Private causes of action exist for violations of the state and federal securities laws and for common law claims such as negligence, breach of fiduciary duty and common law fraud. These causes of action are generally available to customers in any claim against their broker or brokerage firm. Most states provide a statutory right for the recovery of interest, statutory punitive damages, costs, and reasonable attorney's fees for the violation of the state securities laws. Most of these claims may be brought in arbitration.
Nearly all brokerage firms require their customers to submit all disputes arising in connection with their securities account to binding arbitration, before a forum sponsored by a Self Regulatory Organization, such as the FINRA Regulation, Inc., These Self-Regulatory Organizations ("SROs"), as a condition of membership, require your broker and your brokerage firm to arbitrate all eligible claims involving public customers upon demand of the customer. The agreement to arbitrate is customarily found in all brokerage new account agreements, margin agreements, option agreements, and may appears on the back of most monthly customer statements. By agreeing to arbitrate all disputes between you and your broker in arbitration, you are giving up your constitutional right to a trial before a jury. However, arbitration is, generally, a quick and cost effective method of resolving disputes.
Arbitration claims will usually move to a final hearing within 12-14 months from the date of filing of your claim. Usually expensive and time-consuming depositions and interrogatories are not allowed. Securities arbitration panels are usually familiar with securities related issues, and therefore, expensive expert testimony is only required in the more complex matters. What to Expect
Arbitration begins with the filing of a Statement of Claim by the Claimant, against the other party, typically a clients broker or brokerage firm (called the Respondents). The Statement of Claim sets forth the factual and legal reasons as to why the customer thinks he or she is entitled to relief. While there are no formal pleading requirements, the Statement of Claim is the equivalent of a Complaint that would otherwise be filed in court.
The cost to file a Statement of Claim depends on the amount of the claim. Filing fees and the Hearing Session Deposit will vary, depending on the dollar amount of your claim. Remember that it is extremely difficult to determine your damages and the actual amount of your claim without a professional analysis.
Service of the initial pleading or Statement of Claim is made by FINRA on its members. Under FINRA Rules, Customers are not required to arbitrate claims against former FINRA members who have been expelled or have had their registrations revoked.
The location of a hearing is usually at the FINRA hearing location nearest to the customer at the time the customer’s account was opened or where the customer resided at the time the transactions or the events giving rise to the claims occurred.
Respondents are supposed to respond within 45 days from the service of the Statement of Claim. Answers or Responses typically contain Respondents' version of the facts, and the legal reasons why the customer is not entitled to relief, or why the claim ought to be dismissed. Sometimes, Answers or Responses may contain copies of important documents, including correspondence or e-mails, demonstrating why the facts are different than as alleged in the Statement of Claim.
After Respondents enter their appearances, the parties are provided arbitrator selection materials. Each party is provided with certain biographical information, including the educational and employment background, for each proposed arbitrator. Interests and potential conflicts are disclosed, and previous Awards decided by that arbitrator are also available for review. From these lists and summaries, parties rank, in order of preference, prospective arbitrators A Party may strike, without cause, four of the ten arbitrators listed for each position on their Panel. If the Parties do not agree on proposed arbitrators, or if the Parties strike all available arbitrators, then the FINRA will assign an available arbitrator, whom can only be removed or challenged for actual cause or a conflict of interest.
Customer cases involving claims in excess of $100,000 are typically heard by a Panel of three individual arbitrators, consisting of three public arbitrators. Public arbitrators are typically lawyers, retired judges, professional mediators, and other individuals. Industry arbitrators are individuals with a current or recent affiliation with the securities industry, and for the most part are registered representatives, retired registered representatives, branch managers, analysts, accountants, floor traders, or support personnel.
Once a Panel is appointed, a pre-hearing conference is held where the parties and the Panel scheduled final hearing dates, discovery deadlines, and other administrative matters.
FINRA has adopted a Discovery Guide setting forth those documents and information that are presumptively discoverable in customer cases. Generally, depending on the issues in any particular case, customers should preserve and be expected to produce all written communications between them and their broker, all documents relating to any other securities accounts, together with their tax returns for a period of at three years before they opened their account. Customers are also expected to provide detailed information relating to their business interests, education, and financial condition. We normally expect to produce these documents to the brokerage firm within forty-five days of the date that the answer to the claim is due or filed, whichever is earlier and we will expect the brokerage firm to do the same. This exchange should happen automatically, without arbitrator or staff intervention but frequently we must move to compel production of documents.
Among other things, brokerage firms are expected to produce all documents relating to the customer’s account, including new account forms, customer statements, confirmations, and communications between the customer and the broker. Records of complaints or disciplinary action against the broker should also be made available together with information and the brokerage firm in most cases should also produce documents relating to the brokerage firm’s supervision of the broker, the broker’s training, and the broker’s basis of compensation. In connection with the recommendation of any particular security, the broker or brokerage firm is also obligated to produce documents relating to the basis of any such recommendation, if any, along with information relating to any business relationship with the issuer.
All testimony is given at the time of a final hearing. Parties have the right to make opening statements and summarize what they intend to prove. Parties have the right to call witnesses, and may compel the attendance of nonparty witnesses by Subpoena, by Orders of the Panel, or with the assistance of a state or federal court. The parties and their witnesses present testimony under oath, and are subject to cross-examination. Documents are offered into evidence. Expert witnesses may be called upon to testify and may be cross-examined. Closing arguments are made. Typically, within 30 days, the Panel renders a written Award.
Arbitration Awards are final, binding and usually may not be appealed. A court will disturb them only in very limited circumstances involving fraud, corruption, or a manifest disregard for the law by the arbitration panel. Awards against brokers or brokerage firms must be paid within 30 days or the FINRA may suspend or revoke their licenses and registrations.
Investors entering into arbitration are not required to have attorney representation. Investors may represent themselves. However, you should be aware that brokers, advisers and investment firms will, in all likelihood, have legal representation. You may find yourself at a disadvantage by representing yourself in arbitration.