Arbitration and Mediation

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Stockbroker fraud or fraud in connection with the sale of securities is prohibited by federal and state laws. Private causes of action for stockbroker fraud, and investment fraud including churning, suitability, and other violations of the federal securities laws, such as the failure to supervise, generally, are recognized under Section 10(b) of the Exchange Act of 1934, and SEC Rule 10b 5.

Private causes of action against stockbrokers for fraud, or claims, arising from the sale of unregistered securities, or new issues, involving fraud, or the failure to disclose material facts, are authorized by Section 12(2) of the Securities Act of 1933.

Fraud in connection with the sale of securities, or the sale of unregistered securities is prohibited under the laws of all States. Most states provide for a private right of action for these violations to recover damages, and certain states, by statute, provide for the recovery of exemplary damages, together sometimes with interest, costs, and reasonable attorney’s fees.

Most securities related claims against stockbrokers for fraud, however, present federal questions. As such, the federal courts have jurisdiction with respect to these claims, and parties are required to bring their action or lawsuit, together with any other supplemental claims that may arise under state law or common law, in the Federal Court of the Division of Securities.

Most brokerage firms, however, almost universally, require their customers to contractually agree to submit all disputes arising in connection with their securities account to binding securities arbitration, before a forum sponsored by a Self Regulatory Organization, such as the NASD Regulation, Inc., the New York Stock Exchange, or the American Stock Exchange. (In 1998, all American Stock Exchange arbitrations are administered by NASD Dispute Resolution. Inc.). These Self Regulatory Organizations (“SROs”), as a condition of membership, require your stock broker and your brokerage firm to arbitrate all eligible claims involving public customers in securities arbitration.

The agreement to arbitrate is customarily found in all stock brokerage new account agreements, margin agreements, option agreements, and also appears on the back of most monthly customer account statements.

By agreeing to arbitrate all disputes between you and your stockbroker in arbitration, you are giving up your constitutional right to a trial before a jury. However, securities arbitration is, in fact, a quick, fair and cost effective method of resolving disputes.

Following the Supreme Court’s holding in Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 226 (1987), courts will enforce agreements to arbitrate between securities disputes between public customers and stockbrokers and their firms.

Securities arbitration matters, generally, will move to a final hearing in 12-15 months from the date of filing of your claim.

Costly discovery and deposition practice, under most circumstances, is avoided in securities arbitration. Securities arbitration panels for the most part are familiar with most securities related issues, and claims against stockbroker and investment professionals for fraud and therefore, in NASD and NYSE securities arbitrations expensive expert testimony is generally only required in the more complex matters.

Securities Mediation

What Is Mediation And How Does Mediation Differ From Arbitration?

Mediation is an informal, voluntary process in which an impartial person, trained in facilitation and negotiation techniques, helps the parties reach a mutually acceptable resolution. What distinguishes mediation from other forms of dispute resolution-principally, arbitration and litigation-is that the mediator does not impose a solution but rather works with the parties to create their own solution. Mediated solutions often include relief not available in arbitration or litigation.

Mediation is flexible and creative. The actual process varies from case to case depending largely on the parties’ needs and the mediator’s style. Usually, the parties meet to discuss the issues face-to-face. The mediator helps the discussions remain focused and productive. Then, the mediator may hold private caucuses with each party separately, and will carry messages-clarifications, questions, proposals, offers, and counter offers-back and forth between them. The mediator uses the private caucus and other techniques to facilitate the negotiation.

Mediation is non-binding. The emphasis is on fashioning a solution satisfactory to all. However, if the parties cannot negotiate an acceptable settlement, they may still benefit from the process by narrowing the issues to be arbitrated or litigated.

Role as a Mediator

Division of Securities assists and guides the parties toward their own solution by helping them to define the important issues and understand each other’s interests. The mediator focuses each side on the crucial factors necessary for settlement and on the consequences of not settling. The mediator does not decide the outcome of the case and cannot compel the parties to settle.

The mediator can defuse hostile attitudes and remedy miscommunications. The mediator is a mirror of reality, who can help soften or eliminate extreme negotiating positions. Through the mediator, parties asses weaknesses in their own case and recognize potential strengths of the other side. The parties can more clearly view matters previously distorted by anger and emotion.
NASD mediators are knowledgeable in the subject matter of the controversies. Within the privacy of the caucus, mediators can help each party analyze the strengths and weaknesses of its complete case. Most significantly, the mediator can explore creative and innovative solutions that the parties-caught up in adversarial negotiations-might never contemplate.

Benefits of Mediation

  • Control – Mediation belongs to the parties. The disputing parties control the process, scheduling, costs, and outcome of the dispute.
  • Less Adversarial – The mediation process is informal. It is less confrontational than arbitration or litigation.
  • Preserves Options – Parties can enter into mediation without jeopardizing their option to arbitrate or litigate.
  • Swift Settlement – Most mediations are successfully concluded in a single day. Since mediation can be scheduled soon after a dispute arises, parties reach settlement much earlier than in arbitration or litigation. Many mediations conclude before a formal arbitration claim is filed.
  • Lower Cost – Mediation usually entails lower legal and preparatory costs, there is minimal interruption of business or personal life, lost productivity is kept to a minimum, and the fees and expenses of mediation are modest.
  • Preservation Of Business Relationships – By reaching an early resolution with minimal financial or other strain on either party, the chances for preserving business relationships are greatly enhanced.
  • Protects Privacy – Mediation offers greater confidentiality than arbitration.
  • Creative Solutions – Mediators help the parties craft creative solutions.
  • Low Risk – Settlement potential is high. The case proceeds quickly. The cost is modest and there are benefits even if a settlement is not reached.

How Successful Is Mediation/Arbitration?

Historically, parties settle most business disputes submitted to mediation/arbitration. Division of Securities attribute this to the parties’ control over the process, costs, and outcome. The parties approach the process with confidence, leading to successful resolutions. Approximately 80 percent of the cases in the NASD Mediation Program settle within a few weeks to a few months of the parties’ formal agreement to mediate.

Mediation is valuable even when the parties do not reach full settlement. Sometimes parts of a dispute are resolved in mediation, leaving fewer or less extreme differences to be resolved in arbitration or litigation. Gaining agreement on collateral issues can translate into significant savings of time and money for everyone involved.

The mediation process improves communications, narrows outstanding issues, defuses emotions, and defines areas of agreement. Through the mediation process, the parties and their representatives also learn where to focus their energies should arbitration or litigation become necessary. Therefore the parties’ future dispute resolution efforts become more efficient.

Negotiation Of Settlement

Throughout the mediation process, the mediator will help the parties negotiate effectively. Efforts to reach a settlement through mediation will continue until: (a) the parties agree to a resolution and execute a written settlement; (b) the parties conclude that further efforts to mediate the dispute would be futile and declare the negotiations at an impasse; or (c) any party or the mediator withdraws from the mediation process for any reason.