Highlights of City Bar’s Hot Topics Program (Part I)

The annual half-day program on securities arbitration and mediation, sponsored by the Association of the Bar of the City of New York, took place earlier this year. With thanks to the staff at the City Bar, we were able to listen to a video webcast of the Program and make some notes about the proceedings.

Roger Deitz, Program Moderator, led a lively faculty in discussions that ranged from the work of the NAMC on the Dispute Resolution Task Force (DRTF) recommendations to the plight of senior investors to recent moves by broker-dealers to arbitrate ex-FINRA. FINRA’s head of the Office of Dispute Resolution, Richard Berry, opened the Panel discussion with a review of case statistics at the FINRA forum. Customer cases are driving this year’s 23% rise in new case submissions, Mr. Berry reported; driving the surge in customer claims, he added, are more Puerto Rico bond cases and claims relating to failed oil and gas investments.

DRTF Recommendations Implemented

Mr. Berry also discussed the approach taken by the NAMC – FINRA’s National Arbitration & Mediation Committee – to deal with the cascade of 51 recommendations in the December 2015 DRTF Report. The Committee doubled up for a two-day meeting in March 2016 and convened again in June to complete an initial review of the proposals. Two items have so far reached Board level – one, a rule proposal that results from the fact that, in 70% of the eligible cases, one or another party – usually customers – are striking all of the proposed Non-Public Arbitrators. With that in mind, FINRA has proposed to nominate 15 names, instead of the current 10, on the Public Arbitrator lists; six strikes will be permitted, instead of the current four.

Another rule change driven by the DRTF recommendations deals with a new exception to the general proscription against pre-hearing motions to dismiss – when a claimant seeks to re-litigate a previously adjudicated claim. The text of that proposal has not yet been aired or filed with the SEC.

Not all of the DRTF recommendations will require SEC approval. FINRA has already taken numerous steps to enhance the transparency of its operation. It now lists the names and affiliations of NAMC members on the FINRA Website. Its monthly statistical report has been broadened in a variety of ways, including more information about industry cases and an inter-active map that shows the number of arbitrators assigned to each hearing location and a tally of pending cases.

Finally, Mr. Berry mentioned a proposal floated by the Securities Experts Roundtable (SER) and embraced by the NAMC at its initial meeting. SER reported that a survey of its members had disclosed a disturbing number of instances of “phantom retention,” whereby parties name experts on the 20-day witness exchange list who have not been contacted or retained by that party. At the DRTF’s urging, FINRA added a hearing script admonition against the practice, will follow up with training, and will feature a lead article on the subject in the June edition of FINRA’s arbitrator newsletter, The Neutral Corner. (ed: We reported on that article, written by Greg Curley and Ryan Bakhtiari – two NAMC members – in SAA 2016-25.)

Employment Cases/Promissory Note Dynamics

While customer cases are running at a stronger pace than last year, employment cases are down 3%, Mr. Berry reported. Promissory note collections are the primary type of claim. Panelist Sandra Grannum (Drinker Biddle-NJ) noted that statutory employment discrimination disputes are not arbitrable at FINRA under the Form U4 agreement, so a separate agreement is needed. Often, though, such claims will arise as counterclaims where a promissory note claim constitutes the primary claim. Panelist Ross Intelisano (Rich Intelisano-NY) described some other types of counterclaims – fraudulent inducement, constructive discharge, and detrimental reliance – to which Andrew Melnick (RCS Capital-NY) added claims of defamation, which may also come in the form of a preemptive strike. Where the broker has a strong defense in these promissory note cases, the panelists agreed, those cases will be the ones to settle. This partially explains the great statistical results that Award surveys find for firms arbitrating these note disputes.

The more difficult cases are those where regulatory complications are present. Massive fines, regulatory full-court presses, and heightened compliance sensitivities are leading to broker terminations that trigger note collections. Post-Madoff, regulators are opening inquiries far more frequently. Managing the Form U5 language is more difficult, too. In the words of one Panelist, firms would rather have the broker mad at them than FINRA. There is a lot more pressure on U5 disclosures. Generally today, the firms are trending towards just telling the story and eschewing labels.

While the arbitrators do not see the regulatory pressure in the dynamics of the case, the parties are often aware of that component. Still, regulatory events are regularly driving the issue in arbitration; the overlay in these cases is common. As a Panelist put it, the broker is fighting because s/he wants the next job; the firm is fighting to show that it did the right thing.

(ed: We will continue our report on this seminar in next week’s Arb Alert.)

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Mini-Survey – Previous Adjudications and Motions to Dismiss

One of the issues addressed by the FINRA Dispute Resolution Task Force in its Interim Report is a suggestion to “[e]xpand the grounds for Motions to Dismiss Prior to Conclusion of Case in Chief to include situations where the dispute was previously adjudicated by an order, judgment, award or decision.” In this survey, we attempt to ascertain how successful or unsuccessful respondents are likely to be if the suggestion is adopted.

There are two legal principles that could be applied to bar a claim on the basis of a prior decision of another arbitration panel or a court: res judicata and collateral estoppel. Res judicata, also known as claim preclusion, bars consideration of a claim that was previously raised or could have been raised in an earlier case between the same parties. Collateral estoppel, also known as issue preclusion, bars reconsideration of an issue that was previously decided between the parties in a prior case.

Raising the Defense. To answer the question we posed above, we looked for instances in which the panel expressly addressed the allegation that a claim was barred by a prior adjudication (usually in a motion) since the current restrictions on motions to dismiss before a claimant rests his or her case took effect (February 23, 2009). We found 13 cases that sought to dismiss or deny a claim based on prior litigation, 10 of them in pre-hearing motions to dismiss, one in a motion for directed verdict, one in a counterclaim for malicious prosecution and abuse of process, and one in a decision “on the papers” in a Small Claims case. We expect that the three cases in which the issue was not raised in a pre-hearing motion represent only the tip of the iceberg, since the bases for decisions on motions for directed verdicts and decisions on the merits are rarely addressed, but we include them anyway, because we think that they shed further light on the subject of our study.

How Successful? Next, we determined how the panel ruled on the issue of claim or issue preclusion in the motion, counterclaim or defense itself. Since claim and issue preclusion are not currently recognized grounds for pre-hearing adjudications, we would not expect this to be the end of the matter. Therefore, we next computed how often the respondents were held liable when the initial decision was negative. Although we cannot be sure that a denial of liability was a vindication of the respondent’s objection to relitigation, a finding of liability would certainly be proof that the panel rejected the defense.

On two occasions, the pre-hearing motions were granted without the need for the presentation. In a third instance, a decision was deferred until after the hearing commenced, but before the claimant rested, because the panel deemed that the prospective testimony of the claimant’s remaining witnesses would not change the relevant facts. The remaining seven motions (70% of them) were denied. In only two of those cases (29%), however, were the respondents held liable. The motion for directed verdict and decision on the papers were both granted, and while the counterclaim was denied, the respondent in that case was also not liable. Altogether, then, panels that expressly considered the defenses of res judicata or collateral estoppel clearly rejected them only 15% (2/13) of the time.

(ed: *FINRA imposed those restrictions in response to concerns that respondents were filing pre-hearing motions of dubious merit in order to wear down claimants and force them to settle. While we do not express any opinion as to whether this concern was justified, we deemed it better to limit our survey to a period when that is no longer a concern. **In a prior survey (see SAA 2013-24), we found that dispositive motions enjoyed a 70% success rate (167/237) between June 1, 2009 and May 31, 2013. Thus, our findings for the success of motions based on claim and issue preclusion, as limited in scope as they are, seem to be in line with those based on grounds that FINRA already recognizes. ***It makes sense to add this ground to the list of permissible bases for pre-hearing adjudication, one of which is the existence of a written release. As is true of a released claim, it should be easy to document the existence of the judgment that purportedly precludes the pending arbitration and will save the need for hearings in a claim that, if the motion is meritorious, should never have been brought.)

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