By Gabrielle Pollard*
On March 6, the New York State Bar Association (“NYSBA”) hosted a full-day securities arbitration and mediation seminar titled Securities Arbitration 2020: Deep Dive. The event was co-chaired by David E. Robbins and James D. Yellen, both of whom are practitioners and mediators within the securities field. The program was co-sponsored by the bar association’s Commercial and Federal Litigation Section, the Committee on Continuing Legal Education of the NYSBA, and Capital Forensics, Inc. The panels and audience were comprised of customer and firm attorneys, regulators, arbitrators, mediators, experts and practitioners from various sectors of the securities field. This article will address the highlights of the program. The author observes that this event was most likely the last in-person securities dispute resolution program in New York City before the COVID-19 outbreak, and that in many instances, the discussion would have been different if held today.
Session #1: Human Nature and Securities Disputes
Moderator David E. Robbins was joined by Richard W. Berry, FINRA Dispute Resolution Services; Hon. William A. Hohauser, New York District Court; Prof. Seth E. Lipner, Deutsch & Lipner; and C. Evan Stewart, Cohen Gressler LLP, to discuss how trust plays into the representative-client relationship and how FINRA Arbitration differs from court proceedings.
Role of Trust in the Representative-Client Relationship
The panel discussed how trust relationships were established and sometimes breached. Prof. Lipner began by noting that the representative and the client operate together through a risk and reward relationship. He mentioned that investing is a science, because it is quantifiable, understandable, and can be made simple. Yet, representatives do not want it to appear simple. Brokers are experts in marketing, and that is what makes them appear trustworthy to clients. Following the idea that brokers market to investors, Mr. Stewart outlined three types of trusts marketed to investors: 1) “Madoff trusts,” where the client is interested because he or she want to be involved in a secret society; 2) “Wells Fargo trusts,” where a fabled institution that has been around for more than a century is perceived by clients to be trustworthy because it has been around for so long; 3) and “Projection trusts,” where once the investor makes the decision to give their money to the broker, then the act of giving your money to someone is essentially you making the decision that the person is trustworthy (and you cannot come to terms with the fact that your decision might have been wrong). Judge Hohauser added that it is not a question of whether the customer did or did not trust the broker, but whether the customer had a chance to parse through the information the broker was telling them. Mr. Berry added that, when cases regarding suitability and fiduciary duty are brought to FINRA Arbitrations, the arbitrators look at both sides of the argument and determine which side is correct. This thought brought the panel to their second topic of discussion: how FINRA arbitration differs from court proceedings.
FINRA Arbitration as a Forum of Equity
Judge Hohauser, who appeared both as a present-day jurist and as one who has worked in-house as brokerage counsel, noted that he found FINRA’s dispute resolution forum to be moving more toward resembling the court system. Prof. Lipner followed by stating that he would rather have a panel of FINRA arbitrators than a judge or jury, because the arbitrators are lay people who would not consider questions about the law like a judge would, and would instead consider the facts of the case. Many arbitrators are professionals with high educations who can pick up on different concepts quickly. Additionally, a panel of arbitrators allows the attorneys to produce less paperwork, which reduces the amount of formalities and information to be tripped up on and allows the lawyer to focus more efforts on acting as an advocate for the client. Prof. Lipner added that he personally finds he relates better to arbitrators, whereas Judge Hohauser responded that he prefers a jury.
He continued that the arbitration selection process has improved, while Mr. Stewart disagreed, finding that the arbitration process moving towards equity was troubling. He found that arbitrator selection is heavily tilted toward customers and against the industry and that the pool of eligible panelists is shrinking. He also felt that there were instances where an arbitration panel made a decision before hearing any witnesses, and not having a full right of appeal put too much power into the hands of the arbitrators.
Prof. Lipner noted that he prefers new arbitrators with no published awards because experienced arbitrators are sometimes “polluted” by previous cases decided by other arbitrators. Mr. Berry added that FINRA has expanded the Authority’s recruitment efforts to work towards having the arbitrator pool better reflect societal demographics and has accepted many new applications for arbitrators. For instance, in 2019, 39% of newly recruited arbitrators were women and 19% were African American. On the flip side, according to Mr. Berry, FINRA has received complaints about too many new arbitrators.
Cases for Arbitration vs. Cases for Litigation
Mr. Berry shared three tips for lawyers to consider when participating in an arbitration in order to receive better feedback from the arbitrators: 1) do not object all the time, you are not in court; 2) keep it interesting to keep the arbitrator’s attention; and 3) do not engage in ex parte communications with arbitrators, meaning avoiding sharing a taxi, sitting next to them on the train, and riding with them in an elevator.
When asked what tricks he followed to get the arbitrator to engage in his case, Mr. Stewart said that, although the arbitrator will most likely read prehearing briefs, at hearing you begin anew presenting your entire case to the arbitrators as if they know nothing. The key, according to Mr. Stewart, is witness preparation; the witness should appear credible and sympathetic to the arbitrators. The other panelists agreed. Prof. Lipner added that lawyer preparation is also key. The lawyer should come to arbitration with his or her documents organized in an exhibit binder with a clear index, and the lawyer should not be asking mindless questions.
When asked how, in his earlier role, he made a broker appear more likable to the arbitrators, Judge Hohauser said that he suggested making the broker seem like they are an ordinary person, for example, by eliminating the fancy suits and flashy watches. He said that, since brokers are used to earning large amounts of money, it is helpful to remind them that they are “not different in the flesh and blood.”
Judge Hohauser was asked when he prefers litigation over arbitration, and vice versa. He replied that, when the lawyer wants to control the issues in discovery, arbitration is a better forum. He finds that arbitrators want to serve and will devote more time in the case than members of a jury, who most likely do not want to be there. However, when there are strict legal issues, a court is the better forum. Further, when the lawyer wants to be able to file a summary judgment motion or directed verdict, court is a better forum. Mr. Stewart added that, in his practice, he would always prefer federal court, since state courts, outside of New York, are probably not favorable to big financial institutions.
Last, Mr. Berry discussed recent developments at FINRA. First, the Authority has worked to improve the Dispute Resolution Portal, which started as a voluntary database for arbitrations and mediations. FINRA has worked to make the Portal mandatory for everyone involved in the arbitration or mediation except pro se investors, however many of those investors are also using the Portal. FINRA’s goal is to improve the experience for arbitrators. For instance, the DR Portal has been modified to allow arbitrators to use it on their tablets. There are now fillable forms in the Portal to eliminate hard to use PDF forms. He added that arbitrators can now review and sign awards electronically. For practitioners, “short list” rankings will soon be conducted through the Portal. The audience responded positively to the new updates to the DR Portal.
Mr. Berry next discussed proposed changes to the expungement rule, including the implementation of a special panel to hear expungement cases. Where a customer case settled but one party still seeks expungement, the party must file a separate case for expungement to be heard by a specialized group of arbitrators. A majority decision by the special panel will be required. Mr. Berry projects that within three to four months, the special panel will begin to be codified.
Third, Mr. Berry said that FINRA is working to implement rules restricting the abilities of non-attorneys to represent clients in FINRA arbitrations. FINRA’s goal is to address, among other things, concerns regarding non-attorneys not being bound by a code of ethics and potential for fraud. Mr. Berry projects these rule filings will be acted on by the SEC within the next two quarters.
Session #2: Trust and Beyond in Case Selection, Preparation and Pleadings
Moderator Jonathan L. Hochman was joined by Abigail Elrod, Morgan Stanley, and Ross B. Intelisano, Rich, Intelisano & Katz, LLP, to discuss the difference between claimants’ and respondents’ approach to cases.
Approaching a Case
Mr. Intelisano began by explaining that he receives most of his cases via referrals from other brokers, defense counsel, and on occasion the Internet. Once he receives the case, Mr. Intelisano looks at the clients’ monthly statements, new account documents, tax returns, and any important emails before meeting with the client. He noted that in the past he saw mostly churning and suitability cases in his practice, but now there are more specific product cases emerging. He described this change as moving from personalized case types to institutionalized case types. Mr. Intellisano added that his due diligence process for new clients includes conducting Internet research, asking detailed questions about the client’s story to make sure it rings true, and pitching the general facts to a non-lawyer to see if the story appears credible to an outsider.
Ms. Elrod followed by explaining her approach to handling a case. When asked what advice she would give to a claimant’s lawyer, she agreed with Mr. Intellisano’s approach: it is important to vet the client’s case before taking the case, and not just file any case and hope for a settlement. Ms. Elrod added that she first reads the Statement of Claim (“SOC”), and prefers when the SOC is very specific. She then said she then calls the manager of the branch to see if there has been any past history with the relevant client or broker and asks about the broker’s U4/U5. She also looks at the relevant damages number, conducting a profit and loss analysis, as well as looking at key documents, including the account statements, investment profiles, relevant emails and phone records. After piecing together the story as much as possible, she then reaches out to the broker.
Deciding if it is a Case on the Merits
The panel next discussed how to determine if there is a case on the merits or whether to pass on the case. Mr. Intellisano’s approach is to first determine if there is a net-out-of-pocket loss. If the damages are more obvious, he can rely on a small in-house profit and loss, while if the case involves complex trading or products, then he relies on an expert’s damage calculation. Ms. Elrod added that you must consider whether a case can be defended; if it cannot then you must consider settling the case. However, Ms. Elrod finds that many cases are not clear cut and need to go through discovery to determine if they can be defended or not.
The panelists were asked to discuss their professional tips on how to prepare witnesses. Ms. Elrod began the dialogue by stating that she is tough on her witnesses in order to prepare them for questioning. In her experience, witnesses need work, not on changing their stories, but on helping them to tell their stories well. Mr. Intellisano agreed, adding that he starts witness preparation early because it is an important aspect of the case. He found from experience that wealthier clients do not want to give you a lot of their time, differing from older, uneducated, sympathetic clients. Larger cases tend to have more sophisticated clients and need more preparation time.
Multiple Claimant Cases
Mr. Intellisano explained his process for handling multiple claims with multiple clients against one broker. He explained to the audience that, if the clients do not know each other, they can have differing opinions on how the case is to be presented. Moreover, some clients’ cases may be better or worse than others, which adds to how they will want to handle the case. For these reasons, Mr. Intellisano tries to only bring group cases for families. However, sometimes if multiple claimants from different areas all complain of a similar story against a broker, it can increase the credibility of the claimants’ stories to bring the cases together. Both panelists agreed that cases involving multiple claims are case-specific, but it is sometimes more efficient to bring cases together.
Drafting and Presenting Documents
Irrespective of whether he is drafting a SOC in arbitration or a complaint in court, Mr. Intellisano believes that it is more effective to be fact-specific and write only what you can prove. He typically drafts one paragraph for all causes of action rather than breaking them down into different sub-sections. Ms. Elrod followed that she believes that the Answer to the arbitration SOC or court complaint is important because it gives the respondents a chance to tell their story. She believes it is SOC of claim sets up.
When dealing with a bad case on the law, Ms. Elrod prefers lawyers on the arbitration panel because they will consider those questions of law. Similarly, she prefers litigators for discovery issues. In general, Ms. Elrod prefers experienced arbitrators and arbitrators with a specific profession or personality, such as having their CPA or MBA. Mr. Intellisano looks for smart arbitrators; he prefers new, inexperienced arbitrators but experienced chairpersons to make the hearing more efficient. Mr. Intellisano added that he looks for industry arbitrators because he finds that they want to disconnect themselves from bad conduct and conduct that they believe they would never engage in and therefore they are harder on the respondents.
Last, the panel discussed how best to present key themes. Because the arbitrator ultimately must decide whose story is more important to listen to, it is really important how attorneys choose to tell their stories. Sometimes, it seems like the claimant and respondent are telling two completely different stories. Mr. Intellisano stated that he often stresses the concept that, because brokerage firms and brokers are the professionals, they have a responsibility to do the right thing for their clients.
Session #3: Defending the Indefensible?
Moderator Stephen P. Younger was joined by Richard A. Roth, The Roth Law Firm, PLLC, Ellen Slipp, Mediator, and Paula D. Shaffner, Stradley Ronon Stevens & Young, LLP, to discuss what makes an indefensible case and how an attorney should approach it.
Defining “Indefensible Case”
The panelists began by defining the term, “indefensible case,” suggesting that few cases are truly without any defense. Ms. Slipp began that, even if one client’s case appears at first to be unable to be litigated, it might fit into a larger problem occurring in society. Mr. Roth agreed, he suggested learning about the case as much as you can through phone calls and subpoenas, because by learning about the case, you can discover something about the case that was not known to the other side. Ms. Shaffner agreed with the other panelists and added if she had a case that appeared to be "indefensible," she would look to mediate the case.
Next, the panel discussed how to handle a client who is not likeable. All the panelists agreed that preparing the client was key. Ms. Slipp said that preparation helps humanize the client. Ms. Shaffner added that she often brings in an outside person to cross-examine the client at preparation, as a way to demonstrate to the client that he or she is in a tough situation. Because brokers are good sales reps, they can be charming. Additionally, Ms. Shaffner notes that it is helpful to remind the client that they should be appealing to an arbitration panel, since they are the ones deciding their case. Mr. Roth said his strategy is to balance the broker’s charm against the broker’s arrogance. Ms. Shaffner agreed, noting that brokers are salespeople and therefore it is important to put a focus on their charm. Mr. Younger contributed that it can be helpful to videotape the client and play the video back to the client so they can see how they appear to others.
The panel then discussed what effects bad press has had on their cases. Ms. Shaffner said that, for the most part, she has not seen bad press that bleeds into the arbitration. Mr. Roth said that, in the case where there is the potential for bad press, it is important to vet the arbitrators similar to picking a jury.
Elder law is an increasingly important area, with many states implementing rules and policies to protect older or disabled clients. “Your heart goes out to the elderly who put their life earnings into investments for the first time and lose it all,” said Mr. Roth. While some elderly customers are involved and knowledgeable in their investments, many rely on their brokers to make investment choices for them. Ms. Shaffner and Ms. Slipp both agreed that elderly clients are very sympathetic. Alzheimer’s and dementia are increasingly prevalent and are major concerns when investing. In order to handle the prevalence of dementia, Mr. Roth advised that the attorney should keep all documents organized because the documents will help the brokers corroborate their stories. Additionally, in order to show that a client is competent, Mr. Roth looks to when the customer made a will or when the customer financed a mortgage at or around the time of the conduct at issue. Agreeing with this, Ms. Shaffner added that she often hires a medical expert to review the client’s medical records to determine whether the client was competent.
Session #4: Discovery – Making or Breaking a Case
Moderator Paul B. Radvany was joined by Theodore R. Snyder, Murphy & McGonigle, Sam A. Silverstein, Kaufmann Gildin & Robbins LLP, Timothy J. O’Connor, Law Offices of Timothy J. O’Connor, Prof. Christine Lazaro, Professor of Clinical Legal Education | Director of Securities Arbitration Clinic at St. John’s University School of Law, to discuss the costs and benefits of FINRA’s discovery guide.
FINRA Discovery Guide
The purpose of FINRA’s Discovery Guide (“Guide”) is to make discovery faster and quicker in arbitration. Prof. Lazaro began by discussing her thoughts on the Guide from the claimant’s side. In her experience with Clinic cases, which are small cases, the Guide is not applicable. For smaller cases, the Guide is useful for providing a list of many presumptively discoverable documents that the Clinic students can use. In smaller cases, discovery is important because there is typically not going to be a hearing and therefore the documents have to speak for themselves. She finds that the Discovery Guide is spot on for what documents are relevant in larger cases. Prof. Lazaro recommended going through the Guide with the client. Then Mr. Snyder discussed his thoughts on the Guide from the respondent’s perspective. Mr. Snyder finds that the Guide is never used alone, but rather provides a starting basis for requests which are then substituted by additional written requests. While the Guide establishes a list of presumptively discoverable items to be produced by each side, a party can argue that an item need not be produced or that additional material is needed. In practice, Mr. Snyder suggests that both sides attempt to agree on one discovery request together.
Mr. Silverstein added that one cost of the Discovery Guide is that it is difficult to convince the opposing party to stray from the Guide, which many people see as a hard and fast rule. He finds it is better to have an experienced arbitrator to help narrow discovery when it is too invasive or broad. Mr. O’Connor added that, if the attorney shows the Chair that he/she has tried to work with opposing counsel on a resolution before making a motion to compel discovery, then the attorney looks more credible and persuasive to the arbitrators. He has found in his practice that one common mistake parties make is to make their discovery requests overbroad or too long. Instead, it is better to tailor the discovery to more efficiently find the documents that are needed and helpful.
Considering Discovery When Drafting Pleading Documents
The panelists were then asked whether discovery impacted the drafting of a Statement of Claim, or Answer, how they were thinking ahead towards discovery. Mr. Silverstein explained that if you develop a general theme for your case, your discovery will be tailored to fit that theme. This will benefit the attorney, because the arbitrator will read the pleadings before hearing, and then when the attorney makes a motion to compel discovery, the arbitrator will be familiar with the story and will understand the reasons why the attorney needs certain documents. Mr. Snyder prefers to take specific allegations in the Statement of Claim and ask for targeted documents relating to or supporting those specific allegations.
Responses to a Motion to Compel
Prof. Lazaro began the discussion on motions to compel by stating that it is important for advocates to concede consistently, meaning one should not object to everything and then complain that the other side is objecting to everything as well. Considering the Discovery Guide again, if an attorney decides to object to an item on the list of presumptively discoverable material, then the attorney must be very specific. If broader objections must be asserted, Prof. Lazaro finds it better to be clear and give specific reasons why you are objecting to everything in the event that you receive a motion to compel. While on the other side, if you are making the motion to compel production, you should be specific about why you need the document, that is, do not solely rely on the fact that it is in the Guide. This led to a discussion of how arbitrators handle discovery requests.
The panelists shared tips for communicating with the arbitrators to make the discovery process more efficient. Mr. O’Connor suggested holding a prehearing conference for both sides to decide whether the arbitration Chairperson or the whole panel would decide discovery disputes. He added that, if only the Chair is authorized to rule, the decisions are made more quickly. Mr. O’Connor also suggested that early in the process, the parties should schedule a day to potentially use in the future for a discovery hearing. Mr. O’Connor also suggested that it is beneficial to provide the arbitrators with a list of the requests that are the subject of the motion to compel, with columns for the arbitrators to indicate “granted” or “denied.” He said that makes it much easier for the arbitrators to review the requests and create an Order. Mr. Snyder followed that there is a balance that arbitrators must maintain between wanting to give one side the relevant documents to their case, while also protecting the other side’s client. The audience agreed that arbitrators appreciate when all parties work out conflicts themselves. The panelists also discussed when arbitrators issue sanctions. Mr. Snyder said that sanctions are rare and are typically used as a tool reserved for when a party does not comply with production orders. Prof. Lazaro added her view that the strongest message an arbitrator can send is through sanctions. In addition to other sanctions, the arbitrator can order monetary penalties or attorneys’ fees.
When asked to name one thing they would change in the FINRA arbitration discovery process, Prof. Lazaro suggested that a discovery guide for simplified cases be established. Mr. O’Connor recommended that a pro forma or sample “score card” might be created to accompany motions to compel. The “score card” would allow the parties to detail information such as the demand number and why it’s relevant and provide the arbitrators with a template for their decision on motions to compel. Mr. Silverstein proposed establishment of a more limited Guide; and, Mr. Snyder followed with suggesting more training for arbitrators on the emergence of electronic discovery.
Session #5: Whether, How and When to Settle
Moderator James D. Yellen was joined by Manly Ray, FINRA Director of Mediation, Angela Turiano, Bressler Amery & Ross, Brian J. Neville, Lax & Neville LLP, to discuss whether to mediate, who selects mediators, and who brings up mediation.
The panel was first asked how FINRA advocates for or condones mediation. Mr. Ray explained that FINRA’s mediation program has been around since 1995. FINRA becomes involved in cases mostly through existing arbitrations, meaning the Authority will reach out to parties in existing arbitrations and propose that they give mediation a try. Mr. Ray also discussed FINRA Settlement Month, that takes place in October, where FINRA provides mediation at a 50% discount rate, and mediators volunteer to serve at reduced compensation rates, to promote greater use of mediation.
Whether to Mediate, Who Selects Mediators, Who Suggests Mediation?
Mr. Neville, speaking for the claimant’s side, said it does not matter who brings up mediation first, and that he does not find it a sign of weakness to be the first to suggest mediation. He added that it is important to keep the client involved in the entire process, including educating the client on the option to mediate the case and potential mediators to select. Mr. Neville suggested asking the opposing counsel what mediators they prefer in order to find a mediator that both sides can agree on. For the respondent’s side, Ms. Turiano finds that most counsel have preferred mediators they use and in the event of a mediation, counsel feels comfortable telling the mediators which aspects they would like to address. Ms. Turiano looks for a mediator who is trustworthy and credible, and not one who twists facts in order to influence parties to concede.
When preparing for a mediation, Ms. Turiano typically prepares a mediation statement containing the factual aspects of the case as well as multiple exhibits to help educate the mediator as much as possible. Ms. Turiano also suggests going to the mediation with a settlement amount in mind and bringing someone who has authority to approve a proposed settlement or who can readily contact a person with authority to approve settlements. As to when in a dispute’s timeline mediation should be considered, early mediation can save the parties money, but discovery is not yet complete -- especially regarding emails which are time consuming to obtain. Mr. Neville agreed, adding that he found early mediation to be helpful in employment disputes specifically because number-crunching or experts are generally not necessary. By contrast, early mediation is usually not beneficial in sales practice cases because those cases take more time to prep and to understand the specific products involved.
When deciding whether to do an opening statement in a mediation, Ms. Turiano has found that it is not effective to be litigious, but rather to say that you are here to hear what the other side has to say (since you often do not yet know their views on the case). She followed that it is important to be open to mediating but not waste the other side’s time if you do not have the authority or desire to potentially settle. Mr. Yellen added that, in his practice as a mediator, his tactic was to first hold private meetings with each side and then either have a joint meeting with everyone or just a meeting with both clients.
Effective Ways to Break an Impasse
The panel agreed that mediations sometimes get to a point where it would be silly not to settle, since very small amount remains unresolved. Ms. Turiano noted that at a certain point in the day, the parties frequently stop talking about the facts of the case and switch to trying to figure out how much money it would cost to settle.
Mr. Yellen has found in practice that the longer the mediation takes, the more likely it is for the case to settle, since the parties do not want to feel like they are wasting the day. Ms. Turiano added that she recalls times where the case adjourned after an apparent impasse, only to settle weeks later. Mr. Neville has found that many employment agreements require mediation before arbitration, and he finds it is best to attempt a telephone mediation first to see if the parties will mediate in good faith, and then potentially move to an in-person mediation (author: with social distancing restrictions in place and in-person hearings not taking place, this is the only way to go). When a case results in a settlement, parties must both sign a settlement agreement, agreeing to all terms discussed and agreed upon. Mr. Yellen finds that it best to have both parties sign an informal settlement agreement before the hearing adjourns; if not, either party may feel free to walk away from the settlement. Mr. Neville further explained that employees and investors are typically unfamiliar with settlement agreements and need to be educated on what is ahead of them. In his practice, he obtains a blank settlement agreement from respondent’s firm in advance so he can go over it with his clients.
How Mediators are Selected
One audience member asked the panel how mediators are selected for a case. Mr. Ray answered that FINRA maintains a roster of vetted mediators, but that in practice a core group of about five to fifteen mediators are frequently used for most cases. Picking a mediator is not like selecting an arbitrator through list selection. Instead, parties must agree on the mediator and even if the mediator is ‘ranked’ number one on the list, if one party does not want that mediator then that mediator is not selected. According to Mr. Ray, FINRA is working to diversify the mediation roster, adding more women and minorities. Another difference between arbitrators and mediators is that arbitrators can come to the process with no experience as a neutral and be trained through FINRA, while mediators must have past experience and skills as a mediator to be included on the roster. Many audience members suggested that FINRA consider establishing a mentorship program, where inexperienced arbitrators or mediators work with the experienced ones in order to gain experience and become more used. Mr. Ray said that FINRA favors this idea and is working on implementing a potential program.
Session #6: Remedies and Damages
Moderator Ross P. Tulman was joined by Eric Silber, Capital Forensics, Inc., Lorena J. Kern, Kern Consulting LLC, Elizabeth Falk, Falk Financial Analysis, Fred N. Knopf, National Holdings Corporation, and Stan Meyerson, Trade Investment Analysis Group, to discuss what type of damages are awarded by arbitrators and how they are calculated.
Cross-Examining a Witness
Expert witnesses are often used by attorneys to evaluate the value of a case. Mr. Knopf noted that attorneys prefer an expert who is not acting as an advocate, but who is independent and objective, evaluating different damage theories and frameworks to not favor one aspect of a case. Cross-examining expert witnesses is crucial because it brings to light any potential calculation errors that they may have made.
Ms. Falk stated that, in her experience, if documents have been withheld it is difficult to tell whether these documents were withheld on accident or on purpose. This causes a trust issue between the expert and the attorney. For instance, if a case went to hearing and then the expert found out there were other accounts in the portfolio that were withheld, when asked on cross-examination about these accounts, the expert would have no choice but to tell the truth about his or her limited knowledge.
Considering a Portfolio
The panel was asked to address this hypothetical: if a client filed a claim of material misrepresentation or omission against a security that suffered a large loss in a portfolio that was overall highly profitable, would the loss be netted against the gains of the portfolio? Mr. Silber answered that it depends on whether the financial advisor conducted due diligence at the time of the sale. Was the investment suitable for the client at the time of the purchase? Was it consistent with the client’s investment objectives and risk profile? The panel generally agreed that if a material misrepresentation or omission was established, there would be no netting of losses against the gains in the portfolio. According to Mr. Knopf, an important question – at least for arbitration – would be to determine when a person should have known of the material misrepresentation or omission that occurred.
Damage Calculation in a Non-Solicitation Scenario
Next, Ms. Kern presented another hypothetical: suppose a registered representative left the major broker-dealer where he worked, and his employment agreement contained a carveout providing that he could take 90% of his clients, with the other 10% of customers subject to a one-year non-solicitation clause. What happens where all of this rep’s customers followed him when he left? The major broker-dealer wanted one million dollars times fifteen years, discounted to present value, representing lost revenue for 100% of the clients. Mr. Meyerson did not agree with that damage calculation, due to the terms of the written carveout. According to Mr. Meyerson, the time period of damage projections should be about three to five years; although the time period is speculative, too long a time period leaves too much open for market change. Also, in this industry, Mr. Meyerson explained, the variable costs of production represent what it actually costs the firm to enable the registered representative to do business, including the payout to the registered representative; cost of dedicated sales assistants, medical costs, benefits; clearing costs; and, cost of registration fees. When considering these costs, an important question to weigh is how profitable the registered representative was to the firm.
Remedies Available to Arbitrators
Mr. Knopf asserted that it is best practice to give alternative theories of damages, including a range and corresponding justifications depending on the specific facts, so that the lawyers can then consider and argue the most compelling theory for their position at hearing. Mr. Meyerson agreed: as an expert, he looks to the historical growth rate of production and if revenues are changing. To have credibility, which is the most important factor, the expert must show the attorney reasonable projections with reasoning behind these projections. Mr. Silber agreed with both Mr. Knopf and Mr. Meyerson: in his experience working on mostly respondent's side, best practice is to find a range depending on the facts of the case. If the facts of the case are not favorable, then you need to find a range closer to the middle or bottom percentile.
Experts as Dispute Neutrals
The panel was asked, when reviewing the opposing side’s work product, if they would testify that the work is speculative or if that is a determination for the trier of fact, and more specifically how they would evaluate the adverse parties’ work product in a manner that is respectful to the panel? Ms. Falk answered that she believes that experts work for the panel and therefore should deliver their opinions in an objective and neutral manner. If she finds any errors, she will highlight them and show them to counsel, and she is most concerned with flagging cherry-picking of damages by the opposing side.
Market Adjusted Damage Remedy
Market-adjusted damages allow for a comparison between a market benchmark and the actual losses in a customer’s account, to show the losses compared to what the customer’s experience should have been if properly invested. Ms. Falk began that she generally calculates such performance on a monthly basis, creating an identical cashflow in the account, mirroring anything that went into or out of the account. She then coordinates with a liability expert on market benchmarks. Mr. Knopf noted that arbitrators have not rendered market-adjusted damage awards with regularity, and therefore these awards are not predictable.
A collaborative relationship between a financial representative and a customer, according to Mr. Meyerson, is where a knowledgeable investment professional and an investor can discuss the market and the strengths and weakness of different transactions as well as the theory of transactions and assume everyone is speaking accurately and understandably. While the broker generally is not qualified to assess the investor’s mental capabilities, the broker can usually gauge if the investor is understanding and comprehending what the broker is explaining. The majority of the panel agreed that a market-adjusted damage remedy is not valid, and cannot be put forth, when there is a collaborative relationship present. However, Ms. Falk disagreed because she believes that, while most relationships between brokers and investors are collaborative on some level, these investors are paying for advice and relying on that advice and may not fully understand all implications. As an analyst, Ms. Falk believes her job is to give the panel options, provide the numbers, and allow the panel to decide whether this relationship was collaborative. The panel debated if a client is accepting some recommendations and rejecting others, is the broker still accountable for those trades and should be held to a benchmark standard if the client had control? Some of the panelists said yes, while others did not believe so.
The panelists briefly discussed the prevalence of fee-based investment advisory cases. The audience explained that these cases have emerged in JAMS, AAA, and in court. One audience member asked: if a registered investment advisor is dually registered, can the case then be brought in FINRA’s forum? This transitioned the panel toward discussing when a broker is acting in multiple roles, managing clients’ advisory accounts as well as their brokerage accounts. Mr. Meyerson said that, even though both accounts are not fiduciary accounts, the advisor might well be held to the highest standard, which would be the fiduciary standard. Ms. Kern disagreed; although she understood Mr. Meyerson’s point, she believed that the analysis should be account-specific, that is: in what role was the investment professional acting?
Session #7: Trolling and Other Ethical Challenges
Moderator Barry Temkin was joined by Andrew Stoltmann, Stoltmann Law Offices, Jeff Erez, Erez Law Firm, PLLC, Timothy P. Burke, Morgan Lewis, and A. Inge Selden, III, Bressler Amery Ross, to discuss legal ethics in different scenarios.
Mr. Temkin began the discussion by asking the panel what they would do in a hypothetical: suppose a lawyer wants to put a bulletin on his law firm Website saying that his firm is investigating cases against a known bad broker and asking people to contact his offices if they were affected by this broker. Is this acceptable? Mr. Erez answered that the lawyer would be allowed to post this. Mr. Temkin added this factor: what if the lawyer received a call from the bad broker, expressing anger at the posting? Mr. Erez responded that, if the broker’s complaint had merit, he would change the posting accordingly, or if the person complaining was polite about the complaint, he would take it down for as a matter of good business practice. Mr. Selden added that in this scenario, he felt it was important to look not only at the ABA Model Rules of Professional Conduct, but also at the specific rules of multiple states, because an internet posting would be read by people in many different states.
The panel was then asked whether the bulletin posting was considered an advertisement? The panelists all agreed that the posting was considered an advertisement because the lawyer was using the posting to look for potential clients. The audience members agreed that the posting was an advertisement, but one member of the audience pointed out that it was not a solicitation. The panel then began to discuss the differences between advertisements and solicitations. Mr. Stoltmann explained that general advertisements are not solicitations, but targeted advertisements are; radio postings are not solicitations because they are not targeting anyone specifically. Additionally, the attorney cannot make contact with the client first about the case because that is also considered a solicitation. Mr. Temkin added that pro bono solicitation or solicitation by law school clinics are allowed. Additionally, Mr. Temkin added that giving out corporate “swag” is not advertising.
The panelists as well as many audience members said that they maintain a blog and/or follow blogs. The panel was asked if blogging was considered attorney advertising. Mr. Erez answered that a blog is advertising when used to solicit clients, and it is important that the attorney make sure that all information posted on the blog is factual. Mr. Stoltmann agreed. He added that factual news posts might not be considered advertising because the attorney’s purpose for posting is to inform readers and not necessarily to generate business.
Representing Both a Firm and a Broker
The panel was then asked how they would proceed if in-house counsel for a brokerage firm called asking an attorney to represent the firm and a broker. Mr. Burke answered that he would first have the in-house counsel introduce the attorney to the broker. Then he would be certain that there were no conflicts by representing both the firm and the broker. He would also explain to the broker that he represents the interests of the firm as well as the individual broker and would stop representation if any conflicts arose.
Mr. Temkin then asked the panel what they would do in a second hypothetical, where four customers who invested and lost different amounts of money joined their cases. In the hypothetical, there was a $1 million insurance policy, and a $750,000 offer. The clients collectively lost $1.5 million. Two of the clients wanted to settle and two did not want to settle. Mr. Stoltmann answered that, in that scenario, the attorney would not be able to accept the settlement since not everyone agreed to it. Mr. Erez agreed with Mr. Stoltmann’s answer, adding that it is important for the attorney to show the clients all possible options and benefits regarding the settlement in order for the client to be able to make an informed decision.
Last, Mr. Temkin asked the panel about how they would proceed in a final hypothetical: in the middle of a hearing, after the attorney had previously prepped the client, the client unexpectedly testified to false information. In other words, the attorney suspected the client committed perjury. Mr. Burke answered that he would immediately ask for a recess and talk to the client to determine if the given statements were false. If so, the attorney must advise the client that they have to correct the testimony and if the client does not correct the testimony, then the lawyer will be compelled to withdraw from the case.
This engaging seminar gathered attorneys and experts in the securities industry spanning from “New York and beyond” to take a deep dive into hot topics and changing rules in securities cases, arbitrations, and mediations. The event was informative, enlightening, and a great success.
*Gabrielle “Gabi” Pollard studies at St. John’s University School of Law. She is the President of the St. John’s Corporate and Securities Law Society and is an Executive Notes and Comments Editor for the Journal of Civil Rights and Economic Development. As a second-year student, Gabi represented investors as an intern with the Securities Arbitration Clinic at St. John's under the supervision of Professor Christine Lazaro. In the past, she has interned for Judge Mitchell J. Danziger at the New York State Supreme Court, Bronx County; Bank of China International (USA) Holdings Inc. in the Legal and Compliance Division; Signature Bank in the In-house Counsel Department; and, FINRA’s Office of Fraud Detection and Market Intelligence. Currently, Gabi is a law clerk at Lax & Neville LLP, working on securities fraud and employment cases. Prior to enrolling at St. John’s, Gabi attended Susquehanna University as a history major with minors in legal studies and philosophy. The views expressed in this article are her own.