Financial advisors, like other professionals, owe a special duty to their clients. Because of their specialized, advanced knowledge and training, you likely rely on your stockbroker or financial representative’s expertise and trust that they are performing their services competently. If you have been harmed, however, by your stockbroker or financial advisor breaching his or her fiduciary duties in order to make a higher commission, you may have a claim against him or her. Instead of your case being filed in court, however, your claim will likely be headed to arbitration through the Financial Industry Regulatory Authority’s (“FINRA”) arbitration process because of an agreement you signed with your financial advisor. FINRA is a not-for-profit organization authorized by Congress to protect investors by making sure the broker-dealer industry operates fairly and honestly.
Filing a Statement of Claim
The FINRA arbitration begins by filing a Statement of Claim, a submission statement, and the required fee. The Statement of Claim does not have to follow a specific format, unlike a lawsuit filed in Kansas, Missouri, or Federal Court, and can be a narrative of the facts. You will have to include the party names, facts underlying the claim, and the damages requested. You may also want to provide documentary evidence to the Statement of Claim. The Statement of Claim should include a legal discussion setting forth which causes of action are being asserted. Securities disputes arise under various theories such as federal or state securities law which likely include breaches of securities industry rules and regulations. Additional claims often include the breach of fiduciary duty and/or negligence, churning (the situation in which the investor’s account is turned-over at an excessive rate in order to increase commission fees), suitability claims (like the investment was not suitable to the goals of the investor), negligent misrepresentation, fraudulent misrepresentation, failure to supervise the account, unauthorized trading, margin violations, insider trading, and market manipulation. Most of the time, the claimant (or the plaintiff) will name both the broker and his or her firm.
After The Statement of Claim is Filed
The defendant will file an answer to the Statement of Claim and provide facts supporting his or her defenses. As is the case in litigation in state or federal courts, a defendant will be barred from presenting evidence with respect to defenses not stated in his or her answer. After the defendant answers, the parties usually jointly select arbitrators. Other times, a three-person panel is selected consisting of one industry related member and two non-industry individuals. The customer selects the location of the arbitration hearing and therefore, in most cases, will be where the customer resides. The arbitration agreement itself may expressly limit which forums are available to the customer. Discovery in FINRA actions is less onerous than in the court system as depositions are only allowed in complex cases, but the parties will still have a chance to seek out discovery through requests for production and requests for information. Discovery disputes are handled by a pre-hearing conference. Certain problems may arise in discovery such as the difficulty of obtaining discovery from third parties who are not bound by the arbitration agreement. Problems like these do not usually arise in federal or state courts in routine litigation because you have more subpoena power in federal or state courts.
Arbitrators may hold a prehearing conference or the parties may request a conference. It is at such a hearing that diapositive motions are addressed and ruled upon by the arbitration panel. After the prehearing conference, a date for the hearing is usually scheduled, the parties go to a hearing, usually consisting of a few days where the arbitrators are very liberal in the admission of evidence compared to a normal jury trial in the court system. Like a jury trial, an opening statement is allowed as arbitration are conducted in the same manner that a court trial is held. For instance, an opening statement is given, then the introduction of evidence is made by the claimant followed by introduction of evidence by the respondent (usually the stockbroker), and closing arguments are then made to the arbitration panel. While a judge would not usually cross examine a witness in a jury trial, panel members typically ask questions in FINRA hearings. Further, experts are sometimes involved, depending upon the complexity of the case, to address technical issues for the panel.
After This Process is Completed
The arbitrators enter any relief that would have been available in court. Arbitrators do not even have to provide a reason for their decision. The arbitrators make their decision by majority vote and rarely make findings of fact and conclusions of law. Damages may include compensatory damages which are the most common measure of damages, punitive damages, and attorney’s fees. Once the award becomes final, the prevailing party moves for confirmation of the award by filing a petition to confirm in the appropriate jurisdiction, i.e. state or federal court. While a party can challenge an award, they are usually not successful.
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