Crosby & Higgins LLP defends and prosecutes broker-dealer disputes, including claims involving allegations of improper sales practices, churning, unsuitability, misrepresentations or omissions, unauthorized trading, and numerous other state and federal securities laws claims. The Firm represents both plaintiffs and defendants in complex security arbitrations.
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Securities Arbitration is a process of dispute resolution for broker-dealer disputes. The goal of arbitration is to provide a system for resolving disputes without using the courts. While the general procedures of a court trial and arbitration are similar, they differ in that arbitration involves a panel of arbitrators who decide the outcome of cases rather than a jury. Depending on the forum selected, there may be limited opportunities for the parties to review the award histories of the arbitrators, and to have any input into the selection of arbitrators appointed to the panel.
Arbitration is governed by state and federal law; most states have enacted specific arbitration provisions, or have adopted the Uniform Arbitration Act. There are several self regulatory organizations (“SROs”) that provide arbitration, including the Financial Industry Regulatory Authority (“FINRA”)’s arbitration program.
Obligation to Arbitrate
Members of FINRA and the various stock exchanges, which include registered representatives and their firms, are required to arbitrate any disputes with their clients. For instance, members of FINRA are bound by the FINRA Code of Arbitration Procedure. Although this code binds members to arbitrate, there is no reciprocal obligation that binds clients to arbitrate. When enlisting the services of a brokerage firm, clients are typically required to sign a contractual agreement to arbitrate any disputes that may arise. If the client signs this agreement, the client has agreed to resolve disputes through arbitration. If there is no contract providing for arbitration, the client can choose to arbitrate or to opt for a court proceeding.
General Information for the Aggrieved Investor
In order to bring a claim against another party, the claiming party (“Claimant”) must be able to identify and locate the wrongful party; he must have at least one claim that has occurred within a certain time frame; and he must have suffered monetary losses (a loss in profits for claims such as churning is adequate) as a result of the wrongful party’s actions. Although each state has specifications for the time limits in which to bring a claim for arbitration, the cause of action should occur within FINRA’s requirement for filing a claim.
Types of Claims
There are numerous claims that can be brought under securities arbitration. Some common claims include: fraud; misrepresentations and omissions; negligence including unsuitability, unauthorized trading, order failure, churning, or failure to supervise; various breach of contract claims; and breach of fiduciary duty.
Federal securities laws contain anti-fraud provisions that require stockbrokers to apprise the client of the risks of an investment.
Misrepresentations and Omissions
A misrepresentation occurs when a broker intentionally or unintentionally misrepresents the risks of an investment. An omission occurs when a broker intentionally or unintentionally fails to disclose information that the broker knew or should have known that the client would rely on regarding the risks of the investment. Generally speaking, the client must have reasonably relied on the broker’s misrepresentation or omission and must have made his decision to buy or sell the security based on the broker’s conduct. The client’s reliance should be reasonable based on factors that include: his sophistication with securities; the availability of relevant information; and his relationship with the broker.
FINRA and the stock exchanges have rules and regulations that apply to stockbrokers. The actions of a broker must comply with these rules and regulations, and with industry standards. Any breach of the duties described below may constitute a claim for negligence.
A broker has a duty to make recommendations to the client that he reasonably believes are suitable for the client, and consistent with the client’s objectives and needs. Additionally, a broker is required to conduct due diligence to determine the suitability of a particular security, based on the needs of the investor. If a broker recommends an investment that is inconsistent with the client’s investment objectives and the broker knew or should have known that it is inconsistent, then the broker may be liable for unsuitability.
A stockbroker has a duty to obtain approval from a client for a trade before the transaction is completed. With limited exceptions, stockbrokers and other registered representatives can not use discretionary power with respect to a client’s account without first obtaining written consent.
Failure to Supervise
A brokerage firm or supervising broker has the duty to supervise stockbrokers with extensive disciplinary histories. Firms and stockbrokers also have a duty to report every written complaint made against them. In addition, the firms must execute transactions and follow other supervisory procedures in a manner which complies with the industry’s regulations. Generally speaking, a brokerage firm has an obligation to supervise the securities business conducted by a stockbroker outside of the firm. Hence, a brokerage firm may be held liable for any misconduct associated with investments that a stockbroker sells or solicits outside of the firm (“selling away”).
A broker has a duty to put the client’s interests first; he cannot engage in trades for the purpose of generating commissions rather than for the benefit of the client’s account. A broker has an incentive to increase the volume of transactions when he is compensated on the volume of transactions conducted for the client. The practice of engaging in excessive trading activity in light of the objectives and resources of the client’s account is called churning. Churning violates securities laws and brokers may be held liable for such activity.
Breach of Contract Claim
Clients enter into a “Client Agreement” with the brokerage firm, under which the firm and the brokers are contractually bound to follow the applicable rules of all exchanges that the firm is a member of, and of exchanges through which trading is conducted. In addition, the brokerage firms enter into a “License Agreement” with FINRA or with various stock exchanges which require each party to comply with all of the rules and regulations of that exchange. Clients may be able to raise claims for breach of the Client Agreement, or in the alternative, for breach of the License Agreement as a third-party beneficiary.
The Process of Arbitration
Once the party has decided on a potential claim or claims and its ability to bring the claims, the party may choose to arbitrate.
Arbitrations are commenced by filing a “Statement of Claim” along with the filing fee and hearing session deposit. The parties must also sign a “Submission Agreement,” which binds the parties to the decision reached by the Director of Arbitration with respect to the proper forum. The statement of the claim should consist of the identification of the parties; statement of all of the relevant facts and circumstances surrounding the dispute detailing the nature of the dispute, including the relevant dates or time frame, the transactions in dispute, the securities involved; and amount of damages or type of relief requested.
After the party being served (the “Respondent”) has received the Statement of Claim, the respondent has the opportunity to submit: an “Answer,” with any defenses it may have; a “Counterclaim” to assert its own claims against the claimant; or a “Cross-claim” to assert claims against other respondents or third parties.
Next, the parties engage in a process known as “discovery.” Traditionally, discovery in arbitration was limited to keep costs low and to maintain the expediency of the process. Today, however, both parties typically engage in a more thorough discovery process to obtain as much financial information as they can about one another.
Arbitration hearings are typically scheduled months in advance for two or more consecutive days. The arbitration session is conducted in a roughly similar manner to that of a court trial. The claimant starts with opening statements, then the respondent(s) follow with its opening statements. Next the claimant introduces evidence, which includes testimonies of witnesses. After each witness testifies, the witness is cross-examined by the respondent’s attorneys and then by the arbitrators. Following the arbitrators’ examination, the claimant has another opportunity to clarify any questions that were raised during the arbitrator’s cross examinations. The respondents also have the opportunity to cross examine the witnesses again regarding questions raised by the arbitrators. After each witness has testified and has been repeatedly cross-examined, the respondents then have the opportunity to introduce their witnesses. The same procedure ensues. Afterwards, each party has the opportunity for a rebuttal, and then, each party gives their closing arguments. Some arbitrators may also allow the submission of post-hearing briefs.
Outcome of Arbitration
Most securities arbitration claims settle before a hearing is held. If the case does not settle, most SROs render awards within 30 days of the last hearing date, or the submission of post-hearing briefs. Arbitrators are not required to provide a reason for their decision or for their calculation of damages. Generally, after the arbitration award has been served, there is no appeal of the decision. However, depending on the state’s rules regarding arbitration, there may be an opportunity to file an appeal to the state or federal court.
Arbitration awards can include: monetary compensation for trading losses; realized and unrealized losses; various account charges; broker commissions; general expectancy losses; and punitive damages. If the jurisdiction permits, the parties may also agree to seek attorney’s fees.
Recent Broker Dealer Dispute Experience
1/8/2013 – Crosby & Higgins LLP is Serving as Lead Counsel for an Allegedly Defrauded Investor in the United States District Court for the District of Colorado
1/02/2012 — Crosby & Higgins LLP Pursues $3.5 Million Arbitration Arising from Sale of Pivot-4 Auction Rate Securities
12/21/2011 — Crosby & Higgins LLP Takes $75 Million Venture Capital Dispute to Hearing
02/18/2011 — Crosby & Higgins LLP Delivers First FINRA Arbitration Award against Merrill Lynch for Institutional Client Holding Auction Rate Securities
11/11/2010 — Crosby & Higgins LLP Delivers First Arbitration Award against Oppenheimer & Co. for Clients Holding ARS
10/15/2009 — Crosby & Higgins LLP Resolves Compensatory and Punitive Damages Claims Arising Out of Collapse of Sub-Prime Backed Hedge Funds
12/15/2008 — Crosby & Higgins LLP Investigates $50 Billion Fraudulent Investment Ponzi Scheme
12/1/2008 — Crosby & Higgins LLP files $65 Million Auction Rate Preferred Securities Arbitration Against Merrill Lynch & Co.
11/18/2008 — Crosby & Higgins LLP Files $6.1 million Arbitration Claim Against Oppenheimer & Co. Arising Out of the Sale and Marketing of Auction Rate Securities
11/3/2008 — Crosby & Higgins LLP Investigates Claims Involving Lehman Brothers Principal Protected Notes
10/20/2008 — Crosby & Higgins LLP Begins Resolving Retail Auction Rate Securities Claims; Continues Fight on Behalf of Institutional Investors