Tag Archives: Investor

Don’t Ignore FINRA Arbitrator Bias

05 Tuesday Aug 2014

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When an investor sues his/her broker, a brokerage firm sues another brokerage firm, or a broker sues or is sued by his former employer, those disputes are arbitrated before the Financial Industry Regulatory Authority (“FINRA”).

There are unfortunate instances during such arbitrations where a bias or prejudice of an arbitrator will show, either in the course of discovery, motion practice or during the hearing on the merits. In such a situation, it is critical for a party to proceed cautiously but appropriately act to protect his/her/its interests. FINRA provides avenues for a party to take when an arbitrator openly demonstrates partiality or a bias in favor of or against a party.

FINRA Rule 12406 provides a procedure to remove the arbitrator before a hearing on the merits has commenced. A party may file a motion to have an arbitrator recused, or removed, due to obvious bias or prejudice. But be aware, FINRA Rule 12406 requires the motion to be direct to and decided by the very arbitrator who is subject to the motion. While this process may sound odd and impractical, it is one followed by most courts in the county.

If the arbitrator denies the motion for recusal, maintains his/her position on the arbitration panel and continues his/her biased and prejudicial behavior, a party has one remaining option, found in FINRA Rule 12407(a). This rule permits a party to file a motion before the first hearing day to challenge an arbitrator for cause. A challenge for cause will be granted where it is reasonable to infer, based upon evidence presented in the motion, the arbitrator is biased or lacks impartiality. Unlike a recusal motion, a motion to challenge an arbitrator for cause is ruled upon by the FINRA staff.

When filing either or both such motions, the filing is critical not only to the fairness of the arbitration process, but for what happens next. If the arbitrator remains on the panel, there is an inevitability as to the outcome: an award is rendered against you that falls in line with the arbitrator’s past behavior. There is one remaining course to take, move before a court to vacate the award. In most jurisdictions a motion to vacate an arbitration award on the grounds of arbitrator prejudice or bias will only be granted if the moving party objected to the arbitrator’s behavior during the arbitration process. If this objection is not asserted during the course of the arbitration, courts may rule the party waived the objection and cannot move to vacate on such grounds.

There is a reality that must be faced when making a motion pursuant to FINRA Rules 12406 and 12407(a): if an arbitrator is acting in an outwardly biased or prejudicial manner to you during the arbitration, a motion to recuse or challenge for cause could seal the decision against you. If the outcome is inevitable based upon the arbitrator’s conduct, it is critical you preserve your right to vacate the arbitration award so the improper acts of the arbitrator will not have a lasting effect on you or your case.  Better to have an angry arbitrator than an award rendered against you.

The Law Offices of Barry M. Bordetsky represents customers and industry representatives in FINRA arbitrations as well as before state and federal courts on motions to vacate an arbitration award. If you have questions regarding the process, please contact The Law Offices of Barry M. Bordetsky by calling Barry Bordetsky at (800) 998-7705 or email barry@bordetskylaw.com.

Treat Your Brokerage Account Like Your Car? Absolutely.

01 Friday Aug 2014

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Believe it or not, your car provides a perfect analogy of how you should handle your investment account and the broker working with you. Most people have little if any knowledge of cars or how they work. Similar to how you have your broker guide you with your investments, you bring your car to your local mechanic.

Cars receive oil changes every 3,000 miles, and when it is time for your oil change, you bring the car to the service station. When getting the oil changed your mechanic tells you instead of every 3,000 miles, you should get your oil changed every 500 miles.   This just doesn’t make any sense, but you decide to go ahead anyway, because in your mind, the mechanic is the one who does this work for a living, so he must know what he’s talking about.

Stop there. If it doesn’t make sense to you, chances are, you are right on point.  You don’t need to be an expert in the field to know when something is simply off.  First thing you should do: ask to speak to the supervisor.  This should be no different with your stockbroker.

The Financial Industry Regulatory Industry (“FINRA”) recently filed charges against the New York broker-dealer Newport Coast Securities and five of its current and former brokers, charging them of “knowingly engaging in a manipulative and deceptive and fraudulent scheme to churn the accounts of some two dozen customers to boost their commissions.” FINRA alleges rampant churning of customer accounts and other misdeeds that caused significant losses to retirees and other investors.

FINRA is taking action to correct the alleged wrongs of the firm and brokers, and if the firm and brokers are found to have violated both securities law and FINRA rules, there will be be heavy fines issued, as well as the possibility of suspensions and perhaps expulsions from the industry.   This action by FINRA is similar to what the district attorney’s office does with a criminal that steals money from someone.

The present enforcement action by FINRA relating to churning should be a warning to all investors, old and young. Churning is the act of over-trading an account where an exorbitant amount of commissions are generated from the trading.    By way of example, presume an investor has $100,000 in her account. The broker opens the account with a buy of $100,000 of Facebook stock. The broker then repeatedly sells, buys and then sells again the stock twenty times over a one-year period. Each sale is quickly followed by a repurchase.

When one of the sales results in a quick profit, the broker will undoubtedly call and tell you how happy you should be that he made you money on the trade. But did he? Here’s where the churning analysis comes into play. If the broker did not overly trade the position, but rather bought and held, the position would have grown with the market movement of the stock. Instead, the investor’s portfolio has decreased because the broker’s commissions on the buys and sells have actually eaten into the profits in the account, and in many cases simply decrease the portfolio value. The only parties making money on this trading are the broker and his firm.  This type of trading should raise questions – – questions that must be asked before allowing the activity to continue.  And like your mechanic, ask for the broker’s supervisor before things get out of hand with your account.

In addition to enforcement proceedings, FINRA provides investors the ability to bring a civil action against the broker and his employing firm through the arbitration process, a very condensed court-like action. Those who lost money from Newport Coast or any other firm through churning, or other improper acts and omissions, have the opportunity to seek a remedy on their own. Those investors get their proverbial “day in court” in an expedited arbitration process that streamlines both cost and time to have the merits of the claim heard by a panel of arbitrators.

The Law Offices of Barry M. Bordetsky represents parties in arbitrations involving churning, unsuitable trading and other investment related claims. If you have questions relating to investment issues, please contact The Law Offices of Barry M. Bordetsky by calling Barry Bordetsky at (800) 998-7705 or emailing at barry@bordetskylaw.com.