This month, the Financial Industry Regulatory Authority introduced a special arbitration procedure that auction-rate securities investors can avail of to recover consequential damages. This procedure can be used by customers who are allowed to file for such damages under the ARS-related settlements that have been concluded with the Securities and Exchange Commission or with FINRA.
Under the special procedure, investment firms cannot contest liability related to ARS product sales or the illiquidity of ARS holdings. The companies also cannot use as its defense an investor’s choice not to borrow money from the firm (if it offered the ARS holder a loan option) or his or her decision not to sell ARS holdings prior to the settlement date.
Investors have the option to seek their recovery through this procedure or in other applicable forums, including through standard arbitration rules. FINRA Dispute Resolution President Linda Fienenberg says the special procedure offers a quicker, more affordable resolution for clients claiming consequential damages. Any fees related to the special arbitration procedure will be paid for by the firms.
A single public arbitrator will hear consequential damage claims under $1 million. If the amount is larger, the parties have the option, by mutual consent, to have their claim heard by a three-person arbitration panel.
These damages are the financial harm that was experienced by ARS investors because the market collapsed. This may include losses incurred by investors whose ARS assets are frozen, as well as opportunity costs.
As of the end of last month, 275 ARS arbitration claims had been filed under FINRA’s standard arbitration procedure. Investors that limit claims to consequential damages can opt to have their case heard under the special arbitration procedure.
In the wake of the ARS market’s downfall last February, FINRA has been working with the SEC and state regulators to provide investors recovery options. FINRA is also investigating some two dozen firms for alleged misconduct involving their handling of ARS.
FirstSouthwest Co and WaMu Investments have reached final settlement agreements with FINRA. Agreement in principles have been reached with City National Securities, Mellon Capital Markets, SunTrust Investment Services, Comerica Securities, SunTrust Robinson Humphrey, Harris Investor Services, and NatCity Investment, Inc.
Related Web Resources:
FINRA Provides Details on Special Arbitration Procedure for ARS Consequential Damages, MarketWatch, December 16, 2008
WaMu, First Southwest To Buy Back ARS Under Finra Settlements, CNN, December 16, 2008
Special Arbitration Procedures for Investors Involved in Auction Rate Securities Regulatory Settlements, FINRA
Our stockbroker fraud lawyers have successfully represented many clients during FINRA arbitration proceedings. Shepherd Smith Edwards & Kantas LTD LLP is also committed to helping ARS investors recover their investment losses.
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