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In 2008, the United States securities markets experienced one of the single biggest declines since the stock market crash of 1929. As their retirement accounts fell 30, 40, even 50 percent or greater in value in a few months, investors went into shock. Many investors were approaching retirement, or already retired, having been assured by their investment advisors that their accounts were well positioned, with appropriate diversification and asset allocation. When they looked more closely at their accounts, many realized they were concentrated in high risk, volatile stocks, fixed income securities otherwise known as junk bonds, or now nearly worthless structured investment products issued by firms such as Lehman Brothers. When investors complained to their brokerage firms, they received pre-packaged responses—”you said you wanted high growth,” “you agreed to take on risk,” and “we were just following your orders.” You think back to all the recommendations made by your broker—”buy this stock, don’t worry about asset allocation, invest in this principal protected note – no risk, as safe as a T-bill.” Seeing a complete disconnect between the broker’s advice pre-crash and the brokerage firm’s post-crash justification, you contact a securities litigation lawyer to determine your rights. The first words out of his or her mouth is “arbitration.” Welcome to the world of FINRA securities arbitration.

Any investor who opens a securities brokerage account in the United States is required to sign a pre-dispute arbitration clause as part of the account agreement.[1] This agreement will provide that, should a customer have a dispute with the brokerage firm about any aspect of their account, they must pursue any legal claims through the filing of a FINRA arbitration claim. (FINRA was organized in 2007 and merged the arbitration forums established by the NYSE and NASD. If your account agreement pre-dates 2007, the arbitration clause may say NASD, NYSE or both.) As decided by the United States Supreme Court in Shearson/American Express v. McMahon, 482 U.S. 220 (1987), a pre-dispute arbitration clause is considered a forum selection decision. You do not give up your substantive rights under federal or state securities laws or under state common law, just your right to a jury trial in a court of law. To initiate a claim with FINRA, you must file what is called a Statement of Claim. The Statement of Claim is the functional equivalent of a complaint filed in a court of law but without the technical pleading requirements of a complaint. The Statement of Claim should set forth the nature of the dispute, all relevant facts, the responsible party (called respondent in FINRA speak) and the amount of damages you suffered (called relief). The Statement of Claim can be filed in paper form with FINRA or submitted online. For a more complete description of the arbitration process, go to:

Depending on the size of your claim (the dollar value of the relief you are seeking), your case will be assigned to a panel of one or three arbitrators. For claims under $25,000, FINRA also has certain expedited procedures. For the purpose of applying the Rules of Arbitration, your claim will be classified as a customer versus industry complaint. That is important because under new rules recently adopted by FINRA, customers can demand an all-public arbitration panel. Prior to this rule, panels employing three arbitrators were required to include at least one industry arbitrator.

Arbitration vs. Litigation

Some important differences between arbitration and court include:

  • Limited discovery rights, with no right to take depositions of witnesses prior to an evidentiary hearing;
  • At the arbitration hearing, the formal rules of evidence do not apply;
  • Arbitrators will typically allow admission of evidence that would not be allowed into a jury trial with the admonishment that the “evidence will be admitted and given the weight the arbitrators believe appropriate”;
  • Arbitrators rule on claims based on equity (fairness) and justice by issuing what is called an “award”;
  • Arbitrators are not required to strictly apply the rules of law in making an award;
  • FINRA arbitrators are not required to “explain” their decisions (called a reasoned award); and
  • It is extremely difficult to challenge an adverse arbitration award in court. Absent extraordinary circumstances, the decision of the arbitrators is final.

What You Should Do

If you have a dispute with your brokerage firm, you should not delay in bringing a claim. Although FINRA rules define eligible claims as any that are filed within six years of the occurrence or event giving rise to the claim, time limits imposed by state or federal law, known as “statutes of limitation,” may also apply. Most persons with possible securities arbitration claims would be well advised to consult with an attoreny. An initial consultation with a Pearson Simon LLP lawyer is free, and the firm will agree to represent investors on a contingent fee basis in appropriate cases. If you decide you want to consult with an attorney, whether it be at Pearson Simon LLP or another firm, you should immediately gather the following critical documents:

  • Securities account statements (including those from other firms, if any);
  • All account opening documents;
  • All investor or customer profiles; and
  • Notes or other correspondence with your broker, including emails, prospectuses or private placement memoranda you received and, if applicable, documents that gave your broker discretionary authority over your account.

Types of Claims

Although potential claims against your broker arise in a number of contexts, the most common is what is called a “suitability” claim. Under long established rules, brokers must “know their customer” and make “only suitable investment recommendations to that customer.” Although slightly different concepts, Know Your Customer (a NYSE rule) and Suitability (a NASD rule) both apply under FINRA. The Know Your Customer rule requires brokers to ask about their customer’s financial situation, such as income, expenses, financial goals and objectives, and their other investments, before making any recommendation to purchase, sell or exchange securities. Suitability requires brokers to have reasonable grounds for believing that a recommendation to purchase or sell an investment is suitable for a customer in light of the customer’s other investments, financial situation, needs and objectives. However, claims also arise in areas besides suitability. Flawed order execution, churning, misrepresentation of the nature of an investment, trading away (recommending investments not approved by the broker’s firm) and unauthorized trading are just some of the potential claims that can arise.

To discuss your situation and receive a free consultation as to whether your claim is worth pursuing, please call us at (818) 788-8300 or email [email protected]. Pearson Warshaw, LLP is a nationally recognized litigation firm that focuses on plaintiffs’ rights as investors and consumers. With offices in both San Francisco and Los Angeles, Pearson Warshaw’s attorneys have substantial experience in antitrust, securities litigation, consumer class actions and complex business litigation.

[1] This is true of any brokerage firm that is regulated by FINRA. Such firms are also called broker-dealers and their professional employees are commonly referred to as brokers or financial advisors, and by FINRA as “Associated Persons.” All brokers are required to be an Associated Person with a broker-dealer registered with FINRA. There also exist investment advisor firms that are regulated by the Investment Advisers Act of 1940. Registered Investment Advisors (RIA) are not required to be Associated Persons and will not always require pre-dispute arbitration clauses when an investor opens an account. Always check your account opening documents to determine whether you have agreed to arbitrate disputes.