Message to securities customers and their counsel: do your due diligence homework before bringing an arbitration claim. If you don’t have the evidence to prove your case, you may have to pay your opposing counsel’s fees and costs.
Breaking with long-standing tradition, some recent FINRA arbitration panels have assessed costs, attorneys’ fees and expert fees against investors who filed claims ruled to be unreasonable. In the case of Jamie Davis v. WFP Securities Corporation et al., FINRA #10-00507, the California-based panel wrote a full-blown “reasoned award”, citing statutory authority and case law for their decision to dismiss the case and award fees. After dismissing the claims on the merits and finding the claims time-barred by California law, the panel awarded to the Respondent firm and brokers their costs and expert witness fees in the amount of $135,755.89 plus 10% interest, running from the date of the award until the award is paid in full. The amount of costs and expert witness fees listed here presumably includes Respondents’ attorneys fees, which makes the case unusual since attorneys fees are typically not recoverable as “costs.”
The arbitration panel was clearly concerned about the evidence they heard (presumably from Respondents) showing that Claimant had filed the same or similar claims in multiple locations, and had already received compensation on some of those claims. FINRA’s Rule 12209 deals with the issue of parties bringing simultaneous claims in multiple proceedings. According to this rule, “[D]uring an arbitration, no party may bring any suit, legal action, or proceeding against any other party that concerns or that would resolve any of the matters raised in the arbitration.” The panel’s reasoned award pointed out that Claimant’s initiation of proceedings in multiple forums was an attempt to go for a “double recovery,” and was prohibited by FINRA rules.
The panel also dismissed Claimant’s claims under California’s applicable statutes of limitations. The limitations periods for the claims in issue ran from one to four years. Although the award was not clear as to the date of the specific purchases in issue, the panel noted that the claim was filed on February 1, 2010, and stated that Claimant had notice of the risks as of April 13, 2005. This meant that Claimant filed her claim too late, i.e. more than four years after having known of the potential conflict between the oral representations by the broker and the risk factors laid out in the private placement memorandum. Thus, under California law, the claims were time-barred.
In another unique twist, the panel dismissed Claimant’s expert witness Douglas J. Schultz from appearing and testifying at the arbitration due to Claimant’s and the expert’s non-compliance with several discovery orders and with the panel’s written and oral warnings. The panel reasoned that the Claimant’s failure to obey the discovery orders prejudiced Respondents in preparing their case-in-chief. Ironically, prior to the hearing, the panel had denied Respondents’ earlier motions for sanctions regarding Claimant’s discovery violations and forum-shopping (although the earlier denial seems to have been based on Respondents’ alleged failure to follow FINRA’s procedural rules regarding the motions filed, rather than on the merits of the motions).
In the case of Karl Heinrich Vogelbach, MD et al v. Quincy Cass Associates, Inc. and Jens Spitta, FINRA #10-04022, another recent California-based panel similarly found that Claimants had no basis for their garden-variety securities law claims. The panel’s decision stated that Claimants’ claims were “frivolous” and that the bringing of the arbitration was “a bad faith abuse” of the arbitration process. The panel ordered Claimants to jointly and severally repay the Respondents $75,000 out of $110,000 of attorneys’ fees and expenses plus an additional $6,000 out of a total of $7,200 in arbitration hearing session fees.
The case is particularly interesting in its refusal to find any liability for trades conducted by Claimants away from the firm, even if Claimants relied upon the advice of the Respondent broker in making those trades. The lack of a contractual relationship was apparently a key factor in the Panel’s decision. The trades which Karl Vogelbach placed in his self-directed account at T.D. Ameritrade were considered by the Panel to be Karl’s independent decisions alone; the Panel found no proximate causation between the advice by Respondents and the trades Karl placed there. Similarly, claims involving trades placed by Claimant Andrew Vogelbach (presumably a relative of Karl) were dismissed because they took place at another firm, and outside the knowledge of the broker.
Although these cases may have been unusually egregious examples of bad faith by Claimants, the message being sent by these panels is clear – don’t bring a meritless claim, or you might be liable for your opponent’s fees, at least in California and other states with similar fee-shifting statutes.
As an alternative, consider the benefits of mediation – lower costs, a more efficient process, a decision to which both sides agree, and a result which can be kept confidential. If you have any questions about this article or about mediation or arbitration, feel free to contact me at email@example.com.
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 Under California Code of Civil Procedure Section 1032, a prevailing party is entitled to recover its costs in any “action or proceeding.” Since the FINRA arbitration is a proceeding, and since the Respondent firm and brokers were the prevailing parties, the panel apparently decided Respondents should be entitled to recover all its costs of defending the case.