Brokerage firms require potential clients to fill out new account forms before opening an account. Many investors do not notice the arbitration clause in the new account form, and this clause has important ramifications. Foremost is the limitation on available remedies for the dissatisfied investor. Since few, if any, brokerage firms allow potential investors to forgo this important clause, a defrauded investor is effectively prevented from bringing a court action to recoup their losses. Therefore, the overwhelming majority of actions brought against brokerage firms are NASD Dispute Resolution (NASD) or New York Stock Exchange arbitrations. In the very near future, the NASD and NYSE will be merging and become simply the NASD. Although arbitrations involving AMEX, NASDAQ, and NYSE claims may differ somewhat, the overall processes are very similar. At T. Michael Kennedy, P.C. we believe it is important for every client and potential client to familiarize themselves with the major points of this arbitration process. While there are both advantages and disadvantages to the arbitration process, it is generally quicker and less expensive than pursuing an action in court.

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Initiating the arbitration process.

In the first step of this process, the claimant, the person bringing the action against the brokerage firm and/or stockbroker, files a Statement of Claim with the NASD. The Statement of Claim should include the name and address of the claimant and the respondent stockbroker or brokerage firm, as well as the claimant's brokerage account number and a description of the allegations and the claimed monetary losses. The NASD then serves the Statement of Claim on the respondent. The brokerage firm and stockbroker are then given forty-five days to file a response. In their response, they may bring counterclaims against the claimant, and file cross-claims if there is someone else that the brokerage firm feels may have contributed to the claimant's damages.

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Costs involved with filing arbitration.

The cost to file arbitration claims depends upon the amount of money the claimant is seeking in damages. The initial fees range from $25 to more than $2,000. In addition, following the completion of the arbitration, the arbitrators will assess hearing session fees against the claimant, the respondent, or both. In cases where the arbitrators rule favorably for the claimant, they generally assess the additional fees against the respondent. The reverse is true if they rule favorably for the respondent. Although most cases that we file are typically pursued on a contingent fee basis, forum fees and the costs of pursuing the arbitration are typically paid by the client.

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Selecting the arbitrator.

If the amount of money in dispute is $25,000 or less, the arbitration is considered a "simplified arbitration" and one arbitrator is appointed to hear the controversy. If the amount is $25,001 to $50,000, then one arbitrator is selected unless the parties request a panel of three arbitrators. For all controversies involving more than $50,000, three arbitrators are appointed. Shortly after the formal response of the respondents is filed, the NASD will send both parties a list of arbitrators from which to choose. When a three-member arbitration panel is necessary, the NASD provides a list of ten public arbitrators and five brokerage industry arbitrators. When the arbitration panel consists of one arbitrator, then the NASD gives both parties a list of five public arbitrators to choose from. The NASD also includes resumes of the arbitrators, and a list of the arbitration awards they have previously rendered. Both parties are given the opportunity to request copies of the award documents. Any arbitrator can be removed from the list by either party. The parties then rank the arbitrators. The NASD then tabulates the ranking and chooses the arbitrators ranked highest by both parties.

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The pre-hearing conference.

Shortly after the arbitrators are selected, the NASD holds a pre-hearing conference, a short, fifteen- to thirty-minute telephone conference during which the arbitrators and involved parties establish a discovery and hearing schedule. At that time, the arbitrators generally ask the parties if they are willing to mediate their dispute.

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Mediation.

Mediation is a process in which a professional mediator assists the parties in negotiating their dispute. The goal of the mediator is to have the parties leave the mediation with a signed mediation agreement that resolves the dispute. Very often, both the claimant and respondents leave the mediation feeling that they were treated fairly, although they seldom get precisely what they were hoping for. Often, they are glad that they made the decision among themselves instead of leaving total authority to a third party. NASD statistics show that four out of every five cases brought before a mediator are resolved. Importantly, when the parties agree to mediate, they do not give up any rights to arbitrate if the mediation is not successful. However, keep in mind that the respondents do learn more about the claimant's case during mediation. They can later use this information during a subsequent arbitration hearing. Therefore, it is important to have an attorney present at the mediation so that key strategies are not revealed to the respondents.

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The discovery process.

During the discovery process, all relevant documents are exchanged by the parties. The NASD now provides a list of required/standardized documents which each party must turn over to the other. When one party does not wish to turn over certain documents, the arbitrators get involved in the discovery dispute, and either help the parties resolve the discovery issues or issue an order requiring that the documents be provided. Should the documents not be released, the arbitrators may prevent the liable party from proceeding.

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The Final hearing.

This is the equivalent of your "trial." Hearings typically follow a set pattern: both parties are given the opportunity to briefly describe their cases during an opening statement. Following this, they present their evidence and may call witnesses. Next, each side may cross examine opposing witnesses before making their closing arguments, which summarize their cases. Although the arbitration panel typically has at least one lawyer on it, the normal "rules of evidence" and "rules of procedure" that trial lawyers use in court are not strictly used or followed in arbitration. The rules are typically more relaxed, less formal, and this can be either a blessing or a curse as the individual case may be.

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After the hearing.

Immediately after the hearing, the arbitrators ask the parties to leave the room. They discuss the case and render their decision. The ruling is not revealed to the parties at this time. Instead, the arbitrators report their decision to the NASD, which prepares a written decision for the arbitrators to sign. The NASD then forwards the signed decision to the parties. Claimants are sometimes frustrated that the decisions are rendered with no written explanations; a disappointed claimant will not learn the reasoning behind the decision, and may leave feeling that it was unfair. However, the decision of the arbitrators is binding and there are very limited grounds for appeal.

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