October 20, 2017
BrokerAndBroker.com Blog's publisher Bill Singer, Esq. ain't always a popular guy. There are those who view him as an annoying gadfly, a blowhard, and an attention seeker. A lot of that comes from Wall Street interests and industry apologists because Bill isn't shy about criticizing the brokerage community and its regulators when they engage in misconduct -- yeah, you read that right, he also goes after Wall Street's cops. In fairness, Bill also criticizes public customers who fail to do due diligence or choose to believe that's what's too good to be true isn't too good to be true.
In today's blog, Bill takes on the Financial Industry Regulatory Authority for what he views as an idiotic FINRA Arbitration Decision involving the dispute of two public customers against a member firm. Bill is not criticizing the three FINRA arbitrators who signed off on the Decision because they are following the dictates of the FINRA Code of Arbitration. What comes within Bill's cross-hairs is FINRA for its tolerance of a policy of non-disclosure and its contentment with a lackluster approach to quality control over many of its published materials.
Case In Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in July 2016, public customer Claimants McCluskey and Luca alleged that Respondent David A. Noyes & Company failed to honor their $50 per share Stop Loss orders for Molycorp, Inc. Claimants asserted failure to follow instructions; breaches of contract and fiduciary duty; negligence; and failure to supervise. Claimants sought at least $148,000 in compensatory damages plus unspecified punitive damages, fees, and costs. In the Matter of the FINRA Arbitration Between Robert McCluskey and Helen Luca, Claimants, vs. David A. Noyes & Company, Respondent /Third-Party Claimant, vs. Christine Mallul, Third-Party Respondent (FINRA Arbitration 16-02235, October 16, 2017). Third Party Claim
Respondent Noyes generally denied the allegations and asserted various affirmative defense. Also, Noyes filed a Third-Party Claim against Third-Party Respondent Mallul seeking indemnification. Noyes contended that if there is any liability on its behalf to the Claimants, Mallul was the cause. Third-Party Respondent Mallul generally denied the allegations and asserted various affirmative defense. Woman of Mystery
Who is Christine Mallul? What did she do or not do to earn her the role of a Third-Party Respondent? Was she the Claimants' stockbroker? Was she an outside financial advisor? Was she a trader who forgot to execute the Stop Loss orders? Thankfully, those issues will be clarified in the FINRA Arbitration Decision.
A Typo Missing a Zero?
As I read through the FINRA Arbitration Decision, I was stunned when I came upon this statement:
At the close of the hearing, Claimants each requested $14,000 in compensatory damages.
I'm thinking that it's a typo . . . as in FINRA forgot to type in another zero after the "4" and before the ",". Then again, maybe it's not a typo. Maybe it is? Let's assume that it's not a typo and that each of the three arbitrators carefully read the final draft of their Decision before signing off, and, also, let's assume that those beady-eyed folks in FINRA's quality-control area noted the "$14,000," asked for confirmation, got confirmation, and posted the Decision for public consumption. As such, we got the Claimants starting off their lawsuit with a demand for at least $148,000 in compensatory damages. At some point after the evidence was presented to the arbitrators and the hearing moved into closing arguments, the Claimants amended their demand from $148,000 to $14,000, which is something like a 90% reduction. Did the Claimants learn something at the hearing? Thankfully, those issues will be clarified in the FINRA Arbitration Decision.
In adjudicating the claims, this is the full-text of the arbitrators' explanation under the heading "Award" in the FINRA Arbitration Decision:
1. Claimants' claims are denied in their entirety.
2. Noyes's Third-Party Claim is denied.
3. Other than forum fees, which are specified below, the parties shall each bear their own costs and expenses incurred in this matter.
4. Any and all claims for relief not specifically addressed herein, including punitive damages and attorneys' fees, are denied.
Seriously? Are you kidding me? That's it?
- No explanation whatsoever as to whether Claimants placed and/or Respondent Noyes accepted a bona fide Stop Loss order:?
- No explanation whatsoever as to whether any Stop Loss order was honored or properly executed by Respondent Noyes?
- No explanation whatsoever as to why Claimants amended their compensatory damage claim from $148,000 to $14,000?
- No explanation whatsoever as to just who the hell is Third-Party Respondent Mallul?
Read It Yourself
As I often lament when lambasting FINRA's piss-poor quality control over many of its published materials, there is a problem with the self-regulator's/arbitration forum's concept of adequate "content and context." For those of you who think I'm suppressing certain facts or glossing over disclosures in the FINRA Arbitration Decision, please read it yourself at:
Funny thing -- Mallul last worked at Noyes in 2011, so I re-read the FINRA Arbitration Decision to see what year the alleged Stop Loss orders were submitted. Tell you what, for those of you who still think that I play games with FINRA's published facts, see if you can discern just when the Claimants' Stop Loss orders were entered. I will gladly settle for nothing more than a year. Any year. And your answer is?
In reading through Mallul's BrokerCheck file, you may notice that it has no reference to the McCluskey/Luca Arbitration, which may well be appropriate from a regulatory perspective because Mallul was not named by the Claimants but merely brought into the case via an indemnification demand by Respondent Noyes. Pointedly, keep in mind that Mallul was not found guilty by the arbitrators of any misconduct and in light of the dismissal of the Claimants' claims, there was no misconduct by either her or her employer firm. As such, Mallul might well want to consider the expungement of this matter from her Central Registration Depository records if, in fact, any disclosure was noted pertaining to this case.
The Nature of "Alternative" in ADR
FINRA arbitration is a "private" means of alternative dispute resolution ("ADR") and, as such, the parties have every right to insist upon the confidentiality of certain facts. Notwithstanding such a tacit understanding, a mandatory arbitration forum, which FINRA's ADR forum is for both industry participants and public customers, must provide sufficient content and context in its decisions so as to provide intelligible guidance to those essentially trapped within the system. The adequacy of FINRA's arbitration decisions is most critical when the parties appeal to the courts in order to obtain confirmation or vacatur of an award. A less critical but important consideration is that a given forum's decisions provide important guidance to future litigants about how particular facts are weighed and the nature of monetary and non-monetary awards. Although veteran arbitration lawyers know that there is no precedential value from one arbitration award to another, that does not negate the importance of providing sufficient content and context.
Explained and Unexplained Awards
Let's take a brief look at FINRA's rule-book and see what it provides for the default content and context of its arbitration decisions involving public customer disputes:
FINRA Code of Arbitration Procedure of Customer Disputes Rule 12904: Awards
(a) All awards shall be in writing and signed by a majority of the arbitrators or as required by applicable law. Such awards may be entered as a judgment in any court of competent jurisdiction.
(b) Unless the applicable law directs otherwise, all awards rendered under the Code are final and are not subject to review or appeal.
(c) The Director will serve the award on each party, or the representative of the party.
(d) The panel shall endeavor to render an award within 30 business days from the date the record is closed.
(e) The award shall contain the following:
(1) The names of the parties;
(2) The name of the parties' representatives, if any;
(3) An acknowledgement by the arbitrators that they have each read the pleadings and other materials filed by the parties;
(4) A summary of the issues, including the type(s) of any security or product, in controversy;
(5) The damages and other relief requested;
(6) The damages and other relief awarded;
(7) A statement of any other issues resolved;
(8) The allocation of forum fees and any other fees allocable by the panel;
(9) The names of the arbitrators;
(10) The dates the claim was filed and the award rendered;
(11) The number and dates of hearing sessions;
(12) The location of the hearings; and
(13) The signatures of the arbitrators.
(f) The award may contain a rationale underlying the award.
(1) This paragraph (g) applies only when all parties jointly request an explained decision.
(2) An explained decision is a fact-based award stating the general reason(s) for the arbitrators' decision. Inclusion of legal authorities and damage calculations is not required.
(3) Parties must make any request for an explained decision no later than the time for the prehearing exchange of documents and witness lists under Rule 12514(d).
(4) The chairperson of the panel will be responsible for writing the explained decision.
(5) The chairperson will receive an additional honorarium of $400 for writing the explained decision, as required by this paragraph (g). The panel will allocate the cost of the chairperson's honorarium to the parties as part of the final award.
(6) This paragraph (g) will not apply to simplified cases decided without a hearing under Rule 12800 or to default cases conducted under Rule 12801.
(h) All awards shall be made publicly available.
(i) Fees and assessments imposed by the arbitrators under the Code shall be paid immediately upon the receipt of the award by the parties. Payment of such fees shall not be deemed ratification of the award by the parties.
(j) All monetary awards shall be paid within 30 days of receipt unless a motion to vacate has been filed with a court of competent jurisdiction. Absent specification to the contrary in the award, when arbitrators order opposing parties to make payments to one another, the monetary awards shall offset, and the party assessed the larger amount shall pay the net difference. An award shall bear interest from the date of the award:
(1) If not paid within 30 days of receipt;
(2) If the award is the subject of a motion to vacate which is denied; or
(3) As specified by the panel in the award.
Interest shall be assessed at the legal rate, if any, then prevailing in the state where the award was rendered, or at a rate set by the arbitrator(s).
Background & Discussion
FINRA is amending its Customer Code and Industry Code to require arbitrators to provide an explained decision at the parties' joint request. The absence of explanations in awards has been a common complaint of non-prevailing parties in FINRA's arbitration forum, especially customers and associated persons. The amendments are intended to address this complaint and increase investor confidence in the fairness of the arbitration process.
An explained decision is a fact-based award stating the general reasons for the arbitrators' decision. It does not need to include legal authorities and/or damage calculations. Normally, the arbitrators will be resolving the entire matter; thus, the explained decision will address all the claims asserted by the parties. However, the parties may request that an explained decision address only certain claims.
Parties will be required to submit any joint request for an explained decision no later than 20 days prior to the first scheduled hearing date.
The chairperson of the arbitration panel will write the explained decision and will receive an additional honorarium of $400. Once the decision is drafted, the other arbitrators will participate in completing the decision as provided in Rules 12904(a) and 13904(a). As with all other awards, the arbitrators will continue to be permitted to concur, concur in part, dissent or dissent in part. The panel may allocate the cost of the honorarium to one party, or may allocate it between or among all parties. Arbitrators will continue to be permitted to decide, on their own, to write an explained decision. If the panel or a member of the panel decides to write an explained decision in the absence of a joint request, FINRA will not pay an additional honorarium to any panel member.
Parties will not be able to require explained decisions in simplified arbitrations that are resolved without a hearing or in default proceedings. Explained decisions are not appropriate in either of these situations because of the abbreviated nature of the proceedings.
The amendments become effective on April 13, 2009, and will apply to all arbitration cases in which an initial prehearing conference has not been held, or waived by the parties, by the effective date.
If all parties to a FINRA arbitration desire a given level of non-disclosure of facts and rationale, then so be it. I'm a free-market advocate and generally support private agreements as long as the negotiations occur among equal parties and the result is "freely bargained for" and legal. That being said, if the parties desire some enhanced confidentiality about the allegations, the facts, and the findings, then their FINRA Arbitration Decision should disclose the existence of an agreement to limit the presentation of certain facts and to constrain the expression of the arbitrators' rationale.
Simply going by FINRA Rule 12904(e)(1-13), it would be perfectly acceptable for a FINRA Arbitration Decision to consist of the following:
Joe Smith, represented by lawyer Jane Doe, filed an arbitration statement of claim on January 4, 2017, against XYZ Broker Dealer, represented by lawyer John Doe. Arbitrators Thomas Jones, Dick James, and Harriet Green have read the pleadings and materials filed by Smith and XYZ Broker Dealer. The dispute involves a transaction of shares of the common stock of Issuer ABC. Smith seeks $1 million in damages, plus interest, costs, and fees. XYZ Broker Dealer seeks costs and fees. Smith's claims are denied on February 4, 2018. Forum fees and other fees are to be split evenly between Smith and XYZ Broker Dealer. There were six hearing session on December 1, 2, 3, 4, 5, and 6, 2017 held in New York City.
Is the Decision above truly something that a self-regulatory organization should be promoting as a reasonable alternative to litigation in state and federal courts?
FINRA's response to complaints about "the absence of explanations in its awards" is a cynical remedy. An explained decision requires the submission of a request from all parties. That's nonsense since many arbitrations involve issues that FINRA member firms particularly desire to keep confidential, which was the main driving force behind mandatory intra-industry and public customer arbitration. Why does FINRA embrace obfuscation as its default method for a published decision? Why not adopt an explained decision as the default and offer enhanced confidentiality as the alternative when all parties agree? There's something unseemly and discomforting when a regulator sanctions inadequate disclosure. Moreover, when that regulator is a self-regulatory organization controlled and financed by its industry/employer member firms, one inevitably wonders if such a policy is demanded by such vested interests to the detriment of public customers and employees. I can only imagine what a lovely plaque FINRA presents to its veteran arbitrators:
For 10 Years of Exemplary Service as an Arbitrator Rendering Unexplained Decisions