As we noted in a prior post, almost all securities-related disputes end up in front of a FINRA Dispute Resolution, Inc. (“FINRA”) arbitration panel. See Intro to FINRA arbitration for investors As the regulator for the securities industry, FINRA requires broker-dealer firms and their securities professionals to register with FINRA and to submit to the jurisdiction of FINRA, the entity that manages and administers the arbitration claims filed against FINRA member firms and/or their FINRA registered professionals. In fact, it is deemed a violation of FINRA Rule 2010 (“Standards of Commercial Honor and Principles of Trade”) and “inconsistent with just and equitable principles of trade” for a firm or securities professional to fail or refuse to submit to FINRA arbitration. See FINRA Code of Arbitration Procedure IM-12000.
In turn, FINRA member firms usually require their clients to sign account documents that contain a FINRA arbitration clause. Even though this obligates an investor to give up the right to a jury trial, the U.S. Supreme Court has held that these arbitration clauses are enforceable. See Shearson/American Express Inc. v. McMahon, 482 U.S. 220 (1987).
If the suit involves an investor and a FINRA member firm or a FINRA registered professional, the dispute must be submitted to FINRA. The FINRA Code of Arbitration Procedure 12000, et seq., governs claims brought by investors, and it is the only set of rules to which the arbitrators and parties are bound. While most people would assume that federal or state law would apply, they are only “persuasive authority” in a FINRA arbitration; in other words, the law is looked to for guidance, but the arbitrators are not required to follow the law.
FINRA’s Statute of Limitations – the “6-Year Rule”
FINRA strictly adheres to Code 12206(a), which is its version of a “statute of limitation”: “[n]o claim shall be eligible for submission to arbitration under the Code where six years have elapsed from the occurrence or event giving rise to the claim.” This means that an investor has six (6) years to bring a claim for damages, but it is six years from the date the investor knew or should have known that damages were incurred. As an example, an investor who fails to review account statements on time or keep apprised of an account’s activity cannot bring a suit for damages incurred seven years ago if he could have discovered the damages earlier had he been paying attention. But, if the damages were not discoverable at the time they were incurred (e.g., no account statements were provided, the damages were misrepresented by the firm, etc.), then the claim may still be brought within six years from the date of discovery, even though the damages were incurred earlier. If a claim is challenged based upon the “6-Year Rule,” it will be the arbitration panel’s first order of business to determine whether it applies and whether the claim should be dismissed as untimely.
Preliminary Considerations – Damages
For the investor, the very first matter to consider is, of course, whether the losses suffered were avoidable or due to the natural volatility of the securities market. Not all losses are actionable, despite how frustrating or tragic the loss may feel.
While it is crucial to determine whether the losses were avoidable, and therefore actionable, there is no requirement that the amount be certain. In truth, it is extremely rare that the full amount of damages would be known before filing a claim and going through the discovery process. Typically, a party will assert a general range of damages, but there are times when a party claims nothing more than “damages will be proved at hearing.”
Before filing a claim with FINRA, an investor must know the kinds of remedies that will be sought, and this is dependent upon the kinds of losses incurred. There are a variety of remedies that can compensate an investor for different kinds of losses: compensatory (i.e., the amount lost), disgorgement of commissions, rescission of investments, reimbursement of fees and costs, and others. If the misconduct is egregious, under some circumstances a party may seek “punitive damages,” a monetary amount imposed as punishment for the misconduct rather than to compensate for losses.
There are also different ways to calculate the amount lost. FINRA explains a few ways in its Arbitrator’s Guide, including “model portfolio damages,” which allows “claimants to recover the difference between what the Claimants’ account made or lost versus what a well-managed account, given the investor’s objective, would have made during the same time period.” When an account has been handled in an unsuitable or fraudulent manner, damages may be calculated by determining the amount that the claimant would have received had the account been properly handled, less the amount the claimant actually received, plus disgorgement of commissions and fees. See Hatrock v. Edward K. Jones & Co., 750 F.2d 767 (9th Cir. 1984) (investors may recover excess commissions charged by the broker and the decline in value of the investor’s portfolio that resulted from the improper transactions). The calculation to determine the decline in the value of the account is “the difference between what [the claimant] would have had if the account had been handled legitimately and what he in fact had at the time the violation ended.” Id.
Knowing where to look and how to analyze the data can be extremely difficult, but, again, the exact amount of damages need not be certain to file a claim. Qualified attorneys, CPAs and other experts who have substantial experience in the field of securities and securities litigation can simplify the process and make preparing a claim less time-consuming.
One other significant point: an investor is required to “mitigate” his/her damages, or lessen them as much as possible. As noted above, losses are not actionable if they were avoidable.
Preliminary Considerations – Parties
In FINRA, the party filing the claim is called the “claimant,” and the party being sued is called the “respondent.” Naturally, there can be more than one claimant or respondent.
When getting ready to file a claim, investors should consider who may have engaged in misconduct, as well as whether the misconduct was sanctioned by management or the firm. There are times when strategy dictates whether to bring in an individual broker and/or the firm as a respondent, or even other third parties.
Initiating a Claim with FINRA
Filing a Statement of Claim is not the same thing as filing a grievance/complaint with FINRA. A grievance can be filed via FINRA’s “Investor Complaint Center,” and it does not initiate an arbitration. To initiate an arbitration in FINRA, the investor needs to file (1) a “Statement of Claim,” FINRA’s version of a complaint, (2) a “Uniform Submission Agreement” form, which affirms FINRA has jurisdiction over the case, and (3) a filing fee. As of April 3, 2017, all documents must be filed and served via FINRA’s web-based portal. The sole exception is for pro se parties (parties who are representing themselves), but they can voluntarily agree to use the portal.
Unlike court, FINRA does not require any particular format for the Statement of Claim, even a letter will do. Regardless of format, it is important for the Statement of Claim to include specifics regarding the facts and allegations of the dispute, including the nature of the dispute, the relevant dates or time frame, the transactions in dispute, the securities involved and the type of relief or damages sought. Any documents related to the claims can be included, as well, but FINRA has set a strict requirement that all personally identifying information, such as social security numbers, must be removed from any documents filed with FINRA. Bear in mind that the Statement of Claim can be amended even after it is filed (usually with arbitrator approval), so missing facts or causes of action may be added when they come to light.
The Uniform Submission Agreement is a form provided by FINRA that confirms the parties’ agreement to submit the dispute to arbitration. Since they are required by FINRA rules to submit to FINRA arbitration, even if a securities professional refuses to file a Uniform Submission Agreement, FINRA still has jurisdiction and can render an award against him/her, even if he/she fails to show up for hearing!
The filing fee is determined by the amount of damages claimed. There is a fee calculator that can be accessed on FINRA’s website here. The calculation of damages dictates the amount of fees.
Once a Statement of Claim is filed, FINRA assigns a case number and will take care of serving the Statement of Claim upon the opposing party(ies). FINRA also assigns a case administrator to each case. The administrator is responsible for managing the case, including setting deadlines, scheduling hearings and ensuring the case adheres to the Code of Arbitration Procedure. The case administrator, or her/his assistant, is available by phone or email should the need arise, but they cannot provide legal advice, help prepare any documents or provide information outside the confines of their job as administrator.
Answering a Statement of Claim
Following the filing of Claimant’s Statement of Claim, the Respondent must file an Answer within 45 days of receipt. The respondent also must file a Uniform Submission Agreement with the Answer. The answer must include any relevant facts and affirmative defenses to the claims in the Statement of Claim. A failure to raise a particular defense could be deemed a “waiver” of that defense.
If there are claims against the claimant (a “counter-claim”) or other respondents (a “cross-claim”), the respondent must include those at the time of filing the answer or the causes of action will be waived. If there are any claims against third parties (a “third party claim”), they must be submitted at the time of the answer, as well. The respondent is responsible for serving the responsive documents on all of the other parties, including any third parties brought in. There are separate fees for filing a counter- or cross- claim that must be paid at the time of filing, and answers are due within 45 days of receipt.
Getting the proper papers filed is just the start of a long and often difficult process. Appointing an arbitration panel, serving and responding to discovery and motion practice all have deadlines, strategies and elements that require knowledge of the FINRA forum, the FINRA Code of Arbitration Procedure and the kinds of circumstances that give rise to viable claims. FINRA arbitration is not for the faint of heart! Consult with an experienced attorney before filing, so you are confident that you have a viable case, with appropriate remedies and necessary parties.
Girard Bengali, APC, is a law firm specializing in securities, employment and business litigation and arbitration. Girard Bengali, APC, represents individual and institutional investors in securities litigation before FINRA arbitration panels, as well as before state and federal courts and other forums. Girard Bengali, APC, investigates and pursues claims involving a broad range of financial and investment products and has a successful practice representing victims of elder financial abuse, unauthorized trading, unsuitable investments and other firm misconduct. In July 2017, the firm secured an award of $1.8 million for an elderly couple who were victims of elder financial abuse at the hands of Wedbush Securities and one of its brokers, with over $1 million of the award representing punitive damages. You can find the FINRA Award here.
The firm also represents securities professionals with regard to their current, former and prospective employment relationships with FINRA member firms, including transition packages, U-5 reportings, promissory notes and wrongful termination. Girard Bengali, APC has had great success negotiating favorable outcomes for individual brokers, pre- and post-litigation. In December 2016, the firm secured a highly favorable settlement for an individual broker who had been wrongfully discharged and obtained an award for expungement of his Form U-5 after proving the language was incorrect and defamatory in nature. You can find the FINRA Award here.
The mission of Girard Bengali is to aggressively represent our clients through an integrity-driven approach to litigation and counseling. The Firm believes in uncompromising client dedication and ethical standards, while maintaining a result-oriented legal team with the highest reputation. Our core values are character, integrity, respect and excellence. Girard Bengali, APC, is committed to obtaining justice for its clients and pursuing the compensation wronged investors and employees deserve. For more information, please visit http://girardbengali.com or call (323) 302-8300.
Robert J. Girard II, a founding partner of Girard Bengali, APC, has more than 15 years of experience in the areas of securities litigation, securities arbitration and employment disputes. Mr. Girard has recovered millions of dollars on behalf of investors from some of the biggest Wall Street brokerages.
He also represents securities professionals in their employment disputes with broker-dealer firms. His representative matters include wrongful termination cases, unfair business practices and FINRA regulatory matters. In one case, Mr. Girard secured a $3.7 million arbitration award against a FINRA member firm on behalf of former employees wrongfully maligned by their prior employer through filing a false U-5 disclosure.
Mr. Girard’s skill and determination have allowed him to build a reputation as a dedicated and fierce representative of his clients’ interests.
Since 2015, Mr. Girard has been named each year to the Southern California Super Lawyers list. From 2012 through 2014, Mr. Girard was selected to the Southern California Rising Stars list by Super Lawyers Magazine, a designation earned by less than 2.5% of attorneys under the age of forty.
Omar H. Bengali is a founding partner of Girard Bengali, APC. Mr. Bengali specializes in representing executives, employees and small- to mid-size companies in all aspects of employment law before state and federal civil courts, governmental tribunals and arbitration forums. Mr. Bengali’s employment practice extends into the securities arena, including counseling clients through FINRA regulatory and enforcement inquiries.
Both inside and outside of the securities industry, Mr. Bengali litigates all types of employment-related claims and regularly represents employees and executives with claims involving wrongful termination, wage and hour violations, retaliation and discrimination, with a particular focus on female employees and executives who have been discriminated against on the basis of pregnancy, sexual harassment or denial of equal pay.
Mr. Bengali also assists small- to mid-sized business in establishing best practices and proper protocols for their employees, including employment handbooks, dispute resolution programs and related issues. In addition, Mr. Bengali represents employers before federal agencies on I-9 audits and investigations. In one such audit, Mr. Bengali successfully defended an employer against an Immigration and Customs Enforcement audit, avoiding penalties in excess of several million dollars.
In 2016 and 2017, Mr. Bengali was selected to the Southern California Rising Stars list by Super Lawyers Magazine, a designation earned by less than 2.5% of attorneys under the age of forty.