Articles Tagged with arbitration

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When you open a brokerage account, you most always agree to bring any future disputes that arise with your stockbroker or brokerage firm to FINRA for adjudication. This means you give up your right to a jury trial.

FINRA offers both arbitration and mediation services. In a nutshell, mediation is where a neutral third-party attempts to help the parties reach an amicable settlement. Essentially, the mediator points out what he or she sees are the strengths and weaknesses of each party’s position. In arbitration, one or three arbitrators (depending on the amount in dispute) hear testimony, review evidence, and render a binding decision. It is possible to utilize both methods in the same case.

Here are some of the main ways that arbitration and mediation differ.

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stock marketIf you have lost money in a securities investment, obviously you would be happy to recoup some of those funds.  Many companies that offer assistance with recovering lost capital, however, are likely fraudulent.  A company may sound credible, have authentic looking documents, and a fancy website, but if the deal sounds too good to be true, it probably is a scam.

Tips for Investors

  • Be a Skeptic. Assume that any “recovery” company that reaches out to you is a fake until you can independently verify it is a legitimate company – especially if it claims to be registered with FINRA. Look it up on FINRA’s BrokerCheck site and use the contact information on the BrokerCheck report to reach out to the firm.
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Yes, technically, but in reality, no.  Under the law, a FINRA securities arbitration award can be appealed, but practically speaking, arbitration awards are rarely changed when appealed.   Indeed, under the Federal Arbitration Act and the Florida Arbitration Act, a party has the legal right to file an action in court to vacate or modify an arbitration award.  Arbitration awards, however, are very difficult to overturn or modify.

Indeed, federal and state courts give substantial deference to an arbitration panel’s award, notwithstanding that arbitration panels are not necessarily bound to follow the law and can even misapply it with impunity.  Instead, an arbitration panel may enter an arbitration award that it believes results in a fair or equitable outcome.

FINRA Securities Arbitration Award

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An investor who is abused by his or her securities broker cannot sue in court.  Instead, the investor must sue the broker or the brokerage firm in arbitration before the Financial Industry Regulatory Authority, otherwise known as “FINRA.”

FINRA maintains its own arbitration forum that shares certain features of court litigation, but is also different in many material ways.  Here are seven key differences between FINRA arbitration and litigation in court:

  • First, FINRA staff processes the claim filed by the customer against the broker or firm and administers the entire case, not the clerk of court.
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Virtually every new account application with any brokerage firm contains a pre-dispute arbitration agreement. This agreement requires that any dispute you have with your stockbroker or brokerage firm be filed with the Financial Industry Regulatory Authority (“FINRA”) instead of being filed in court. The FINRA arbitration process differs from the court system in several key aspects: the case will be decided by 1 or 3 arbitrators instead of a jury; there are no depositions or interrogatories permitted in FINRA arbitrations (with very limited exceptions); FINRA arbitrations are not a matter of public record (the only aspect of FINRA arbitration proceedings that is made public are the awards); and there are extremely limited grounds for appealing a FINRA arbitration award.

The way a FINRA arbitration case generally works is this.

Claimant files the initial document that begins the FINRA arbitration called the Statement of Claim.  It identifies the parties, contains the allegations of wrongdoing, and sets forth the amount of damages being claimed.  Once it is filed with FINRA, FINRA will serve it on the named Respondent.   The Respondent then has forty-five (45) days to file a Statement of Answer.

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Securities arbitration is the legal process by which most disputes between customers and brokerage firms are resolved.  Arbitration is an alternative to traditional litigation, which takes place in a courthouse before a judge and jury.

When a person goes to arbitration, he or she is giving up, or surrendering, the right to have a dispute heard by normal court or jury. For this reason, arbitration can only happen by agreement of the parties, usually by way of a signed arbitration agreement.

Many businesses today insert an arbitration clause into the boilerplate language of their agreements with customers. The brokerage firm industry is no exception. The new account paperwork for almost every brokerage firm in the United States contains a mandatory arbitration clause.

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West Palm Beach Arbitration Lawyers

If  you have a brokerage account with a major brokerage firm in the United States today, you have almost certainly agreed to resolve any dispute through mandatory arbitration.  This means you cannot take your case to a courthouse to be heard by a jury.  Instead, you must take your case to arbitration before the Financial Industry Regulatory Authority, also known as FINRA.   (By the way, the brokerage firm you are suing is also a member of FINRA.)

For decades, lawyers who represent investors in these arbitration proceedings have railed against the inherent unfairness of the proceedings.   Statistically, investors would be far better off taking their dispute to a regular court to be heard by a regular jury.

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The United States Court of Appeals for the Eleventh Circuit recently held that “clawback actions brought by court-appointed receivers are not categorically exempt from the Federal Arbitration Act.”  Wiand v. Schneiderman, 2015 WL 525694 (C.A. 11 (Fla.)).  The appellate court affirmed the district court’s decision to decline to vacate an arbitration award in a clawback action.

The lower court case was one of approximately 150 clawback actions brought by the court-appointed receiver of six hedge funds involved in a Ponzi scheme orchestrated by Arthur Nadel.  The receiver initiated the clawback suits to recover “profits” received by an investor in Nadel’s Ponzi scheme so they could be redistributed among all the investors who lost money in the scheme.  Nadel, a former Florida fund manager was dubbed a “mini-Madoff” after admitting to defrauding investors out of $168 million in February 2010.  In October 2010 he was sentenced to 14 years in prison.  In 2012, Nadel died in prison at the age of 80.

The clawback action at issue was initiated in January 2010 in the U.S. District Court for the Middle District of Florida against the estate of Herbert Schneiderman.  Schneiderman invested $100,000 with Victory Fund, Ltd., one of the hedge funds connected with Nadel’s scheme.  Schneiderman received total payments from the fund in the amount of $263,660.  The receiver filed suit against Schneiderman’s estate to recover the fake “profits” of $163,660.  The estate moved to compel arbitration based on an arbitration provision contained in the Subscription Agreement and Limited Partnership Agreement between Schneiderman and the Victory Fund.  The district court granted the motion to compel arbitration.  The parties agreed to arbitrate before the American Arbitration Association (“AAA”). Thereafter, the AAA arbitrator granted the summary judgment motion filed by Schneiderman’s estate and entered a Final Order and Award dismissing the receiver’s claims as barred by the Florida probate statutes.  In addition, the arbitrator denied the receiver’s motion declaring the agreement containing the arbitration provision void.   Subsequently, the receiver moved to vacate the Award which was also denied.