I just read this article – admittedly authored by lawyers, Ethan Brecher and Ana Montoya, whose website provides that one of their three principal areas of practice is representing investors “who have been defrauded by their securities brokers”[1] – that advocates for a new FINRA rule designed “to limit wasteful post-arbitration appeals by brokerage firms.” And I just had to respond. Because I am soooo tired of claimant’s counsel complaining about the supposed advantages held by broker-dealers in arbitrations that result in the so-called “unlevel playing field.”
According to Mr. Brecher and Ms. Montoya,
Brokerage firms, with vast financial resources and the home court advantage at FINRA, have little to complain about when they lose an arbitration. Generally, arbitrators reach fair and equitable results and give all parties a full opportunity to be heard. Many brokerage firms, however, pursue sour grapes appeals when they lose against less financially resourced employees and customers, resulting in a man-bites-dog situation.
Based on their observations, they advocate for a new rule “that broker-dealers be required to pay liquidated damages equal to double the damages awarded in arbitration to the prevailing employee or customer if the firm loses an appeal from an adverse arbitration award.”
Where should I start?
How about the brokerage firms’ “vast financial resources.” I wonder who they had in mind when they wrote that? Granted, there are, of course, lots of big broker-dealers with lots of money. But, they are hardly the only firms that get named as respondents in customer (or industry) arbitrations. Indeed, most cases are filed against small firms, whose financial resources are anything but “vast.” And many of those firms rely on insurance coverage to pay the cost of defense, coverage that has finite limits (not to mention deductibles – sometimes very high deductibles – that alone can bankrupt a firm). Moreover, this ignores the fact that customers don’t always just sue their BD; often, they name their advisor, too. And rare is the registered rep who has “vast financial resources.” (Even when an RR is not named, if he works for an independent contractor model firm, the likelihood is that he has signed an indemnification agreement, obligating him to reimburse the BD for its “losses,” which include the firm’s self-insured retention. That can be considerable, to say the least. I have one client now whose deductible is $150,000. PER CASE!)
Ok, moving on to BDs’ supposed “home court advantage at FINRA.” Frankly, I have no idea what they are referring to, although this phrase has been used forever (but, sadly, successfully, by claimants’ counsel, who have managed over the years to gaslight FINRA into believing it). Anyone who deals with FINRA customer arbitrations knows well that as a result of changes that have been implemented over the years – at the behest of PIABA and claimant’s counsel – FINRA has bent over backwards to avoid any argument that somehow its forum favors firms over customers. Just consider, most notably, the drastic limitations imposed on pre-hearing, dispositive Motions to Dismiss, and the elimination – at the claimant’s option! – of the Industry member of the hearing panel. To suggest that there is a home court advantage for respondents is to ignore this reality.
Mr. Brecher attempts to support his argument by citing FINRA Dispute Resolution statistics that show that in cases that actually go to hearing, the hearing panel only occasionally awards the claimant money.[2] Which must mean that there is a problem with the system itself, right, that it is skewed in favor of respondents? Well, no. As I have stated time and time again, it is no surprise that respondents win the vast majority of cases that go to hearing, and that’s for the simple reason that we settle cases that we reasonably think we have some chance of losing. According to FINRA statistics, in 2020, only 13% of all cases that were closed came after a hearing (or a decision on the papers). Respondents’ counsel are clever enough not to risk taking a case with bad (or arguably bad) facts to hearing. Thus, it makes perfect sense that claimants don’t usually receive money at a hearing. This does not mean the playing field is not level.
There are other problems with the proposal. To begin, the law already provides a remedy if a lawyer files a frivolous appeal. According to Rule 38 of the Federal Rules of Appellate Procedure, “[i]f a court of appeals determines that an appeal is frivolous, it may, after a separately filed motion or notice from the court and reasonable opportunity to respond, award just damages and single or double costs to the appellee.” That is already a big enough club for any ethical lawyer to deal with. Besides, note that Mr. Brecher’s proposal doesn’t make any distinction between a “frivolous” appeal and an appeal that is merely unsuccessful. According to his article, any time an appeal fails, the respondent would owe the claimant not just “costs,” as per the Federal Rule, but double the “damages,” with no consideration of whether the appeal was frivolous. Such a powerful, preemptive procedural maneuver exists nowhere else, to my knowledge.
Also, it is sort of predictable that Mr. Brecher’s proposal is strictly a one-way street. That is, there is no reciprocal treatment suggested for when a claimant who loses at hearing files an appeal and loses there, too. Apparently, that either never happens, or, when it does, it is somehow ok, and respondents should just suck it up. I can tell you from personal experience that it does, in fact, happen. Claimants who receive a 0 from an arbitration panel sometimes decide to file a motion to vacate, and my clients are stuck defending them, no matter how spurious the arguments they contain. At a minimum, putting aside all the other issues I have with Mr. Brecher’s proposal, shouldn’t it cut both ways? Maybe have a rule that says if a losing claimant files a motion to vacate that is denied, then the claimant must pay the respondent’s legal fees, at least the fees incurred in connection with the defense of the appeal (but maybe, too, the fees incurred defending the hearing)? Fair is fair, after all.
Look, I don’t know Mr. Brecher and have never litigated with him, and I have no issue with him personally. All I am saying is that it gets old hearing complaints about how FINRA arbitration is supposedly unfair to claimants[3] when, in my experience, it is respondents who can make the much better argument. Most of the time – the vast majority of the time – FINRA arbitrations do work. Or, to the extent there is some unfairness, it impacts both sides equally. But, in short, there is absolutely no evidence that I have ever seen, statistical or anecdotal, that would lead me to conclude that the playing field tilts in respondents’ favor.
[1] With that said, I looked at every arbitration award in a case that Mr. Brecher has handled – at least those that appear on FINRA’s website – and in not one did he represent an investor. Rather, every case was on behalf of someone who worked for a BD and was either going after his/her firm for damages, or was the subject of a claim by the BD for damages. The point is: Mr. Brecher likely knows a lot about industry cases, but, perhaps, not as much about customer cases.
[2] Mr. Brecher says 40% of the time a customer gets an awrrd, but the statistics I looked at – the ones to which the hyperlink here will send you – show that in 2020, claimants only got some money in 34% of cases that went to hearing.
[3] This is what I said on this issue back in 2017, which I think sums it up pretty well: “PIABA doesn’t care about the law; it cares about the ability of its members to make panelists feel badly for claimants. That’s why most arbitrations end up being fights about ‘fairness,’ not about the application of actual statutes or regulations; in PIABA’s world, it is always unfair that a customer incurs a loss, no matter that investments inherently have risks, no matter how robust the risk disclosures may be, no matter the documents that claimant may have signed.”
