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Arbitration Fairness?

Imagine, after the market collapsed you were forced to sell your auction-rate securities at a significant discount, even though you were advised beforehand that these securities were as safe as money-market funds. Then, at your arbitration hearing, one of the three panel members charged with deciding your case is an employee of another firm that also sold auction-rate securities. Do you expect you will receive a fair and unbiased hearing?  

That is the question posed by Jane Bryant Quinn in her commentary on today’s

According to Ms. Quinn, the recent arbitration claims regarding auction-rate securities illustrate how the odds are stacked against investors in the securities-industry arbitration.

All claims exceeding $50,000 require that the panel of decision makers includes two public members and one industry representative. The industry rep often acts as the “talking head” for Wall Street. Their job is to explain the industry’s point of view to the others, but of course will likely be favoring the exact practices you are there to protest. To make matters worse, as a “specialist”, their opinion is considered superior and their input may be given greater weight.  

The industry and FINRA have always rejected investor lawyers’ wishes to rid the system of the industry position. However, last year when the Arbitration Fairness Act emerged in congress (containing a clause requiring all public members on panels) FINRA hedged their position, slightly. Just last week, FINRA announced a two-year pilot project that allows as many as 420 cases to be heard by the proposed all-public panel.

Many lawyers embraced the plan as a trivial, small step to fairness. But this path to fairness was interrupted by FINRA after the Public Investors Arbitration Bar Association (PIABA) asked that potential panelists who had worked for firms that originated or sold auction-rate securities be excluded from hearings on auction-rate cases. FINRA shot down the idea and decided arbitrators are merely required to disclose if they worked for firms that sold auction-rate securities, sold them themselves or supervised anyone who did after January 1, 2005. The decision to select those arbitrators will then be left in the lawyers’ hands.  

Though it sounds like a fair proposal, the decision has lawyers irritated. “The steam is coming out of my ears,” said Phillip Aidikoff of Aidikoff, Uhl & Bakhtiari. “Where are the people who speak for individual investors?” 

Panels are chosen by both sides of the case, and then ultimately named by FINRA. Each party gets three lists of eight names, randomly picked by a computer from the arbitrator pool (one list for the industry panel and two lists for the public members). Each side is permitted to strike up to four names for whatever reason they want, and rank the remaining four. Then FINRA chooses the arbitrators most acceptable for both parties.  Since the arbitrators involved with auction-rate securities are still in the panelists pool, it forces the lawyers to use up their challenges to get rid of them. These challenges may have been used for reasons such as ridding of someone whose awards consistently disfavor of the industry, or challenged for cause – meaning direct and definite bias or interest.

If you have an auction-rate case against a large brokerage firm and get an industry panelist from a different large firm, how can they award the investor damages when his company is up against the same charges? That question has yet to be answered by FINRA.

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