At first glance, some investors may not notice the arbitration clause in their new account form.  All brokerage firms insist that this form be signed before they will accept an investor as a client, and this has important ramifications.  Foremost, among these is the limitation of available avenues of recourse to the dissatisfied investor. Indeed, since few if any brokerage firms will allow potential investors to forgo this important clause, the disgruntled investor is effectively prevented from bringing a court action to recoup losses.  Currently then, the overwhelming majority of actions brought against brokerage firms are  NASD Dispute Resolution (NASD) or New York Stock Exchange arbitrations.  In this article, we will focus on the NASD arbitration process.

Initiating the Arbitration Process

Prior to initiating the arbitration proceeding, the claimant should request an arbitration package from the NASD either by telephoning the NASD at (212) 858-4400 or by downloading the package at the NASD website at www.nasdadr.com. The claimant should then sign the Uniform Submission Agreement form included in the arbitration package and return it with the Statement of Claim and required filing fees.  By signing this document, the claimant in essence agrees to abide by the rules of the NASD regarding the arbitration process.

In the first step of this process, a claimant (the person who is bringing the action against the stockbroker) files a Statement of Claim with the NASD. The Statement of Claim should include the name and address of both the claimant and the respondent (i.e. stockbroker or brokerage firm), as well as the claimant’s brokerage account number, a description of the allegations, and the claimed monetary losses. The NASD will then serve the Statement of Claim on the respondent. The brokerage firm and stockbroker are then given 45 days to file a response.  In their response, they may bring counterclaims against the claimant, and file cross-claims if there is someone else that the brokerage firm feels may have contributed to the claimant’s damages.

Costs of Filing an Arbitration

The cost to file an arbitration depends upon the amount of money the claimant is seeking in damages. The initial fees range from $25 to more than $2,000. In addition, following the completion of the arbitration, the arbitrators will assess additional hearing session fees against the claimant, respondent or both.  In cases where the arbitrator rules favorably for the claimant, they will generally assess the additional fees against the respondent. The reverse also hold true if they rule favorably for the respondent.

Selecting the Arbitrators

If the amount of money in dispute is $25,000 or less, then the arbitration is considered a "simplified arbitration" and one arbitrator is appointed to hear the controversy. If the amount of money in dispute is $25,001 to $50,000, then one arbitrator is selected unless the parties request a panel of three arbitrators. For all controversies involving more than $50,000, three arbitrators will be appointed. Shortly after the formal response of the respondents, the NASD will send both parties a list of arbitrators from which they may select.  When a three-member arbitration panel is necessary, the NASD will provide a list of ten public arbitrators and five brokerage industry arbitrators. When the arbitration panel will consist of one arbitrator, then the NASD will give both parties a list of five public arbitrators to choose from. The NASD will also include resumes of the arbitrators and a list of the arbitration awards they have previously rendered. Both parties are given the opportunity to request copies of the award documents.  Any arbitrators that the parties do not like can be struck from the list. The parties then rank the arbitrators. The NASD then tabulates the ranking and chooses the arbitrators that both parties ranked highest.

The Pre-Hearing Conference

Shortly after the arbitrators are selected, the NASD will hold a pre-hearing conference. The pre-hearing conference is a short (15 to 30 minutes) telephone conference during which the arbitrators and involved parties establish a discovery and hearing schedule. At that time, the arbitrators will generally ask the parties if they are willing to mediate their dispute.

Mediation

Mediation is a process in which a professional mediator assists the parties in negotiating their dispute. The goal of the mediator is to have the parties leave the mediation with a signed mediation agreement that resolves the dispute. I have often found that both the claimant and respondents usually leave the mediation feeling that they were treated fairly, although they seldom get precisely what they were hoping for. Often, they are glad that they made the decision among themselves instead of leaving total authority to a third party. It is no surprise then, that NASD statistics show that four out of every five cases that are brought before a mediator are resolved. Importantly, when the parties agree to mediate, they do not give up any rights to arbitrate if the mediation is not successful. However, it is imperative to keep in mind that the respondents do learn more about the claimant’s case during mediation.  They can later use this information during a subsequent arbitration hearing. Therefore, it is important to have an attorney present at the mediation so that key strategies are not revealed to the respondents.

The Discovery Process

During the discovery process, all relevant documents are exchanged by the parties. The NASD now provides a list of required documents that each party must turn over to the other. When one party does not wish to turn over certain documents, the arbitrators will get involved in the discovery dispute and either help the parties resolve the discovery issues or issue an Order requiring that the documents be provided. Should the documents not be released, the arbitrators may prevent the liable party from proceeding with their prosecution or defense.

The Hearing

Hearings typically follow a set pattern. At the hearing each party is given the opportunity to briefly describe their case during an opening statement.  Following this, they then present their evidence and may call witnesses.  Next, each side may cross exam opposing witnesses before making their closing arguments which summarizes their case.

After the Hearing

Immediately after the hearing, the arbitrators ask the parties to leave the room that the hearing was held in.  They then begin to discuss the case and render their decision.  This is not revealed to the parties at this time. Instead, the arbitrators report their decision to the NASD which prepares a written decision for the arbitrators to sign. The NASD then forwards the decision to the parties. The decision of the arbitrators is binding and there are very limited grounds to appeal it. Particularly frustrating to claimants is that the decision is rendered with no written discussion as to why the arbitrators ruled in a certain way.   Hence, a disappointed claimant will not learn the reason for the decision and may leave feeling that it was unfair.

Jenifer's Justice

Jenifer inherited money from her mother. She invested the money with a stockbroker who churned her account (over-traded the account to generate commissions). We brought an arbitration against the stockbroker and brokerage firm. The hearing took two days. Jenifer received about 90 percent of her losses plus interest and attorney’s fees. Although Jenifer would have been happier had she received 100%, she nonetheless believed that the arbitration was fair.

Alex's Angst

Alex brought an arbitration against a brokerage firm because he suffered losses as a result of a brokerage firm back office error. I represented Alex in his arbitration against the brokerage firm. After a full day hearing, the arbitrators awarded Alex 100% of the monies he had requested plus interest. Alex was disappointed he was not awarded attorney’s fees and punitive damages, but he, as well, felt that the arbitration was fair.

Is an Attorney Needed?

Although the NASD allows a claimant to bring an arbitration without an attorney, I recommend that all claimants retain an attorney. In the many arbitrations in which I was present either as an arbitrator or as counsel, I have never seen a brokerage firm not represented by counsel.  A competent attorney representing a claimant in an arbitration helps assure that the claimant is on equal footing with the respondent. Typically, attorney’s representing claimants are paid on a contingency fee basis.

Conclusion

While there are many theoretical advantages and disadvantages to the arbitration process, it is a quicker and less expensive venue than the normal court setting.  While many investors would rather present their case to a jury of their own peers, arbitrators are both knowledgeable and dedicated and do their best to listen carefully and render a decision that is fair and just.

Debra G. Speyer is an attorney practicing law in Center City, Philadelphia who concentrates her practice in the areas of investment fraud, elder fraud and elder law.  She is chair of the Elder Law Committee of the Philadelphia Bar Association and is on the board of directors of the SeniorLaw, a non-profit organization that assists indigent senior citizens with their legal problems.  She was recently listed in Philadelphia Magazine in its Best Lawyers issue for Elder Law.  She can be contacted at 215 238-1980.

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