NYU, have strong ties to the financial community (Jill E. Fisch is the Perry Golkin Professor of Law, University of Pennsylvania) (Perry Golkin is a member of Kohlberg Kravis Roberts & Co., a private equity firm, and Stephen J. Choi is the Murray and Kathleen Bring Professor of Law, New York University, Murray H. Bring Senior Vice President & Counsel, on the Board of Directors of Phillip Morris), and we would never question their academic integrity, they did find that the impact of these characteristics is affected by whether the arbitrator in question serves as the panel chair and by whether the parties to the arbitration are represented by counsel.

On the other hand, an arbitrator’s connections to the industry — those same connections that may furnish expertise — may also lead to claims that the arbitrator is biased. Of particular concern is the possibility that arbitrators with industry ties will be predisposed against claimants.

Refreshingly, something us practitioners always knew without the benefit of an empirical study, “To the extent that a trend against claimants exists, it may be due to the advantage that brokerage firms have, as repeat players, in securities arbitrations” and Arbitrators new to the job may be reluctant to make large awards because it may reduce their chances for future selection by brokerage firms and their attorneys — the repeat players in securities arbitrations.

If an arbitrator wishes to appear attractive to securities firms, he or she may vote for lower awards in an effort to generate future work. This effect is potentially important in that a substantial percentage of our pool of arbitrators consists of professional arbitrators. They constitute 35% of the chairs, arguably the most influential position, and 25% of the other public arbitrators.

Also, the professors took notice that Retired chairs make up nearly a third of the sample, and over half of the arbitrators occupying the second public arbitrator position. A willingness to serve would give retired arbitrators an incentive similar to that of professional arbitrators to curry favor with brokerage firms, the repeat players in this process.

Public Investors Arbitration Bar Association Notes

In fact, as was recently noted by members of the Public Investors Arbitration Bar Association, in certain cases, instead of appointing arbitrators from a local arbitrator pool, FINRA has appointed “national” arbitrators to these cases, i.e. its repeat players, and as a result, claimants lose 400% of the time more often.

Uncovered in a Bloomberg Article

Moreover, as recently uncovered in Bloomberg article, after three arbitrators in Atlanta, Georgia, rendered a significant award for a claimant, Merrill Lynch complained to FINRA, and of course, for reasons unrelated to the award, all three arbitrators were subsequently removed from being eligible arbitrators.

While we all know that arbitrators with ties to the securities industry, retired or professional arbitrators who want to serve on panels, and not routinely be struck by the same industry players by handing our favorable customer awards, make horrible arbitrators, and that the system is corrupt, luckily, the professors, who are also lawyers, attempt to lessen these real concerns, because at least according to their study, their “most consistent finding is that representation by counsel can reduce or eliminate the effect of arbitration background on arbitration outcomes.”

Guiliano Law Group

If you have been the victim of securities fraud you should consult with an attorney. The practice of Nicholas J. Guiliano, Esq., and The Guiliano Law Group, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.