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Arbitration System Looks More Like Court

3/28/2007

Dow Jones Newswires

By Jaime Levy Pessin

A Dow Jones Newswires Column

NEW YORK (Dow Jones)–Arbitration was supposed to be a quick and easy way for investors to settle disputes with brokerage firms.

Nowadays, that’s not always the case.

In one pending arbitration case, the defense attorneys filed a motion that included 85 pages of panel decisions to dismiss other claimants’ cases – even though precedents have no standing in arbitration. In another, a brokerage firm insinuated the claimant had committed tax fraud – an unrelated matter that the claimant’s lawyer denied. In what has turned into a legal arms race, both sides regularly call expert witnesses.

These time-consuming and lawyerly tactics are a far cry from the early days of arbitration, when an investor could walk into a room, tell a panel what happened, and be done with the hearing in a few hours.

Twenty years after the U.S. Supreme Court made it legal for brokerage firms to require arbitration for customer disputes, arbitration run by the National Association of Securities Dealers has grown into a large and complex system that increasingly resembles the courts.

“The pendulum has swung very far the other way,” said Ted Krebsbach, who represented the brokerage firm in Shearson/American Express vs. McMahon, the 1987 case in which the Supreme Court gave the go-ahead for firms to use mandatory arbitration agreements with customers. “You’re getting a process that has lost many of its initial advantages.”

A New Industry

Before 1987, there weren’t enough cases – especially big ones – to sustain many arbitration lawyers. But the number of claims and their size grew: After the technology bust, the forum saw nearly 9,000 claims filed in 2003, an  all-time high. Now the Public Investors Arbitration Bar Association, established in 1990, has about 540 members.

A stronger investors’ bar means mom-and-pop consumers may have a better shot of getting their money back when they’ve been wronged. But it also means brokerage house lawyers are playing harder. “Everybody I talk to says you’re a fool to go to arbitration without an attorney,” said Robert Keenan, the principal of St. Bernard Financial Services, who said he spent $35,000 in legal and forum fees to win a recent claim against a fellow broker.

Between 1990 and 2005 the length for all arbitration hearings has stretched to 6.1 sessions, just over three days, from 3.5 sessions, or just over a day and a half. Turnaround times for hearing panel cases has expanded to 16.6 months, up from 15.1 months in 1996.

Still, the court system could take at least three years before completing a case, said Rick Ryder, editor of the Securities Arbitration Commentator, a Maplewood, N.J. newsletter that tracks awards.

In the past, motions to dismiss were used only for cases where a claim wasn’t eligible to go forward – such as when the time frame for filing a claim had expired.

Now, though, the practice has become more common – and, investor advocates say, it’s dangerous.

“The motion to dismiss is an inappropriate tactic that once granted really gives no recourse to the aggrieved party to appeal,” said James Eccleston, an investors’ lawyer. For the most part, arbitration decisions can’t be appealed.

To adequately respond to a motion to dismiss takes time. “The more work a contingency lawyer is forced to do, the higher the threshold will be for the lawyer to accept the claim,” said Phil Aidikoff, the claimant’s lawyer fighting the motion to dismiss with the 85-page attachment, and a former PIABA president.

Ben Suter, the lawyer who submitted the motion to dismiss that Aidikoff is fighting, said the attachments were intended to affirm “the propriety of the motion to dismiss process,” not to persuade the panel to grant the motion. He said he rarely files such motions, but said they can save investors time and money if there’s no chance of a customer win.

To prevent them from being over-used, the NASD has a rule pending before the Securities and Exchange Commission that would say “motions to decide a claim before a hearing are discouraged and may only be granted in extraordinary circumstances.”

Court Complexity

Expert witnesses and contentious discovery disputes often make the arbitration process feel like court.

“Sophisticated lawyers know how to try a case,” said Linda Fienberg, president of NASD dispute resolution, and they often feel an expert witness will help.

Once one side brings in an expert, the other side feels pressure to do the same.   “The only reason to get an expert was because the other side had one… even if the panel’s laughing at him,” said Matthew Farley, a partner at law firm Drinker Biddle & Reath, who represents brokerage firms in arbitration. “It adds expense, it adds time. At best, they have neutralized each other.”

Farley often calls experts, just to avoid suggestions that his side couldn’t find anyone to support them. “I don’t think there are too many defense attorneys out there willing to take the chance of not putting on expert testimony of their own,” he said.

As for discovery, lawyers on both sides say demands have got out of hand – as have the responses.

“There’s not a case we’ve filed in eight to 10 years where we haven’t filed a motion to compel” the other side to provide requested documents, said Aidikoff, the claimant’s attorney. There are “a lot of people who fight over everything, who pretend the compliance manual is confidential.”

Krebsbach, the defense attorney, said: “They want to get every document from a brokerage firm’s history for every case because they might find something….It’s intrusive, ridiculous, expensive.”

Both Krebsbach and Aidikoff are optimistic about an NASD pilot program in which a separate arbitration panel will establish ground rules for discovery.

Discipline Required

Lawyers on both sides say they are hungry for discipline from arbitrators – whether shutting down motions to dismiss, limiting the length of hearings, or setting up strict standards for discovery.

“We’ve lost the ability to discriminate, determine what is important and not so important,” Farley said. “It has gone this way without anyone blowing the whistle and saying, ‘Stop!'”

The NASD hopes a new training program for chairmen of arbitration panels will better equip them to referee.  For now, investors’ advocates worry that brokerage firms, with their deeper pockets, will win a war of legal attrition.   Average investors “think they don’t need a lawyer: They’ll go in, tell their story, and Judge Judy gives them a verdict,” Aidikoff said. “Boy, are they in for a surprise.”


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