Pursuing a Claim

When opening a brokerage account, brokerage firms routinely require new clients to complete a New Account Form. The form requests information such as name and address, as well as financial data concerning your income, net worth, previous investment experience, and investment objectives. Contained in these forms is an arbitration agreement whereby the customer agrees that any dispute regarding the account will be submitted to arbitration, usually through one of the arbitration programs operated by the securities industry. There is heated debate as to whether these industry run arbitration programs are fair to the investor. However, clients are usually bound by these arbitration clauses, and must use one of the programs to pursue a claim against their broker or brokerage firm.

The Financial Industry Regulatory Authority (“FINRA”) was formed as a result of the merger of the regulatory divisions of the National Association of Securities Dealers and the New York Stock Exchange. FINRA provides a dispute resolution program in which aggrieved investors may pursue claims against brokers and brokerage firms. In addition to FINRA Dispute Resolution, various other stock exchanges including the American Stock Exchange and the Pacific Stock Exchange operate arbitration programs. FINRA’s Dispute Resolution forum is the mostly commonly used program, but they all operate along the same general guidelines.

Arbitration Time-Line

Phase One: Filing the Claim and Answer

Arbitration claims are begun by an aggrieved investor (“Claimant”) filing a Statement of Claim setting forth the relevant facts and legal theories why they believe they are entitled to recover their losses from their broker and/or brokerage firm. After the broker or brokerage firm that is named as a “Respondent” receives the Claim, they have 45 days to file an Answer. Extensions of time to file an Answer are frequently given, so it may take as long as 60 - 75 days before an Answer is filed.

Phase Two: Appointment of the Arbitrators

After the parties have filed their Claim and Answer, an arbitration panel is appointed.  Since the arbitrators will determine the outcome of your case, selecting good arbitrators is perhaps the most complicated, important, and controversial part of the arbitration process.

The securities arbitration forum sends to the parties the names of 45 proposed arbitrators. The parties must narrow down the 45 proposed arbitrators to three arbitrators that will decide their case. The parties are supplied with background summaries of each of the proposed arbitrators. Some arbitrators have extensive histories of deciding investment disputes whereas others have never decided a case. The parties jointly engage in a selection process to arrive at their panel of three. Having a panel comprised of three good arbitrators can significantly increase the odds of prevailing in the case. Having arbitrators that are not as good can be disastrous.

The arbitrators are the “judges” of the case. Selecting the members of an arbitration panel is probably the most important factor affecting the outcome of a case.

Selection of an arbitration panel usually takes around 30-45 days, but runs concurrently with the discovery phase, so doesn’t, in and of itself, add any significant time to the arbitration time-line.

Phase Three: Discovery

After the Claim and Answer have been filed and served the parties enter into the discovery phase. During discovery the parties exchange documents and information relevant to their case and defense. Some documents are expected to be exchanged routinely, whereas other documents and information must be specifically requested. Claimants can expect the Respondent(s) to object to providing relevant data. Frequently, a Claimant will object to providing data that the Respondent believes relevant. In either event, a party who does not receive the documents and information to which it believes it is entitled may file a Motion to Compel the other party to produce the requested data. Discovery disputes, if not resolved between the parties, become the subject of a separate, telephonic, hearing between the parties and the arbitrators.

Discovery, including discovery disputes, can easily last 180 days.

Part Four: Pre-hearing Settlement Negotiations

After the parties have received documents and information regarding the opposing party’s claim and/or defense, they are in a position to try to resolve the case without having to go to a formal hearing. Experienced securities arbitration attorneys know that if a case goes to a hearing, anything can result. Having assessed the strengths and weaknesses of the other side’s case, it's often preferable to settle a case without going to a hearing, rather than take the case to a formal hearing.

Part Five: The Hearing

Hearings are very similar to courtroom trials. The arbitrators act as judges and, in some respect, have more authority than does a judge. (There are very limited grounds upon which an arbitration award can be challenged. It is much easier to appeal a court judgment.) Claimants put on their case. Respondents put on their defense. Evidentiary objections are made by the parties, and ruled upon by the arbitrators. After the case and defense have been presented the arbitrators make a ruling. By the time arbitration cases get to hearing it has usually been 15-18 months since the Claim was first filed.

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