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Vonnegut: ‘Harrowing’ Fight for Brokers Who Take On the Firm

Wall Street Journal

“When can we expect payment?” asks the soulless lawyer in a cadaverous monotone. He’s from the broker-dealer you used to work for, and he’s talking about the unpaid balance on your Employee Forgivable Loan.

You go ballistic. Those clowns broke their promises. They almost destroyed your business, which is taking forever to rebuild.

Now what?

Unless you have a quick change of heart and get out the checkbook, you’re headed for that murky venue mapped out in just about every broker’s contract: mandatory arbitration. Do you have any idea what happens there? Is the process even fair?

Let’s start with statistics. From 2013 to 2014, arbitrators in the Financial Industry Regulatory Authority’s dispute-resolution program decided 829 cases between employers and employees. In 498 of those cases, they ruled on firm claims for unpaid EFLs. They awarded monetary damages 93% of the time.

There were 291 decisions related to brokers’ claims like discrimination, unpaid compensation or wrongful termination. The brokers won awards 38% of the time. These numbers all come from the Securities Arbitration Commentator, a research firm in Maplewood, NJ that tracks arbitration awards.

If you’re a financial adviser, these statistics are sobering. The odds are against you in just about any kind of claim. If an EFL is involved, they get really bleak.

David Richan of Baritz & Colman, who represents both advisers and firms in these matters, calls arbitration a “harrowing process for those who have not been through it.”

He lists six typical steps: claim, counterclaim, selection of arbitrators, discovery, hearing, and finally the decision, which includes awards if any. Unlike traditional courts, there are few avenues for appeal.

For claims that go all the way to a hearing, generally in front of a panel of three arbitrators, Mr. Richan estimates the whole process can last about 13 months and be quite costly.

And when the panel makes its decision, it rarely explains its thinking. “Most times it’s a mystery” why arbitrators decided a certain way, Mr. Richan adds. After losing, brokers have 30 days to pay the awards. Or they risk losing their securities licenses.

I agree. Harrowing.

It’s no wonder 90% of cases settle before they go to hearing. This estimate comes fromBrent Burns, who represents financial advisers as well as individual investors.

In the course of the legal battle, there’s often a “shift in expected returns,” Mr. Burns says. Interest continues to accrue during EFL cases, and attorneys’ fees start climbing. Brokers who lose their cases frequently pay all of those, Mr. Burns notes.

From 2013 and 2014, for example, the brokers who lost promissory note cases paid their adversaries’ legal bills 60% of the time a claim was made. These fees averaged $32,200 according to the Securities Arbitration Commentator.

Tack on your lawyer’s bill of, say, $72,000 (I’m assuming eight hours a month, 13 months, and five full days of hearings at $500 per hour) and you’re looking at legal fees over $100,000 in the event of a loss.


Who exactly are these arbitrators that sit in judgment?

They can be anyone. Literally. Mr. Burns says most are lawyers although a legal background isn’t required.

Nor is financial industry expertise. In fact, Mr. Richan notes his partners and he have argued cases in front of arbitrators including a police sergeant, a Roman Catholic priest and an interior decorator.

After examining a pool of 5,375 arbitrators, the Public Investors Arbitration Bar Association estimates 80% are male. Their average age is 69, and 40% are 70 or older.

“How’s that feel to minorities?” asks Joe Peiffer, president of Piaba.

Good question. So is this one: Are arbitrators fair?

“Yes,” answers Rich Abbrecht, a financial industry insider and Finra arbitrator. He notes that non-industry panelists sometimes start with the notion of “splitting the baby”-that is, they initially avoid hard decisions and try to give something to each side. But they “usually get to a fair decision in the end,” he says.

Well, perhaps. But brokers are losing. A lot. I understand why they paid damages in 93% of the 2013-2014 EFL decisions: written contracts. A loan is a loan. But what about cases involving nondocumentary issues like discrimination? Broker victories of only 38% are disturbing.

Or maybe not.

My take: It sounds like negative selection, like the Finra-supervised panels are only arbitrating the cases that are long shots for brokers. If so, the won-lost stats are inconclusive about the system’s fairness.

Sandra Grannum, whose firm Davidson & Grannum, LLP primarily represents broker-dealers, says consider the alternative-a broker in New York City earning $300,000 a year would be “hard pressed to find a sympathetic jury.”

Great point.

Remember that soulless lawyer at the start? I’d call him back, make nice, and do everything possible to avoid arbitration. And if that failed, I’d ask the contingency lawyers what they think before deciding to fight.