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Choosing Mediation to Resolve Your Securities Arbitration Claim
nvestor arbitration claims have reached new highs — 3,400 claims filed for 2001 through June 2001. Investors are alleging numerous types of investment-loss claims, including churning (excessive trading), unsuitable investments and failure to disclose risks.
Nine of ten investor claims are arbitrated. That process is more informal than litigation in court. Nonetheless, it involves presentation of evidence, to a panel of three arbitrators, who will decide the outcome. Most securities arbitrations are conducted at the National Association of Securities Dealers (NASD).
As an alternative to arbitration, investors should consider agreeing to mediation of their claims. NASD mediation still is in its infancy — about 3 years old — and parties submit only about 10% of their arbitration claims to mediation. But one cannot argue with the results, or the clear benefits of attempting to mediate a settlement in lieu of arbitration.
Let's start with the success rate. For the last three years, no less than 77% of all claims submitted to mediation resulted in a settlement.
Now let's try to understand why. The NASD has very informative materials that are available on its website, www.nasdadr.com. As an NASD mediator as well as an advocate representing parties in mediation, I see three principal benefits of mediation. These benefits are:
- Much lower cost;
- Party controlled; and
- Confidentiality
Regarding lower cost, it now is common for arbitration hearings to take three days. Few take less than two days. Many take 5 days or more. By comparison, although some mediators are satisfied to mediate in bits and pieces over several day or weeks, most mediators recognize the great physics concept known as "momentum". They mediate a settlement, if one is to be mediated, in one day, even if that means working through the dinner hour. Likewise, attorney preparation time (at your expense) for mediation is markedly less than attorney preparation time for arbitration. As a rule of thumb, we estimate one (very long) day of intense preparation time for every day of arbitration or mediation. One can see how much preparation time is rendered unnecessary when faced with the prospect of a one-day mediation instead of multiple day arbitration.
The second benefit is that the mediation process is party controlled. That means two things. First, the parties determine the outcome (settlement or no settlement, and the terms of any settlement). That process removes the decision-making from the "three strangers" (i.e., the panel of three arbitrators). Second, the parties are allowed to vent their feelings, and vent their feelings in an informal setting. That is very different than the formal presentation of witness testimony in a Q&A format at an arbitration hearing. And it is far more rewarding: at the risk of offending my attorney brethren, most clients do not find the rules of evidence, evidentiary objections and other "technicalities" to be productive. Clients are pleased to hear most mediators learn the facts by simply asking, "Please tell us why you are here and what do you want?"
The third benefit is confidentiality. While both mediation and arbitration are private (unlike a court room where anyone can walk in to the courtroom and listen), arbitration decisions are public and readily accessible. By comparison, the mediation process and any settlement agreement reached are confidential. Incidentally, confidentiality is an especially important benefit to brokers in egregious cases where there is a possibility that an NASD arbitration panel may make a "disciplinary referral" to the NASD regulators for disciplinary action.
Those are the three major benefits. Are there any disadvantages? Few, if any. First, some claim that mediation just will delay the arbitration. However, at the NASD, that normally does not happen because the arbitration process continues on a separate track than mediation.
Another concern is that the opponents may perceive the party who suggests mediation as having a weak case. Nonetheless, the NASD effectively deals with this possible perception by having a mediation administrator contact the opponent without revealing or otherwise suggesting that the other side is interested in mediation.
A final possible disadvantage is that mediations that fail (i.e., no settlement is reached) will have wasted cost the parties' time and money. However, we find that even a failed mediation process allows the parties and their lawyers to learn a great deal about the strengths, and weaknesses of their case. That knowledge then becomes useful for the preparation and prosecution / defense at the arbitration hearing.
Overall, investors should be well advised to consider mediation as a viable substitute for arbitration.
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James J. Eccleston is a securities attorney, representing investors as well as brokers and brokerage firms nationwide in arbitration, litigation and regulatory matters. He is a past co-chair of the Chicago Bar Association's Securities Law Committee, a past chair of its Financial and Investment Services Committee, a registered investment advisor and a licensed securities principal of the National Association of Securities Dealers (NASD). He can be reached at 312-641-2929. The firm's website, www.FinancialCounsel.com, contains global market intelligence, daily financial news, alerts, articles, studies, and other information for investors and financial professionals.
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