Two events have conspired to increase the number of claims filed by investors against stock and commodities brokers.
1. The October 19, 1987, stock market crash caused enormous losses, particularly to people who had invested on margin or who had sold options.
2. The U.S. Supreme Court in Sbearson/American Expres,,,, Inc. v. McMahon 482 U.S. 220 (1987) held that arbitration provisions of customers' agreements with brokerage firms are enforceable and that a lot of the client's claims must go to arbitration if the clause so provides.
On May 15,1989, the Supreme Court in RodriQuezde Ouiias v. Shearson/American ExRress 88-885, held that a customer's 1933 Securities Act claims as to an initial offering must also be arbitrated in accordance with the arbitration clause in the cus- tomer's agreement. With that, the last remaining loophole abow- ing for litigation of broker/dealer fraud cases vanished.
The American Arbitration Association and the National Asso- ciation of Securities Dealers both have offices in Kansas City which conduct securities arbitrations. The New York Stock Exchange routinely holds arbitration hearings in Wichita and St. Louis. The National Futures Association, which is a self-regula- tory organization comprised of broker/dealers of commodities and futures contracts, will hold arbitration hearings in Kansas City if requested to do so. Because claimants generally have the right to choose the hearing location, attorneys in this area can now avail themselves of these local forums. This article will provide an over-view of the substantive and procedural issues that arise in the course of securities and commodities arbitrations.
Typical Arbitration Clauses of Securities Accounts
Most brokerage f-irrns require customers to sign agreements when they open an account. These agreements usually contain an arbitration provision. The following is a typical arbitration clause:
I agree that any controversy which may arise between myself and yourself concerning any transaction or the construction, performance or breach of this or any other agreement, between myself and, yourselves, whether entered into prior to or subsequent to the date hereof, shall be submitted to be settled by arbitration in New York City, New York before and in accordance with the rules then obtaining of the New York Stock Exchange, Inc., or the National Association of Securities Dealers, Inc., or in the case of an options transaction, the exchange upon which the relevant transaction was executed. I shall have the right of election as to which of the foregoing tribunals shall conduct the arbitration.
With the two Shearson cases, the Supreme Court has put its imprimatur upon such clauses, and investors are now required to take their complaints exclusively to arbitration. Prior to the McMahon case, the investor could ____ pendent state law claims to arbitration, but no arbitration agreement would be deemed to have waived the customer's right to litigate his federal securities claims. Wilko Y. Swan, 356 U.S. 427 (1953). However, now all claims, including those seeking punitive damages and RICO claims asking for treble damages, are sent to arbitration. Shearson/American Express, Inc. Y. McNiah-21L 482 U.S. 229, 231 (1987).
Choice of
In advising a customer who has a claim against a broker/dealer, the attorney should carefully read the arbitration provision to choose the appropriate forum. Unfortunately, many such contracts do not provide that the American Arbitration Association is an appropriate forum. However, the AAA is the most favorable forum for claimants because its arbitrators are generally attorneys or accountants, and not members of the securities industry. Therefore, the AAA usually allows for more discovery and continuing oversight by the arbitration panel. The forums provided by the self-regulatory organizations such as the NASD, National Futures Association, or New York Stock Exchange, typically include at least one broker and sometimes several brokers. For this reason, those attorneys who do significant securities and commodities work for claimants favor filing claims before the AAA. Their second choice is the NASD and the NYSE is generally considered to be the most pro-industry.
"The Amex Window"
Article VIII, 9063, Section 2(c) of the American Stock Ex- change Constitution provides that "the customer may elect to arbitrate before the American Arbitration Association in the City of New York, unless the customer has expressly agreed, in writing, to submit only to the arbitration procedure of the exchange." This "Amex window" allows claimants to file before the American Arbitration Association even though the arbitration clause does not expressly provide, so long as the respondent broker/dealer is a member of the American Stock Exchange. The American Arbitra- tion Association respects this provision of the American Stock Exchange Constitution and will initiate such cases on the theory that the issues raised are arbitrability questions. Therefore, they will take jurisdiction of such claims so long as tbe following factors exist:
1. The broker is a member of the American Stock Exchange.
2. The clause does not provide only for arbitration under the rules of the American Stock Exchange.
3. The customer specifically makes an election under the American Stock Exchange Constitution for AAA arbilrabon.
In the absence of a court order staying arbitration, the AAA's standard policy of proceeding will generally be followed in these cases.
In We v. B.C. Christopher, (WD.MO., Case No. 88-0636-CV-W-1) Judge Whipple required claimants to arbitrate before the NASD or NYSE, as the arbitration clause provided, rather than using the "Amex window" and filing before AAA. The AAA was not specifically listed in the arbitration clause. (April 10, 1989 Order). Now that arbitration is an exclusive remedy, the SEC is much more likely to monitor the process and may require that brokerage firms allow customers to chose the AAA. For the time being however, counsel for both parties should be aware of the "Amex window."
Typical Claims