1.  What is the statute of limitations for filing an arbitration claim?

 2.  How much does securities arbitration cost?

 3.  Where does the arbitration take place?

 4.  How long does a claim take to be resolved?

 5.  Will the investor face a deposition?

 6.  Who decides a securities-arbitration claim?

 7.  Will the investor face harsh cross-examination?

 8.  Where will the hearing be held if the investor lives outside the United States?

 9.  Why are investors’ claims against their brokers decided by arbitration instead of by a court?

10. How likely is an investor to succeed with a claim?

11. Should an investor complain about her broker’s misconduct to the Securities and Exchange Commission or FINRA?

12. How are investors’ losses calculated?

13. Can an investor appeal if her arbitration is wrongly decided?

14. Can an investor represent herself at arbitration?  Should her family lawyer represent her?

15. How can an investor tell if she has a viable claim?

16. If a broker committed no obvious misconduct but the investor lost money, can the investor have grounds for bringing an arbitration claim but not be aware of it?

17. Other questions

 1.  What is the statute of limitations for filing an arbitration claim?

     The deadline for filing an arbitration claim is usually six years. That is because the self-regulating securities organizations like the National Association of Securities Dealers and the New York Stock Exchange bar securities arbitrations that are more than six years old. But those are eligibility rules, not statutes of limitations, because they govern when a claim is eligible for arbitration.

     The applicable statutes of limitations are set by federal and state law, and some of the limitation periods are less than six years. A fraud claim alleging a violation of Rule 10b-5 of the federal Securities Act of 1933, for example, must be filed no more than one year after the fraud should reasonably have been discovered, or no more than three years after the fraud occurred, because the Securities Act and the rule interpreting it so provide.

     Yet six years usually is the statute of limitations for securities-arbitration claims in New York State. That is because most claims are brought under a breach-of-contract theory, and in New York contract cases have a six-year limitation period.

(a)  When does the statute of limitations start running?

    The statute begins running when the stockbroker or investment advisor commits the wrong giving rise to the claim. Thus, when an investor buys the security that she loses money on is not necessarily when her claim arises. If a broker gives the customer a monthly statement containing a false stock price, for example, the limitation period commences when the broker falsifies the information, not when the investor bought the stock whose price was falsified.

 2.  How much does securities arbitration cost?

(a)  The attorney’s fee

     An initial consultation is free. If attorney Stephen A. Katz takes a case he is paid a contingent fee, which is a percentage of the amount that he recovers for the client. The client owes Katz no fee if no money is recovered.

(b)  The expenses involved in arbitration

     The client pays the expenses incurred in a securities arbitration, which include these charges:

(1)    The filing fee

     The filing fee for arbitrating before the Financial Industry Regulatory Authority (FINRA), the organization that hears most securities arbitrations, is about $1,200.

(2)    Expert witness

     An expert may be needed to provide a damages analysis or to testify at the arbitration hearing. The first service costs about $1,500 to $4,000, the second about $1,500 to $3,000 a day plus travel expenses.

(3) Miscellaneous expenses

     These include overnight mail, extensive copying, a messenger service, travel expenses, and other minor charges.

(4)    The arbitrators’ fees

     The arbitration panel allocates responsibility for paying its own fees when it hands down a decision. Usually the brokerage firm pays all of the fees, but if not they are split evenly between the parties. Only in unusual circumstances—such as when the panel concludes that the claim is frivolous—must an investor pay all of the arbitrators’ fees.

     A typical arbitration hearing can last three days and, if the arbitrators’ fees are split equally between the parties, cost the investor $4,000.

 3.  Where does the arbitration take place?

     Most arbitration claims are settled without a hearing’s being necessary. But if a case cannot be settled, the hearing is usually held near the customer’s residence at the time her claim arose.

 4.  How long does a claim take to be resolved?

     The average arbitration claim is closed within eleven-and-a-half months. An unusually complex case, or one involving many motions and disputes, can take up to eighteen months.

 5.  Will the investor face a deposition?

     Almost certainly not. Depositions are not used in securities arbitration except to record a dying witness, preserve the testimony of someone who cannot attend the hearing, or facilitate a complex case. Even then, telephone testimony or video conferencing often replace the traditional in-person deposition.

 6.  Who decides a securities-arbitration claim?

     A panel of one arbitrator decides the case if the damages sought are less than $100,000; three arbitrators decide if the claimed damages are more. When there is one arbitrator she is a public arbitrator, which is someone who is not associated with a broker–dealer or with a securities-industry organization. When the panel consists of three arbitrators, two are public arbitrators.

     To determine who will serve as an arbitrator, the investor’s attorney researches the candidates that the arbitration forum gives him, and selects those whose backgrounds appear to dispose them favorably toward the investor. The stockbroker’s counsel does the same for her client. Then a panel is chosen from the selected names.

 7.  Will the investor face harsh cross-examination?

     Dramatic Hollywood-style questioning will not occur at the hearing; but the investor should be prepared to explain how well she understood her investments. If the broker’s attorney can show that the investor had an MBA or subscribed to investors’ newsletters, for example, she may have trouble convincing the arbitration panel that she did not understand her investments. Or if the investor studied a stock and then told her broker to buy it, she may face embarrassing questions if she claims that her broker forced her to buy the stock and its risk level was too great for her.

     Ideally, no surprises arise on cross-examination. The investor should have revealed to her lawyer beforehand any facts that can hurt her, and she should be prepared to explain those facts in a way that keeps them from harming her case.

     If there is damning information that undermines the investor’s whole theory of recovery, the case should not be filed at all. And the time to discover that is before the case is brought, not at the hearing.

 8.  Where will the hearing be held if the investor lives outside the United States?

     FINRA rules require a foreign investor with a brokerage account at a FINRA-registered firm to file her case in the United States. But the hearing can be held abroad under certain conditions.

 9.  Why are investors’ claims against their brokers decided by arbitration instead of by a court?

     Because of a contractual provision: brokers’ retainer agreements invariably require the investor to arbitrate all disputes that arise between her and the broker.

10. How likely is an investor to succeed with a claim?

     The odds are very good. The publication Securities Arbitration Commentator has reported that 80% of all cases settle with the investor making a recovery, and that of the remaining 20% which go to a hearing, over half the cases produce an award for the investor. Those figures do not tell how much the investor recovered, but they show that she is likely to recover something.

11. Should an investor complain about her broker’s misconduct to the Securities and Exchange Commission or FINRA?

     Such complaints, which can also be made to state agencies, may cause the stockbroker to be fined or disciplined, but they rarely obtain money for the investor. Filing an arbitration claim is a far better way for an investor to recoup her losses.

12. How are investors’ losses calculated?

     Customers who have been victimized by excessive, unsuitable, or unauthorized trading may incur commissions and other costs because of the broker’s improper trading. The excessive charges that they paid are their losses.

     Such customers may also be able to recover “portfolio damages,” which is the reduction in value to the investment portfolio that the broker caused. That reduction can be determined by calculating either (a) “out-of-pocket” losses, or (b) the amount of gain that the broker caused the investor to lose (that method of calculating damages is called the “well-managed-account” method).

     “Out-of-pocket” losses are determined by comparing the investment portfolio’s value before and after the broker’s misconduct, but reduced by “gross economic loss,” that is, reduced by any general decline in the market over the relevant period that the broker did not cause.

     The “well-managed-account” measure of damages compares the portfolio’s actual value, after the broker’s misfeasance, with its probable value had a better investment strategy been used. That method of calculating damages attempts to compensate the investor for lost opportunity; but the method is vulnerable to attack on the ground that it is speculative. Still, some courts have used it (before 1989 securities arbitrations were brought in court, and there are records of the courts’ decisions).

13. Can an investor appeal if her arbitration is wrongly decided?

     Not really. An investor does have the right to appeal an arbitration decision to a court, but the decision will be overturned only if the arbitration panel made an egregious mistake. Because the investor usually cannot meet that standard, typically appealing an arbitration decision is futile.

14. Can an investor represent herself at arbitration?  Should her family lawyer represent her?

     Both arrangements are permissible but discouraged. Pro se representation (self-representation) risks presenting the claimant’s her case incompetently, and also risks irritating the arbitration panel. Using the family lawyer can also be dangerous, because securities arbitration is a specialized area requiring study and experience which the family lawyer may not have. So an investor may feel comfortable with her family lawyer, but not realize that he is out of his depth.

     A third dubious strategy is to have a personal-injury lawyer represent the investor. Tort lawyers sometimes assume that securities arbitration is similar enough to accident cases for their skills to be transferrable. But liability under the securities laws differs from liability for negligence, and securities trading is governed by numerous regulations that are foreign to tort law. So an accident lawyer who has not gained expertise in securities arbitration—by taking courses, reading, hiring a mentor—may be inadequate.

15. How can an investor tell if she has a viable claim?

     This website’s menu choice “Broker Misconduct” describes the various ways in which a broker or investment advisor can harm an investor. Visitors to this website may read that section to see if they have encountered any of the wrongdoing described in it.

     A personalized evaluation of an investor’s potential case will be provided by attorney Katz. His accepting a case on a contingent fee - which provides for his being paid only if he is successful - shows that he believes that a case has merit.

16. If a broker committed no obvious misconduct but the investor lost money, can the investor have grounds for bringing an arbitration claim but not be aware of it?

     Investing in securities is so complex, legally and mathematically, that a lay person may not realize that her broker or investment advisor caused her losses. But there can be warning signs: a broker’s

•    not returning phone calls;

•    withholding bad news from the investor;

•    making trades that the investor never authorized;

•    executing numerous transactions;

•    employing margin without the investor’s consent;

•    promoting investments that the investor does not understand; or

•    assuring the investor that her portfolio is conservatively invested when the portfolio’s value is rapidly declining.


17. Other questions

     If you have questions about securities arbitration that this section did not answer, please contact attorney Katz.


Disclaimer

All Content found in this website is the sole opinion of the author and for informational purposes only.

Contact

Attorney Stephen A Katz
Stephen A Katz, P.C.

111 John Street, Suite 800
New York, NY 10038-3180
(212) 349-6400
(800) 251-3529
(646) 308-1170 (fax)

SAKatz00@AOL.com

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