Navigating FINRA Arbitration | Ascent Law Firm Support

In many industries, victims of fraud and misconduct have the option of filing a lawsuit and seeking a just resolution from a judge and jury. For many investors and securities industry employees, however, the available legal options are far more limited. For them, FINRA arbitration is mandatory.

The New York Times’ recent coverage of arbitration between Barclays Capital and a former Barclays employee perfectly demonstrates why FINRA arbitration can be so challenging for individuals going up against massive securities firms.

William Thomas Pair worked for Barclays Capital for several years, having been recruited from his previous position at UBS. To convince Pair to join Barclays, the firm offered him a $1 million forgivable loan, which would be paid off after several years of employment. At one point, Pair’s loan was renegotiated to pertain to Barclays Bank, a British company, which means it should not have been subject to mandatory FINRA arbitration. Several months before that 7-year mark, Barclays fired Pair and assigned his outstanding $600,000 loan balance back to U.S.-based Barclays Capital. Barclays then filed for FINRA arbitration against Pair, who chose to represent himself. Barclays, on the other hand, was represented by highly paid outside legal counsel.

The arbitrators chose to throw out the former broker’s key witness for unclear reasons. Pair lost, and no sufficient explanation was given for why Barclays had passed the outstanding balance back from its British owner to the U.S. subsidiary. As a result, Pair was ordered to pay back not only the $600,000, but also $20,000 in unpaid interest and $360,000 for Barclays’ attorney fees. Pair’s story is, unfortunately, not an unusual outcome in FINRA arbitration. In fact, in 2013, securities customers were awarded some portion of their claimed damages in only 42% of arbitrations.

How FINRA Arbitration Works

The challenges involved in FINRA arbitration are complex and fairly institutionalized, but navigating them is possible. As an independent non-profit, FINRA exists to create and enforce securities regulations for the protection of investors and the overall health of the securities industry.
The challenges for victims of securities industry misconduct center around two major concerns.

First, when you pay for the brokerage services of a securities firm, in most cases you sign away your right to a trial. This is also the case for employees of banks and brokerages who wish to resolve legal disputes with their employers.

Securities firms have powerful outside counsel at their beck and call, which means that standing up against them in arbitration—and prevailing— is a tall and often expensive order. As the Barclays case demonstrated, losing in arbitration can result in a former employee or investor being liable for the firm’s legal costs.

Second, arbitration panels are often far from neutral. Though they are required to remain impartial, the reality is that arbitrators are paid based on how many arbitrations they handle, and if they become known for giving Claimants favorable awards, the banks and brokerages will not use them. There have been past instances demonstrating some arbitrators’ potential conflicts-of-interest.

This is How FINRA Arbitrators are Chosen

Arbitrators are charged with the weighty responsibility of deciding whether those who file claims deserve an award. FINRA maintains a roster of over 6,000 arbitrators.

In order to become certified, arbitrators must complete approximately 10 hours of coursework and an entrance exam. According to research conducted in 2009, the proportion of arbitrators affiliated with the financial services industry, in contrast to those who are not, is approximately 1 in 3.

This is reasonable in the sense that those with a securities background have first-hand knowledge of the nuances of the industry. It is concerning in the sense that some arbitrators may have strong ties to powerful securities firms, which could potentially color their decisions.
FINRA has reviewed this issue in response to concerns that it may cause bias, and has passed restrictions on who is eligible to serve as a public arbitrator. Still, the structure of the system as it stands may make individuals involved in FINRA arbitration feel that they are powerless against a biased system.

What Can You Do if You Are Not Paid the Full Amount of Your Contract?

Unfortunately, an all too common issue for contractors is what to do if they are not paid the full amount they are owed for their work—even when the contract was properly and fully performed. On the surface, reneging on promises would appear to be bad business, not only from a conscientious standpoint, but also because burning bridges can make it difficult to conduct future business.

There’s a simple reason, however, why businesspeople might not pay contractors in full: they can get away with it, since it will cost the contractors more to sue than it will to just take the loss. This strategy relies on the premise that the contractor will need to pay an attorney hundreds of dollars an hour to attempt to recover the money owed, which can quickly make litigation untenable for the average businessperson.

Litigants Can Exploit Contract Law

U.S. law generally requires each party to a lawsuit to pay its own attorney fees. While this rule can encourage more equal access to justice, it can also lead to a situation where a well-funded defendant drags out a case and drives up the legal fees to the point where taking a loss is the better choice for the plaintiff.

For example, if a contractor enters into an agreement to perform painting work at an apartment complex for $250,000 and, upon satisfactorily completing the work, the apartment complex owner refuses to pay, the contractor can file a breach of contract lawsuit to recover the unpaid money.

But if the contractor’s legal fees hit $25,000 – $50,000—which is on the very low end of the cost of prosecuting a business lawsuit—the profit margin on the contract will effectively be wiped out. The lawsuit essentially becomes a no-win situation. As a result, many contractors give up their legal fight, settle their cases for less than they are worth, go bankrupt, or even go out of business.

Knowing this, defendants can offer contractors a lower amount than what is owed and force them to drop the case. This is an example of how hourly attorneys’ fees create a “Justice Gap” for small business owners that cannot afford the high cost of business litigation.