Security claims by experienced lawyers in America


In the securities industry today, most broker/dealers require investors to sign contracts requiring mandatory arbitration in the event of wrongdoing to be submitted to the Financial Industry Regulatory Authority. FINRA is a self-regulatory organization, or SRO, that is, a non-government organization that has responsibility to regulate the securities industry Thus, the investor is forced to give up the right to trial by jury and to proceed, if at all, before a regulatory agency that is paid for and run by Wall Street. To put it simply, the fox is guarding the henhouse. This is a one-sided and fundamentally unfair system, and it is high time to bring it to an end.

The SEC should act now, while the financial industry’s laws are being overhauled, and give injured investors the right to choose between arbitration and court. If arbitration is as fair, inexpensive and quick as adherents claim, then it will remain in use. If not, it should be improved so that it is a desired option to court. Regardless, it should not be forced upon the public.

The Federal Arbitration Act (FAA), passed in 1925, was designed to permit disputants to avoid ‘the courthouse and delays of litigation’ and to place agreements to arbitrate ‘upon the same footing as other contracts.’ Thereafter, mutually agreed to arbitration agreements surged, especially between organized labor and employers and between businesses to commercial contracts.

In the securities industry, however, there was no bargaining with customers over whether to voluntarily choose arbitration over court. Rather, there were unilateral efforts by securities firms to have consumers waive their rights to go to court by having such court waivers in the fine print of their account agreements. The effects of the securities industry’s efforts were minimal up until the 1980s because stock ownership was not widespread, and the forced agreements to arbitrate usually covered only “complex investments” such as margin accounts. By 1990, with the blessing of several United States Supreme Court decisions, the voluntary submission to arbitration had become an industry mandate, leaving aggrieved customers, which now included vast numbers of the middle class with run-of-the-mill cash accounts, with no other choice than to arbitrate their claims. By 1990, investors were not only middle class, but older. Seniors became, and are, the fastest-growing segment of investing consumers. Today, seniors are also the most
vulnerable to abuse by financial advisors and to unjust and unfair outcomes in
forced arbitration.

Customer choice has been eroded in other ways as well. Today, the only
remaining SRO-sponsored forum is FINRA. Requiring arbitration before a single
forum is a dramatic change from the arbitration alternatives in place in the 1980s. Most stock exchanges and the Chicago Board of Option Exchange provided arbitration forums. Many arbitration clauses, and the rules of the American Stock Exchange, gave investors the option of avoiding arbitrating in an arbitration forum associated with the securities industry altogether by allowing arbitration before the American Arbitration Association. So while customers may
have had to arbitrate, they could still choose among various arbitration forums, including at least one that was entirely independent of the securities industry. Different forums had different rules, different policies, different administrators and, most importantly, different pools of arbitrators. These options were essential in attempting to obtain fair processes and just outcomes for

Now all these choices are effectively gone for customers. Over the last
decade, we have seen a consolidation of the American securities markets, which
culminated in the 2007 NYSE-NASD merger. Customers with pre-dispute
arbitration clauses (virtually all customers) are forced into the only game left in
town, an association run by an organization made up of securities firms. FINRA
now has a total monopoly on investor arbitration. There is no competition, and there
is no alternative. Twenty-three years ago, a defrauded customer could pursue
claims in court, or choose between numerous arbitral forums. In a relatively short
time span, America’s savers and investors have seen their ‘choices’ dwindle to one.
Research supports that investors are against forced FINRA arbitration., Most participants conclude that such arbitration is rigged against them and fails to protect their substantive rights. In a 2008 empirical study, 48 percent of claimants thought that the panel deciding their case was biased, 76 percent found arbitration less fair than a court proceeding, and 70 percent were unhappy with their outcome. In addition, over 60 percent would not arbitrate again, and 49 percent felt the process was too expensive.

A second fundamental flaw with forced FINRA arbitration is that every panel includes a securities industry representative. What’s more, FINRA selects all of the arbitrators – none of whom is required to be an investor advocate. This in-house selection process frequently appears to result in a biased panel member, or more, since arbitration panelists are reviewed and selected in subsequent arbitrations with knowledge of their past awards.

A third area of difficulty has to do with the awards often granted by arbitrators. While all available legal remedies are supposedly available in arbitration, many panel members are not lawyers, and most are not aware of the legal remedies available to investors in court. Often a panel’s damage calculations, awards of costs or fees, punitive damages, injunctive or declaratory relief bear no rational relationship to the actual losses suffered by the investor. Since any right of appeal is non-existent in all but the most egregious situations, investors often get short-changed. In addition, arbitrators are often concerned that if they give large awards or assess punitive damages, even where richly deserved, they may be blackballed by the industry and in future arbitrations. In other words, arbitrators who displease the brokerage houses may find themselves assigned to fewer cases. This adds another level of inherent bias to a process that is already weighted in favor of the industry.

An additional concern is that FINRA’s internal procedures do not keep the playing field level. Online arbitration panelist applications, online panel training, email limitations, and similar bottlenecks are unfair to investors.

The very act of transforming FINRA arbitration into a voluntary opt in process naturally will force FINRA to respond to the “marketplace” by making changes to its arbitration system that compel potential users to choose FINRA arbitration over court.

In sum, forced arbitration before an agency that is run and paid for by Wall Street unfairly protects the wrongdoer and harms the victim – and that’s you, the investor. Investors who lose their hard-earned money to fraudulent stockbrokers, bad products, and undisclosed risks should be able to pursue available remedies in court, if they so choose, rather than being forced into an alternative process that is paid for and run by financial industry insiders.

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