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. 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
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 PSW 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 PSW
or another firm, you should immediately gather the following critical
- 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
firstname.lastname@example.org. Pearson Simon & 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 Simon &
Warshaw's attorneys have substantial experience in antitrust, securities
litigation, consumer class actions and complex business litigation.
 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.