Most cases settle. They settle for various reasons. They settle at various stages of a dispute. They settle before attorneys get involved and then when we take over, they settle directly with opposing counsel or through the services of a mediator. We all know the high settlement rate of the NASD's mediation program and the NASD should be applauded for aggressively pushing it on the industry and on practitioners. This article is not about mediation. I'm going to suggest various means to eliminate the "middle man" - the mediator - saving you time and money in the process.
None of my insights are original. They rarely are. But they work. The following 15 rules for settling a customer-broker dispute come from the experience of practitioners more experienced than I and, in part, from trying out a few of their suggestions myself. For a more thorough examination of this fascinating subject, I invite you all to join us this summer at the 13th annual PLI program on securities arbitration. The first segment of our San Francisco and New York programs is entitled: How to settle practically any case! We'll deal with direct settlements, which I'm going to focus on now, and mediatio
SETTLEMENT CHECKLIST AND COMMENTS
Comment - In all likelihood, before the claim was filed, Claimant's counsel retained an expert to prepare a profit-and-loss analysis. Before entering into settlement negotiations, however, counsel should have the expert prepare alternate theories of damages, such as the well-managed account measure of damages and, if appropriate, damages based on losses only as opposed to netting losses and gains. Always remember to calculate statutory prejudgment interest, attorneys' fees and expert fees. And don't forget to keep a fall-back calculation, based on your client's probable failure to mitigate damages in a timely fashion.
The most important subjects on which to seek consensus in settlement discussions are the realized and unrealized profit or loss in the account, the turnover rate and commissions. Two excellent spreadsheet programs are Lotus and Excel.
Comment - Most of us engaged in securities arbitration practice prefer that an opposing party be represented by an equally experienced attorney who can assess the strengths and weaknesses of the case. In such instances, grandstanding is kept to a minimum and, unless your opponent has developed too inflated an ego, there is a better likelihood the case can be settled. The problem lies with an attorney who lacks integrity, an attorney who lacks experience (which is usually evidenced in the pleadings) or a claimant who "has a fool for a client" (that is, the customer who represents himself or herself).
Few factors are more conducive to the settlement of a case than the reputation of the opposing attorney as a knowledgeable, ethical and reasonable attorney. Ted Krebsbach once told me, based on his wealth of experience, that an experienced claimant's attorney understands the value of a case well before defense counsel has even seen the complaint. Likewise, experienced defense counsel will quickly size up the witnesses and documents, examine the trading and numbers, and develop a preliminary settlement range. Armed with this information, the settlement dance can begi
Comment - The motivations of the parties are usually self-evident. The customer has lost money due, he believes, to the broker's breach of trust. The broker, on the other hand, believes he or she dealt properly with the customer and that the case is merely one of sour grape
Before commencing settlement discussions, you can't fully appreciate the hidden motivations of an opposing party unless you learn, at a minimum, about the financial and employment background of a customer or, with respect to the broker, unless you understand the trading strategy recommended by the broker and any skeletons the broker has in her closet (that is, prior customer complaints and disciplinary proceedings
Comment - Many of us believe that settlement discussions should not begin until after basic discovery documents have been produced. Forced, last minute decision making should be avoided at all costs. When has sufficient discovery been accomplished? When are you truly prepared to engage in settlement discussions? The simple answer is that you don't know. That's where experience comes in. As an experienced attorney, you'll know the basic documents required for most cases. Sometimes the best documents, however, are deep within the recesses of the brokerage firm (or the clearing firm) and you may have to demand their production before you can engage in serious settlement discussions.
Comment - If there is a particularly damaging or helpful piece of evidence that will come in at the hearing, that evidence should either be shown to your opponent (if it has been requested in discovery or will have to be produced pursuant to the 20 day rule at the SROs) or held back if it will be used as a cross-examination exhibit (and has not been requested). Knowing the likely impact of that evidence at the hearing is an important consideration in settlement negotiations. The question here is whether to disclose your "smoking gun" if you haven't had to produce it. I guess it depends on whether the gun will backfire. Timing is also important. You may want to use it as a trump card late in the settlement discussions - to push the other side over the edge, to your side.
Comment - Securities arbitration can no longer be considered a mere civil proceeding in which, at the end, a customer's claim for damages is either satisfied or denied. In the current regulatory climate, brokers and firms must be sensitive to the repercussions an arbitration Award can have on the permanent record of that broker and firm. Those interests must always be considered by both sides in deciding whether to settle the case or "go to the mat."
A broker's Forms U-4 and U-5 must be amended to reflect all claims by customers seeking damages of $10,000 or more, and all settlements of $5,000 or more. Firms are required to file a report with the NYSE regarding any judgment or settlement of $15,000 or more against a broker and $25,000 or more against the firm. If a settlement crosses the $15,000 threshold, the firm is required to file the RE-3 regarding the broker even if the broker has not been named as a respondent in the claim; merely the fact that he or she was the claimant's broker will suffice for the complaint to trigger a report to the NYSE. Then someone at the NYSE or NASD Regulation may give that broker a call to ask about the reported complaint. The SROs have no statutes of limitations; nor do brokers have a fifth amendment right during an SRO investigation. If they fail to cooperate, they're suspended until they do so.
Comment - One of the characteristics of a good mediator is the ability to not only listen to the words spoken but the way in which each side expresses those words. So, too, in one-on-one negotiations.
The need for listening is obvious, yet it is difficult to listen well, especially under the stress of an ongoing negotiation. Listening enables you to understand the other side's perceptions of the case. If you pay attention and interrupt occasionally to ask, "Did I understand correctly that you are saying that...?" the other side will realize they are not just killing time, not just going through a routine. They will feel the satisfaction of being heard and understood.
Understanding is not agreeing. One can at the same time understand perfectly and disagree completely with what the other side is saying. But unless you can convince them that you do grasp how they see it, you may be unable to explain your viewpoint to them. Once you have heard their case, then come back with the problems you find in their proposal. If you can explain their case better than they can, and then refute it, you maximize the chance of initiating a constructive dialogue on the merits and minimize the chance of their believing that you have misunderstood them.
Comment - Sometimes a firm will ask its broker to share in the settlement payment and the broker, feeling that he or she was not at fault, will reject that proposal. Sometimes a broker will not have a choice and will be told by the firm that unless he or she "ponies up," termination is assured. This dynamic could present problems to the settlement of a case. Few pieces of information are more vital than knowing if you are negotiating with someone who is spending OPM -Other People's Money - or his own. If he is spending someone else's money, he's more secure. A wrong decision is tax-deductible. A series of wrong decisions may cost him his job, but not his life savings. While it's tough to generalize, usually when someone's negotiations involve his or her own money, those negotiations will proceed at a slower pace.
Comment - Your objective is to make the other side come to you with a reasonable settlement proposal and not make it look like you are begging to resolve the case. Make it clear that you (or your client) would like to have a deal, but you can live without one. If she knows this is a deal you absolutely must have, expect to be shown little mercy.
Showing that you need a settlement weakens your bargaining position; it will result in selling yourself short. The other side will sense this weakness and pounce on you. Be cool and consistent emotionally. Never get overly enthusiastic. Tell your opponent, "That's a nice offer. But I think I'll sleep on it." This is a very subtle skill, learned only after a great deal of experience. Make them work for the settlement.
Comment - How you see the world depends on where you sit. People tend to see what they want to see. Out of a mass of detailed information, they tend to pick out and focus on those facts that confirm their prior perceptions. They disregard or misinterpret those facts that call their perceptions into question. Each side in a negotiation may see only the merits of its case and only the faults of the other side's.
The ability to see the situation as the other side sees it is one of the most important skills a negotiator can possess. If you want to influence the other side, you need to understand his point of view and feel the emotional force with which they believe in it. It's not enough to know that he see things differently.
Comment - Here is where the professional skills of attorneys are dramatically distinguished from the normal reactions of laymen. An attorney is trained to view negotiations as an integral part of the adversarial process, not to be taken personally. He or she knows that during early negotiations, one side may just be venting, expressing the frustrations or principles of his client.
In the initial stages of negotiations, don't be reluctant to make a high dollar demand if you're the customer's attorney or a low settlement offer if you represent the brokerage firm. Start high, but don't be ridiculous.
As long as your figures can be justified, there's no reason for anyone to resent you for asking, even if they reject it outright. In starting at the highest level possible, you provide yourself with room to move and put yourself in a better position to be able to compromise without jeopardizing your bottom line. There is an often expressed fear that by opening the settlement dance with a high number you may anger or offend the other side and endanger a settlement. That's rarely true.
The way in which you control the tone of your voice in settlement negotiations is also important. It's best to speak in a low-keyed, pleasant voice, slowly and clearly. The less threatening you sound, the more your opponent will be comfortable with you. The objective is to show sincerity and not to sound too impersonal. (It helps, as well, to actually be sincere.)
Comment - Threats and ultimatums are rarely effective and almost always backfire. Nothing ends settlement discussions as quickly as an extreme proposal. In most cases, when your adversary issues hard and fast ultimatums -- "Take it or leave it"; "If you don't accept this condition, then everything is off" -- you're better off not making the deal.
It has been said that the essence of style is making the other side feel comfortable and persuadable. If you are able to reduce the other person's anxieties about what you want, you've taken a major step toward settlement. The first settlement offer or demand should not be the final one your opponent hears. However, it must be within a reasonable range. Most ultimatums are artificial and are used only by the other side to try to gain an advantage, to intimidate you or to bring the deal to a close in a preemptive manner. Please don't let an ultimatum intimidate you. Have the poise to continue the negotiations.
Comment - Because settlement discussions can become fast and furious and take place when one side is under a great deal of pressure or is tired, it's important to keep detailed notes of all conversations, if only to keep track of the trend of the bidding. Few people do keep notes and, when reminded of their past positions, they fumble around and lose points. Having the facts is a basic part of preparation; keeping track of them is just as important.
Keep your client advised at every stage of the negotiations and always keep notes of settlement discussions. Reviewing those notes, you'll probably see a pattern developing before your eyes. The large disparity between initial offer and demand should, over time, diminish.
Attorneys should be ever mindful of their ethical obligations with regard to settlement discussions. If settlement proposals are put on the table, an attorney has the obligation to submit that proposal to his or her client, whether or not the attorney is in favor of it. Additionally, an attorney can only make an offer of settlement if authorized to do so by his client. Just as a broker rarely has discretionary trading authority in a customer's account, an attorney cannot negotiate a settlement without the formal consent of his client. An attorney cannot assume his client would accept the offer; she must confirm it.
Comment - Some customers will agree to take less money up front in a settlement if there is the potential of eventually receiving more than their out-of-pocket loss. A few years ago, I represented an extremely wealthy gentleman who lost only $400,000 in a high-yield bond transaction. After the customer removed his $27 million of cash and securities from the brokerage firm, he commenced an arbitration to recover his loss. The brokerage firm finally recognized that it lost a valuable client and eventually came up with a novel settlement proposal. They knew the client was motivated more by the principle of his position than by the principal that had been lost. They first suggested commission free trading for a certain period of time. That proposal was rejected.
Their attorneys then suggested that the former customer open a new account, with the brokerage firm depositing $250,000 into it, to be matched by an equal amount from my client. That account would be given "first dibs" on new stock offerings underwritten by the firm. Such preferential treatment was normally given only to institutional accounts, not individuals. In addition, the customer was given dramatically reduced commissions for an extended period of time for any account he opened with the firm. Since the firm understood the customer's true motivation in bringing the claim, it was no surprise the customer agreed to the proposal. The settlement eventually resulted in a profit to the customer.
Alternatives to the outright payment of money include: (a) the brokerage firm assuming all tax liability incurred by the customer as a result of its broker's misconduct; (b) commission-free business for a certain amount of time or until a certain point in the profitability of the account; (c) a letter of apology from the firm and the broker to the customer; (d) preferences on IPO allotments; (e) a donation to the customer's favorite charity; (f) payment of the customer's attorneys' fees; and, (g) offering the customer the services, free of charge, of the firm's outside accountants (to do tax returns or advise on tax matters) or its outside attorneys and affiliated estate planners (to draft wills or to keep the customer up-to-date on estate planning techniques). A brokerage firm could also propose to assign the account to the branch manager or other senior person at the firm, whose integrity is above reproach.
Comment - While many settlements are memorialized by a mere exchange of General Releases and the issuance of a check to the customer, more and more settlements entail the drafting of a detailed agreement. This is especially so if the issues in the case are controversial or where the firm is going to be paying the settlement over time. At a minimum, the agreement should set forth the time by which payment must be made, the confidentiality of the agreement, the individuals who are bound by its confidentiality and the signatures of all the parties and their counsel. Make sure to add that a violation of the agreement - if payment is to be made over time - is an admission by the broker or firm that they have violated the NASD or NYSE rule requiring them to abide by all settlement agreements related to an arbitration. Don't forget to advise the arbitration forum of the settlement since hearing deposit fees can be returned to a claimant depending on when the settlement is reached relative to the first scheduled hearing.
One of the problems in letting a small NASD firm enter into a long-range payout schedule is that the firm may be out of business before the final payment is made. While your settlement agreement for an "over time" payment plan should always contain a reference to the appropriate SRO rule dealing with arbitration settlements (as noted above), this may not provide enough of an incentive to get a small firm to pay in full. In such instances, you may want to require officers of the brokerage firm to be personally responsible for the balance of all payments, with the added kicker of marketable collateral.
Until the settlement has been committed to writing, don't ask the arbitration forum to disband the panel. It is not uncommon to reach agreement on the settlement number only to have the final settlement break down when negotiating the final points of the written agreement. One particular sticking point is if the brokerage firm requires a liquidated damage provision in the event the confidentiality clause is breached. Firms often insist on such provisions when the facts of a case are controversial or embarrassing to their employees or when the firm is defending a number of similar cases and is concerned that the other claimants will learn and be influenced by the settlement terms. My firm makes it a practice never to agree to liquidated damage clauses. Should the firm be able to prove a material breach of the confidentiality clause, and resultant damages, it has ample redress in the courts or in arbitration
It is recommended that the settlement agreement not set forth the underlying allegations or issues in the case, since one never knows if the agreement will be subpoenaed or otherwise disclosed at a subsequent hearing. It is also recommended that the settlement agreement require both sides to return all documents produced in discovery. I often tell my customer-clients that brokerage firms are paying them for their silence and that the firm should expect never to hear from or see those customers again. Lastly, some brokerage firms try to add a provision prohibiting the customer's attorney from representing any of the firm's customers in similar cases in the future. Since many of us believe that provision to be unethical and an unfair restriction on our right and ability to practice law, I never agree to it. However, I tell my clients at the outset of the retention that that is one of my firm's policies, so they can decide at that time whether to proceed with us.
Even if you follow this 15 point checklist, you may never learn why the other side "blinked" and how you were able to negotiate a favorable settlement. The reason may be based on a fact you were unaware of but one which would, inevitably, have been disclosed at the hearing. But who really cares - your client thinks you're a genius and you've controlled the outcome of the case without having to subject it to the eccentricities of an arbitration panel.
* David E. Robbins is a member of the SAC Board of Editors. He represents customers, brokers and firms and chairs the annual PLI program on securities arbitration. Second reprint rights reserved by the author.
Reference: Securities Arbitration Commentator, Vol. X, No. 7
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