A few thoughts on Securities Arbitration

June 18, 2009

One thing is clear, Alternative Dispute Resolution (ADR) is a growing trend in the law that can allow for fast, more cost effective dispute resolution by means of out of court mediation and arbitration procedures.  Both mediation and arbitration have different merits, and in terms of financial regulation arbitration is the norm. Just read an interesting article about PIABA’s petition to the SEC to allow plaintiffs to opt out of arbitrations by industry abitrators in FIRNA arbitrations.

[A]s arbitration expanded and became more popular, the process began to look more and more like a court proceeding. While we can debate the benefits, if any, of that transformation, the industry arbitrator has become an issue. Expert witnesses are common place today. Further, having a panel decide a case based on facts not in evidence (an individual arbitrator’s personal experience, knowledge and opinions) cuts against our sense of due process and trial procedure.

Plus, it just doesn’t “look” right. It is difficult to argue that the process is fair when one of the arbitrators has an affiliation with the securities industry.

Of course, there is no evidence that even suggests that the industry arbitrator sides with the industry. In my experience it just isn’t the case. In fact, I obtained a multimillion dollar award for a customer, which included punitive damages, from a panel that included the General Counsel of a major wirehouse.

But individual stories prove nothing, and perceptions are important. Perhaps it is time to insure that all arbitrators are not only impartial, but have the appearance of being impartial…

Appearances mean a lot in arbitration. Let’s allow all parties to opt out of having an industry arbitrator, and also allow them to opt out of having a customer attorney on the Panel. And lets do the same for employee arbitrations. Remove the industry arbitrators from those panels as well.

Mark J. Astarita, PIABA Petitions SEC to Remove Industry Arbitrator Requirement

A though from the eminent Professor Llewellyn that has always stuck with me seems to bear indirectly on the issue:

Two lacks I regret.  There isn’t paper here which picks up for sustained development the theory of Justice as being not attainable or even describable substance, but a quest, as being an idea conditioned in the first instance by each quester’s view of the Universe, and conditioned secondly (as Law-Government must always be) by the fact of scarcity.  Whether within an organized group with firm legal-government traditions or within an emerging, half-chaotic world, the justified desires and demands have always exceeded the wherewithal to fulfill them, and they always will.

Karl Llewellyn


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