On the same day, February 25, the Public Investors Arbitration Bar Association issued a Report and a News Release and held a press conference to publicize the problem of unpaid arbitration Awards.
The Report, authored by current PIABA President Hugh D. Berkson, is entitled “Unpaid Arbitration Awards – A Problem the Industry Created – A Problem the Industry Must Fix,” and begins by describing the nature of the problem. Using Securities America’s private placement liabilities as an example, the Report portrays the dilemma facing investors when brokerage firms with huge liabilities threaten to or actually do go out of business. “When a brokerage firm shuts down, for whatever reason, the likelihood that any arbitration awards against the firm will be paid is slim if not entirely non-existent.” Gauging the size of the problem next, Mr. Berkson cites a 2000 GAO Study that estimated unpaid Awards at 64% of the whole in 1998 – in dollar terms, 80% of the whole ($129 million).
By 2011, FINRA was reporting about an 11% delinquency and in 2015, FINRA’s Dispute Resolution Task Force reported that $62.1 million, assessed in 75 Awards, went unpaid in 2013. PIABA conducted its own analysis, reviewing all FINRA Awards issued in 2013, and determined that 225 Awards were “wins” for customers in 2013 and $256.7 million was assessed in those 225 Awards. That means, PIABA concludes, that one in three Awards went unpaid and one in four of the dollars awarded went unpaid. FINRA, PIABA acknowledges, has taken numerous measures to monitor for unpaid Awards, to educate arbitrating investors about defunct firms, and to suspend non-payers. Still, the problem persists. FINRA considered, but rejected, a form of insurance as “prohibitively expensive.”
Moving to other possibilities for remedying the problem of non-payment, the Report discusses expanding SIPC coverage (“Herculean effort”), increasing net capital requirements (“unfeasible”), insurance coverage (lots of “limitations and loopholes”), and advocates a “National Recovery Pool” as the best and least expensive option. “A national recovery pool would provide a source of recovery for those investors who carry a claim all the way through award and have exhausted reasonable efforts to collect the award from the brokerage firm and/or broker.” The legal authority to mandate a pool could come from the SEC and could be funded from contributions from FINRA and its members. A fee of $100 per broker would have covered the 2013 non-payments. The elements for eligibility are also suggested. While recognizing and, indeed, enumerating the many issues that would need to be resolved prior to implementation, PIABA insists that “[a[llowing one in three awards to go unpaid is unconscionable” and concludes that “a new division of FINRA [must] craft and administer a national recovery pool.”
(ed: *We were interested to see a Wall Street Journal article, published just prior to the 37-page Berkson Report, that was clearly in the works for at least a month. It reported figures provided by FINRA for 2014 and for the five years ending in 2014, calculating $34 million in unpaid Awards for 2014 (15% of the total amounts awarded) and $213 million in unpaid Awards for 2010-2014. The article, dated February 25 and titled, “Arbitration Awards Against Stockbrokers Go Unpaid,” provided some other information that PIABA was unable to obtain: more than one-third of U.S. broker-dealers are subject to a net capital requirement of just $5,000 and one in five brokerages reports net capital under $50,000. **1998 was the year of the “schlock houses” in arbitration – big awards against defunct firms, so recent “unpaid” results profit from the contrast. Still, NASD/FINRA has worked hard on this gnawing issue and deserves credit for closing many of the gaps that made it easier to escape payment. The Berkson Report, well-written and heavily researched, presents a thorough-going analysis of a problem that faces all claimants and plaintiffs: “Will I get paid?” To the extent PIABA has a valid point, it rests more in the percentage of Awards that go unpaid, not the amounts. FINRA missed an opportunity to be more transparent, as it so often does, in releasing the 2010-2014 data to WSJ and only talking dollars, not the number of investors affected. ***PIABA’s News Release, announcing the Berkson Report and a scheduled news conference, focused on a single investor, Willie Cabbil, who arbitrated a claim against Resource Horizons, won a total of $355,000 and “never got paid a dime.” The Award in question, FINRA ID No. 13-01951, is dated October 8, 2014. FINRA “cancelled” Resource Horizons Group’s membership in January 2015, according to BrokerCheck. ****PIABA has also posted an audio file of its February 25 news conference.) (SAC Ref. No. 2016-08-01)
Like what you see here?
Twice a week we present blog posts consisting of one write-up from each of our two flagship weekly online Alert services. Consider a subscription to these publications to receive the full array of coverage right on your desktop every week. Give it a try and sign up for a free trial to the Securities Arbitration Alert and the Securities Litigation Alert.