July 05, 2012
Second Circuit Affirms $20.5 Million Arbitration Award Against Ponzi Scheme's Clearing Firm
The Second Circuit summarily affirmed a district court's confirmation of a $20.5 million arbitration award against Goldman Sachs Execution & Clearing L.P. The claimants, the unsecured creditors committee of Bayou Group, LLC, asserted that the clearing firm had "red flags" to alert them that Bayou was in fact a Ponzi scheme. Goldman Sachs unsuccessfully argued that the award was "in manifest disregard of the law." The Second Circuit, noting that the manifest disregard standard is, by design, exceedingly difficult to satisfy, agreed with district court that Goldman had not satisfied it. Goldman Sachs Execution & Clearing, L.P. v. Official Unsecured Creditors' Committee of Bayou Group LLC (2d Cir. July 3, 2012).
July 02, 2012
FINRA Launches Pilot Program for Large Arbitration Cases
FINRA announced the launch of a pilot program specifically designed for large arbitration cases involving claims of $10 million or more. The program enables parties to customize the administrative process to better suit special needs of a larger case and allows them to bypass certain FINRA arbitration rules. Participation in the pilot program, which began today, is voluntary and open to all cases; but in order to be eligible, all parties will be required to pay for any additional costs of the program and must be represented by counsel.
FINRA gives some examples how parties may customize the process:
have additional control over the method of arbitrator appointment and the qualifications of arbitrators;
hire non-FINRA arbitrators for their case;
develop their own procedures for exchanging information prior to the hearing;
have expanded discovery options such as depositions and interrogatories; and
choose from a wider selection of facilities.
June 28, 2012
FINRA Simplified Arbitration's Dollar Limit Raised to $50,000
FINRA Rules 12800 and 13800 (Simplified Arbitration) of the Customer and Industry Codes of Arbitration Procedure (Codes) provide streamlined arbitration procedures for claimants seeking damages of $25,000 or less. The SEC approved amendments to the Codes to raise the dollar limit for simplified arbitration from $25,000 to $50,000. The amendments are effective on July 23, 2012, for all cases filed on or after
the effective date.
May 14, 2012
Court Dismisses Schwab's Challenge to FINRA Rule For Failure to Exhaust Administrative Remedies
Regular readers of this blog will recall that Charles Schwab and FINRA are involved in a dispute over the SRO's rules that prohibit broker-dealers from requiring customers to give up their rights to bring class actions in court. Last fall Schwab amended its customers' agreements to include such a prohibition in reliance on AT&T Mobility v. Concepcion. FINRA promptly brought a disciplinary proceeding against the firm, and Schwab, in turn, brought an action in federal district court seeking a declaratory judgment that FINRA could not enforce its rules, first, because the FINRA rules do not really prohibit class action waivers and, second, even if it does, the rules violate the FAA.
On May 11, the federal district court granted FINRA's motion to dismiss the complaint because the court lacks jurisdiction to hear the case. The court held that Schwab failed to exhaust its administrative remedies and that the failure to exhaust administrative remedies is jurisdictional. In addition, even if failure to exhaust is only an element of a claim, Schwab failed to show that it meets the requirements for an exception to the requirement of administrative exhaustion.
The 21-page opinion emphasizes that the issues involved in this case are squarely within the expertise of FINRA and the SEC and do not involve any constitutional claims (unlike the issues in SEC v. Gupta dealing with retroactive application of Dodd-Frank).
Charles Schwab & Co., Inc. v. FINRA (N.D. Cal. May 11, 2012) (Download Order Granting Def's MTD)
May 04, 2012
FINRA's Simplified Arbitration Cap Raised to $50,000
The SEC approved a proposed rule change filed by FINRA to amend FINRA’s Customer and Industry Codes of Arbitration Procedure to raise the limit for simplified arbitration from $25,000 to $50,000. (Download 34-66913)
FINRA currently offers streamlined arbitration procedures for claimants seeking damages of $25,000 or less. Under FINRA’s simplified arbitration rules, one chair-qualified arbitrator decides the claim and issues an award based on the written submissions of the parties, unless the customer requests a hearing (if it is a customer case), or the claimant requests a hearing (if it is an industry case). FINRA also expedites discovery in these cases.
The rule change raises the dollar limit for damages sought in order to offer simplified arbitration to claimants seeking damages of $50,000 or less. The rule change also states that if the amount of a claim is more than $50,000, but not more than $100,000, exclusive of interest and expenses, the panel would consist of one arbitrator unless the parties agree in writing to three arbitrators.
FINRA represented that the $25,000 threshold captured twenty-one percent of all cases filed with FINRA’s arbitration forum in 1998, but currently captures only ten percent of FINRA’s caseload. FINRA stated that, based on 2011 statistics, raising the threshold to $50,000 would increase the percentage of claims administered under simplified
arbitration to seventeen percent of the claims filed with the forum.
April 17, 2012
FINRA Proposes Expungement Procedures for Unnamed Brokers
FINRA is requesting comment on proposed new rules that would permit brokers who are the “subject of” allegations of sales practice violations made in arbitration claims, but who are not named as parties to the arbitration, to seek expungement relief by initiating In re expungement proceedings at the conclusion of the underlying customer-initiated arbitration case. These allegations must be reported in the same way that customer complaints are reported—to the Central Registration Depository (CRD®) system on Forms U4 or U5. Currently, the Code of Arbitration Procedure for Customer Disputes (Customer Code) and the Code of Arbitration Procedure for Industry Disputes (Industry Code) (together, Codes) do not provide unnamed persons with express procedures to seek expungement of these types of allegations.
According to FINRA, the proposed In re expungement rules and accompanying forms provide unnamed persons with a remedy to seek redress concerning allegations that could impact their livelihoods, yet maintain the protections of FINRA’s expungement rules to ensure the integrity of the CRD records, on which the investing public relies.
The Comment Period expires May 12, 2012.
April 10, 2012
SEC Approves FINRA Rule Change on FLSA Collective Action Claims
The SEC approved a FINRA proposed rule change to make explicit FINRA's longstanding position that collective action claims brought under the Fair Labor Standards Act are class actions and therefore ineligible for arbitration in its forum. The rule change was made necessary by a federal district court opinion that held to the contrary. (Download 34-66774)
April 06, 2012
Merrill Seeks to Vacate $10 Million Arbitration Award in Deferred Comp Dispute, Citing Arbitrator Bias
A FINRA arbitration panel recently ordered Merrill Lynch to pay two former brokers about $5 million in deferred compensation and tacked on an additional $5 million in punitive damages. The panel found that a committee set up to decide deferred compensation payouts when brokers left was a "sham." Merrill promptly went to court to try to vacate the award, charging that the chair of the panel was biased and "demonstrated overt hostility" toward Merrill. According to Merrill, the chair failed to disclose that her husband is a plaintiff's attorney who has previously sued Merrill. InvNews, Merrill Lynch loses $10.2M broker-pay case
February 24, 2012
FINRA Proposes Raising Limit for Simplified Arbitration from $25,000 to $50,000
FINRA has filed with the SEC a proposed rule change to amend FINRA Arbitration Rules to raise the limit for simplified arbitration from $25,000 to $50,000. In its release FINRA explains that it currently offers streamlined arbitration procedures for claimants seeking damages of $25,000 or less. Under the simplified arbitration rules, one chair-qualified arbitrator decides a claim and issues an award based on the written submissions of the parties, unless, in a customer case, the customer requests a hearing, or, in an industry case, the claimant requests a hearing. FINRA also streamlines discovery for these cases.
The $25,000 threshold has been in place since 19983 and, at that time, captured 21 percent of all cases filed with the forum. Currently, the $25,000 threshold captures ten percent of FINRA’s caseload. Statistics for 2011 indicate that raising the threshold to $50,000 would increase the percentage of claims administered under simplified arbitration to 17 percent of the claims filed with the forum.
FINRA states a number of advantages to raising the threshold for simplified arbitration to $50,000:
Forum fees for simplified arbitration claims would be reduced.
Parties would save the time and expense of preparing for, scheduling, and traveling to the hearing.
Customers who are not able to retain an attorney to handle their case because of the small amount in dispute, and who are not comfortable appearing at an evidentiary hearing without representation, would have the flexibility to choose whether to request a hearing.
Raising the limit for cases decided on the papers would reduce the time to process the cases because the arbitrator and parties would not need to coordinate their calendars to schedule a hearing.
February 23, 2012
FINRA Seeks to Dismiss Schwab's Lawsuit Contesting its Rule Prohibiting Class Action Waivers
We previously blogged that Charles Schwab has filed a declaratory judgment action against FINRA, in response to FINRA's institution of a disciplinary proceeding against the firm for requiring its customers to accept a class action waiver in its customers' agreements. Schwab asserts that (1) FINRA Rule 2268(d)(3) does not prohibit the firm from including a class action waiver in its customer agreements, and (2) even if it does, the FAA and the recent Supreme Court decision in AT&T Mobility v. Concepcion preempt FINRA's prohibition. Schwab fails to acknowlege (much less address) the argument that the Securities Exchange Act and its anti-waiver clause preempt the FAA. On Feb. 21, 2012 Schwab filed a motion for preliminary injunction, reasserting its arguments.
On Feb. 22, FINRA in turn filed a Motion to Dismiss for lack of subject matter jurisdiction, asserting as its principal argument that Schwab failed to exhaust its administrative remedies under the Exchange Act. The Exchange Act establishes a comprehensive system of regulating broker-dealers, including judicial review of FINRA disciplinary proceedings. Noting the Schwab instituted this judicial proceeding within hours after the disciplinary complaint was served, FINRA argues that Schwab failed to meet the prerequisite for filing a federal law suit -- exhaustion of its administrative remedies. Moreover, Schwab does not assert valid reasons for bypassing the disciplinary proceeding -- either that the disciplinary proceeding is too time-consuming or that the FINRA and SEC adjudicators lack the expertise to address issues outside of securities law or FINRA rules.
A hearing is scheduled for April 3.
February 03, 2012
Carlyle Drops Arbitration Clause in IPO Filings
Good news! The Carlyle Group announced today that it was dropping the controversial mandatory arbitration (and no class actions) clause from its IPO documents. Apparently it decided it was a bad idea after consultations with the SEC, investors and other interested individuals. Three Democratic Senators (Blumenthal, Franken and Menendez) also wrote to SEC Chair Schapiro expressing their concerns.
Schwab Sues FINRA, Seeks Declaratory Judgment It Can Prohibit Class and Consolidated Claims
In a blog yesterday, I reported that Charles Schwab has filed a declaratory judgment action against FINRA in federal district court in Northern California in response to FINRA's institution of a disciplinary action against the firm. The issue is whether Schwab's amending its customer agreements to bar class actions in court and to prevent arbitrators from consolidating individual claims is legal and enforceable. FINRA asserts the changes violate its rules; Schwab disputes this, but says that in any event the recent U.S. Supreme Court opinions in Concepcion and Compucredit override FINRA's rules.
I will have more to say about the litigation later, but in the meantime here is the Schwab complaint (Download Schwab Complaint).
February 02, 2012
Schwab Goes to Court to Uphold its Class Action Waiver
Recently I wrote an article in which I explored the question of why no brokerage firm seeks to attract retail investors by advertising that it does not require its customers to enter into mandatory predispute arbitration agreements. Barbara Black, Can Behavioral Economics Inform Our Understanding of Securities Arbitration?, 12 Transactions: The Tennessee Journal of Business Law 107 (2011). Charles Schwab, apparently, has chosen a different strategy. In fall 2011 the firm amended its customer agreements to include a provision requiring customers to waive their rights to bring or participate in class actions against the firm and also states that arbitrators do not have the authority to consolidate claims. In a blog yesterday, I described FINRA's enforcement proceeding against Schwab, which charges that both these provisions violate FINRA rules.
Schwab has responded to the FINRA action by filing a declaratory judgment action in federal district court in Northern California, seeking a determination that the agreements are enforceable under recent U.S. Supreme Court opinions, AT&T Mobility v. Concepcion and Compucredit Corp. v. Greenwood. As reported in BNA Securities Daily, the company stated that class actions are "unduly expensive and time-consuming, and too often result in little benefit to class members" and that class action waivers are "in the best interests of both its customers and its shareholders."
We now have the Carlyle Group, in its IPO, seeking to bar investors' class claims and Schwab seeking, in its brokerage agreement, to bar customers' class claims. Both are directly attributable to Concepcion. If these provisions are legal and enforceable, securities class claims will soon be a thing of the past; the Supreme Court will have accomplished what millions of lobbyists' dollars could not. Where does the Securities and Exchange Commmission, the self-proclaimed investors' advocate, stand on these developments?
January 30, 2012
FINRA Reports that 76% of Investors Chose All-Public Panels in First Year of Choice
On Feb. 1, 2011, the SEC approved the FINRA rule change that permits customers to select panels consisting solely of all-public arbitrators (i.e., no industry arbitrator). After nearly a year in operation, Linda Fienberg, head of FINRA's arbitration program, reports that 76% of investors chose the all-public option, according to Investment News. Ms. Fienberg says this is a "bit surprising," because the numbers in the pilot program were lower. The pilot program, however, could only be used by customers of a few large brokerage firms that voluntarily participated and could not be used in cases where the individual registered representative was named as a party.
Do all-public panels arrive at results that are more favorable to investors? There has not yet been examination of the data, and this will certainly be carefully watched by observers. Meanwhile, the consensus is that the FINRA arbitration forum gets high marks for instituting this change.
Perhaps, in light of the popularity of the all-public panel (a result that does not surprise me), FINRA will next consider a rule change to make all-public panels the default option. Under the current rule, unless the all-public panel is selected within a relatively short time frame, the claimant is stuck with the default choice -- one industry and two public arbitrators. This can create confusion and an unfortunate choice by the per se claimant or inexperienced counsel.
January 25, 2012
FINRA Fines Merrill Lynch for Not Letting Brokers Arbitrate Bonus Disputes
FINRA fined Merrill Lynch, Pierce, Fenner & Smith $1 million for failing to arbitrate disputes with employees relating to retention bonuses. Registered representatives who participated in the bonus program had to sign a promissory note that prevented them from arbitrating disagreements relating to the note, forcing the registered representatives to resolve disputes in New York state courts, which greatly limits the ability of defendants to assert counterclaims in such actions.
FINRA found that Merrill Lynch, after merging with Bank of America in January 2009, implemented a bonus program to retain certain high-producing registered representatives and purposely structured it to circumvent the requirement to institute arbitration proceedings with employees when it sought to collect unpaid amounts from any of the registered representatives who later left the firm. In January 2009, Merrill Lynch paid $2.8 billion in retention bonuses structured as loans to over 5,000 registered representatives. Also, Merrill Lynch structured the program to make it appear that the funds for the program came from MLIFI, a non-registered affiliate, rather than from the firm itself, allowing it to pursue recovery of amounts due in the name of MLIFI in expedited hearings in New York state courts to circumvent Merrill Lynch's requirement to arbitrate disputes with its associated persons. Later that year, after a number of registered representatives left the firm without repaying the amounts due under the loan, Merrill Lynch filed over 90 actions in New York state court to collect amounts due under the promissory notes, thus violating a FINRA rule that requires firms to arbitrate disputes with employees.
In concluding this settlement, the firm neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
January 19, 2012
Can Carlyle Group Require Investors to Arbitrate All Disputes (and no Class Arbitration)?
Carlyle Group, L.P., the private equity firm, is preparing to go public and has filed with the SEC a registration statement that discloses that its partnership agreement will require arbitration of all investors' disputes, including federal securities claims. In addition, the agreement provides that investors may only bring claims in their individual capacities and not as a class action. The agreement also contains a confidentiality agreement, so that parties cannot disclose any of the arbitration materials, including any awards. Here is the registration statement as filed with the SEC. The Registration Statement contains other anti-investor provisions that Steven Davidoff has ably analyzed in his New York Times Dealbook blog, Carlyle Readies an Unfriendly I.P.O. for Shareholders.
I have written two law review articles exploring the possibility that publicly traded issuers may seek to compel arbitration and prohibit class arbitration:
Arbitration of Investors' Claims Against Issuers: An Idea Whose Time Has Come?, Law and Contemporary Problems (forthcoming) and available on SSRN, and
Eliminating Securities Fraud Class Actions Under the Radar, 2009 Columbia Bus. Law Rev. 802 and available on SSRN.
As I describe in those articles, arbitration of investors' claims against public issuers is an "idea whose time has come" for over twenty years. Although proposals to require arbitration have been floated periodically, publicly traded domestic issuers and their counsel have not seriously pursued them, probably because of legal obstacles to their implementation, including the fact that the SEC has never publicly repudiated its staff position that an arbitration provision in a publicly traded issuer's governance documents would violate the anti-waiver provisions of the federal securities laws. In addition, until the recent U.S. Supreme Court opinion in AT&T Mobility LLC v. Concepcion, issuers and their counsel may not have perceived significant advantages to arbitration to warrant challenging the SEC on this issue and risking criticism in the court of public opinion. However, Concepcion is a game-changer; in that case the Court upheld a provision in a consumer contract that disallowed class arbitration. Accordingly, I predicted that issuers may be able to achieve an advantage to the adoption of an arbitration provision that they were not able to achieve previously -- the elimination of the securities class claim! My prediction has now come to pass.
Will the SEC try to stop Carlyle? When Christopher Cox was SEC Chairman, there were rumors that the agency was giving consideration to allowing issuers to require arbitration. Moreover, there are already foreign private issuers whose securities are traded in the U.S. markets that require arbitration, the best known of which is Royal Dutch Shell. In light of these developments, some Commissioners may be ready to back away from the agency's previous opposition to arbitration clauses in public issuer's governance documents.
To my knowledge only two of the current Commissioners have stated publicly an opinion on the use of mandatory arbitration in investors' agreements with their broker-dealers. Commissioners Elisse Walter and Luis Aguilar have previously expressed reservations about the use of mandatory arbitration clauses in customers' brokerage agreements, so I would expect that they would not look favorably on Carlyle's arbitration agreement, which is a considerable extension of the concept of an "agreement" for purposes of the Federal Arbitration Agreement. It is likely that it would come down to SEC Chair Mary Schapiro, who previously was the CEO of FINRA, which sponsors the primary arbitration forum for the securities industry. To date she has been circumspect about expressing a view on mandatory arbitration. Even assuming that she supports mandatory arbitration of customer-broker disputes, the Carlyle "agreement" mandating arbitration does not bear much resemblance to the arbitration agreements entered into between customers and their brokers. The latter involve an actual, one-on-one contractual rrelationship (albeit standard-form) between the customer and the broker. Including a arbitration provision in a governance document that is included in a Registration Statement and that purports to bind all subsequent investors may be a "bridge too far" for Ms. Schapiro.
Certainly the Carlyle Group is pushing the envelope here with its "take it or leave it" attitude. I hope the SEC shows some backbone and doesn't let this go by without a fight.
January 09, 2012
FINRA Proposes to Preclude Collective Action Claims from Arbitration
FINRA recently filed with the SEC a rule change that would amend Rule 13204 of the Industry Arbitration Code to preclude collective action claims from being arbitrated under the Industry Code. (Download SR-FINRA-2011-75) The amendment is a consequence of a federal district court opinion that held, contrary to the view of FINRA Dispute Resolution, that collective action claims under the Fair Labor Standards Act were not "class actions" for the purpose of Rule 13204 and thus compelled arbitration of the claims before FINRA. (Apparently the federal district court thinks it can interpret FINRA rules better than the organization itself.) The amendment explicitly provides that collective action claims under the Fair Labor Standards Act, the Age Discrimination in Employment Act or the Equal Pay Act of 1963 may not be arbitrated under the Code.
December 07, 2011
FINRA Proposes Rule to Invalidate PDAAs for Whistleblower Disputes
FINRA has filed with the SEC a proposed rule change (Release No. 34-65896; File No. SR-FINRA-2011-067) (December 6, 2011) to amend FINRA Rule 13201 of the Code of Arbitration Procedure
for Industry Disputes (“Industry Code”) to align the rule with statutes that invalidate predispute
arbitration agreements for whistleblower claims.
The Dodd-Frank Act amended the Sarbanes-Oxley Act of 2002 by adding a new paragraph (e) to 18 U.S.C. § 1514A4 to provide that:
(1) WAIVER OF RIGHTS AND REMEDIES – The rights and remedies provided for
in this section may not be waived by any agreement, policy form, or condition
of employment, including by a predispute arbitration agreement.
(2) PREDISPUTE ARBITRATION AGREEMENTS – No predispute arbitration
agreement shall be valid or enforceable, if the agreement requires arbitration
of a dispute arising under this section.
Prior to the Dodd-Frank Act, it was FINRA staff’s position that parties were required to arbitrate SOX whistleblower claims under the Industry Code. The proposed rule change would amend FINRA Rule 13201 of the Industry Code to make clear that parties are not required to arbitrate SOX whistleblower claims, superseding the existing guidance to the contrary. While the main impetus for the proposed rule change is the need to update FINRA staff’s stated position on SOX whistleblower claims, FINRA proposes to make the rule text broad enough to cover any statutes that prohibit predispute arbitration agreements for whistleblower claims.
November 28, 2011
Ninth Circuit Upholds FINRA's Immunity from Suit
Two recent short, interesting opinions from the Ninth Circuit address FINRA's immunity.
In Central Registration Depository #1346377 (Paul Merritt Christiansen) v. FINRA (9th Cir. Nov. 23, 2011, not for publicationDownload CentralRegistration.112311), the plaintiff sued FINRA alleging violation of his right to be nominated for and serve on FINRA's board of directors and disclosure of false and injurious information about about him to a prospective employer through its Central Registration Depository (CRD) computer database. The appellate court affirmed the trial court's dismissal because the lower court properly concluded that FINRA enjoys absolute immunity from money damages for its regulatory activity. In addition, his request that he be reinstated and that certain information be purged from his record would require the court to contravene FINRA's properly adopted rules.
In Sacks v. Dietrich (9th Cir. Nov. 23, 2011Download Sacks.112311), plaintiff appealed from the dismissal of his claims against two arbitrators who disqualified him from representing an investor. The Ninth Circuit agreed that the claims were barred by arbitral immunity. Two of the three arbitrators assigned to the panel disqualified the plaintiff because he was barred from the securities industry and thus ineligible to represent investors before FINRA under FINRA rule 13208. However, the panel noted that it would allow plaintiff "to assist a representative qualified under Rule 13208" in a future proceeding.
The 9th Circuit first affirmed the district court's ruling that it had jurisdiction over the action. Although plaintiff's claims were all state law causes of action, the alleged wrongful conduct underlying those claims turned on a federal question: whether the arbitrators exceeded their jurisdiction under FINRA arbitration rules by applying Rule 13208 and barring plaintiff from representing the investor. The appellate court also agreed with the lower court that the arbitrators were protected from liability under the doctrine of arbitral immunity. FINRA rules and applicable law dictate that the arbitrators were acting within their jurisdiction in applying FINRA rules. Even though plaintiff was not a party to the arbitration agreement between the parties, he was still bound by it under ordinary contract and agency principles. Because the arbitrators acted with full authority under the arbitration agreement, they cannot be subject to suit by a party representative.
November 01, 2011
Ninth Circuit Confirms Debt Award Against Challenge to Arbitrability
In an opinion marked "not for publication," Wang v. Bear Stearns & Co. (Oct. 31, 2011)Download Wang.103111, the Ninth Circuit rejected a customer's efforts to resist confirmation of an adverse arbitration award by claiming that the claim was not arbitrable because her claim was encompassed by a putative class action.
Bear Stearns had brought the FINRA arbitration proceeding to collect payment for completed stock purchases pursuant to the customer's agreement. Wang asserted that a pending class action alleging that the broker-dealer committed fraud in the sale of the stock meant that she did not have to submit to arbitration. The court, however, rejected her argument because "the essential elements of the claims are distinct and bear little relation to each other....It is axiomatic that Bear Stearns cannot assert a counterclaim for monetary damages in the pending class action where Wang is not a named party." Accordingly, the appellate court affirmed the trial court's confirmation of the award in favor of Bear Stearns.