Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Tuesday, December 16, 2008

FINRA Announces Special Arb Procedures for ARS Consequential Damages Cases

FINRA announced details of a special arbitration procedure for investors seeking recovery of consequential damages related to their investments in Auction Rate Securities (ARS). Customers entitled to file for consequential damages under ARS-related settlements that firms have concluded with FINRA or the SEC may use this special procedure.  Consequential damages equate to the harm investors suffered from their ARS transactions - such as opportunity costs or losses that resulted from investors' inability to access their funds because their ARS assets were frozen. Use of this special arbitration procedure is at the investor's sole option. Investors also have the option of bringing a case under standard arbitration rules or in any other forum where they may have the right to seek redress.

Under the special procedure, firms will pay all fees related to the arbitration, including filing fees, hearing session fees and all the fees and expenses of arbitrators. Firms cannot contest liability related to the illiquidity of the ARS holdings, or to the ARS sales, including any claims of misrepresentations or omissions by the firm's sales agents. Further, the firm cannot use in its defense an investor's decision not to sell ARS holdings before the relevant ARS settlement date or the investor's decision not to borrow money from the firm if it made a loan option available to ARS holders.

With the special arbitration procedure, investors now have the option of selling their ARS holdings back to the firms under the regulatory settlements and, at the same time, pursuing consequential damages. Investors who wish to seek punitive damages or attorneys' fees have the option to do so under FINRA's standard arbitration procedures.

To speed the arbitration process under the special procedure, cases claiming consequential damages under $1 million will be decided by a single, chair-qualified public arbitrator. In cases with consequential damage claims of $1 million or more, the parties can, by mutual agreement, expand the panel to include three public arbitrators.

For investors who opt for the standard FINRA arbitration process, disputes will be heard by a typical three-arbitrator panel consisting of two public arbitrators and one non-public arbitrator. However, under rules created by FINRA four months ago, that non-public arbitrator cannot have been associated with ARS since Jan. 1, 2005. That is, that non-public arbitrator cannot have worked for a firm that sold ARS, cannot have sold ARS him- or herself and cannot have supervised an individual who sold ARS since Jan. 1, 2005.

Also in the standard forum, ARS damage claims up to $50,000 will be heard by a single public arbitrator. In cases where damages claimed are over $50,000, the panel will consist of two public arbitrators and one non-public arbitrator who has had no association with ARS since Jan. 1, 2005.

As of the end of November, 275 ARS arbitrations claims have been filed in FINRA's Dispute Resolution forum under its standard arbitration procedure. Investors with pending claims against settled firms can switch to the special arbitration procedure as long as they are willing to limit their claims to consequential damages.

The SEC has announced final ARS settlements with Citigroup Global Markets, UBS Financial Services and UBS Securities, while FINRA has reached final settlements with WaMu Investments and First Southwest Company. The SEC has reached agreements in principle with Bank of America, Merrill Lynch, RBC Capital Markets and Wachovia. FINRA has reached agreements in principle with Mellon Capital Markets, City National Securities, Comerica Securities, Harris Investor Services, SunTrust Investment Services, SunTrust Robinson Humphrey and NatCity Investment, Inc. Formal settlements in those cases are expected to be announced soon. Additionally, FINRA is actively investigating an additional two dozen firms for ARS-related misconduct.

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