Which Claims Are Eligible For FINRA Arbitration
In September 2008, the Securities and Exchange Commission approved the Rule 12206 of the Code of Arbitration Procedure, which became effective January 23, 2009, and which specifically provides that pre-hearing Motions to Dismiss are limited to three circumstances on which to grant the motion: if the parties settled their dispute in writing; “factual impossibility,” meaning the party could not have been associated with the conduct at issue; or the existing 6-year time limit on the submission of arbitration claims.” In connection with the promulgation of the new Rule, “FINRA emphasize[d] that these exceptions do not constitute an invitation to parties to file motions to dismiss.” FINRA Dispute Resolution Party’s Reference Guide at 42 (May 21,2013).
Rule 12206(a), with respect to Eligiblity, and the Time Limitation on Submission of Claims, provides that “No claim shall be eligible for submission to arbitration under the Code where six years have elapsed from the occurrence or event giving rise to the claim. The panel will resolve any questions regarding the eligibility of a claim under this rule.”
Stockbrokers and securities broker-dealers, almost without exception, seeking to avoid arbitration contend that the operative date is the date the customer first purchased the securities at issue.
However, consistently, throughout the years when the Director of Arbitration determined eligibility under the Code, the Director, without exception, held that the “occurrence or event giving rise to the dispute, claim or controversy” is the date claimants discovered the fraud or wrongdoing, not the purchase date of claimants’ investment. For example, in a Letter Ruling dated July 26, 1991, the Director denied a Motion to Dismiss, on identical grounds that Respondents attempt to advance here, ruling that for purposes of eligibility under Rule 10304, that:
It has been determined that the purchase date is not the event occurrence that gave rise to this dispute. Also, Section 15 does not refer specifically to the purchase date as the time that the six year limitation begins to run. Therefore it is equally appropriate that the discovery by the claimant be treated as the occurrence or event giving rise to the dispute.
Thereafter, in September 1991, using the same exact language, the Director of Arbitration denied an identical Rule 10304 “eligibility” Motions to dismiss filed by Merrill Lynch, on the same grounds, finding that the investment purchase date was not the “event or occurrence” giving rise to the claim. Priv. Ltr. Rul. Jul. 26, 1991 (Sept. 17, 1991).
In October 1991, the Director of Arbitration, in two other fraud cases, denied respondents’ NASD Code Rule 10304 “eligibility” motions to dismiss and expressly held that the date claimants discovered the fraud was the date that triggered the six-year limitation period. Priv. Ltr. Rul. 91-01780 and 91-01781 (Oct. 28, 1991). The Director expressly held that:
It has been determined that the purchase date is not the event occurrence that gave rise to this dispute. Also, Section 15 does not refer specifically to the purchase date as the time that the six year limitation begins to run. Therefore it is equally appropriate that the discovery by the claimant be treated as the occurrence or event giving rise to the dispute.
Priv. Ltr. Rul. 91-01780 and 91-01781 (Id.)
Similarly, in October 1992, and perhaps more importantly, in connection with the adjudication of a Motion to Dismiss based upon eligibility, where the claimant alleged an on-going course of fraudulent conduct and concealment, the Director of Arbitration ruled:
In NASD #92-01717, the claimant’s attorney alleges fraudulent concealment by the respondents which prevented the claimant from discovering the wrongdoing until 1989. Since the allegations of continuing fraud fall within the eligibility requirements of Section 15 of the Code of Arbitration, that is within six (6) years of May 6, 1992, the date claimant executed her submission agreement in this matter, the Director has determined that this case shall proceed.
In January 1993, in another matter where a brokerage firm advanced the date of purchase as the operative date to determine eligibility under the Code, the Director of Arbitration again ruled that “the six year eligibility time period will be calculated from the date” which claimants “learned of the continuing misrepresentations and/or fraudulent inducements by respondents,” not based upon respondents’ suppositions, but based upon the date “alleged” by claimants in the Statement of Claim. Priv. Ltr. Rul. 91-02199 (Jan. 16, 1993).
In the January 16, 1993 Ruling, the Director or Arbitration explicitly ruled:
As to Section 15 of the NASD Code of Arbitration Procedure, the NASD National Arbitration Committee has provided me with discretion on a case by case basis in determining the occurrence or event giving rise to the act of dispute claim, or controversy from which the six (6) year eligibility time period will be calculated. In this matter, claimants have alleged that September 1989 was the date they learned of the continued misrepresentation and/or fraudulent inducement by the respondents. Therefore, I have determined the claim to be eligible under Section 15.
Priv. Ltr. Rul. 91-02199 (Jan. 16, 1993)(Id.).
In each of the above cases, the Director of Arbitration held that the date claimants discovered the fraud or wrongdoing is the “occurrence or event” that starts the six-year clock running, not the purchase date of claimants’ investment.
Notwithstanding that the Director of Arbitration no longer decides eligibility under the Code of Arbitration Procedure, the FINRA Dispute Resolution Arbitrator’s Guide, expressly rejects the date of purchase when determining eligibility, and provides that:
The arbitrators may find that there is a continuing occurrence or event giving rise to the dispute. For example, although a customer purchased stock 10 years ago, there are allegations of ongoing fraud starting with the purchase, but continuing to a date within six years of the date the claim was filed.
Arbitrators Reference Guide at 38 (Apr. 2013); See also, FINRA Dispute Resolution Arbitrator Training: Motions to Dismiss at 9 (Aug. 2010).
Construction of Eligibility by the Courts
As stated above, prior to the Supreme Court’s holding in Howsam v. Dean Witter Reynolds, Inc. 537 U.S. 79 (2002), eligibility was determined by the Courts. Courts have consistently held the date of purchase is not the operative date for determining eligibility under the rule.
Following the Seventh Circuit holding that the first purchase date is the date of the “occurrence or event” from which eligibility is determined in Edward D. Jones & Co. v. Sorrells, 957 F.2d 509 (7th Cir. 1992), the Seventh Circuit substantially overruled the decision in Sorrells. See, e.g., J.E. Liss & Co. v. Levin, 201 F.3d 848 (7th Cir. 2000)(Posner, J.)( “Rule 10304 does not bar a claim that arises within the six-year period merely because the securities involved in the claim were brought more than six years before the claim was filed.”).
However, even prior to Sorrells, other Circuit Courts, including the Sixth Circuit, reached the same result. Osler v. Ware, 114 F.3d 91 (6th Cir. 1997)(“[T]he occurrence or event giving rise to the act or dispute, claim or controversy’ would not be the initial investment.” “We refuse to interpret the ‘occurrence or event’ language, which does not otherwise suggest that the purchase date always triggers the running of the six-year period, in this manner”); Kidder Peabody v. Brandt, 131 F.3d 1001, 1004 (11th Cir. 1997)(“‘We decline to adopt an interpretation of [Rule 10304] that would render some claims ineligible for arbitration before they even come into existence.”).
In fact, most Courts hold that there is an exception to the six-year eligibility requirement where the wrongful conduct has been fraudulently concealed.” Dean Witter Reynolds, Inc. v. McCoy, 995 F.2d 649, 651 (6th Cir. 1993); FSC Securities Corporation v. Freel, 811 F.Supp. 439, 444 (D.Minn, 1993) aff’d 14 F.3d 1310 (8th Cir. 1994)(“Contrary to plaintiffs’ assertion, the language of section 15 [NASD Rule 10304] does not clearly indicate that the six year limitation period commences on the date of purchase; rather it measures the six-year period from ‘the occurrence or event giving rise to the act or dispute, claim or controversy.’”); See also, Goldberg v. Parker, 1995 WL 396568, *3-4 (N.Y. Sup. Ct. 1995)(“selection of the purchase date as the starting point for computing the six-year eligibility period, rather than the date of the discovery of the fraud” is “inappropriate.”).
Notably, the Goldberg Court rejected the same argument that Respondent Stoll seeks to advance here, and expressly held:
The effect of this interpretation in fraud cases is to reward the unscrupulous broker and to penalize the unsophisticated investor who does not discover the fraud for more than six years after the investment was purchased.
Goldberg v. Parker, 1995 WL 396568, *2 .
Indeed, when a claim “comes into existence” is peculiarly a question of fact inappropriately resolved by a motion to dismiss. Bohus v. Beloff, 950 F.3d 919 (3d Cir. 1991)(when a plaintiff discovers the existence of a claim, or his injury is peculiarly a question of fact); Lujan v. Mannsmann, 956 F.Supp. 1218 (E.D. Pa. 1997)(the point at which complainant should reasonably be aware of the injury is a jury question, and not appropriately determined as a matter of law); Gray v. First Winthrop Corp., 82 F.3d 877, 881 (9th Cir. 1996)(same).
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