US Supreme Court rules on Palm Beach County arbitration motion.

Palm Beach County is famous for many things.  Burt Reynolds, Tiger Woods, Michael Jordan, Spring Training for the World Series-winning St. Louis Cardinals are among them.  Sometimes Palm Beach County gets in the news because the United States Supreme Court finds something worthy emanating from our court system.

In this case, the Supreme Court took issue with a ruling from the Fourth District Court of Appeals, which agreed with a ruling by Hon. David French, denying a motion to compel arbitration by KPMG, a national accounting firm.  This dispute is more fallout from Bernard Madoff and his admitted fraud.

It appears that the plaintiffs lost money investing through one or more of the feeder funds, Termont Partners and others.  They claim, according to the court, that they relied on audits performed by KPMG.  They further claimed that the audits were not done properly.  And, of course, they claim that they lost money.

When they sued, KPMG moved to compel arbitration because there was an arbitration clause in the audit engagement agreement.  According to the court, there were professional malpractice claims along with some Florida state law claims.  The court differentiated the claims, under a Delaware choice-of-law provision, as direct or derivative.  The trial court and the Fourth DCA both held that arbitration was unavailable because the direct claims did not have to be arbitrated.

The US Supreme Court disagreed.  The Court held that, even though it may appear judicially inefficient, the arbitrable claims, referred to as “derivative”, must be arbitrated.  The Court also held that the “direct” claims need to be examined to see if they are arbitrable as well.  This could very well leave the litigation split between two arenas, likely increasing costs and complexity.

Not sure how I feel about this decision.  The US Supreme Court continues its support of arbitration “above all.”   But in a situation where the cases will be split, it seems that the costs of litigation will increase dramatically and no real benefit will be served by forcing the parties to arbitration.

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Latest FINRA Securities Arbitration Statistics Released

Statistics and percentages can be fun. (Cue groans here) Sometimes it can be interesting to dig deeper into the statistics and see what else they might mean. Each month, FINRA releases arbitration statistics for the month ending one month prior. So this month’s statistics analyze arbitrations through the end of July.

The report has the usual stuff — number of new arbitration cases filed, number of cases closed, etc. But dig a little deeper and there are some interesting figures. For instance, New arbitration case filings through July are down 12% over 2010. But they’re down 35% over 2009. This is likely a function of the reaction to the 2008 meltdown and the wave of cases that followed.

Here’s something else. If you total the new cases through July for 2009, 2010 and 2011, that equals 10,724. The number of cases closed during that same time period is 9,795, leaving an overhang of about 1,000 cases.

Another interesting statistic is the “How Arbitration Cases Close” analysis. An average of less than 20% of cases have gone to final hearing in the last 5 years. An average of 50% of the cases settle through direct communication between the parties (but the report does not specify how much the cases settled for). And, at most, 10% of cases settle through mediation. It is not clear if the “Direct Settlement” category includes cases settled through non-FINRA mediation but I suspect that the mediation category includes FINRA and non-FINRA mediation.

So what can we take away from this? First, if the numbers hold, a litigant is just more likely to settle a case than have it go to hearing, by a large margin. There is a less than one in five chance of going to hearing. And more than three-fourths of all cases never see a hearing.

What would be interesting is to pair these figures up with the “win” figures that are also tracked. The only problem with that, of course, is that the claimed damages may not be based in any sort of supportable logic.

That’s the view of one Lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.

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Chase Investment Services loses another non-solicitation arbitration

Loyal readers (who may be wondering if I had lost interest in the blog) will recall that Chase Investment Services lost an arbitration to Morgan Keegan and Todd Rozzo in March of this year. Chase tried to enforce a contract against a former WaMu broker, Rozzo, and his new employer, Morgan Keegan. My firm represented Morgan Keegan.

It turns out that there was a very similar case in Seattle, Washington. Chase, again, went for an injunction. Chase, again, acted as if the world was going to end if the brokers were allowed to talk to their clients. Chase, again, initiated an arbitration against the former brokers. And Chase, again, lost the arbitration.

Maybe Chase will get the message that I have detected. Absent some horrific set of circumstances, such as bad acts by the departing brokers or raiding, arbitration panels do not get excited about the run-of-the-mill changing of jobs. For Chase to behave like a child complaining about not getting his/her way is just bad business. Brokers change firms. Chase needs to get over it.

This does not mean that, in the right set of circumstances, an arbitration panel won’t award damages. It simply means that it has to be something more egregious than simply changing jobs. Having the manager and several brokers leave at the same time could be sufficient. Deleting data on a computer system could be sufficient. There are any number of bad acts that could lead to liability. But if a broker leaves “clean”, the likelihood of a firm prevailing in an arbitration is pretty slim.

That’s the view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.

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Wall Street Never Learns

When I was a young punk, just a few years out of New York Law School, Janney Montgomery Scott fired an analyst named Marvin Roffman. What offense did Mr. Roffman commit? None, said Janney.

Mr. Roffman disagreed. He said he was fired because he said negative things about the Trump Taj Mahal project, in particular its bonds. He said that the Trump Organization threatened Janney and that he was fired as a result of higher-level corporate interaction. He filed an arbitration and, in one of those rare perfect coincidences, the Taj Mahal filed for bankruptcy just before the arbitration. This was 20 years ago, but I think it was the week that the arbitration was supposed to start.

I remember calling the lawyer representing Mr. Roffman, Scott Vernick, and encouraging him, telling him that his case got a whole lot better. Mr. Roffman, I am sure, was able to testify that he not only was fired for giving his opinion, but that he was right in having the opinion. He was awarded $750,000.

Fast forward to today. An article by Jesse Eisinger in the New York Times Dealbook blog describes the treatment of David Maris by Bank of America. The article describes how Maris opined that a company’s financial statements were unreliable and that shareholders should sell.

Guess what? He was fired. According to BofA, he was not fired because of his sell opinion, but for other reasons. Right. Just because BofA is in Charlotte, doesn’t mean they’re not trying to sell the Brooklyn Bridge.

By the way, Maris turned out to be right. The company settled with the SEC due to inaccurate financial statements. Looks like another arbitration where an analyst will say “I was right and they fired me for it.”

That’s the view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.

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Chase Investment Services loses arbitration to Morgan Keegan

This is fun to talk about, because my firm (in the form of yours truly) represented Morgan Keegan. The firm was named in an arbitration by Chase Investment Services, Inc. because a former Washington Mutual investment representative left the firm just before Chase Investments and WaMu Investments merged in May 2009. Chase thought he shouldn’t have contacted his customers.

Chase filed for an injunction and an arbitration. The final FINRA arbitration hearing took place in early March. The result was a complete victory for Morgan Keegan and the broker, Todd Rozzo. In fact, Rozzo was awarded $50,000 in damages for a wrongful injunction and custody of notebooks he had created while at WaMu. Kudos to my co-counsel, Chuck Dalziel and Stuart Sims, from Brock, Clay in Marietta, Georgia. These guys were a lot of fun to work with, and Chuck and I go waaaay back.

One part that was particularly fun was that I got to refer to one of my favorite television commercials. It’s called Washington Mutual “head scan”.

Just remember the phrase – “I hate it when these things don’t scan.”

You might recognize Jane Lynch from Glee and Tim DeKay from White Collar.

That’s the joyous view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.

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Securities America wants it both ways with Federal injunction strategy.

I am outraged. It’s no secret that I’m not a big fan of Securities America, the hapless offspring of American Express Financial Services (now Ameriprise). In fact, I’m kind of embarrassed that I own Ameriprise stock, if for the only reason that it owns Securities America. There may be other reasons, but I haven’t looked at the company that closely lately.

Those of you who know me will recall that, with my then-partner, my law firm obtained an arbitration award against Securities America for $5.4 million several years ago. In that case, the firm tried to assert, with a straight face, that a broker using a stolen identity was properly registered. The arbitrators disagreed.

This time around we have Medical Capital Holdings and Provident Royalties. Both of these companies turned out to be frauds and Securities America was a huge seller of these two products. The one at issue in the Federal case is MedCap.

Securities America is desperate. Even though the company is owned by a huge financial services company, it is claiming that there is not enough money in the pot to fund a class action settlement and pay potential arbitration claims. So the company asked a judge to stop the arbitrations and now is asking the same judge to stop state regulators. (See Suzanne Barlyn’s article here.) Huh?

I was outraged when the judge halted the arbitrations. To me it was the height of hypocrisy to tell clients that they must participate in a class action. Yet Securities America would not allow a class action arbitration I am certain. Further, if a client brought an individual action against the company in court, it’s first reaction would likely be a motion to compel arbitration of the claims. Then they would ask a class-action judge to stop the arbitration? How is that fair or logical.

Pick your venue, boys. Class action or arbitration. But you don’t get the choice of stopping an arbitration (or regulator) in favor of the class action. If you don’t have the money, then file for bankruptcy and let everyone pick over the carcass. I’m betting there’s a good financial reason not to do it.

I have clients on both sides of the arbitration aisle. What I’m looking for is consistency in the application of laws regarding arbitration. I don’t see it here. Once again, Securities America seems to be making up the rules in its favor as it tries to deal with a problem. Good luck with that.

That’s the view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.

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FINRA Promissory Note Decisions Reflect Market Forces.

Early on in my legal career, I was a collection lawyer. In fact, I did collection work as a legal assistant while I was in law school. When I started doing collections in the securities business, I immediately starting working on promissory note cases. They go by many names, we called them Transitional Compensation.

At UBS (PaineWebber), they were called EFLs – for employee forgivable loans. Every firm on Wall Street had a different name. But one thing was for certain, in good markets, everyone got big money, even lower-end producers. And when acquisitions were on the way, even more money flowed. I called it “fattening the turkey”.
Well, those turkeys have come back to the turkey ranch. In an unscientific review of a large batch of recent arbitration awards, it sure felt like close to half of the awards were for promissory note cases. The excesses, and mergers, of just a few years ago have come home to roost. Producers that were hired to fill seats and desks washed out pretty quickly. Or, even worse, they were made to feel so unwelcome through a cut in support staff access and payout, they walked out because they couldn’t afford to work for peanuts any more.
Then there are the retention agreements. Firms provide “loans” or “bonuses” to employees to encourage them to stay after the merger of alleged equals (which it never is). A number of employees, who placed their faith in the smooth-talking executives whose bonuses counted on the short-term success of the merger, left their firms for many reasons. Most of the time it turned out that the grass was not greener on the other side.
For many years, one of my brokerage firm clients never gave out loans. They had an open door policy, meaning that the door was always open if the broker no longer wanted to work there. That firm was swallowed up – twice. It bears no resemblance to the firm it once was. And that’s a real shame. Because one never knows if the broker is moving for the culture or the money. And when the honeymoon is over, all that’s left is an arbitration to sort out the damage.
That’s the near-frozen view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.
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Is the FINRA Proposal for Public Arbitrators a Good Idea?

My initial answer is no. Suzanne Barlyn, a reporter with Dow Jones and the Wall Street Journal, reports that FINRA is planning to make its “pilot” program permanent.

The pilot program provided the opportunity for public investors to have three public arbitrators and no industry-affiliated arbitrators. The results of the pilot program are that 17 of 23 cases resulted in an award to the customer. This is viewed as a 70% “win” rate. I’m not sure this is a statistically significant number when compared with FINRA’s much larger universe of over 4,800 cases heard to completion since January 2005. The win rate over time is less than 50%.

Again, I’m not sure that’s a bad thing. On average, during the same time period, approximately 20% of all filed cases went to hearing. This means that, on average, 80% settled or went away in some fashion. (I think that involuntarily dismissed cases are few and far between.) But this is a big sample, not like looking at 23 cases and declaring a trend.

There could be a number of reasons why the number is higher in the pilot program. Statistical anomalies for one thing. Another could be the types of cases being handled in the pilot program. I also have concerns that a purely public panel may lose the benefit of the knowledge of an industry panelist’s experience.

Vociferous plaintiff’s lawyers and their pals at NASAA say that the process is unfair because of the industry panelist. But how about switching it around? Is the process now fair because one party, the brokerage firm and its broker, will be judged by 3 people with no industry experience. Or does fairness only exist when the process is stripped of any industry insider experience? This makes no sense to me.

Will I choose an all-public panel for cases where I’m representing customers? I don’t know. I’m still not convinced that it helps me. I’m sure someone will be keeping score.

That’s the view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.

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FINRA changes arbitrator list – And then there were two?

In case you don’t normally handle FINRA securities arbitrations, after the Statement of Claim and Answers are filed, the parties receive a list of arbitrators. The classification of arbitrators, public vs. non-public (these used to be called industry), is usually a total of sixteen choices in public (broken down into two 8-person lists) and one 8-person non-public list. Each party was entitled to four “peremptory” strikes, forcing out up to four people “just because”. The remaining names were ranked from 1 through, up to, 8 depending on the number of strikes.

Once FINRA received the list, the ranked arbitrators common to both lists were combined and the rankings are added up. The arbitrator with the lowest combined ranking (meaning most desirable from the combined list) is contacted first, then the next, and so on. But if both parties exercised all of their strikes, then it was possible that there were no names in common and FINRA would have to select names, on its own, at random. The parties, theoretically, then have no input on who the next two arbitrators are.

This selection process will change on September 27, 2010. Under the new rules, which you can read about here, each list will have groups of 10, not eight. However, the number of party strikes will not increase. This could lead to some unintended consequences.

For example, let’s say that the Claimant and Respondent use each of their strikes on four separate people, striking a total of eight. This leaves two people, who could have been ranked as numbers 5 and 6 by both parties. So the parties end up with their least desired arbitrator candidates (which they could not strike). While this may end up removing an administrative burden on FINRA, I’m not sure the parties are going to be happier.

On the other hand, my own experience led me to believe that the previous procedure was not so “random.” It seemed to me that the many of the same arbitrators would get the call as an off-list choice. But that could just be my perception.

So now, we will likely be assigned a name that we know, but not necessarily one that we like. It is rare that both sides agree on which arbitrator candidates they like, so it will be interesting to see how this new process changes the dynamics of list selection.

And finally, here’s another twist. When multiple parties are represented by the same lawyer, they get one set of strikes – four per listing of 10. When multiple parties are represented by separate counsel, each lawyer gets a set of strikes, four per lawyer per listing of 10. If both the broker and the firm are named respondents, then the entire list can still be stricken. A loophole? Perhaps.

That’s the view of one lawyer from Jupiter, Palm Beach County, Florida. I’m Marc Dobin.

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A reasoned award results in vacatur.

I’m not a big fan of reasoned arbitration awards. I think that they provide fodder for a motion to vacate (what others might call an appeal). What they really do is answer the age-old question “What were the arbitrators thinking?” Having served as an arbitrator, trust me, you don’t want to know.

But the arbitrators in a breach of contract case involving Raymond James Financial Services and three former brokers felt a need to share their opinions. In doing that, not only did they get it wrong (and sully the name of a very good in-house lawyer at Raymond James), but they bought and paid for a motion to vacate. The tortured reasoning of this arbitration panel deserved to be put under a microscope. They didn’t seem to have a clue.

It was clear that the arbitrators wanted to award money to the brokers. They could have done so without explaining themselves. Had they not provided an explanation, which they were entitled to do, the brokers would have gotten their money. But noooooo, the arbitrators wanted to “share”. And in doing so, the case found its way through the District Court, where the award was vacated, and the Fourth Circuit Court of Appeals, where the opinion is lengthy but comes down to this simple analysis – the arbitrators blew it. And how does the court know? Because the arbitrators demonstrated it in their award.

For those of you that want reasoned awards, here’s the poster child for why they have no business in arbitration.

That’s the view of one lawyer from Jupiter, Palm Beach County, Florida. I am Marc Dobin.

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