by Bill Singer
FINRA Arbitrators Punt When They Should Have Gone For It
August 8, 2014
Not a lot of folks are fans of FINRA arbitrations. I, for one, do not support mandatory public customer or mandatory intra-industry arbitration before FINRA. It's not that the forum is biased and the proceedings are unfair -- to the contrary, I believe that the hearings are generally well conducted and the outcomes more or less fair. That being said, the admonition is that Caesar's wife must be above suspicion and, in that spirit, there are just far too many legitimate concerns about the built-in conflicts in FINRA arbitrations. Conduct the same arbitrations at a neutral forum that is wholly free and clear of the financial support and influence of Wall Street's brokerage firms, and you will eliminate many concerns raised by public customers and industry employees about how the deck is stacked against them when they are forced to litigate their disputes against FINRA member firms and employers. Moreover, when FINRA arbitration panels issue controversial rulings, you eliminate a lot of the second guessing that naturally flows from the perceived conflicts inherent in the system. Take this recent case, for example.
Case In Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in July 2013, public customer Claimants asserted breaches of fiduciary duty and contract; negligence; negligent supervision; and fraud in connection with the alleged failure to execute instructions to place Claimants' funds into "safer, less volatile investments." At the close of the hearing, Claimants sought $166,189.50 in compensatory damages and pre-judgment interest of $43,794.21. In the Matter of the FINRA Arbitration Between Michael Ericson; Michael Ericson as Executor for the Estate of Don Ericson; Michael Ericson as Executor for the Estate of Jane Ericson; Michael Ericson as Successor Trustee of the Don Ericson Living Trust; and Michael Ericson as Successor Trustee of the Jane Ericson Living Trust,Claimants, vs. ProEquities, Inc., Respondent (FINRA Arbitration 13-02070, July 30, 2014)
Respondent ProEquities generally denied the allegations and asserted various affirmative defenses.
Maybe . . . perhaps . . . possibly?
At the conclusion of Claimants' case-in-chief, Respondent moved to dismiss based upon its assertion that Claimants had not presented evidence in support of their claims. Claimants opposed the motion. According to the FINRA Arbitration Decision:
[T]he Panel denied the motion because it felt Claimants might be able to find support for their case during cross-examination of Respondent's witness.
Decision
Upon the completion of the hearing, the Panel denied with prejudice Claimants' claims.
Bill Singer's Comment
Without question, a Motion To Dismiss brought by an industry respondent against a public customer Claimant in a FINRA arbitration should be an extraordinary remedy granted only in rare circumstances where there has been a failure by the public customer to overcome the preponderance of the evidence standard of proof. Nonetheless, the burden of proof in a FINRA arbitration is on the Claimant; and, as such, by the conclusion of its case-in-chief, either a Claimant has or has not carried that burden. A Respondent has no obligation to put on a case and may, in effect, simply rest at the conclusion of Claimant's presentation of evidence.
Consequently, I do not understand this Panel's rationale for declining to grant the Motion to Dismiss following the conclusion of Claimants' case-in-chief because the public customers "might be able to find support for their case during cross-examination of Respondent's witness." Might be able? The inference we are compelled to accept is that the Panel uneasily believed that Claimants had not yet proven their case but, hey, you know, maybe if you guys call a witness, gee, who knows.
If, in fact, Claimants had concluded their case-in-chief and demonstrated by a preponderance of the evidence the validity of their claims, that's one thing - under such circumstances, a denial of the motion is mandatory and appropriate. In Ericson v. ProEquities, however, it seems as if the FINRA Arbitration Panel lacked the courage of its convictions and instead of properly granting the motion, manufactured some odd-ball rebuttable presumption that required Respondent to put on a case so that Claimants might be able to cure their failure to prove their case-in-chief by cross-examining a single witness of Respondent.
Ultimately, this whole procedural brouhaha takes on the cast of a lack of nerve -- a decision to punt when the circumstances dictate that you go for it. The fact that the Panel eventually dismissed the charges is irrelevant. You shouldn't impose the additional costs of further hearing sessions upon parties just because it doesn't leave you open to second guessing. No one ever suggested that judging disputes is an easy undertaking. In the end, someone typically wins and someone typically loses; and as with much litigation, sometimes everyone is unhappy with the judge, no matter the outcome.
I would hope that FINRA would issue a memo to its Panel of Arbitrators reminding them that there is a Rule addressing the proper handling of motions to dismiss. Moreover, FINRA might wish to highlight Rule 12504(b), which pointedly carves out an exception for such motions after the presentation of a claimant's case-in-chief:
FINRA Code of Arbitration Rule 12504. Motions to Dismiss
The Customer Code applies to claims filed on or after April 16, 2007. In addition, the list selection provisions of the Customer Code apply to previously filed claims in which a list of arbitrators must be generated after April 16, 2007; in these cases, however, the claim will continue to be governed by the remaining provisions of the old Code unless all parties agree to proceed under the new Code.
(a) Motions to Dismiss Prior to Conclusion of Case in Chief
(1) Motions to dismiss a claim prior to the conclusion of a party's case in chief are discouraged in arbitration.
(2) Motions under this rule must be made in writing, and must be filed separately from the answer, and only after the answer is filed.
(3) Unless the parties agree or the panel determines otherwise, parties must serve motions under this rule at least 60 days before a scheduled hearing, and parties have 45 days to respond to the motion. Moving parties may reply to responses to motions. Any such reply must be made within 5 days of receipt of a response.
(4) Motions under this rule will be decided by the full panel.
(5) The panel may not grant a motion under this rule unless an in-person or telephonic prehearing conference on the motion is held or waived by the parties. Prehearing conferences to consider motions under this rule will be recorded as set forth in Rule 12606.
(6) The panel cannot act upon a motion to dismiss a party or claim under paragraph (a) of this rule, unless the panel determines that:
(A) the non-moving party previously released the claim(s) in dispute by a signed settlement agreement and/or written release; or
(B) the moving party was not associated with the account(s), security(ies), or conduct at issue.
(7) If the panel grants a motion under this rule (in whole or part), the decision must be unanimous, and must be accompanied by a written explanation.
(8) If the panel denies a motion under this rule, the moving party may not re-file the denied motion, unless specifically permitted by panel order.
(9) If the panel denies a motion under this rule, the panel must assess forum fees associated with hearings on the motion against the moving party.
(10) If the panel deems frivolous a motion filed under this rule, the panel must also award reasonable costs and attorneys' fees to any party that opposed the motion.
(11) The panel also may issue other sanctions under Rule 12212 if it determines that a party filed a motion under this rule in bad faith.
(b) Motions to Dismiss After Conclusion of Case in Chief
A motion to dismiss made after the conclusion of a party's case in chief is not subject to the procedures set forth in paragraph (a).
(c) Motions to Dismiss Based on Eligibility
A motion to dismiss based on eligibility filed under Rule 12206 will be governed by that rule.
(d) Motions to Dismiss Based on Failure to Comply with Code or Panel Order
A motion to dismiss based on failure to comply with any provision in the Code, or any order of the panel or single arbitrator filed under Rule 12212 will be governed by that rule.
(e) Motions to Dismiss Based on Discovery Abuse
A motion to dismiss based on discovery abuse filed under Rule 12511 will be governed by that rule.