Arbitration of securities disputes has been in effect for many years, but it didn't take off until 1987, when the US Supreme Court decided a case called Shearson Lehman/American Express v. McMahon. At that point the court determined that arbitration was the most efficient means of resolving broker-customer disputes, and it remains so today.
Each brokerage firm which is a member of the National Association of Securities Dealers ("NASD") (along with each broker working for that firm) is required by NASD rules to arbitrate any dispute upon the request of the customer. The customer need not have signed a brokerage agreement containing a "pre-dispute arbitration agreement," although most have done so. (This is not true of a brokerage that wants to sue a customer, say for a debit balance owed on his/her account. Then the brokerage must prove that the customer has signed an arbitration agreement.)
While arbitration is similar in form and effect to a court proceeding, there are significant differences. Like a court, there are papers served back and forth between the parties, attorneys representing the parties (not required, but strongly recommended), and independent finder of fact (either one or three arbitrators), and a hearing to produce sworn testimony by each of the principal parties. (If a losing party fails to pay, in fact, the winner can have the arbitrators' decision turned into a formal judgment by a court of law.)
Unlike the courts, however, arbitration is focussed primarily on facts first, the law second. Arbitrators have wider discretion than judges as to what they will or will not consider admissible evidence. (Basically, if they think it's relevant, it's in; if they don't, it's out.) But at the same time, parties have more limited tools for obtaining evidence. There are no depositions in arbitration (except in extremely rare cases). Exchange of documents is normally limited to one list of requests from each party. All of this contributes to the other great difference: arbitration actions are normally concluded in a year or less, from initial complaint to final hearing.
Arbitration is begun by the filing of a Statement of Claim ("SOC"). Simpler than a court complaint, it recites the basic facts in controversy and the legal reasons (called "causes of action") for bringing the complaint. The SOC is accompanied by a filing fee and hearing deposit, with may range from $100 to $1,500, depending on the size of the claim. The filing fee is nonrefundable, but the hearing deposit may be returned under certain circumstances discussed below. The customer filing the SOC is called the "Claimant."
The brokerage firm (and/or the broker) file an Answer to the SOC within 45 days. The firm and the broker may or may not be represented by the same attorney. (It makes no difference to the customer if the broker still works at the firm where the dispute arose, or even if he's still the the brokerage business.) The brokerage firm and broker are called the "Respondents."
Exchange of documents and information is called "discovery." Each side is allowed to ask the other for relevant documents. A party may feel a request is inappropriate and file an objection. Objections may be resolved by the parties themselves or the arbitrators may have to hold a telephonic "pre-hearing conference" with only the attorneys present. Whatever the arbitrators decide is final.
Discovery may take several months, during which the NASD is scheduling the hearing and appointing arbitrators. Meanwhile, the parties are free to discuss settlement, if they wish. In almost every case, there are settlement discussions. It is vital to these discussions that each party understand that settlement means compromise. Negotiations are useless where one party refuses to recognize the vulnerabilities in its own case.
Settlements are normally reached between the parties themselves, but if negotiations become stalled, mediation can be used. In mediation, a neutral person (not an arbitrator appointed by the NASD) meets with both parties individually to try to bring them together in a settlement. The mediator promises confidentiality to both sides, so there is no fear of revealing too much information. By shuttling back and forth between the parties, a mediator can often persuade each to give up something. Unless otherwise agreed, a mediator makes no appraisal of a case, and his recommendations are not binding. If the parties reach a settlement, however, they can sign an agreement on the spot and the case is over. If a case is settled (with or without mediation) more than eight business days before the first scheduled hearing date (or unless a pre-hearing conference has been convened), the hearing deposit is refunded by the NASD.
Fully 80% of all cases filed are settled before hearing. Each side recognizes that there are no guarantees, and often getting something that is fair is better than risking it all. In a fair settlement, everyone wins. At hearing, only one side wins, and sometimes it is not yours.
Each party named in the arbitration (Claimant and Respondents) should attend the hearing, which will last as long as needed (typically three days). The hearing is usually held in or near the home city of the Claimant. Both Claimant and Respondents will be called upon to testify. Each is questioned first by his own attorney and then "cross-examined" by the other side. At any point in the proceedings the arbitrators may (and often do) ask questions of any witness. Testimony is given under oath.
When the hearing is done, the arbitrators meet and confer on their decision. Although only a majority vote is required, most decisions are unanimous. The arbitrators have thirty days to make their decision, which is then sent to the parties' attorneys. This decision will reveal who wins the case. If the case decided in favor of the Claimant, the arbitrators will also decide how much money to give to the Claimant. They will not give a reason for their decision.
Arbitrators are empowered to award damages as they see fit, loosely constrained by law. Mostly they give "compensatory" damages, based on the amount actually lost by the Claimant. The amount may be anything up to and including the full amount requested, although normally it is somewhat less. Arbitrators may also award interest, attorneys' fees, or "punitive" damages, but each of these is rare.
Appeals from an arbitration award are rare, and even more rarely granted. The grounds for an appeal are very narrow. To all intents and purposes, the arbitrators' decision is final.
Law Offices of Steve Buchwalter
(800) 678-8185