financial industry regulatory authority
broker fraud

According to a Jan. 17 piece by former investment banker William D. Cohan, the mandatory arbitration provision buried deep within the documents one must sign to open a brokerage account or get hired by a brokerage firm is a wholesale abdication of legal rights.

Author William D. Cohan

Cohan, the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is also a Bloomberg View columnist whose piece was reprinted by Investment News. He suspects that the millions of people who interact with the financial industry every day — either as customers of stockbrokers or as employees of brokerage firms — have no idea that should a dispute arise, they will never see the inside of courtroom save in a few narrow circumstances.

The buried arbitration provision that had Cohan seeing red is a nonnegotiable agreement to submit all claims to a mediation or arbitration process overseen and administered by the Financial Industry Regulatory Authority, or FINRA, the powerful self-regulatory organization that overseas broker dealers and their registered representatives.

Cohan explained that when a dispute arises, for example, over an irresponsible broker who sinks his customers’ money in a unsuitable synthetic collateralized debt obligation that then goes belly up, the customers cannot take the broker or the firm to court. This is because they have already agreed through the arbitration provision of their account contracts not to pursue any future monetary claim against Wall Street firms in the U.S. court system.

The Arbitration Process

Once disputes are funneled into this arbitration process, according to Cohan the chance for meaningful monetary recovery goes way down. He noted that from January through November 2011, a total of 4,359 cases came before FINRA’s arbitrators. Of the 629 cases among them that involved broker malfeasance, FINRA reported that about 44 percent resulted in “monetary or non-monetary recovery for the investor.”

Non-monetary recovery is often a suspension or band from association with any FINRA member, and while 44 percent may seem normal, there is no indication as to how many arbitrations actually resulted in payment of money damages.

About 13 Percent Of Damages Sought Awarded

Moreover, when money is recovered, FINRA arbitrators are stingy with the amount. Cohan quoted Jeffrey Liddle, a New York lawyer who represents plaintiffs who have claims against Wall Street firms. Liddle said when employees arbitrate a claim against their Wall Street employers they are typically awarded only about 13 percent of the damages sought. The majority of cases, Liddle said, end in no recovery for the plaintiff at all.

Because FINRA oversees some 4,460 brokerage firms and 630,000 registered representatives, if you are investing or you work in the industry, the odds are overwhelming that you’ve agreed to arbitrate.

Largest Abdication Of Legal Rights In US Today

The requirement affects millions of people. Cohan called it perhaps the largest abdication of legal rights in the United States today, and he thinks that efforts should be made to remedy the injustice.

Cohan explained how arbitration works. Once an aggrieved party has filed a complaint with FINRA, a three-member panel is generally convened somewhere among a group of selected cities to hear the facts and circumstances of the dispute.

While many tout arbitration for being speedy compared to litigation, Cohan pointed out that, unlike a trial, the arbitration hearing is not continuous. The on-again, off-again process can take longer than a year to finish.

The arbitrators are often retired Wall Street brokers, although anyone can become an arbitrator with FINRA approval, Cohan said. Arbitrators are paid, and the tab can run into thousands of dollars per case, although Cohan takes care to say he does not think the fees are unreasonable.

Arbitrators’ Judgment Is Final & Binding

This process is designed to be impartial, but courtroom rules on evidence and procedure are not allowed. In addition, the arbitrators’ judgment is final and binding, except in certain rare circumstances when a party can seek to have an arbitration panel’s decision vacated. Usually such circumstances involve some kind of wrongdoing on the part of one or more arbitrators.

Cohan quotes the FINRA website, which says: “Arbitration of disputes with broker/dealers has long been used as an alternative to the courts because it is devised as a prompt and inexpensive means of resolving complicated issues. … Most importantly, perhaps, is the fact that an arbitration award is final and binding, subject to review by a court only on a very limited basis. Parties should recognize, too, that in choosing arbitration as a means of resolving a dispute, they generally give up their right to pursue the matter through the courts.’

The problem, according to Cohan, is that most of FINRA’s almost $1 billion in annual revenue comes from fees paid by its members related to regulatory, contract and dispute-resolution matters.

FINRA Exists To Benefit Wall Street

“FINRA exists for the benefit of Wall Street and to advance Wall Street’s complex agenda, one component of which is disposing of nasty financial claims against it as painlessly as possible,” Cohan said.

Cohan ends his piece with an acknowledgement that few Americans are going to fret over the abridged rights of Wall Street bankers and traders. Nonetheless, he maintains that it is not serving justice to force the millions of people who work at banks and brokerage firms or who do business with them into a “kangaroo arbitration system” overseen by Wall Street itself.

Guiliano Law Group

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 to 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.