Arbitrators Have an Important Role in Keeping the Financial Markets Honest
News stories and congressional inquiries into financial scams perpetrated by Madoff, Stanford and others have shined a light on the problem of lax enforcement of securities laws and rules by regulators. Recent trends suggest that arbitrators, however, are increasingly cognizant of their importance in the process of requiring financial firms to comply with applicable securities laws and rules, and protecting victims of firms that do not comply.
On March 18, 2009, arbitrators ordered Merrill Lynch to pay $39.8 million to a customer in one of the largest awards levied against a Wall Street firm, as reported by Suzanne Barlyn in the March 30, 2008 Wall Street Journal. The award included approximately $9.2 million of interest, and represented more than 100% of the amount of compensatory damages the claimants had requested the arbitrators to award. The customer had asserted a claim for $30.6 million in compensatory damages based upon negligence, breach of contract, misrepresentation, and breach of fiduciary duty relating to the purchase of interests in Sphinx Managed Futures Index Fund, L.P. Merrill Lynch vigorously contested the case. The arbitration was conducted by the Financial Industry Regulatory Authority, or FINRA (formerly NASD Dispute Resolution).
Similarly, multiple FINRA arbitration panels have recently entered significant awards against Morgan Keegan for its misconduct in marketing a group of structured finance bond mutual funds. Several weeks ago, arbitrators in Birmingham, Alabama entered an $187,000 “make whole” award to a customer resulting from damages sustained in these toxic funds. Then, a few days ago, a FINRA arbitration panel in San Francisco ordered Morgan Keegan to pay investors $267,711 plus interest and all forum fees as a result of losses in the same toxic funds. Both of these cases arose out of misrepresentations by Morgan Keegan relating to these proprietary bond funds. The funds invested almost exclusively in non-conventional investments composed almost exclusively of the very riskiest tranches (slices) of collateralized debt obligations and other structured finance products.
Last, but certainly not least, a FINRA arbitration panel recently entered a $400 million award against Credit Suisse based on claims that it improperly sold auction rate-securities to a large corporation, STMicroelectronics. The award also required that Credit Suisse pay over $6.5 million in attorney’s fees.
These awards send a strong message to the financial services industry that violations of the securities laws and rules will not be tolerated. While some observers have periodically questioned the fairness of FINRA arbitration, FINRA arbitrators who take their jobs seriously can have a real impact on restoring investors’ trust and confidence in the integrity of the financial markets.
Page Perry, LLC is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in representing institutional and corporate investors in securities cases. For further information, please contact us.
