Arbitration

FINRA Says Securities Arbitration Claims Increased by 85% in 2008

Published on: January 28, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority says that between 2007 and 2008, the number of securities arbitration claims increased by 85%. While Investors filed 1,985 claims against brokerage firms in 2007, last year, 3,667 cases were filed.

Between November 30 and December 31, 2008, 462 securities arbitration claims were filed with FINRA. Through November 30, FINRA received 3,215 claims.

Some of the reasons why there were so many more claims last year than the year before are that the market has been so volatile and certain investment products have experienced losses. Among these are the frozen auction-rate securities market and losses from the Regions Morgan Keegan bond funds and a number of Charles Schwab YieldPlus funds.

Investors, frustrated that brokerage firms placed them in a position to experience such losses, are seeking to recover through arbitration and in court. Unfortunately, it is a challenging time for many investors to recover their losses, especially those involving defaults and bankruptcy. This is one reason why investors are filing their cases now instead of waiting to do so years later.

FINRA’s Arbitration Process
Arbitration provides parties with a way to resolve their securities industry-related disputes. This alternative to filing a securities fraud lawsuit is considered a less costly and more rapid way for investors to resolve their claims with broker-dealers.

The resolution of an arbitration case is considered final and binding. Parties who choose to resolve their case through arbitration have generally given up their right to bring the case to court.

Related Web Resources:
Charles Schwab YieldPlus funds
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Former Stanford Group Co. Financial Advisers Must Arbitrate Constructive Discharge Claims

Published on: December 29, 2008 | by Shepherd Smith Edwards & Kantas, LLP

This month, the Texas Court of Appeals concluded that two ex-Stanford Group Co financial advisers must arbitrate state labor law claims that their former employer constructively discharged them for complaining about its unethical business practices. The appeals court’s decision reverses a lower court’s ruling to not compel arbitration.

According to Chief Justice Hedges, former Stanford advisers Charles W. Rawl and D. Mark Tidwell signed U-4 registration applications that had arbitration provisions. The promissory notes they executed that were payable to Stanford also came with arbitration provisions.

While they worked for Stanford, the two men allegedly discovered that the company engaged in several unethical and illegal business practices, such as the deletion of certain electronic data in the wake of a Securities and Exchange Commission probe and the inflation of certain asset values in order to mislead potential customers. Tidwell and Rawl contend that they told management to investigate the alleged illegal activities, but their requests were ignored. The two advisers then resigned from the company because they thought they could be implicated for the alleged illegal activities.

After they left the firm, Stanford began FINRA arbitration proceedings against the two men to collect on promissory notes that allegedly were due to be paid as soon as they resigned. The former advisers responded by filing an employment discrimination lawsuit. They claim that their constructive discharge violates the Texas Labor Code because they refused to participate in Stanford’s alleged illegal acts. They also maintained that Stanford’s behavior was actionable under Sabine Pilot Services Inc. v. Houck, 687 S.W.2d 733 (Tex. 1985).

Stanford’s response was a motion to compel arbitration. The two men then said that under FINRA Rule 13201, their employment claims were excluded from arbitration.

The appeals court says that although the Texas labor code prohibits employment discrimination, the plaintiffs failed to note that their discrimination was based on any protected classes named in the statute. As a result, Judge Hedges said the trial court was in error when it did not compel arbitration.

According to Shepherd Smith Edwards & Kantas LTD LLP Cofounder and Securities Arbitration Attorney WIlliam Shepherd, “The key on this one is that registered securities representatives must go to securities arbitration and can not take employment cases to court despite language securities arbitration code concerning statutory labor claims in the Texas Labor Code. Our securities arbitration law firm often represents such persons against their employer or former employer.”

Related Web Resources:

3201. Statutory Employment Discrimination Claims, FINRA
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Former NEXT Financial Group Stockbroker’s Claim that He Was Fired for Refusing to Conceal Churning is Subject to Arbitration

Published on: December 16, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The Texas Supreme Court says that former NEXT Financial Group Inc. stockbroker Michael Clements’s claim that the brokerage firm fired him for refusing to cover up churning activity must be arbitrated. Clements was hired as a NEXT Financial regional supervisor in September 2006. Nearly a year later, the brokerage firm fired him because he allegedly failed to perform his required broker responsibilities related to an NASD audit.

Clements filed a lawsuit against the company, claiming he was terminated from his job because he refused to conceal the fact that a NEXT trader had violated federal securities laws by churning client accounts. NEXT pushed for arbitration, claiming that Clements had signed a Form U-4 when he was hired, which requires that he resolve any claims with the brokerage firm through arbitration-per the Federal Arbitration Act.

Clements has maintained that because his claim was based on at-will employment and wrongful termination, rather than a contract connected to a commercial transaction, his claim is exempt from the FAA’s arbitration requirement. He also asserted that his claim resulted from NEXT’s alleged illegal behavior, not its business dealings, and that a recent change in NASD code (following the National Association of Securities Dealers’s merger with the Financial Industry Regulatory Authority) indicated an intent to exclude disagreements involving employment matters from arbitration. Clements noted Sabine Pilot Services v. Hauck, (1 687 S.W.2d 733, 1985), a case where the Texas Supreme Court held that an employer had to pay an ex-employee damages because the worker was fired for refusing to perform an illegal act.

The Texas Supreme Court, however, upheld that the FAA was applicable in this case, NEXT could compel arbitration, and the NASD rule 13200 (a) did not exclude employment and termination-related claims. The court’s decision reverses the trial court’s ruling, which denied NEXT’s request, as did the court of appeals.

Related Web Resources:

Next Financial Group Inc.
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District Court Confirms Merrill Lynch Arbitration Award in Investor Dispute

Published on: November 12, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Merrill Lynch, Pierce, Fenner & Smith, Inc. and a number of its workers have won an arbitration dispute filed by a couple that invested in a money market mutual fund. In U.S. District Court for the Southern District of New York, Judge George Daniels confirmed the award.

Konstantinos Karetsos and Greta Rothstein began their New York Stock Exchange arbitration in February 2006. The married couple accused Merrill Lynch and several of its employees of alleged deceit, fraud, conspiracy, deceptive practices, misrepresentation, obstruction of justice, material omissions, unauthorized transactions, unsuitable investments, gross negligence, breach of fiduciary duty, and account management related to their money market fund purchase.

Arbitration proceedings took place over a six-day period. On the 4th day, the arbitration panel dismissed claims against three Merrill Lynch employees with prejudice. At the end of the proceedings, more claims against Merrill Lynch and a fourth employee were dismissed with prejudice.

The arbitration panel also found that claims against one Merrill Lynch employee were obviously erroneous and that the couple had filed claims against another employee who did not take part in the “alleged investment-related sales practice violations.”

According to the district court, the opposition that was noted in the couple’s pro se pleadings appeared to be based on many of the arguments they made in arbitration. Judge Daniels also said that the couple’s “vague and conclusory” terms” impugned the arbitration panel’s “integrity and neutrality.”

Commenting on Merrill Lynch’s arbitration award, Securities Arbitration Attorney William Shepherd said, “Investors who do not hire a lawyer, or hire one without experience in securities arbitration, fare very poorly in claims against brokerage firms. While securities arbitration has less formalities than court cases, investors simply cannot alone understand how to properly present their claims to the arbitrators.”

Related Web Resources:

Rothstein et al v. Fung et al, Justia
Change in Arbitration Panels Will Allow Investors Only, NY Times, July 25, 2008 Continue Reading ›

FINRA Rolls Out New Arbitration Process for Auction-Rate Securities Claims

Published on: August 21, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority says it has set up an arbitration process designed to resolve claims involving auction-rate securities. Parties now have the option to have their claims reviewed by an arbitration panel with members that are not connected with any firm that may have recently sold the securities.

FINRA says the process was developed following the system it set up for Citigroup’s settlement with the Securities and Exchange Commission. Earlier this month, Citigroup Inc. reached an agreement with state and federal regulators to redeem $7.3 million in illiquid auction rate securities that retail investors had purchased, as well as pay $100 million in fines. The agreement was to settle charges over misconduct related to sales practices.

FINRA Dispute Resolution President Linda Fienberg says it is only fair that all investors with auction-rate securities claims be given the opportunity to resolve their disputes in the same way. She said that FINRA would work hard to put the process in place so that claims wouldn’t be delayed unnecessarily. Persons that since January 1, 2005 have sold auction-rate securities, worked for a company that sold the securities, or supervised the selling of the securities cannot be on the panels.

FINRA Creates Process for Arbitrations Involving Auction Rate Securities, Marketwatch.com, August 7, 2008
Citigroup Returning $7 Billion To Auction-Rate Securities Investors, The Star, August 8, 2008
FINRA
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FINRA Pilot Program Offers Up All-Public Arbitration Panel to Hear Investor Claims

Published on: August 8, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Citigroup Global, Merrill Lynch, Wachovia Securities, UBS, Charles Schwab, and Morgan Stanley have volunteered to participate in a Financial Industry Regulatory Authority pilot program that would allow investors to have their cases heard by a panel consisting of three public arbitrators. Currently, investors have the option of having their cases dealt with by a panel made up of two public arbitrators and one non-public arbitrator.

Investors that choose to participate in the pilot plan and the firm they have filed a claim against will be given the same three arbitrator lists that those involved in regular arbitration proceedings would receive. The parties can strike the same number of names from the lists and rank according to preference the names of arbitrators they are willing to have on the panel. Parties participating in the pilot can cross out the names of all non-public arbitrators.

Except for Charles Schwab, all of the firms will submit 40 arbitration cases annually for the duration of the two-year program. Schwab will refer 10. However, the decision of whether to avail of this new panel model will be left to the investor. The pilot is available for eligible claims filed after October 6.

The program’s results will be assessed, including who decides to participate in the pilot, who decides to avail of an all-public panel, the duration of the hearings, and the outcomes of both pilot and non-pilot claims. FINRA CEO Mary Shapiro says the pilot “better serves and protects the interests” of investors.

“This is really a political move,” says Securities Arbitration attorney WIlliam Shepherd. “An outcry from consumer advocates has resulted in a bill Congress to make ‘pre-dispute arbitration’ clauses in consumer contracts un-enforceable. Some lawmakers want investors to be included as consumers protected by the bill.

“Wall Street brokerage firms are lobbying hard to exempt themselves from this mandatory arbitration ban,” adds Shepherd. “Despite its name, FINRA is the former National Association of Securities Dealers, a non-profit corporation owned by brokerage firms. FINRA is attempting to show Congress it is willing to reform securities arbitration rather than end it. Doing away with the ‘industry arbitrator’ is one of the so-called reforms it is proposing.”

Related Web Resources:

Test Lets Investors Pick Form of Arbitration Panel, The Wall Street Journal, July 25, 2008
FINRA to Launch Pilot Program to Evaluate All-Public Arbitration Panels, BusinessWire.com, July 24, 2008
FINRA
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Court Says Investor Must Arbitrate Claims Against Broad Street Securities, Pershing LLC, and Bank of New York Mellon Over Contract Alterations

Published on: March 26, 2008 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Eastern District of Michigan has concluded that Mouayad Shammami, an investor that is accusing brokerage firm Broad Street Securities Inc. of fraudulently inducing him to change his investment goals, must arbitrate this dispute rather than pursue the matter through the courts.

In 2004, Shammami entered into an agreement with Broad Street stating that the brokerage firm would give him investment and management advice. Broad Street and clearing broker Pershing LLC had their own agreement between them that allowed Broad Street to ask Pershing to trade securities for Shammami. Shammami and Pershing entered into a marginal agreement in 2005, which contained a pre-dispute arbitration clause.

In 2007, Shammami filed a lawsuit alleging that Broad Street and Pershing traded securities and churned his account without honoring his stated investment goals. Pershing and its parent company Bank of New York Mellon LLC filed a motion to have the case dismissed. Per the terms of the agreement with Shammami, both firms wanted to resolve the dispute in arbitration.

TV Judge’s Case Goes to U.S. Supreme Court

Published on: January 16, 2008 | by Shepherd Smith Edwards & Kantas, LLP

Some folks resolve their disputes by going on TV, where they also get paid and enjoy their 15 minutes of fame (or infamy). But what does a TV judge do to resolve disputes and, perhaps, gain notoriety? Take his case to the U.S. Supreme Court!

TV trials are really arbitrations. The parties sign an arbitration agreement to resolve their disputes on TV. The shows pay each party so, reportedly, no one is actually out any money. One participant or the other may walk away with more than the other, or even all the money. The loser gets rid of the claim and, more importantly, is a loser on national TV. (Hey, people agree to eat worms, get caught cheating on their mates or to getting “punked,” proving some people will do anything to get on TV.)

TV’s “Judge Alex” is a male version of “Judge Judy” (only prettier). Allegedly, Florida State Judge Alex Ferrer, gave up his real judge gig in 2002, to try his luck on TV, though the help of promoter Arnold Preston, who claims Judge Alex agreed to pay him 12% of his income. After Judge Alex made the big time he decided he did not have to pay Preston because Preston was not a registered talent agent under California law. Preston claims he is a manager, not an agent, and does not have to be registered.

NASAA Calls for Voluntary Securities Arbitration System

Published on: December 20, 2007 | by Shepherd Smith Edwards & Kantas, LLP

On December 12, The North American Securities Administrators Association told the Senate Judiciary Constitution Subcommittee says that it is calling for a voluntary securities arbitration system. NASAA also approves of the proposed Arbitration Fairness Act (S. 1782).

NASAA says that right now, nearly every broker-dealer has to include a pre-dispute arbitration provision in its customer agreements that says public investors must submit any disputes with a firm and its associates to an arbitrator.

Illinois Secretary of State and Illinois Securities Director Tanya Solov says that mandatory arbitration is unfair to investors and that the securities arbitration system should be voluntary. Currently, arbitration panels are made up of one mandatory securities industry representative and public arbitrators that may have connections to the securities industry.

Fired UBS Broker’s $2.4 Million NASD Arbitration Award is Upheld

Published on: October 25, 2007 | by Shepherd Smith Edwards & Kantas, LLP

A $2.4 million NASD Arbitration Award to a former UBS financial adviser, who was fired in 2003 by the company that preceded UBS PaineWebber Inc. is being upheld by the U.S. District Court for the Western District of North Carolina. The court said that it did not agree with UBS’s theory that the arbitration award did not honor provisions made in the arbitration contract or that it was in manifest disregard of the law.

Former financial adviser W. Van Pelt Jr. had served as a financial advisor UBS and its predecessor JC Bradford from 1999-2003. Upon his hiring, he filled out a Form U-4 industry form in which he agreed to not hold UBS liable if it provided specific information, including notice of termination.

He was let go in January 2003 during an internal probe. UBS filed a U-5 form reporting Van Pelt’s termination because of “concerns of conduct” in a matter involving a customer transaction. On the form, UBS said that Van Pelt was not under investigation because the probe was already over at that time.