Securities Law Prof Blog

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

Saturday, March 5, 2011

District Court Issues TRO to Restrain Arbitrations that may Deplete Settling Defendants' Assets

Susanne Craig's article in today's New York Times (Financial Fraud Case Pits Arbitration vs. Class Actions) highlights a knotty issue involving the relationship between arbitration and class action litigation.  The article focuses on the plight of customers whom Securities America brokers talked into investing the bulk of their investment funds into two risky investments.  Many of these investors have filed claims in FINRA arbitration to recover their losses; at least one Securities America customer has already obtained an award of nearly $1.2 million.  Securities America is also the defendant in a class action involving the same allegations of misconduct.  A federal district court has thrown into doubt whether those investors who filed their claims in arbitration can even proceed with their claims, much less ever recover their losses.  A judge hearing the class action granted plaintiffs' request for a TRO to restrain the individual arbitration hearings, citing his power under the All Writs Act (Billitteri v. Securities America, Feb. 18, 2011, N.D. Tex.).  The judge received notice that the parties have reached a settlement that would end the class action; the plaintiffs argued that the ongoing arbitrations could deplete defendant Securities America's assets.  In granting the TRO, the court stated that it was necessary to restrain the arbitrations "to ensure the conditions for reaching a Settlement Agreement remain in place as the Court considers the Motion for Preliminary Approval." 

It's important to remember that customers of brokerage firms can always bring an individual arbitration claim against their broker-dealer.  The FINRA forum does not hear class actions, and customers remain free to bring class actions in court (to the extent permitted by the PSLRA and SLUSA).  Customers remain free to opt out of the class action and pursue their claim in arbitration.  If the district court ultimately decides that it has the authority to enjoin the arbitrations in favor of the class action (and if it is upheld on appeal), the court has substantially disrupted the brokerage customers' choice of remedies set forth in the FINRA rules.  The next court hearing is set for March 18.

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