The Law Planet Blog

In another installment of the incompetent/malevolent broker/dealer guidebook, Barclays Capital partially prevailed on a Motion to Vacate Arbitration Award filed against one of its former employees. In Barclays Capital Inc. vs. Elizabeth Bing Shen, 2008 N.Y. Misc. LEXIS 2327, a NY Supreme Court judge (the lowest level trial court, interestingly enough) found that the ruling in Rosenberg v. MetLife barred recovery of punitive damages.

Rosenberg, as those who have been following this issue will recall, held that incorrect statements on a U-5 Termination Notice were absolutely privileged. In my opinion, regardless of whether you represent a firm or the broker, this is a wrong-headed decision that was decided by judges who ignored the impact on a broker's life a U-5 can have. There has been some discussion by commentators that there are ways "around" Rosenberg. Certainly, one of them is to avoid New York law in contracts. There are others as well, but if I shared them I'd have to shoot you.

Back to Ms. Shen. She was apparently owed a bonus and her U-5 was found to be erroneous by the arbitrators. By the description in the court's opinion, she does not qualify for "Employee of the Year" status by any means, but the arbitrators clearly felt that she didn't deserve the disclosure she received. They awarded her punitive damages.

The court found that the punitive damages could only have been for the U-5 defamation claim and, therefore, vacated that part of the award. We are currently representing brokers whose U-5s, we believe, are defamatory. We are not concerned about the New York choice of law provision because we feel that there are valid arguments against it when the the broker is in Florida. Nevertheless, this creates more stress and anxiety and creates a "free defamation zone" for broker-dealers, honorable and not.

That's the view from The Law Planet - Jupiter, Florida.

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Posted In: Labor & Employment , Securities Arbitration , Securities Industry , Stockbroker Issues

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In an email from FINRA, formerly NASD, dated April 14, 2008, the agency announced that the arbitrators' procedures on damages and closing the hearing will be changing. This is, ostensibly, to unify the scripts between NASD and NYSE arbitration codes.

The first change has to do with damages. In an effort to have the percentage "win" rate more accurately reflect what was sought at hearing, the arbitrators will be asking for a summary of the "final request" for damages. It is off of this amount that the statisticians calculate customer "win" rates and percentages. Since the statisticians use the amount sought as described in the award, this amount will now be based upon what the party asks for at hearing.

Frankly, I don't see how this will make a difference. If it makes FINRA feel better, so be it.

The next change is more interesting. The NASD script always ended with the chairperson asking the parties if they had a "full and fair opportunity to be heard." Every once in a while a party would say "no." Interestingly, there's nothing that I recall from the chair's script that tells the arbitrators what to do in the case of "no." Basically, it causes a fire drill. Or the chair says that the objection is not relevant or necessary. I once used the threat of a "no" in a case where I felt the arbitrator was being unfair in the allocation of time to present my case. The arbitrator, an otherwise fair-minded individual, changed course and I was given the opportunity to present my client's case in full (successfully, as well).

The new script will ask the following "Do the parties have any other issues or objections that you would like to raise that you have not previously raised?" This was, I think, the intent of the prior question anyway. But there is a big perceived difference between "full and fair" and "any other issues or objections."

FINRA states that "full and fair" is nowhere to be found in its arbitration codes. Given some of the results I've received, "fair" certainly isn't in there.

These are hardly earth-shattering changes. But ever since I attended my first arbitration (when dinosaurs roamed the earth) I have heard the "full and fair" language. I'll miss it.

That's the view from The Law Planet - Jupiter, Florida.

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Posted In: Securities Arbitration

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FINRA, the securities regulatory agency governing all stockbrokers, has announced its approval of a new expungement rule in a press release dated December 14, 2007. This is further evidence of regulatory scrutiny of a long-standing practice of obtaining expungements in the settlement of customer claims.

Many moons ago, when my hair was more plentiful and darker, the warring parties in a securities arbitration could simply agree to have the customer complaint removed from the broker's record, get the arbitrators to sign off on it and the deal was done. NASD got wise to this practice and enacted a series of ever-tightening rules regarding expungements. First time around, the arbitrators had to grant the expungement and the award was required to be confirmed by a court, unless the defamatory U-5 filing was the subject of the arbitration, in which case no court confirmation was necessary.

The NASD then enacted standards that must be met regarding the expungement of customer complaint information. Arbitrators were to apply certain standards in granting expungements. Additionally, NASD was to be notified when a broker sought a court confirmation of an expungement order. It appears that these standards and practices were not enough. Much settlement money changed hands and arbitrators were still granting expungements.

This new rule, as proposed, tightens the noose further. An evidentiary hearing is required and the terms of the settlement with the customer must be disclosed. This raises an interesting question. If the brokerage firm pays the money and the customer gives a separate release to the broker, which release is relevant to the arbitrators' inquiry?

FINRA's concern about expungements is understandable. As the custodian for CRD, which is relied upon customers and regulators as the broker's record, expungements can skew a broker's history. At the same time, a broker should have a right to have frivolous items removed.

That's the view from The Law Planet - Jupiter, Florida. Happy holidays to one and all.

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Posted In: Securities Arbitration , Securities Industry

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The Securities Industry and Financial Markets Association (SIFMA), the securities industry's trade group, has been remarkably silent in the arbitration abolition wars. First, the distorted report from Daniel Solin and Edward O'Neal came out which said arbitration was unfair, simply based upon won/loss rates. Then the Feingold-Johnson bill is proposed - to ban all "consumer" arbitrations. Even PIABA, the trade group for securities claimants' lawyers, came out against arbitration and, separately, proposed removing the industry panelist from all arbitration panels.

In a recent article from The Investment News, SIFMA is described as fighting back. Of course, the naysayers will portray SIFMA's study as self-interested, but noone seemed to accuse Mr. Solin or PIABA of the same self-interest. But I digress.

A review of the SIFMA study shows that a lot of thought went into debunking the horse-droppings that were left behind by the Solin study. SIFMA correctly points out the number of garbage cases that were filed by people who were incapable of accepting that the market simply went down. This is not to say that every case was garbage, but my own experience was that there were a lot of people who wanted to take the risk and that ultimately led to their financial distress.

Read the report. It provides the other side of a coin that was not previously turned over. Now, I'm sure, the battle heads for Congress. Long live arbitration!

That's the view from The Law Planet - Jupiter, Florida.

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The newly-minted securities regulator, FINRA just fined Morgan Stanley $12.5 million for failing to produce emails in its possession. To make this even more heinous, Morgan Stanley hid behind the 9/11 tragedy as the reason for its failure to produce. As it turns out, this representation was just wrong and Morgan Stanley knew it.

This problem came to light in a very public way when Morgan Stanley tripped over itself, numerous times, in Palm Beach County Circuit Court litigation with Ron Perelman. Mr. Perelman's lawyers pressed and pressed the firm for emails. And, magically, emails started popping up all over. Eventually, the judge decided that Morgan Stanley couldn't be trusted and shifted the burden of proof to Morgan Stanley to prove that it wasn't liable to Perelman.

We have litigated against Morgan Stanley. In all cases but one, the company fought production of obvious items, produced incomplete documents and stated that documents didn't exist, and then produced the documents when forced. In one case, we were told no documents existed and a witness showed up at a hearing to testify with a big stack of paper that was in a file outside his office.

Litigation is a battle. But there are rules and expectations of lawyers and clients to abide by those rules. Morgan Stanley was fined for more than an oversight and it was deserved. Perhaps this will serve as a warning to other firms who play games in discovery.

That's the view from The Law Planet, Jupiter, Florida.

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Electonic Data Discovery, and other areas relating to electronic data storage, are hot topics in litigation and arbitration, whether in the securities field or other commercial disputes. There have been many articles written about the new sections of Rule 26 of the Federal Rules of Civil Procedure. What is not often discussed is the practical advantages of reducing the amount of paper being carried around and the amount of stress (when the computers are working) that is removed through proper usage of electronic media.

Here is a recent example of how some planning and Adobe Acrobat can make your life easy. My partner and I were defending a securities client in an arbitration brought by a group of unhappy non-clients of our client. We had litigated the same underlying issue with the same law firm two years ago. We had agreed with that law firm that the documents from the prior case could be used in this case, so that we did not have to produce the same universe of documents twice. Among the documents from the prior case was a list of clients of the broker, who went to jail for what he did.

We advised the arbitrators that this list was produced in the prior case and that counsel should have a copy among the (disorganized) papers he had in his possession. He wanted proof that we had produced the document in the prior case. Before we left the office, Debra and I both used the Microsoft Windows Offline Files function to synchronize all of the documents, pleadings and discovery, to our laptops. When the issue came up, I was able to locate the subject document in seconds. But we had a problem -- we wanted to maintain confidentiality of the contents and wanted to denote on the document that it was produced in the current case, not just the prior one.

While sitting at the counsel table, I opened the document, a PDF, in Acrobat and added a footer with all of the case identifying information and the confidentiality warning. Then, using the HP portable printer that is almost always with me at hearing, I printed out the document and gave a copy to opposing counsel, all the while listening to his examination of my witness. The witness was ordered to review the document over lunch, which he did, and his testimony was over within a few minutes of returning to lunch.

Think about this story the next time you are loading up boxes and boxes of paper discovery documents into your car or onto the messenger's truck. And think about the fact that the prior case had an equally large number of documents. Yet we did not bring a single box of production documents, from either case, to the hearing, only our exhibit notebooks.

The electronic document management train is leaving the station. If you're going to compete, you need to get on, but there's no room for storage boxes of documents in the overheads!

That's the view from The Law Planet - Jupiter, Florida

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Posted In: Law Practice Management , Legal Technology , Securities Arbitration

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Senator Russell Feingold (D-Wis.) has sponsored a bill in the Senate to eliminate consumer arbitration, including securities arbitration. This knee-jerk reaction to some "Chicken Littles" claiming that big chunks of sky have landed on their heads is misguided. Consumer arbitration, including securities arbitration, has deep roots in American commerce. I am disappointed that, once again, our government is sticking its nose where it need not do so.

Here is why arbitration is good. It is fast. It is less expensive (not cheap, by any means). And a resolution is generally final. The persons hearing the case want to be there and are generally somewhat familiar with the issues presented. They may not be geniuses, but they have some knowledge, at a minimum. In securities arbitration, there is at least one member of a three member panel who is classified as being a "non-public" arbitrator because of securities industry ties. I am classified as a "non-public" arbitrator because my firm represents brokerage firms like A.G. Edwards & Sons, Stifel, Nicolaus & Co. and Legend Equities Corporation for more than 20% of its revenues.

Here is why arbitration is bad. The panel's knowledge and prejudices are the luck of the draw. Sometimes you get a well-educated panel with no biases. Other times, you get a panel that "hates" whichever side you happen to be representing that day. And it's very difficult to overcome the biases. Further, the rights of appeal are very limited. This is usually a good thing, but sometimes an arbitration panel just blows it. They focus on the wrong points, misinterpret some facts, and come up with the wrong result. It happens. And when it does, the appeal rights are virtually non-existent.

In court there are depositions. These cost, just for the court reporter, over $1,000 per day. In court, the days tend to be shorter so less is done. There is motion practice, which means more attorneys running to court to cool their heels to argue some esoteric point of law that is part of the judicial procedural jousting. There is jury selection. And then there are the appeals. They cost money, delay the result and possibly change the result. And the expenses attendant to keeping the matter open, through appeal, would be astonishing.

Here's an example of a case we have in our office. Our client has sued a Registered Investment Advisor. The lawsuit was filed in February of this year -- almost 6 months ago. We have now been through two motions to dismiss and have served our second amended complaint. We haven't even seen an Answer from the defendant yet.

In arbitration, we would already have a hearing date and discovery would be underway. Our client is elderly and we tried to get her trial expedited. The court denied the motion. Is this the result that Senator Feingold wants? Doubtful. Be careful what you wish for, folks.

That's the view from The Law Planet - Jupiter, Florida.

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Posted In: Investments , Securities Arbitration , Securities Industry

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Dobin & Jenks, LLP, the sponsor of The Law Planet Blog, represented Nicholas C. Hodges, CPA, CFP in an NASD Securities Arbitration in Jackson, MS. The dispute involved issues of defamation, copyright ownership, breach of fiduciary duty, diversion of corporate opportunities. After almost 8 days of arbtration hearings, Mr. Hodges was awarded $75,000 in damages, ownership of the copyright to his book, The Lazy CPA’s Guide for Adding Financial Services to Your Tax Practice, and attorneys' fees of more than $86,000.

The arbitration award can be found here.

Perhaps the best part of this case was our two clients, Nick Hodges and Toni Nurnberger. They were two of the nicest people we have ever represented and the award represented the culmination of nearly two years of litigation and hard work. Nick, "The Lazy CPA" is anything but lazy. Toni, his associate for several years, keeps everything from boiling over. When my kids ask me what I do for a living, I tell them that I help people and think of people like Nick and Toni.

Nick has made a movie. Thankfully, he doesn't sing or dance and he keeps his clothes on.

A big thanks to Nick and Toni and to all our clients who have helped us keep the doors open since 1999.

That's the view from The Law Planet, Jupiter, Florida.

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Recently, I wrote about Dan Solin's "study" of securities arbitration and the conclusion that mandatory arbitration is unfair. I suggested that the authors of the study incorrectly dismissed the commonly-held belief that the bad cases for the brokerage firms get settled while the defensible ones generally go to hearing. The "study" has received much press recently, including this article in The Washington Post by Michelle Singletary.

I read a recent arbitration award that made me think of this study, again. In a case involving Raymond James, the Claimants dismissed the claim after one day of hearing. The arbitration award specifically discussed the Claimants' dismissal of the claim with prejudice and a representation that the allegations against the individual broker were without basis and should be expunged. I know both lawyers who handled the case and they are well-known and experienced securities arbitration lawyers.

What this award says to me, between the lines, is that an overnight settlement was reached. This was possibly due to the evidence that was brought out during the first day of hearing. My question vis a vis Mr. Solin's study is this - Does this count as an investor loss? My guess is that it does. This just goes to further prove the flawed nature of this study.

It disappoints me that a number of media outlets and politicians are hanging their hats on this study, which is intellectually flawed. If these special interests (and I admit that I would probably be termed a special interest as well) get their way, just wait another 15 to 20 years. They'll be begging to go back to arbitration after a series of successful motions to dismiss and incomprehensible jury verdicts.

That's the view from The Law Planet, Jupiter, Florida.

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Under Florida law, the courts have upheld a qualified privilige on disclosures made on NASD form U-5, the Uniform Termination Notice for Securities Registration. Eaton Vance Distributors, Inc. et al. v. Ulrich, 692 So. 2d 915 (Fla. App. 2nd DCA 1997). However, there are a number of brokerage firms that use a New York "choice of law" provision in their employment contracts. A recent decision was initially thought to be the death knell for defamation actions.

In Rosenberg v. Metropolitan Life Insurance Company et al., 2007 NY Slip Op 2627, the New York Court of Appeal, the state's highest court, ruled that statements made on a Form U-5 are protected by an absolute privilege. The ruling, at first blush, appeared unequivocally devastating to registered representatives wishing to assert U-5 defamation claims employed in New York and/or governed by enforceable New York choice-of-law provisions. Fortunately, however, the Second Circuit Court of Appeals, after it received the Rosenberg case back from the New York Court, identified a very legitimate and glaring hole in the Court of Appeals’ analysis. Op. issued June 14, 2007 at n. 1.

The Court of Appeals recognized that statements in a Form U-5 that are not “material and pertinent to the issues to be resolved” are probably not protected. Specifically, the court recognized that not all statements placed on a broker’s Form U-5 may be absolutely protected:

Consequently, we need not decide if there are circumstances in which statements on a Form U-5 are not absolutely privileged under Rosenberg II. We note, however, that in the context of judicial or quasi-judicial proceedings, statements made by parties, attorneys, and witnesses are absolutely privileged only ‘so long as they are material and pertinent to the issue to be resolved in the proceeding.'

While initially devastating to broker U-5 defamation claims under New York law, the Second Circuit’s latest per curiam decision holds out hope that brokers are not completely without recourse when false language is contained within a Form U-5. Moreover, because U-5 defamation analysis is governed by state law, states such as Florida that reject an absolute privilege in U-5 defamation cases remain unaffected by Rosenberg.

Here at The Law Planet, we continue to receive inquiries from recently-terminated stockbrokers about getting help with the language on a form U-5. Most brokerage firms are savvy enough to realize that getting the broker's input on the language is a major step towards avoiding defamation litigation. Our role as counsel is to make sure that the brokerage firm discharges its regulatory obligation while minimizing the impact on our client's career.

That's the view from The Law Planet, Jupiter, Florida.

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There was a study published recently by Dan Solin, a lawyer in New York City, and his co-author Eddie O'Neal, a professor, which conclued that mandatory securities arbitration is unfair. Now, I will admit that I (and others) make a pretty good living in securities arbitration venues of the NASD and NYSE. But I don't understand what all the hand-wringing is about and I certainly don't understand the conclusions that these two gentlemen reached.

Most importantly, I think, they completely discounted the notion that the broker-dealers settle the tough cases and try the cases that they can't settle or think they can win. I don't know Mr. Solin but I don't think he does any defense work (he is a member of PIABA, the Public Investor Arbitration Bar Association), I find it hard to believe that he can simply dismiss this notion as "anecdotal." In my firm's practice, where we represent customers, brokers and broker-dealers, we have seen the vast majority of our cases settle before they go to hearing. It's not just anecdotal, it's a fact.

There are some distinct advantages in arbitration. The strict evidentiary rules don't apply. This allows hearsay, double hearsay, newspaper articles and the like into evidence. An old saw in arbitration is that arbitrators "let everything in" and they will "take it for what it's worth." You won't see a judge do that.

Expert witnesses are another area where arbitration is more lenient. When I first came to Florida, I examined a proposed expert and he admitted that he was not an expert on securities laws, even though he was going to testify in a securities fraud case. His testimony was allowed. In court, he would most likely have been shown the door.

There really isn't a way to study the purported fairness or unfairness of securities arbitration by just looking at numbers. But look at PIABA's name. Notice the word "Arbitration." Trust me, no one is holding a telethon for impoverished securities lawyers.

That's the view from The Law Planet in Jupiter, Florida.

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