Friday, October 26, 2007
SIFMA's Oct. 25 testimony before House Subcommittee on Commercial and Administrative Law on the "Arbitration Fairness Act" is posted on its website, a more concise version of its White Paper on Securities Arbitration, subtitled "the success story of an investor protection focused institution that has delivered timely, cost-effective, and fair results for over 30 years."
The Arbitration Fairness Act is the most recent Congressional expression of concern about the securities arbitration process that dates back to the McMahon decision itself. My objections to the White Paper are not so much with its position; I have previously written that, with all its flaws, the securities arbitration process is reasonably fair and that most investors are probably better off in arbitration than in court. I just wish that SIFMA had invested its resources into contributing new research or new insights to this perennial debate. Instead, the White Paper is principally a rehash of the old arguments and relies heavily on old studies – e.g., a 1988 study comparing arbitration and litigation, the 1992 GAO study, the 1999 Tidwell study based on NASD party evaluations. The most argumentative portion of the White Paper is devoted to a critique of the recently released Solin Report. While I have previously pointed out difficulties with the analysis in the Solin Report, its authors base their arguments on an empirical examination of a substantial number of arbitration awards.
The White Paper, for example, faults the Solin Report for its failure to account for what the White Paper characterizes as the “particularly aggressive claimants’ bar” in the early 2000s which filed, in its view, a large number of meritless claims, specifically, the tainted research claims. I think, however, that the poor rate of success of the tainted research cases in arbitration is a topic worthy of more dispassionate study. Given the public exposure of statements by analysts that they were lying about their expectations for the stocks, why were the arbitrators apparently so willing to blame the investors instead of the firms? Contrary to the White Paper, I personally do find it surprising that arbitrators awarded damages in fewer than one-third of the analyst cases. Unlike the White Paper, I have doubts that the explanation lies with the aggressive claimants’ bar.