Arbitration

Fired UBS Broker’s $2.4 Million NASD Arbitration Award is Upheld

Published on: October 25, 2007 | by Shepherd Smith Edwards & Kantas, LLP

A $2.4 million NASD Arbitration Award to a former UBS financial adviser, who was fired in 2003 by the company that preceded UBS PaineWebber Inc. is being upheld by the U.S. District Court for the Western District of North Carolina. The court said that it did not agree with UBS’s theory that the arbitration award did not honor provisions made in the arbitration contract or that it was in manifest disregard of the law.

Former financial adviser W. Van Pelt Jr. had served as a financial advisor UBS and its predecessor JC Bradford from 1999-2003. Upon his hiring, he filled out a Form U-4 industry form in which he agreed to not hold UBS liable if it provided specific information, including notice of termination.

He was let go in January 2003 during an internal probe. UBS filed a U-5 form reporting Van Pelt’s termination because of “concerns of conduct” in a matter involving a customer transaction. On the form, UBS said that Van Pelt was not under investigation because the probe was already over at that time.

Study Says Securities Arbitrators Often Expunge Investor Settlements from Brokers’ Records

Published on: October 9, 2007 | by Shepherd Smith Edwards & Kantas, LLP

A recent study conducted by the Public Investors Arbitration Bar Association indicates that securities arbitrators frequently agree to erase past settlements that were paid to investors from brokers’ records. Removing brokers’ settlement payments from their histories could cause future investors to not find out about the brokers’ past misconduct.

The study reveals that 99% of the time, FINRA arbitrators are the ones who suggest expunging these records. Over 70% of these decisions were made without hearings, even though there are new rules in place that say that a record can only be expunged if the complaint is false, erroneous, or did not involve the broker that was accused.

FINRA disagrees with the study results and claims expungements have dropped dramatically since the new rules were put in place in 2004.

FINRA Is Pressured to Cut Ties Between Public Arbitrators and the Industry

Published on: September 11, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Industry arbitration critics want the Financial Industry Regulator Authority to forbid “public” arbitrators from having any connections to the industry. Although the majority of arbitration panels in the industry continue to be made up of one industry member and two “public” panelists, critics say that the public members are not actually public-especially if the arbitrator has any industry ties.

Investor attorneys want FINRA to adopt a “zero tolerance” policy toward any public arbitrators that have a connection to the industry.

Public arbitrators currently can have up to 10% of their yearly income from the last two years come from clients that participate in activities related to the securities industry.

FSC Securities Unit of AIG – A ‘Cozy’ Place for Fraud?

Published on: July 26, 2007 | by Shepherd Smith Edwards & Kantas, LLP

FSC created “an extremely cozy environment for a man bent on defrauding his customers,” said three NASD Securities Arbitrators, “management ineptness was broad” and the firm ignored red flags that the broker had “selling away” issues (using one’s status at a firm to aid in the sale of investments not approved by the firm).

FSC Securities of Atlanta, part of the AIG Financial Group, had warning when it hired broker Scott Hollenbeck that he had problems during his past employment, said a panel of three arbitrators in their award to several investors. During his past employment, they say, he even embezzled money from a church organization.

Hollenbeck was based in Kernersville, N.C. where he was employed by FSC for over 5 years, ending in 2002, not counting a 20 month hiatus. Not named in the arbitration claim, Hollenbeck faces charges over an alleged Ponzi investment scheme which reportedly took place after he left FSC and included the use of billboards.

Merrill Lynch Ordered to Pay $1.6M to Former Broker for Ethnic Bias – But Will This Survive Appeal?

Published on: July 25, 2007 | by Shepherd Smith Edwards & Kantas, LLP

A NASD arbitration panel ordered Merrill Lynch & Co. Inc. to pay an Iranian former employee $1.6 million, for claims that his boss set him up to be fired after discovering his ethnicity. Merrill is currently defending a suit filed in court by another Iranian who has also accused the firm of discrimination.

In an unusually lengthy decision, the securities arbitration panel awarded Fariborz Todd Zojaji $400,000 in compensatory damages and $1.2 million in punitive damages. The arbitrators explained that Merrill Lynch defamed Mr. Zojaji in a required exit disclosure form (Form U-5), which “destroyed claimant’s ability to become employed in the securities industry.”

This language may cause the award to be undone, since it was recently determined that brokerage firms have total immunity for statements made in such disclosures. Yet, the standard for vacating arbitration awards is quite high and a court could let the decision stand if it determines the arbitrators could have decided the case for any other reason. It is also possible the arbitrators heard evidence that the derogatory statements made in the U-5 were stated orally or in writing elsewhere, thus not be protected by the privilege.

California Can Not Require Higher Standards for NASD Arbitration

Published on: June 11, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The California Supreme Court and a U.S. Court of Appeals have both determined that securities arbitration standards do not violate the California Constitution. The courts have instead decided that The Federal Arbitration Act preempts (is superior to) California’s ability to govern securities arbitration.

Rapidly growing arbitration is forcing consumers to, often unknowingly, forego their right to go to court. To protect its citizens from injustices in arbitration the California legislature passed legislation in 2001 ordering the California court system to create ethical standards for commercial arbitrators. Comprehensive standards were then created regarding arbitrators, including disclosure and conflict-of-interest checks.

The NASD’s Arbitration Code is not consistent with these new standards and the NASD refused to make adjustments to comply with the California requirements. It instead sued members of the California court system in federal court seeking a ruling that California could not set standards regarding securities arbitration. In November 2002, the US Court dismissed the lawsuit holding the US Constitution barred the suit in federal court.

Disputes With Former Brokerage Firms and Brokers Must be Arbitrated

Published on: May 30, 2007 | by Shepherd Smith Edwards & Kantas, LLP

In two related decisions the a New York U.S. Bankruptcy Court determined that a failed broker-dealer must arbitrate (under the NASD Code of Arbitration) its differences with a former registered representative and the firm that hired him — even though the defunct firm is no longer is an NASD member — and that an arbitration agreement is even enforced when the party seeking recovery is in bankruptcy.

According court records, in 2000, M. Carleton Boothe went to work for NASD member firm Continental Broker-Dealer Corp. and received $300,000 he was to repay if he left the firm within five years other than through death or disability. Boothe resigned in 2004 and joined Gunnallen Financial Inc. Continental soon closed and was expelled from the securities industry.

After Continental was then thrown into bankruptcy, the bankruptcy court trustee for Continental sought to recover the unpaid balance of the note from Boothe and to obtain damages from Gunnallen Financial for claims including “raiding” its brokers and stealing its clients. Boothe and Gunnallen then sought to enforce certain arbitration agreements to move these actions from bankruptcy court to NASD arbitration. The bankrultcy court agreed.

U.S. Senators Push For The End of Mandatory Arbitrations

Published on: May 11, 2007 | by Shepherd Smith Edwards & Kantas, LLP

U.S. Senator Robert Casey of Pennsylvania has joined the efforts of two other U.S. Senators, and others, to persuade the SEC to lift the requirement mandating arbitration when there is a security dispute. Senator Casey expressed his opinion earlier this week at the yearly public policy conference hosted by the North American Securities Administrators Association Inc. (NASAA) of Washington. Mr. Casey said he would use his position as a Banking Committee member to push the SEC on this matter.

Senator Russ Feingold of Wisconsin and Senator Patrick Leahy of Vermont had written a letter to the SEC just last week requesting that mandatory arbitration in securities disputes be banned.

Currently, most investors are required to sign agreements mandating that they take their disputes to an NASD-operated arbitration system. NASAA has asked the U.S. Congress to consider letting investors bring their disputes to the courts.

Securities and Exchange Commission Looks At Arbitration

Published on: May 3, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The SEC is considering a new policy that could let companies resolve shareholder complaints via arbitration. If adopted, this policy could limit a shareholder’s ability to sue the company in court.

A move toward arbitration could shift the balance of power between corporate managements and shareholders during a time when the balance has been more and more in favor of shareholders. The change could also restrict shareholders’ ability to recover financial, as well as other kinds of compensation from corporations.

The SEC is also examining whether corporations should be allowed to change their bylaws to make room for arbitration. This type of amendment will, in some cases, require the approval of shareholders.

Is the Arbitration System Stacked In Favor Of Brokerage Firms and Against Investors?

Published on: April 5, 2007 | by Shepherd Smith Edwards & Kantas, LLP

After the U.S. Supreme Court decided to let brokerage firms make customers sign arbitration agreements, a lot of people thought that this was a faster, less expensive alternative than letting investors take their claims to courts. Recently, however, what seemed like a good way to resolve disputes between brokers and investors has come under close scrutiny.

Certain regulators and lawmakers are now saying that the system needs to be reviewed. According to William Galvin, the Massachusetts Secretary of the Commonwealth of Massachusetts, the arbitration side of disputes need to be fairer and not “stacked against” investors.

These kinds of concerns are taking on a new importance in the wake of the upcoming consolidation of the NYSE Group Inc.’s New York Stock Exchange and the National Association of Securities Dealers.